As filed with the Securities and Exchange Commission on May 11, 1998

SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

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

FORM 20-F

(Mark One)

/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission file number 0-29526

GENSET
(Exact name of Registrant as specified in its charter)

France
(Jurisdiction of incorporation or organization)

24, rue Royale
75008 Paris, France
+ 33 1 55 04 59 08
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Title of each class to be so registered Name of each exchange on
which each class is to be registered

American Depositary Shares, each representing
one-third of one Ordinary Share Nasdaq National Market

Ordinary Shares, nominal value FF 17 per share Nasdaq National Market*

* Approved for listing (not for trading), but only in connection
with the registration of American Depositary Shares, pursuant to
the requirements of the Nasdaq National Market.

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None

Indicate the number of outstanding Ordinary Shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report:

Ordinary Shares, nominal value FF 17 per share: 7,189,087

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:

Yes /X/ No / /

Indicate by check mark which financial statement item the Registrant has elected
to follow:
Item 17 / / Item 18 /X/

TABLE OF CONTENTS

Introduction................................................................................................ 3
Exchange Rate Information................................................................................... 3
Forward-Looking Statements.................................................................................. 4

PART I

ITEM 1: Description of Business.................................................................... 4
ITEM 2: Description of Property................................................................... 33
ITEM 3: Legal Proceedings......................................................................... 34
ITEM 4: Control of Registrant......................................................................34
ITEM 5: Nature of Trading Market.................................................................. 35
ITEM 6: Exchange Controls and Other Limitations Affecting Security Holders........................ 38
ITEM 7: Taxation.................................................................................. 40
ITEM 8: Selected Consolidated Financial Data...................................................... 47
ITEM 9: Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 48
ITEM 10: Directors and Officers of the Registrant.................................................. 54
ITEM 11: Compensation of Directors and Officers.................................................... 62
ITEM 12: Options to Purchase Securities from Registrant or Subsidiaries............................ 62
ITEM 13: Interest of Management in Certain Transactions............................................ 64

PART II

ITEM 14: Description of Securities to be Registered................................................ 64

PART III

ITEM 15: Defaults upon Senior Securities........................................................... 64
ITEM 16: Changes in Securities and Changes in Security for Registered Securities
and Use of Proceeds....................................................................... 64

PART IV

ITEM 17: Financial Statements...................................................................... 66
ITEM 18: Financial Statements...................................................................... 66
ITEM 19: Index to Financial Statements and Exhibits and Signature.................................. 66

Introduction

Genset's consolidated financial statements that form part of this
Annual Report on Form 20-F (the "Annual Report") are presented in French francs
and prepared in accordance with generally accepted accounting principles in the
United States ("U.S. GAAP").

Solely for the convenience of the reader, this Annual Report contains
translations of certain French franc amounts into U.S. dollars at specified
rates. These translations should not be construed as representations that the
French franc amounts represent such U.S. dollar amounts or could be converted
into U.S. dollars at the rates indicated or at any other rate. Unless otherwise
stated, the translations of French francs into U.S. dollars have been made at
the rate of FF 6.0190 to $1.00, or 16.61 cents to FF 1.00, the noon buying rate
in New York City for cable transfers in French francs as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1997 (the "Noon
Buying Rate").

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

All references herein to "United States" are to the United States of
America, references to "U.S. dollars," "U.S. $," "$" or "cents" are to the
currency of the United States, references to "France" are to the Republic of
France and references to "French francs," "francs" or "FF" are to the currency
of France.

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

Genset is a societe anonyme organized under the laws of France (the
"Company"). Its principal executive offices are located at 24, rue Royale, 75008
Paris, France and its telephone number is + 33 1 55 04 59 00.

Exchange Rate Information

For a discussion of the impact of currency fluctuations on the
Company's financial condition and results of operations, see "Item 9:
Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Results of Operations -- Impact of Currency Fluctuations".

The following table sets forth, for the periods indicated, certain
information concerning the exchange rate between French francs and U.S. dollars
based on the Noon Buying Rate (expressed as French francs per U.S. dollar). Such
rates are provided solely for the convenience of the reader and are not
necessarily the rates used by the Company in the preparation of its consolidated
financial statements included elsewhere in this Annual Report.

Year Period-End Rate Average Rate(1) High Low
- ---- --------------- ------------ ---- ---

1993........................ 5.92 5.69 6.06 5.30
1994........................ 5.34 5.51 5.98 5.11
1995........................ 4.90 4.96 5.39 4.78
1996........................ 5.19 5.12 5.29 4.90
1997........................ 6.02 5.85 6.35 5.19
1998 (through April 30, 1998) 6.02 6.11 6.21 5.97

- ----------

(1) The average of the Noon Buying Rates on the last business day of each month
during the relevant period.

Forward-Looking Statements

This Annual Report on Form 20-F contains certain forward-looking
statements that involve risks and uncertainties relating to the future financial
and technological performance of the Company. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. In evaluating such statements,
readers should specifically consider factors which could affect expected
results, including, but not limited to, those highlighted in the relevant
sections hereof and principally: (i) the inability to maintain or initiate
third-party arrangements which generate revenues, in the form of license fees,
research and development support, royalties and other payments, in return for
rights in technology or products under development by the Company; and (ii)
delays or difficulties in developing or acquiring genomics technologies and
technical and managerial personnel to fulfill gene discovery programs at
reasonable costs. Readers are cautioned not to place undue reliance on such
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release publicly any revisions to forward-looking statements to
reflect any changes in events, conditions or circumstances on which such
statements are based.

PART I

ITEM 1: Description of Business

General

- high resolution mapping;
- high-throughput sequencing;
- functional polymorphism scanning ("FPS");
- high-throughput oligonucleotide synthesis;
- 5 prime sequence and regulatory region identification;
- BioIntelligence analysis software; and
- NetGene-TM- and SignalTag-TM- databases.

The Company believes this integrated array of technologies will accelerate the
identification of disease-related and drug response genes and regulatory
regions. See " -- The Company's Technology."

By virtue of the Company's comprehensive approach and new technology,
it considers itself a next generation genomics company. To date, other genomics
companies have focused principally on one of two approaches: random sequencing
to identify genes or gene fragments without regard to their role in the disease
process; or positional cloning (the identification of a disease-specific gene by
applying a series of mapping and sequencing techniques to a collection of DNA
samples from affected families). The Company's technological strategy is to
apply large-scale, industrial techniques to the systematic and comprehensive
analysis of the human genome. The Company's strategy relies upon genome-wide
association studies in unrelated individuals. See " -- Strategy -- Technological
Strategy."

The Company has developed an original approach to gene discovery based
on its proprietary high density biallelic marker map. The Company expects this
map to enable it to conduct genome-wide studies in unrelated individuals and
thereby overcome the limitations of conventional familial studies. In this way,
the map will optimize

the Company's gene discovery efforts by allowing it to rapidly, comprehensively,
and cost-effectively home-in on the multiple genes associated with many common
diseases. See " -- The Company's Technology -- Mapping." In addition, this
approach has opened the door to the new field of pharmacogenomics by enabling
the Company to isolate the genes involved in drug response pathways using
routine clinical samples of unrelated patients with specific clinical traits. On
the basis of the Company's integrated approach utilizing industrial-scale
mapping, sequencing and polymorphism analysis, the Company believes it is in a
position to lead the industry in the development of genomics information for the
analysis and prognosis of drug response and side effects. See " -- The Company's
Pharmacogenomics Program."

The Company's current commercial objective is to capitalize on its
broad platform of genomics technologies to diversify its business opportunities
and generate multiple revenue streams that will lead to sustained revenue
growth. These multiple revenue streams include research and development fees and
milestones, clinical milestones and royalties on drug sales. The Company
exploits business opportunities in three business areas which together provide
targeted services to the pharmaceutical industry throughout the drug life cycle.
These three business areas are: disease gene discovery, gene libraries, and
pharmacogenomics. The Company has focused its disease gene discovery efforts on
common diseases involving multiple genes (multigenic diseases) such as
cardiovascular and central nervous system ("CNS") diseases, osteoporosis and
cancers. The Company's strategy to attain its commercial objective is to form
strategic partnerships with pharmaceutical companies in each of its business
areas. To date, the Company has entered into five strategic alliances with:

- the French pharmaceutical company Synthelabo to discover genes
associated with prostate cancer;

- Janssen Pharmaceutica, N.V., a subsidiary of the U.S. pharmaceutical
company Johnson & Johnson, to discover genes related to schizophrenia;

- Abbott Laboratories in the field of pharmacogenomics to discover
markers and genes associated with drug response and side effects of
existing drugs, including an initial program on an Abbott drug for the
treatment of asthma, Zileuton, and to jointly develop and market
diagnostic products based on these discoveries;

- Genetics Institute ("GI"), a subsidiary of American Home Products,
for the inclusion of the Company's SignalTag-TM- sequence database
and full-length clones for secreted proteins in GI's
DiscoverEase-Registered Trademark- program; and

- the U.S. agricultural biotechnology company Ceres for applications of
the Company's sequencing and bioinformatics technology in this field.

See " -- Strategy -- Commercial Strategy," " -- The Company's Disease Gene
Discovery Programs", "-- The Company's Gene Libraries", "-- The Company"s
Pharmacogenomics Programs", and " -- Strategic Partnerships and Collaborative
Agreements -- Strategic Partnerships."

The Company has developed a worldwide network of academic and clinical
collaborations to assist in the collection of DNA samples for targeted disease
gene discovery programs. As of April 30, 1998, the Company was engaged in
specific collaborations with the Royal College of Surgeons in Ireland ("RCSI")
relating to cardiovascular disease, with the Technion Research and Development
Foundation in Israel relating to osteoporosis, obesity and prostate cancer, with
the Parmenio Pinero Hospital in Buenos Aires and the Laboratorio Argentino de
Biologica Molecular ("LABIMO", or Argentinian Laboratory of Molecular Biology)
relating to CNS disorders, with the Centre de Recherche pour les Pathologies
Prostatiques ("CEREPP" or Research Center for Prostate Pathologies, France)
relating to prostate cancer, and with the Centre d'Etude du Polymorphisme Humain
("CEPH" or Center for the Study of Human Polymorphism, France), relating to
aging diseases. See " -- Strategic Partnerships and Collaborative Agreements --
Collaborative Agreements."

In addition to its research and development activities, the Company's
Oligonucleotides Division manufactures and sells synthetic DNA. This business is
strategically valuable since the Company's genomics activities require the use
of large quantities of high-quality synthetic DNA. The Company believes its
Oligonucleotides Division is the largest manufacturer in the world of synthetic
DNA. At present, the Company uses approximately half of its synthetic DNA
production capacity for its internal research programs and the other half is
sold worldwide. The Company has

adapted many of the industrial production and quality control techniques from
its synthetic DNA business to its mapping and sequencing operations and has
applied these techniques to its disease gene discovery, gene libraries, and
pharmacogenomics programs. See " -- Manufacturing and Marketing -- Synthetic
DNA."

Scientific Overview

The Genome

The genome is the total DNA content of an organism. DNA is composed of
four constituent compounds, known as bases or nucleotides: adenine (A), thymine
(T), guanine (G) and cytosine (C). The sequence or order of these bases is the
code that determines the structure and function of all organisms. The human
genome is arranged into 46 separate pieces known as chromosomes. Chromosomes and
their genes are present in identical form in the nucleus of each cell of an
organism. Chromosomal DNA is in the form of a double helix. The base adenine in
one strand is always found opposite the base thymine in the other strand, and
the base guanine is always opposite the base cytosine. A and T are therefore
said to be complementary, as are G and C. The human genome consists of
approximately three billion bases.

Certain DNA sequences on these chromosomes are coding regions, called
genes. A single gene will exist in different forms, known as alleles. The
beginning sequence of the gene is called 5 prime (5') and the end is called 3
prime (3'). The human genome is estimated to contain 100,000 genes that make up
roughly 5% of humankind's total DNA. Each cell of any given organ or tissue uses
only a subset of the 100,000 genes. Some of the non-coding DNA sequences,
generally located immediately before the 5 prime sequences, turn on or off the
genes in the different tissues. These are referred to as regulatory regions. The
function of the rest of the genome is still unknown.

How Genes are Expressed

The function of genes is to direct the production of proteins. Proteins
are large molecules that control all biological processes. They are composed of
constituent compounds known as amino acids. The order of the bases in DNA
determines the order of amino acids in a protein. In order for a gene to direct
the production of a protein, an enzyme known as RNA polymerase reads a strand of
a gene and makes a strand of RNA (a molecule similar to DNA) that consists of a
string of bases complementary to that of the DNA of the gene. This process is
known as transcription and results in the production of messenger RNA (mRNA).
Messenger RNA directs the assembly of amino acids in a sequence that corresponds
to the order of the bases of the mRNA. When amino acids are linked together a
protein results and the gene is said to be expressed. In other words, the
expression of a gene is the production of the specific protein that corresponds
to the DNA code of that gene. The structure and function of the protein are
determined by the order of its constituent amino acids and thus indirectly by
the order of the bases of the gene from which it is derived.

The Role of Genes in Disease

Each human genome has approximately three billion bases arranged in a
unique order. Bases that vary within DNA sequences from one individual to
another are known as polymorphisms. Polymorphisms result from changes in
specific DNA bases known as mutations. Since protein structure is ultimately
determined by the sequence of bases in a gene, mutations can (but do not always)
affect the functioning of a gene and thereby either enhance or diminish the
effectiveness of a protein. If a mutation or mutations result in the improper
functioning of a protein, a disease, or an increased susceptibility to a
disease, can result.

The different forms that exist of any given gene are known as alleles.
Disease causing alleles can be of high penetrance or low penetrance. A highly
penetrant allele will lead to a hereditary genetic disease which will have an
early onset independent of environmental conditions. Highly penetrant disease
alleles will most often appear in related individuals, but remain rare in the
population. Low penetrance disease alleles, however, are more frequent in the
population, and lead to common diseases with a later onset that are dependent on
a combination of precipitating conditions.

A low penetrance allele will cause an individual to be predisposed to a
common disease but not necessarily manifest it. In fact, the actual number of
individuals who show symptoms of the disease will be a small sub-population of
the total number of individuals carrying the disease allele. This is because the
polymorphism cannot independently cause the condition without the influence of
environmental and other factors which, in combination, will lead to
precipitation of the disease. Age is a common precipitating factor. Many common
diseases occur more often in the elderly, for example, Alzheimer's disease.
Environmental influences may also lead to the precipitation of the disease. For
example, ultraviolet light may lead to the onset of cancer or stress may lead to
the onset of CNS disorders. The presence of another interacting disease allele
may also lead to the development of disease.

Since diseases caused by low penetrance alleles are manifested by only
a small percentage of persons carrying the allele, such a disease will rarely
occur with an identifiable hereditary pattern in which several members of the
same family are affected by the disease. Patients manifesting such a disease
therefore appear as sporadic cases. Samples will typically only be available
from unrelated individuals. This is why it is almost impossible to discover low
penetrance disease causing genes using familial analysis, which is more suitable
for high penetrance gene discovery. This is critical as about 90% of patients
affected with a given common disease, such as Alzheimer's disease, depression,
schizophrenia or hypertension, carry high frequency, low penetrance alleles. The
Company believes that the most efficient way to discover low penetrance disease
alleles in unrelated individuals is by using genome-wide association studies.

Genomics and Drug Discovery

Genomics is the systematic analysis of the structure and function of
the genome. Genomics enables scientists to establish the order or sequence of
DNA bases and to identify disease-related genes. It is believed that once these
genes are identified, scientists will be able to determine the molecular
mechanisms that cause the disease and that these steps will furnish new targets
for drug screening. Drugs developed in this way are potentially more efficacious
than current drugs since they treat the cause of a disease rather than the
symptoms and, because they are developed based on the molecular mechanisms
specifically related to a disease, may have fewer side effects. To date, no drug
has been developed based on genomics research.

Pharmacogenomics

Pharmacogenomics is the application of genomics technologies to the
analysis and identification of genes involved in drug response pathways, such as
drug metabolism and side-effects. It encompasses the discipline of
pharmacogenetics, which is the study of genes specifically related to drug
metabolism. Pharmacogenomics emerged as a new discipline during 1997 with the
advent of high-resolution mapping tools that first made it possible to apply
genomics analysis to clinical trial data.

Drug efficacy and toxicity may be considered as multifactorial traits
that involve pathways of interacting

proteins in much the same way as complex diseases. Just as genetic variations
may lead to disease they may also determine why individuals have a different
response to a particular drug. There may be several reasons why individuals
respond differently to a drug or are non-responders. It is known that several
independent alleles can cause the same disease in different individuals. In
general, a given drug targets only one allele and hence it will only be
efficient in the patients carrying the target allele. Therefore, patients who
either do not carry the targeted allele, or have a polymorphism in this allele,
will not respond to the drug. Individual variations in genes that code for
proteins in a metabolic pathway can affect the metabolism of a drug and thus its
efficacy and potential toxicity. A side effect can be regarded as a disease
pathway in itself, which has been triggered by an artificial factor, the drug.
Interaction of the drug with proteins that resemble the target may induce
alternative pathways which could potentially cause side effects.

Physical Mapping

To analyze the human genome, scientists need to fragment DNA into small
stretches of a few hundred, typically 500, bases in length, the maximum size
that automated DNA sequencers can process. Physical mappers take the
approximately three billion bases of the human genome and cut them randomly into
thousands of overlapping fragments of 100,000 to one million bases. These large
DNA fragments are stored and replicated in either yeast or bacterial cells
through the construction of Yeast and Bacterial Artificial Chromosomes (YACs and
BACs). YACs and BACs are yeast and bacterial chromosomes to which large
fragments of human genomic DNA have been added. The yeast and bacterial cells
replicate these artificial fragments of human DNA along with their own DNA when
they undergo cell division. YACs contain fragments of up to one million bases of
human DNA while BACs contain fragments of approximately 100,000 bases of human
DNA. BACs are, in turn, further fragmented into stretches of a few hundred bases
long that can be sequenced. YAC and BAC libraries are key tools for physical
mapping and the efficient sequencing of DNA fragments because the overlapping
fragments of human DNA contained in YACs and BACs cover the entire region to be
sequenced and can be ordered and further fragmented into stretches of DNA small
enough to be sequenced.

Genetic Mapping

Genetic mapping is a technique enabling scientists to identify a region
or regions of the genome that is likely to contain a gene associated with a
particular disease or clinical trait. This technique requires a collection of
DNA samples from individuals affected by the disease and utilizes a tool called
a genetic map. A genetic map is an ordered set of known stretches of DNA
sequences or markers at polymorphic sites spaced along the genome. Scientists
test the DNA of both the affected and non-affected individuals and through
statistical analysis are able to identify the region or regions of the genome
which are likely to contain a gene related to the disease or clinical trait.

Association Studies

An association study compares DNA samples from individuals with a given
trait with those of unaffected individuals to determine which alleles are
associated with the particular trait. An allele is said to be associated with a
disease when carriers of this allele are more frequent among patients than among
unaffected people. When candidate genes that are derived from biological studies
are available, they can be tested using association studies. Furthermore,
genome-wide association studies allowing the study of human genes throughout the
genome, even in the absence of a priori knowledge about the disease pathway,
would be an ideal means to pinpoint the polymorphisms associated with a given
disease or drug response trait in unrelated individuals.

The Company's Technology

Mapping

The Company uses genetic and physical maps to locate which regions of
the genome may contain medically relevant genes. The Company uses genetic
mapping to identify a region or regions of the genome that is likely to contain
a gene associated with a particular disease or drug response, and physical
mapping to establish a set of ordered, overlapping DNA fragments in those
regions of the genome that may be of commercial interest. Genetic mapping
involves a statistical comparison of DNA samples from affected and non-affected
individuals affected by a disease. The Company believes it has access to
suitable DNA collections to perform this statistical analysis for its current
programs. The Company uses physical mapping to generate genetic maps and to
sequence specific regions of DNA. Instrumental to the Company's mapping effort
is its proprietary BAC library containing 300,000 fragments of human genomic DNA
from which the Company is generating an ordered sub-library of 20,000 BACs that
constitutes a physical map covering the entire human genome. The Company uses a
fully automated fluorescence in situ hybridization ("FISH") hardware and
software system to confirm chromosomal locations of all BACs of interest. To the
Company's knowledge, this is the first system in the world for FISH-based
automated quality control of high resolution maps. It is the Company's intention
to develop additional industrial-scale FISH-based technologies to further
support its high resolution mapping effort.

In February of 1996, Dr. Daniel Cohen, a co-founder and former
Scientific Director of both CEPH and Genethon, joined the Company and was
followed in the spring of 1996 by the 25 member CEPH mapping team. In 1993, CEPH
and Genethon collaborated to produce the first physical map and the most
comprehensive genetic map of the entire human genome. Both maps have been widely
used by the genomics community and have served as the basis for subsequent maps.
In 1995, Genethon published a genetic map with over 5,000 markers. The Company
believes that its team is one of the foremost mapping groups in the world and
that the expertise of its members enhance the Company's ability to rapidly
identify disease-related genes. The Company's extensive mapping know-how enables
it to produce its own high resolution maps for specific regions of interest of
the genome.

Biallelic Marker Map

The Company is developing a completely new genetic map known as the
high resolution biallelic marker

map which it believes will be a revolutionary tool for gene discovery and
pharmacogenomics. This high resolution map is a collection of single nucleotide
polymorphisms ("SNPs"), known as biallelic markers, that are evenly distributed
throughout the human genome. The Company believes that the detail and accuracy
of this map will give it a major competitive advantage by allowing it to conduct
a genome-wide search for disease and drug response genes. This task is made
feasible through the association of the biallelic markers with genes of clinical
relevance. The Company generates an average of three biallelic markers from each
BAC.

Once a marker associated with a disease or drug response trait has been
identified, this ordered library can be used to locate the position of the
associated gene in the human genome. Biallelic markers, which are inherently
binary, can be readily incorporated in automated assays. Genotyping is the
determination of the polymorphism composition of an individual's genome with
respect to a specific set of markers. The Company has a fully automated
high-throughput genotyping technology with a capacity exceeding 20,000 genotypes
per day.

The Company's approach uses the phenomenon of linkage disequilibrium to
find genes in close vicinity to its biallelic markers. Linkage disequilibrium is
the tendency for alleles at nearby genomic sites to be found together in the
same individual. This is because the closer the alleles the less chance they
have of being separated during evolution. The Company's approach uses linkage
disequilibrium to narrow down the search for disease and drug response genes.
Due to linkage disequilibrium, when a marker at a given site is found at high
frequency, one can expect that the gene found in the vicinity of this marker
occurs at high frequency as well. Once a marker associated with a given disease
or drug response has been identified, the identification of the gene is greatly
simplified as its position has already been determined by mapping in the ordered
BAC library. Therefore, the Company will be able to easily locate the target
gene from the known position of the BAC fragment (to the nearest 50,000 to
100,000 bases). This is much more specific than the familial approach, which can
only estimate the location of a gene to the nearest 5 million to 50 million
bases. The Company can then effectively sequence a relatively short piece of DNA
to obtain the sequence of the target gene and discover any functional
polymorphisms in the gene sequence thought to be associated with disease or drug
response.

The Company's industrial-scale mapping facility is housed in its
Genomics Research Center in Evry, France. This facility uses the Company's
proprietary high resolution maps based on BACs with a five-fold increase in
scale relative to the previous CEPH operation. This unique facility is designed
to identify rapidly and precisely those genes associated with particular
diseases and drug response. The Company's production of the high density
biallelic marker map relies on its fully integrated, industrial-scale platform
of technologies, specifically: high-throughput sequencing and oligonucleotide
production (DNA synthesis), functional polymorphism scanning ("FPS") and
bioinformatics. See " -- Sequencing", "Manufacturing and Marketing -- Synthetic
DNA"," -- Functional Polymorphism Scanning ("FPS")", and " -- NetGene-TM- and
SignalTag-TM- Databases and BioIntelligence Analysis Software."

Sequencing

Sequencing technology is used by the Company to determine the order of
the bases or nucleotides that compose DNA. The Company believes that it has
established one of the largest high-throughput sequencing operations in the
world. Located in Evry, France this approximately 20,000 square foot facility,
was relocated and expanded during 1997 so as to be an integral part of the
Company's Genomics Research Center.

The Company's sequencing facility is organized as an industrial
production unit to maximize both efficiency and accuracy and is characterized by
automation of tasks, control and command workstations, quality control with
bar-code systems and high and "just-in-time" throughput. Several proprietary
technologies are used for the preparation and separation of templates at various
steps of the sequencing process. The equipment consists of a range of automated
sequencers, sequencing reaction robots, preparation robots and thermocyclers.
The sequencing facility includes sophisticated robotics and the Company's
proprietary advanced process control and sequence verification software. The
Company's sequencing facility utilizes the most advanced sequencing equipment
commercially available and serves as a

pre-marketing test site for more advanced equipment not yet on the market.
Current throughput is approximately five million bases per day with greater than
99.5% accuracy. The Company expects to increase its sequencing capacity to ten
million bases per day during 1998.

Since genes are scattered throughout the genome, but make up only about
5% of the genome, special techniques must be used to find them. Once the Company
has sequenced a region, it uses several complementary techniques, including its
5 prime sequence identification technology ("The 5 Prime Technology") and its
NetGene-TM- and SignalTag-TM- databases and BioIntelligence analysis software,
to detect genes and regulatory regions.

Identification of 5 Prime Sequences

The Company has developed a technique, for which it has filed two
patent applications, which enables it to rapidly isolate the 5 prime sequences
of genes. See " -- Patents and Proprietary Rights -- The Company's Patent
Portfolio and Strategy." 5 prime sequences are stretches of DNA that are located
at the beginnings of genes. Once these 5 prime sequences are isolated, the
Company sequences them at its high throughput sequencing facility and inputs the
resulting data into its NetGene-TM- database. As of April 30, 1998, the Company
had identified over 56,000 different 5 prime sequences. By scanning its database
of sequenced regions for these 5 prime sequences, the Company can locate both
genes as well as regulatory regions, which typically are located immediately
prior to the 5 prime sequences of genes. In addition, using only its
BioIntelligence analysis software, the Company was able to compile
SignalTag-TM-, a specialized subset of NetGene-TM-, containing sequences which
correspond to genes coding for secreted proteins. See " -- NetGene-TM- and
SignalTag-TM- Databases and BioIntelligence Analysis Software."

Identification of Regulatory Regions

Gene regulatory elements represent important therapeutic targets and
may also have potential utility in gene therapy. Regulatory regions are
sequences of DNA that serve as on/off switches for the genes under their
control. Regulatory regions are usually located immediately before the beginning
of a gene. In 1994, the Company launched a program dedicated to identifying,
sequencing and analyzing the regulatory regions of the human genome in an effort
to provide new information about the processes controlling gene expression.
Since the DNA sequences of regulatory regions exhibit characteristic patterns,
software can be used to recognize these characteristic patterns and detect
regulatory regions, and the genes which typically follow them, within sequenced
regions. See " -- NetGene-TM- and SignalTag-TM- Databases and BioIntelligence
Analysis Software." In addition, the Company has developed and filed a patent
application for another technique based on its database of 5 prime sequences
which enables it to analyze the variation in the gene expression patterns in
normal and diseased tissues, called tissue expression patterns. The Company's
regulatory region program through June 30, 1997 was conducted in
collaboration with Genethon. Pursuant to an agreement with Genethon, the
regulatory region data that resulted specifically from this collaboration is
the joint property of the Company and Genethon. Each of the parties is
granted the right to apply for patents and any commercial rights on any
applications it independently develops from this data. Genethon has never
applied for such a patent and the Company believes that Genethon has no
intention to do so.

NetGene-TM- and SignalTag-TM- Databases and BioIntelligence Analysis Software

The Company has established a proprietary database of genomic
information known as NetGene-TM-. This database contains extensive data on
genomic sequences, genes, 5 prime sequences, regulatory regions and tissue
expression patterns. As of April 30, 1998, NetGene-TM- contained over 56,000
different 5 prime cDNA sequences, each corresponding to a different human gene.
NetGene-TM- integrates information discovered by the Company with data available
from public sources. The NetGene-TM- database is not available commercially.

The NetGene-TM- database was enhanced in early 1997 by
SignalTag-TM-, a specialized database of secreted protein sequences.
SignalTag-TM- is a subset of NetGene-TM- which was electronically compiled by
Genset using its proprietary BioIntelligence analysis software. The
SignalTag-TM- database contains over 3,000 cDNA sequences, of which the
majority are new sequences (not characterized in public databases) which
correspond to unknown genes coding for new secreted proteins. The Company's
secreted protein sequences are located at the 5 prime end of the coding
region. Each sequence, known as the signal sequence, codes for a specific
amino-acid region located at the N-terminal side of the protein, which is
used by the cell to direct the protein toward a secretory pathway.
Application of Genset's 5 Prime Technology is instrumental in the rapid and
systematic identification of these signal sequences. Therapeutic applications
of SignalTag-TM- are included in the Company's portfolio of exclusive
licensing opportunities offered to pharmaceutical collaborators. On July 25,
1997, the Company entered into an exclusive license agreement with Genetics
Institute ("GI"), a subsidiary of American Home Products, to provide access
to its SignalTag-TM- sequence database and full-length clones for secreted
proteins for inclusion in GI's DiscoverEase-Registered Trademark- program
aimed at pharmaceutical collaborators. See " -- Strategic Partnerships and
Collaborative Agreements -- Strategic Partnerships -- Genetics Institute
License and Distribution Agreement."

Bioinformatics is the application of computer technology to the
analysis of complex genomic data. The Company has enhanced its bioinformatics
capabilities with artificial intelligence tools. The resulting proprietary
BioIntelligence software analyzes the DNA sequence data in the NetGene-TM- and
SignalTag-TM- databases and develops rules for recognizing patterns
characteristic of secreted proteins, genes and regulatory regions. DNA sequences
identified as secreted proteins, genes or regulatory regions can then be fed
into the Company's FPS program to identify those related to disease. The
secreted protein sequences in the SignalTag-TM- database provide additional
depth to the Company's portfolio of genomics research products and represent an
important advance for the Company's BioIntelligence program. The Company also
uses its BioIntelligence analysis software to edit sequence data from public
sources to remove the redundancies and inaccuracies that can limit the utility
of these databases, and to conform the format of data from these numerous
databases to that of its NetGene-TM- and SignalTag-TM- databases. The
capabilities of the BioIntelligence program increase as more data becomes
available from the Company's mapping and sequencing activities and from public
sources.

Functional Polymorphism Scanning ("FPS")

FPS is the Company's automated and systematic technology to identify
genes and markers related to diseases and drug response by detecting and
analyzing the frequency of DNA sequence variations or polymorphisms in affected
populations. Functionally identical genes generally have slightly different DNA
sequences from one individual to another. Many of these DNA sequence variations
are largely medically irrelevant. However, some sequence variations either cause
a disease, or create an increased susceptibility to a disease, or are involved
in drug response and drug side effects. It is these polymorphisms that have
commercial potential and that the Company's FPS technology is designed to
identify.

The Company uses its FPS technology to compare the DNA sequences of a
number of individuals with a given disease or drug response trait with those
individuals who do not have the trait. The polymorphisms that appear more
frequently in individuals who have a given trait are generally those that are
specifically associated with the trait. FPS can be performed efficiently using
DNA samples from unrelated individuals and from routine clinical trials, thus
reducing

the time and cost involved in obtaining patient DNA samples. Since FPS can be
used on clinical trial samples, it can be used to support pharmacogenomics
analysis for drug response and side effects as well as for disease gene
discovery programs. Also, FPS can be carried out with the Company's proprietary
biallelic markers and can be used to identify multiple genes implicated in a
disease or drug response. FPS allows genome-wide scanning so that several
genomic regions can be analyzed in parallel and several genes can be sought at
the same time.

FPS relies on extensive know-how and trade secrets. In addition, FPS
requires a large amount of high quality synthetic DNA for which the Company is
one of the world's leading suppliers. See " -- Manufacturing and Marketing --
Synthetic DNA."

Strategy

The Company's mission is to assist pharmaceutical companies in the
discovery, development and marketing of their drugs through the discovery and
analysis of common disease and drug response genes. The Company's current
commercial objective is to capitalize on its broad platform of genomics
technologies to diversify its business opportunities and generate multiple
revenue streams that will lead to sustained revenue growth. The Company's
strategy is to enter into strategic partnerships with pharmaceutical companies
in each of its three target business areas: disease gene discovery, gene
libraries, and pharmacogenomics.

Technological Strategy

The Company's technological strategy is to apply large-scale,
industrial techniques to the systematic and comprehensive analysis of the human
genome. The Company's strategy specifically utilizes genome-wide association
studies to investigate multiple gene pathways and not just single candidate
genes. This unique approach is made possible by the accuracy and high resolution
of the Company's biallelic marker map. By analyzing human genetic diversity, the
Company expects the map to enable it to pinpoint the polymorphisms associated
with a clinical trait through the comparison of unrelated individuals with and
without the clinical trait. Ultimately, a disease or drug response will often be
determined by a complicated pathway of interacting proteins. Using this
genome-wide approach, the Company can obtain a comprehensive view of most
disease genes involved in various interacting pathways rather than focusing on
just one candidate gene which is unlikely to give a complete picture. The
Company expects its strategy to enable it to more quickly identify and patent
genes and regulatory regions related to selected common diseases and drug
response and to provide more complete information about the genetic causes of
diseases. Each of the Company's technologies contributes to this strategy.

Speed and efficiency are key to the Company's technological strategy.
The Company's high resolution mapping capabilities combined with its
large-scale, high-throughput genotyping and sequencing facilities are designed
to increase the speed with which it can sequence regions of the human genome.
Once the Company has sequenced these regions, its 5 Prime Technology and
NetGene-TM- and SignalTag-TM- databases and BioIntelligence analysis software
should enable it to identify genes and regulatory regions. The Company expects
that its FPS technology will enable it to identify in parallel the multiple
genes and markers that are related to disease and to drug response. FPS
technology should also enable the Company to decrease its reliance on family DNA
samples, and thus decrease the time and cost involved in obtaining patient DNA
samples.

In addition to its focus on speed and efficiency, the Company has
undertaken a comprehensive approach to the analysis of the human genome because
it believes that possessing more complete information about the genetic causes
of diseases will increase the chance that effective drugs will be developed. The
Company expects its various technologies to provide it with information about
the multiple genes related to a disease.

To date, very few of the genes related to common diseases have been
identified. Identifying and patenting such genes faster than competitors will
lead to valuable commercial rights. The Company's

strategy for patent protection is to file comprehensive patent applications that
combine full-length gene sequences with genomic information of clinical
relevance, typically including the corresponding proteins and their functional
characterization, related polymorphic markers and functional mutations, together
with disease or drug response association data. The Company believes that such
comprehensive patents will provide broader and more valuable protection. See "
- -- Patents and Proprietary Rights."

There is limited scientific understanding relating to the role of genes
in most diseases and relatively few products based on gene discoveries have been
developed and commercialized. In addition, the Company's genome-wide and
comprehensive approach to find multiple genes related to a disease or drug
response and the use of this information to discover therapeutic drugs to find
treatment for multigenic diseases or to improve the use of a therapeutic is
unproven. There can be no assurance that the approach of competitors will not
prove to be more effective or that competitors will not develop alternatives to
the Company's biallelic marker map.

Commercial Strategy

The Company's commercial strategy is to pursue multiple business
opportunities to commercialize the results of its research and development work.
The Company focuses on strategic partnerships for the development and marketing
of drugs resulting from its genomics and pharmacogenomics research. To date, the
Company has entered into five strategic alliances with:

- the French pharmaceutical company Synthelabo to discover genes
associated with prostate cancer;

- Janssen Pharmaceutica, N.V., a subsidiary of the U.S. pharmaceutical
company Johnson & Johnson, to discover genes related to schizophrenia;

- the U.S. agricultural biotechnology company Ceres for applications of
the Company's sequencing and bioinformatics technology in this field.

See " -- Strategic Partnerships and Collaborative Agreements -- Strategic
Partnerships."

Research licensing fees and research milestone payments from strategic
partnerships provide the Company with a source of revenue in the near term,
while clinical milestone payments and royalty payments on therapeutic sales
represent a stream of potential medium and long-term revenue. The Company's
programs may also include hormones, growth factors or other therapeutic
proteins, particularly those derived from its SignalTag-TM- database, which it
expects would come to market faster than small molecule drugs since they would
require much less development. The Company's focus on regulatory regions may
provide another opportunity which could be useful for gene therapy as well as
for the development of small molecule drugs to modulate gene expression.

While the Company anticipates that it will select appropriate
commercialization strategies, depending on the product, with several different
strategic partners, failure to allocate its resources to those products with the
most commercial potential and to the appropriate strategic partners could have a
material adverse effect on the Company. Even if the Company is successful in
identifying disease-related and drug response genes, relatively few products
based on genes have been developed and commercialized to date, and there can be
no assurance that the Company or other entities working in collaboration with
the Company will be able to discover drugs and develop commercial products based
upon its gene discoveries. In addition, the development and commercialization of
drugs based on genes discovered by the Company will be subject to the risks
inherent in any new drug. Although the Company's contractual arrangements
obligate its strategic partners to develop or commercialize genes discovered by
the Company in good faith, there can be no assurance that current or future
strategic alliance partners will do so or that they will not pursue

alternative technologies, or develop alternative drugs either on their own or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by strategic alliances with the
Company.

The Company's Gene Discovery Programs

The Company has focused its gene discovery efforts on common diseases
representing major markets for the pharmaceutical industry. The Company's unique
approach to association studies has allowed it to optimize its gene discovery
programs by enabling it to use DNA samples from unrelated individuals including
samples collected by pharmaceutical companies or clinical research organizations
during clinical trials, and thus eliminating the time consuming collection of
familial samples. By comparing unrelated populations of individuals, the Company
is able to provide genomics information with increased statistical value. The
Company's comprehensive approach should enable it to provide pharmaceutical
companies with multiple targets for drug discovery.

The Company chose its initial disease targets based on the potential
size of the therapeutic market, its access to DNA samples from related and
unrelated individuals affected with the disease and the interest expressed by
potential strategic partners. The Company has entered into a strategic alliance
with Synthelabo for the discovery of genes related to prostate cancer and a
research and collaboration license agreement with Janssen Pharmaceutica, N.V., a
subsidiary of the U.S. pharmaceutical company Johnson & Johnson, for the
discovery of genes related to schizophrenia. See " -- Strategic Partnerships and
Collaborative Agreements -- Strategic Partnerships."

The Company's programs are designed to identify the genes coding for
the proteins involved in disease pathways and drug targets, for which it
receives research fees and milestones, clinical milestone payments and royalties
on sales of therapeutics developed from genomics information. Partners have the
exclusive license to use the gene discoveries for clinical development and
marketing of therapeutics for a specific disease.

Prostate Cancer

The Company has established a strategic alliance with the French
pharmaceuticals company Synthelabo to discover genes associated with prostate
cancer. Pursuant to its research collaboration agreement with CEREPP, the
Company has exclusive access to a large collection of DNA samples from affected
families and unrelated individuals, as well as DNA and RNA samples from healthy
and unhealthy prostate tissues.

The initial two-year research program was completed on May 8, 1998
and the Company and Synthelabo have agreed to extend their research and
development collaboration for a third year during which the Company will search
for additional prostate cancer genes. The Company successfully completed all of
the research milestones provided for in the initial two-year research program,
and as a result of this research filed one patent application related to
chromosomal regions suspected to contain genes associated with prostate
cancer, and one patent application related to a novel gene associated with
prostate cancer. See " -- Strategic Partnerships and Collaborative Agreements
- -- Strategic Partnerships -- Synthelabo Collaboration Agreement" and " --
Collaborative Agreements -- The CEREPP Research Collaboration Agreement."

Prostate cancer may represent a significant commercial opportunity as
populations of older individuals continue to increase in the developed world.
The American Cancer Society estimated that approximately 209,900 new cases of
prostate cancer and more than 41,800 deaths associated with the disease would
occur in the United States in 1997, representing an increase from approximately
165,000 new cases and 35,000 deaths in 1993.

Schizophrenia

The Company has established a research collaboration with Janssen
Pharmaceutica N.V., a subsidiary of the U.S. pharmaceutical company Johnson &
Johnson, for the discovery of genes associated with schizophrenia. The Company
believes that Johnson & Johnson's experience in the development and marketing of
new products combined with Genset's strength in gene discovery may further
development of new drugs in the field of CNS disorders. The Company and third
parties have identified regions of DNA containing genes associated with
schizophrenia and the Company is using its biallelic marker map to pinpoint the
exact location of these genes.

Schizophrenia is a severe chronic mental disorder that is estimated to
affect approximately 1% of the world's population. Schizophrenia is
characterized by disturbances of mind and personality, including hallucinations,
delusions and a deterioration in psychosocial functioning. The cause of
schizophrenia is unknown and there is no known cure for the disease. Current
therapy is inadequate both in terms of efficacy and side effects. Approximately
45 million people worldwide suffer from schizophrenia, according to the World
Health Organization. Gradually, conventional neuroleptics are being replaced by
a new class of anti-psychotics that combine a superior efficacy with reduced
side effects. Despite this progress, antipsychotic treatment remains symptomatic
and more research into the cause of the disease is necessary to develop better
treatments or even a cure for this devastating disease.

Osteoporosis, Aging Diseases and the Centenarians

The Company has established a gene discovery program for osteoporosis
for which it has established a program involving hospitals throughout France to
collect DNA samples and associated clinical data from individuals suffering from
osteoporosis. In addition, the Company expects to obtain access to samples from
patients affected with osteoporosis as part of the research collaboration with
the Technion Research and Development Foundation. See " -- Strategic
Partnerships and Collaborative Agreements -- Collaborative Agreements --
Technion Research Agreement."

Osteoporosis is a pathological reduction in bone density that is
particularly common in postmenopausal women and is associated with increased
fractures of the wrist, spine and hips. It is currently estimated that
approximately 15 to 20 million people in the United States suffer from
osteoporosis, of whom approximately 80% are women. It is difficult to estimate
the size of the U.S. market for drugs used to treat osteoporosis, because some
of these drugs are prescribed for other indications. The Company is actively
seeking a strategic alliance with a pharmaceutical company to support drug
development from the results of its gene discovery program.

The Company has access through the CEPH Collaboration Agreement to all
results from CEPH's research on a large collection of DNA samples from
individuals over 95 years of age -- the centenarians. The collection contains
DNA from approximately 200 pairs of centenarian siblings. The centenarian
samples are particularly valuable because they can serve as negative controls
for all diseases related to aging. Any centenarian who is unaffected by a
particular aging-related disease, such as osteoporosis, is very unlikely to have
the genetic mutation or mutations related to the disease. See " -- Strategic
Partnerships and Collaborative Agreements -- Collaborative Agreements -- CEPH
Collaboration Agreement."

Cardiovascular Diseases

The Company has established a gene discovery program for cardiovascular
disease which is initially focused on hypertension, thrombosis, restenosis and
their complications. In October 1997, the Company entered into a ten-year
strategic research collaboration with the Royal College of Surgeons in Ireland
("RCSI") to create a DNA bank and to perform genomics research based on
association studies using samples from

unrelated individuals, and which initially involves approximately 20,000
patients over a period of five years. As part of the collaborative arrangement,
the Company and RCSI formed Surgen, a dedicated joint venture owned 50% by each
and located in Dublin, Ireland. Surgen is responsible for DNA extraction, cell
immortalization, sample and data storage and, more generally, all operations
connected with the creation and maintenance of the DNA bank. See " -- Strategic
Partnerships and Collaborative Agreements -- Collaborative Agreements -- Surgen
Joint Venture." The Company is actively seeking a strategic alliance with a
pharmaceutical company to support drug development from the results of the gene
discovery program.

The World Health Organization estimates that cardiovascular and heart
diseases were responsible, on a worldwide basis, for 15 million deaths in 1995,
and that they would be implicated in up to 40% of all deaths by the year
2020. Cardiovascular and heart diseases are currently either the leading
cause of death or one of the leading causes of death in all industrialized
countries. The Company believes that cardiovascular diseases are related to a
complex series of genes and therefore that its comprehensive approach is
particularly suited to understanding the genetic causes of hypertension,
thrombosis, restenosis and their complications. The Company is actively
seeking a strategic alliance with a pharmaceutical company to support drug
development from the results of the gene discovery program.

Bipolar Disease and Other CNS Disorders

It is the Company's intention to identify genes associated with CNS
disorders, and specifically, with bipolar disease. In June 1997, the Company
established a collaborative network in Argentina for the collection, banking and
analysis of DNA samples from patients affected with CNS disorders. See " --
Strategic Partnerships and Collaborative Agreements -- Collaborative Agreements
- -- Argentina Research Agreement." In addition, the Company expects to obtain
access to samples from patients affected with bipolar disease from a clinical
research program it is establishing with the Versailles Hospital Center outside
Paris. The Company believes that CNS disorders are related to a complex series
of genes and therefore that its comprehensive approach is particularly suited to
understanding the genetic causes of these diseases and their complications.

Obesity

In collaboration with INSERM, the Company has identified a novel
gene which codes for a receptor related to obesity and filed a joint patent
application thereon. The Company has developed a program and established
collaborations with several hospitals in France for the collection of DNA
from obesity patients. It is the Company's intention to license this gene to
a pharmaceutical partner for the discovery and development of drugs for the
treatment of obesity. See " --Strategic Partnerships and Collaborative
Agreements -- Collaborative Agreements -- INSERM Collaboration Agreement."

The Company's Gene Libraries

The Company has developed unique gene libraries and proprietary
databases in order to supply the demand of pharmaceutical companies for new
therapeutic targets and products. SignalTag-TM- is the first gene library
developed from Genset's integrated platform of genomics technologies. The
SignalTag-TM- gene library is a proprietary genomics database specific for
secreted proteins. These proteins are of special commercial and therapeutic
interest as they include growth factors, hormones, and cytokines which play a
key role in triggering physiological responses by acting on distant cells or by
reacting to cellular signaling. The demand for novel therapeutic proteins is
high and in 1997 the sale of drugs derived from secreted proteins exceeded $12
billion.

SignalTag-TM- is a subset of the NetGene-TM- database which was
identified using the Company's patented 5 Prime Technology together with
advanced bioinformatics technology. The 5 Prime Technology permits the
systematic, rapid and accurate isolation of the beginning of genes by a specific
tagging process. Secreted protein genes have a characteristic signal sequence at
the 5 prime end which codes for a specific amino acid sequence used by the cell
to direct the proteins to a secretory pathway. See " -- The Company's Technology
- -- NetGene-TM- and SignalTag-TM- Databases and Biointelligence Analysis
Software." With bioinformatics analysis, the Company was able to rapidly
identify more than 2,000 new gene sequences of potential commercial value. The
Company has applied for patents covering over 2,500 of these sequences. See " --
Patents and Proprietary Rights." As a point of reference, all current secreted
therapeutic proteins have been derived from a pool

of fewer than 2,000 genes identified over the last 20 years.

In July 1997, the Company entered into an agreement with Genetics
Institute ("GI"), a wholly-owned subsidiary of American Home Products and a
leader in secreted protein commercialization through the
DiscoverEase-Registered Trademark-program. GI has exclusively licensed up to
2,000 SignalTag-TM- sequences and full-length cDNA clones from which it will
express secreted proteins and make them available for evaluation by
pharmaceutical companies through the DiscoverEase-Registered Trademark-
distribution platform. As of April 30, 1998, DiscoverEase-Registered
Trademark-partners which have signed up for access to the library include
Chiron, Chugai, Genentech, Bayer, Immunex, Kirin Brewery, Ontogeny and Scios.
See " -- Strategic Partnerships and Collaborative Agreements -- Strategic
Partnerships -- Genetics Institute Licence and Distribution Agreement."
Through GI's DiscoverEase-Registered Trademark-program, the Company expects
to realize several important objectives, including:

- the rapid access to a large potential market;

- the generation of immediate revenues;

- the retention of a significant share of the longer term market value
that will be created from the therapeutic products discovered and
developed using SignalTag-TM- novel secreted proteins; and

- the leverage of the Company's proprietary genomics platform for
commercialization in new business activities.

The Company's Pharmacogenomics Program

Pharmacogenomics is the comprehensive study of the genes involved in
drug response. Drug response, like the manifestation of common diseases, is
determined by a combination of interacting gene pathways for drug response as
well as alternative pathways such as drug metabolism and side effects. Genset's
unique biallelic marker map has opened the door to pharmacogenomics by enabling
the Company to find the polymorphisms associated with response to a drug
treatment. The Company's approach to pharmacogenomics is to derive functional
information on drug response genes by comparing individuals with different
responses to drug treatment, using data coming directly from clinical trials.
Using this information, the Company can work with its pharmaceutical partners to
design clinical trials more efficiently and to achieve better rates of success
by tailoring the drug to the correct target population of patients.

Pharmacogenomics aims to bridge the gap between gene discovery and drug
discovery as it is immediately applicable to clinical trials of existing drugs.
The diseases which represent the greatest opportunities for pharmacogenomics are
those which have significant phenotypic heterogeneity such as CNS disorders,
like schizophrenia and bipolar disease, and cardiovascular disease. This is
because the more genetically complex (polygenic) a disease is, the more
difficult it is to locate the correct drug target and hence the less likely it
is that a drug will have its desired effect across the target population. In
addition, clinical trials are long and costly for these diseases. The Company's
pharmacogenomics approach explores on a genome-wide scale the multiple genes
involved in drug response pathways to fine-tune a drug to its ideal target
population.

Pharmacogenomics makes sense for pharmaceutical companies, for patients
and for health care budgets. It has the potential to reduce costs and time in
drug development, and to increase efficacy and decrease side effects in marketed
drugs, thereby increasing both the value and safety of drugs. A recent report in
the Journal of the American Medical Association ("JAMA", published April 15,
1998) argues that more than 100,000 Americans die in hospitals each year from
adverse drug reactions. These reactions would be the fourth leading cause of
death in the U.S. after heart disease, cancer and stroke. The findings of this
study underscore the potential importance of pharmacogenomics in identifying
patients who are susceptible to adverse reactions to prescription drugs. The
overall objective of pharmacogenomics is to improve the risk-benefit profile of
drugs and increase their benefit-cost ratio. A drug that is safer and more
effective delivers greater value for the patient and can be sold at a premium
while reducing overall healthcare costs. Also, once the drug is prescribed and
used by a patient population, its use is more likely to be maintained as the
drug has been customized to this population's genetic make-up. Pharmacogenomics
offers the opportunity to build market share based on the real value of the drug
and to collaborate on disease

management strategies with patients, doctors and insurance providers.

Pioneering Pharmacogenomics Alliance with Abbott

In July 1997, the company entered into a strategic alliance with Abbott
in the field of pharmacogenomics for the development of genetic markers and
diagnostic tests for the analysis of drug response. In addition, Abbott became
the first pharmaceutical customer of the alliance through a research and license
agreement for the development of markers and discovery of genes associated with
patient response to and side effects of Abbott's drug for the treatment of
asthma, Zileuton. This alliance also includes an agreement to collaborate on
additional pharmacogenomics programs for third party pharmaceutical companies.
See " -- Strategic Partnerships and Collaborative Agreements -- Strategic
Partnerships -- Abbott Strategic Alliance."

The Company is actively seeking pharmacogenomics research
collaborations with pharmaceutical companies to develop markers and discover
genes associated with specific drugs. The Company expects to receive clinical
milestone payments and royalties for all drugs developed and marketed using its
pharmacogenomics technology platform. In January 1998, the Company began
development of its Pharmacogenomics group to support research and business
development of related programs. This group is located at the Company's facility
in La Jolla, California.

The Company believes that diagnostic tests developed through
pharmacogenomics research have the potential to be employed throughout the life
cycle of a drug, including in preclinical development, clinical trials,
regulatory approvals and marketing. The pharmacogenomics research programs that
the Company will undertake for other pharmaceutical companies in collaboration
with Abbott are expected to enable these companies to realize three major
opportunities for drugs that are in clinical development or are already on the
market:

- Safer and more effective clinical trials. Diagnostic tests can be
used to screen potential participants in clinical trials to select
those individuals who will be drug responders and are not
susceptible to side effects. Hence trials should proceed more
safely, efficiently and rapidly, yield better data, and result in
a reduced number of drug failures.

- Repositioning of drugs on the market. An approved drug may have
disappointing sales due to limited efficacy or adverse side
effects. Pharmaceutical companies with a diagnostic test specific
for their drug will be able to target individuals who will really
benefit from their drug. In this way they will be able to increase
sales for these drugs.

- Rescue of drugs that failed due to adverse effects or limited
efficacy. Approximately 30% of drugs fail Phase III clinical
trials due either to adverse side effects or limited efficacy. The
genes causing these adverse side effects may only be present in a
small percentage of the population, whereas the drug may be
completely safe and effective in the remainder. Alternatively, the
drug may be effective in only a portion of the population that
manifests the disease. The Genset-Abbott diagnostic tests may
enable the safe use of failed drugs or demonstrate their efficacy
in a target population.

Strategic Partnerships and Collaborative Agreements

The Company's strategy for the discovery, development and
commercialization of drugs based on its gene discoveries depends upon the
formation of alliances with strategic partners, as well as on licensing
arrangements. The Company's strategy involves forming alliances with several
different strategic partners at the same time to pursue gene discovery in
different disease areas, for gene libraries and in pharmacogenomics. To date,
the Company has four strategic partners for the development and
commercialization of potential drugs in its three targeted business areas and
one strategic partner for applications in agricultural genetics. The strategic
alliance agreements are subject to termination under various circumstances,
which could have a material adverse effect on the Company's business or
financial condition.

There can be no assurance that the Company will be able to establish
additional strategic alliances or any licensing arrangements to develop and
commercialize drugs based upon its gene discovery programs or that any such
arrangements or licenses will be on terms favorable to the Company. In
addition, the Company's strategy involves forming alliances with several
different strategic partners at the same time to pursue gene discovery in
different disease areas and there can be no assurance that the Company will
be able to manage multiple programs successfully in parallel. With respect to
current and future strategic alliances and licensing arrangements, the
Company will depend upon the expertise of, and dedication of sufficient
resources by, strategic partners to develop and commercialize drugs based on
genes discovered by the Company. The Company generally does not expect to
develop, manufacture or market drugs in the near term, if at all. Should a
strategic partner fail to develop or commercialize a drug to which it has
rights, the Company's business may be adversely affected. Although the
Company's contractual arrangements obligate its strategic partners to develop
or commercialize genes discovered by the Company in good faith, there can be
no assurance that current or future strategic alliance partners will do so or
that they will not pursue alternative technologies, or develop alternative
drugs either on their own or in collaboration with others, including the
Company's competitors, as a means for developing treatments for the diseases
targeted by strategic alliances with the Company. Disputes may arise in the

future with respect to the ownership of rights to any technology developed with
strategic partners, and these and other possible disagreements could lead to
delays in the collaborative research, development and commercialization of
product candidates, or could result in time-consuming and expensive litigation
or arbitration, in which case they could have a material adverse effect on the
Company's business, financial condition and results of operation.

Strategic Partnerships

Synthelabo Collaboration Agreement

On May 9, 1996, the Company entered into a research and development
collaboration agreement with the French pharmaceuticals company Synthelabo (the
"Synthelabo Agreement") to discover and sequence genes involved in or associated
with prostate cancer. Pursuant to the Synthelabo Agreement, Synthelabo agreed to
provide research and development funding and milestone payments of up to an
aggregate of FF 355 million, as and when certain research objectives are met. In
addition, the Company will receive royalty payments on any future drug sales
which may result from the use of certain of the Company's research conducted
pursuant to the terms of the Synthelabo Agreement. The Synthelabo Agreement is
comprised of two parts: (i) a collaborative research program (the "Research
Program") and (ii) a license granted to Synthelabo for therapeutic products that
treat prostate cancer and potentially other prostate diseases and that are
derived from genes discovered pursuant to the collaboration (the "License").

The term of the initial Research Program was two years, commencing
on May 9, 1996. The Company successfully completed all of the research
milestones provided for in the initial two-year Research Program, and as a
result of this research, filed one patent application related to chromosomal
regions suspected to contain genes associated with prostate cancer, and one
patent application related to a novel gene associated with prostate cancer.
The Company and Synthelabo agreed to extend the Research Program for a third
year beginning May 9, 1998, during which the Company will search for
additional genes associated with prostate cancer. This extension provides for
further research funding and milestones.

In addition, Synthelabo has an option, exercisable through February 8,
1999, to have the Company conduct additional research to develop certain assays
derived from discovered prostate cancer genes. The Company will grant Synthelabo
a license to use certain of the Company's research results for the screening of
libraries of small molecules and for the discovery, development, manufacture and
marketing of certain small molecular weight drugs, therapeutic proteins or
therapeutic antibodies. If Synthelabo exercises such option, the term of such
research program will be one year.

Pursuant to the terms of the License, Synthelabo has an exclusive,
worldwide license to develop and sell small molecular weight drugs, therapeutic
proteins and therapeutic antibodies that treat prostate cancer and potentially
other prostate diseases and that are derived from genes discovered pursuant to
the collaboration. The License as to each prostate cancer therapeutic product
will terminate on the date as of which Synthelabo is no longer required to pay
royalties to the Company on its net sales of such prostate cancer therapeutic
product pursuant to the terms of the License. As of such date, Synthelabo will
have a non-exclusive, royalty-free and perpetual license with respect to such
prostate cancer therapeutic product. The Company retains all rights in all the
results of the research and in any know-how developed during the term of the
License, including therapeutic oligonucleotides, all gene and cell therapies,
all diagnostic applications and all applications other than for prostate
diseases, except rights granted to Synthelabo under the License.

Johnson & Johnson Strategic Alliance Agreement

In anticipation of entering into a research collaboration with the
Company, Johnson & Johnson Development

Corporation, pursuant to an agreement dated May 10, 1996, made an equity
investment of approximately FF 20 million in the Company, purchasing 119,900
Ordinary Shares.

On September 26, 1996, the Company entered into a research and
collaboration agreement with Janssen Pharmaceutica, N.V., a subsidiary of
Johnson & Johnson, for a program to identify and clone genes associated with
schizophrenia or, under certain conditions, another disease. Under the terms of
the agreement, Janssen Pharmaceutica N.V. ("Janssen") will fund Genset research
during a period of two years, will make additional payments as certain
milestones are met and will pay royalties on net sales of certain products
developed with the genes discovered. In return, Genset granted licenses to
Janssen, both exclusive and non-exclusive, under technology, know-how and
patents resulting from the research to make, have made and sell certain
products, including drugs, gene therapy, cell therapy and diagnostics products.
Janssen has the sole responsibility to develop and market these products. In the
event of a change of control of the Company, Janssen may terminate the
agreement. The Company believes that Johnson & Johnson's worldwide experience in
the development and marketing of new products for the treatment of schizophrenia
and other psychotic disorders combined with Genset's strength in gene discovery
technology may further new developments in the field of CNS disorders. The
research has resulted in the identification of regions of DNA containing genes
associated with schizophrenia and the Company is using the biallelic marker map
to pinpoint the exact location of these genes.

Abbott Strategic Alliance

Effective as of July 15, 1997, the Company entered into a strategic
alliance with Abbott Laboratories in the field of pharmacogenomics for the
development of genetic markers and diagnostic tests for the analysis of drug
response. The strategic alliance is comprised of three parts: (i) a subscription
agreement; (ii) an exclusive 18 month research and license agreement for the
development of genetic markers and discovery of genes associated with drug
response to and side effects of an Abbott drug for the treatment of asthma,
Zileuton, for which Abbott has agreed to provide research and development
funding and milestone payments that could total up to $22.5 million; and (iii)
an exclusive collaboration for the development of diagnostic systems for
pharmacogenomics research programs (the "Alliance Agreement"). Pursuant to the
subscription agreement between the parties, Abbott made an equity investment in
the Company on September 19, 1997 of $10 million and the Company has a one-year
put option, that is exercisable from September 7, 1998, subject to certain
conditions, to sell an additional $10 million of the Company's equity to Abbott
at the then current market price.

Pursuant to the Alliance Agreement, the Company and Abbott have agreed
to collaborate on additional pharmacogenomics research programs for third party
pharmaceutical companies. Genset will discover genes and markers associated with
drug response and Abbott will develop, produce and market diagnostic tests using
these genes and markers to test patient response to specific drugs. The goal of
the Alliance Agreement is to provide pharmaceutical partners with simple genetic
tests specific for their drugs. Also pursuant to the Alliance Agreement, the
Company and Abbott will share revenues resulting from pharmacogenomics
collaborations based on the relative contributions of their respective
technologies. The Company will receive commercial milestone payments and
royalties on the sales of drugs and diagnostic tests developed pursuant to the
alliance. The Alliance Agreement may be terminated under certain conditions,
including upon a change of control of either party.

Genetics Institute License and Distribution Agreement

On July 25, 1997, the Company entered into an exclusive license
agreement with Genetics Institute ("GI"), a wholly-owned subsidiary of American
Home Products (the "GI Agreement"). Pursuant to the GI Agreement, GI

has exclusively licensed from the Company approximately 2,000
SignalTag-TM-sequences and full-length cDNA clones from which GI will express
secreted proteins and make them available for evaluation by pharmaceutical
companies through the DiscoverEase-Registered Trademark- distribution
platform. DiscoverEase-Registered Trademark- was launched in September 1996
and represents GI's initiative to isolate and express a comprehensive library
containing novel human secreted proteins. As of April 30, 1998,
DiscoverEase-Registered Trademark- partners which have entered into
agreements with GI for access to the library include Bayer, Chiron, Chugai,
Genentech, Immunex, Kirin, Ontogeny and Scios. In return for access to the
SignalTag-TM- library, GI will provide the Company with up to $20 million of
payments based on the number of clones delivered by Genset to GI and the
number of orders delivered by GI to DiscoverEase-Registered Trademark-
partners. In addition, the Company and GI will share clinical milestones
payments and royalties from therapeutics developed by the program's partners.

Ceres License and Services Agreement

On December 28, 1997, the Company entered into a series of agreements
with Ceres, Inc. ("Ceres"), a company specializing in the field of agricultural
biotechnology. The collaboration consists of three parts: (i) the acquisition of
an approximately 20% equity interest in Ceres by the Company; (ii) an agreement
for sequencing and bioinformatics services (including training services) to be
provided by the Company for which Ceres will make quarterly payments and issue
additional equity to the Company; and (iii) an exclusive license agreement
providing Ceres access, on a royalty-free basis, to certain of the Company's
technologies for applications in agricultural genetics.

Collaborative Agreements

The CEREPP Research Collaboration Agreement

On January 1, 1996, the Company entered into a research contract with
the Centre de Recherche pour les Pathologies Prostatiques ("CEREPP" or Research
Center for Prostate Pathologies) for the collection and study of DNA samples
from prostate cancer patients. CEREPP is an association of urologists
specializing in prostate cancer which has established a network for the
collection of samples, together with related clinical data, from several
locations in France. This network has been expanded to include samples from the
French West Indies through a collaboration with Universitat Ulm in Germany.

The term of the agreement continues through December 31, 1998.
Pursuant to the agreement, CEREPP has been (i) constructing and maintaining a
clinical and pathological collection of constituent DNA from donor families
and unrelated individuals suffering from prostate cancer; (ii) collecting DNA
from healthy individuals; and (iii) preparing representative tumor samples at
different stages of tumoral progression; and has been performing related
research using these various samples. Such collections of DNA will remain the
sole and exclusive property of CEREPP. CEREPP is responsible for obtaining
all administrative and regulatory authorizations necessary for the
construction and maintenance of the collections and cultures. As of April 30,
1998, CEREPP possessed a database of approximately 400 individuals, of whom
almost one half are individuals belonging to families with at least two
affected persons.

The agreement also provides that the Company will supply funding for
CEREPP's activities and make certain milestone payments corresponding to the
progress of the compilation of the collections. The results of the genomic
analysis of these DNA collections will be the exclusive property of the Company,
which will have the right to apply for, prosecute and maintain patents in France
and abroad in relation thereto. The agreement reserves to CEREPP the right to
use the results of the study for its own research but grants the Company all
rights worldwide to the commercial exploitation of such results. In addition,
CEREPP has the right to publish the results of the research, subject to the

Company's consent and notably to the protection of the Company's intellectual
property rights.

Using the results of this collaboration, the Company has successfully
completed the initial two-year research program provided for in the Synthelabo
Agreement and has filed one patent application related to chromosomal regions
suspected to contain genes associated with prostate cancer genes and one patent
application related to a novel gene associated with prostate cancer. See " --
The Company's Gene Discovery Programs -- Prostate Cancer."

CEPH Collaboration Agreement

On April 23, 1996, the Company entered into an agreement with CEPH
setting out the terms of the transfer to the Company of CEPH's mapping team and
copies of certain related proprietary materials and data and the terms of the
collaboration between the Company and CEPH relating to research on aging (the
"CEPH Agreement").

Pursuant to the CEPH Agreement, the Company received copies of CEPH's
libraries of YACs, BACs and certain oligonucleotides for mapping, and all
related research databases, including the database of YAC and BAC screening
results, as well as the mapping know-how of the members of the mapping team. The
Company did not, however, acquire any patent rights under the agreement,
although it has the right to patent any inventions that are developed by members
of the mapping team as employees of the Company. The Company believes that
non-compete and confidentiality agreements with the members of the mapping team
and subsequent patent applications should protect the know-how acquired in
connection with the CEPH Agreement. However, there can be no assurance that
these agreements will provide meaningful protection or adequate remedies in case
of breach. See " -- Patents and Proprietary Rights -- Proprietary Rights."

Under the CEPH Agreement, the Company granted CEPH warrants exercisable
for 209,800 Ordinary Shares, and agreed to provide research funding over three
years to be used notably for CEPH's research on aging conducted using its
collection of centenarian DNA samples. In exchange, CEPH granted the Company a
right of first refusal, valid until April 30, 1999, covering the use of any
results of CEPH's research on aging, other than research being performed in
connection with certain pre-existing agreements. CEPH agreed to communicate such
results to the Company prior to communicating them to any third party, and in
any case at least once every six months. Until the parties have come to an
agreement regarding the Company's right of first refusal to CEPH's research
results, CEPH will keep such research confidential. If Genset decides to
exercise its right of first refusal, the parties have agreed to use their best
efforts to reach an agreement within a specified period.

CEPH brought a claim against Genset before the Paris Court of First
Instance (Tribunal de Grande Instance) for the payment of the third and fourth
installments for research funding associated with the aging program, due under
the CEPH Agreement. The Company considers that the research reports that CEPH
provided and continues to provide do not provide satisfactory assurance that
CEPH has performed the contracted research on aging or has maintained an
appropriate level of research for the aging program. On March 30, 1998, a panel
of experts appointed by the Court determined that the research reports provided
by the CEPH were not consistent with its obligations under the Agreement. While
no assurance can be given that Genset will successfully defend against CEPH's
claim, the amount of payment has already been budgeted for the year and a
judgment against the Company would have no material impact on its results.

INSERM Collaboration Agreement

In February 1997, the Company entered into a preliminary research
collaboration agreement with the Institut

National de la Sante et de la Recherche Medicale ("INSERM" or National
Institute of Health and Medical Research), pursuant to which the Company
funded research in molecular physiology and pathology conducted by INSERM's
Laboratory of Nutrition, Lipoprotein Metabolism and Atherosclerosis located
at the University of Rennes I in the Brittany region of France. Under the
terms of the agreement, the Company has the exclusive right to the commercial
exploitation of any inventions resulting from the research and INSERM will
receive royalties on sales of products derived from these inventions. Based
on the results of the research, the Company and INSERM filed a joint patent
application on a novel gene coding for a receptor related to obesity.

The Company intends to continue the research collaboration with INSERM
concerning the receptor gene related to obesity. The Company has decided,
however, not to pursue the development of a joint laboratory in Rennes. INSERM
has confirmed its agreement to grant the Company an exclusive license worldwide
to this joint patent application. Pursuant to the terms of this license, the
Company will make certain royalty payments to INSERM corresponding to the
different categories of products which may result from the use of the gene.
INSERM and the University of Rennes I are currently discussing the rights of the
University of Rennes I under the patent application. INSERM has indicated to the
Company that the rights, if any, of the University of Rennes I will not affect
the Company's development and commercialization rights under the agreement with
INSERM.

Technion Research Agreement

On May 28, 1997, the Company entered into a two-year research agreement
with the Technion Research and Development Foundation, a subsidiary of the
Technion Institute of Technology (the "Technion Institute"), in Haifa, Israel,
pursuant to which DNA samples and corresponding phenotype and family history
information from patients with certain specified common diseases will be
collected. The diseases currently targeted by the research include osteoporosis,
obesity and prostate cancer. The original terms of the Agreement have been
modified to increase the number of samples collected from unrelated individuals
rather than related patients. The Laboratory of Human Molecular Genetics (the
"LHMG"), which is part of the Technion Institute, is responsible for
coordinating the research and compiling the DNA collection, and is free to use
the phenotype data for its own research. The Company is responsible for funding
the research, uses the DNA collection for its genomics analysis, and retains
exclusive ownership of the results of research conducted on the DNA collection,
as well as the exclusive right to apply for, prosecute and maintain patents in
relation thereto.

Argentina Collaboration Agreement

In June 1997, the Company established a collaborative network in
Argentina together with the Parmenio Pinero Hospital in Buenos Aires (the
"Hospital") and the Laboratoria Argentino de Biologia Molecular ("LABIMO" or
Argentinian Laboratory of Molecular Biology) for the collection, banking and
analysis of DNA samples from patients affected with CNS disorders. Pursuant to
the terms of its one-year research agreement with LABIMO, the Company is
providing research funding, the Psycho-pathology Department of the Hospital is
collecting the samples and corresponding phenotype and family history
information and LABIMO is coordinating the research and compiling the DNA
collection. The Hospital and LABIMO may use the results of these activities for
their own research purposes. The Company uses the DNA collections for its
genomics research, and retains exclusive ownership of the results of research
conducted on the DNA collection, as well as the exclusive right to apply for,
prosecute and maintain patents in relation thereto.

Surgen Joint Venture

On October 31, 1997, the Company entered into a ten-year strategic
research collaboration with the Royal College of Surgeons in Ireland ("RCSI"), a
medical school with substantial clinical research activities, to create a DNA
bank and perform genomics research based on samples from unrelated individuals.
As part of the collaborative arrangement, the Company and RCSI formed Surgen, a
dedicated joint venture owned 50% by each party and located in Dublin, Ireland.
RCSI will furnish to Surgen biological samples and corresponding anonymous
clinical data obtained in the course of conducting specified clinical studies,
principally in the field of cardiovascular diseases.

Surgen is responsible for DNA extraction, cell immortalization, sample
and data storage, and more generally all operations connected with the creation
and maintenance of the DNA bank. Under the terms of the agreement, the Company
has exclusive access to this DNA bank to conduct disease gene discovery and
pharmacogenomics studies and to commercialize any products, including
therapeutic, diagnostic and database products, developed using the DNA bank.
Surgen has the right to use the DNA bank for non-commercial research. The
Company is responsible for funding the salaries of Surgen's employees and the
direct expenses of the DNA bank, has provided a loan to Surgen to serve as
initial working capital, will provide funding for the collection of certain
other samples and will make certain other payments to Surgen.

Other

The Company has discontinued relationships with the Chinese Academy of
Medical Science and the Hopital Saint-Louis for collection of DNA samples in
order to concentrate on programs with greater commercial potential.

Patents and Proprietary Rights

The Company utilizes both patents and trade secret methods to protect
its proprietary technology platform and its genomics-related inventions.

Patents

The Company's commercial success will depend, in part, on its ability
to obtain effective patent protection in

France, Europe, the United States and elsewhere for the products and processes
resulting from its disease gene discovery, gene library and pharmacogenomics
efforts, as well as for the proprietary technologies supporting these
activities. The Company is actively and systematically applying for patents to
protect the results of its programs in accordance with defined strategies and
objectives for each of its business areas. The Company believes that its broad
technology platform, and in particular its high density biallelic marker map,
enables it to formulate more comprehensive patent applications, containing both
sequence data and related pharmaceutically relevant information, and thereby to
strengthen its competitive patent position.

The patent positions of biotechnology companies, including the Company,
are generally uncertain and involve complex legal and factual questions. There
can be no assurance that the patents for which the Company is applying will be
granted or, if granted, that they will provide protection against competitors,
will be sufficiently broad to provide the Company and its strategic partners
with competitive advantages, or will not be challenged, invalidated or
circumvented by others. The Company believes that there is likely to be
significant litigation in the industry regarding patent and other intellectual
property rights. If the Company becomes involved in such litigation, it could
consume a substantial portion of the Company's management and financial
resources. Any legal action brought against the Company or its strategic
alliance partners claiming damages and seeking to enjoin drug screening,
clinical testing, manufacturing or marketing of products or services developed
using information generated by the Company could have an adverse effect on the
Company's financial condition or results of operations.

The Legal Environment

There are an estimated 100,000 genes scattered throughout the human
genome and the Company believes that virtually all such genes will be identified
over the next several years. A growing number of groups are attempting to
rapidly identify and patent gene fragments and full-length genes. The strategies
of these groups vary widely as to the extent of biological characterization and
the nature of utilities they provide in their patent applications. Whereas the
patentability of an identified gene fragment or full-length gene together with
specific functional information is widely accepted in most jurisdictions in
which the Company wishes to obtain patent protection, there remains substantial
uncertainty regarding the value of patent applications covering gene fragments
or full-length genes without known function.

In France, Article L.611-17 of the Intellectual Property Code provides
that the knowledge of partial or full-length sequences of genes is not in and of
itself patentable. However, genes with known utility have been patented in
France. This French law has no effect on the patentability of genes in other
European countries. A proposed European directive on the Legal Protection of
Biotechnological Inventions would likely prevent the DNA sequences of genes in
their natural environment from being patented in the member states of the
European Union, but would not exclude patent protection for a human gene or a
partial sequence of a human gene isolated from the human body, or otherwise
produced by a technical method, whose function is sufficiently precise and
identified. This proposal received a favorable vote from the European Parliament
at its first reading and has been adopted by the European Commission and the
Council of Ministers. If it is passed after its second reading by the European
Parliament, member states will be required to implement the directive by January
1, 1999.

In the United States, the Patent and Trademark Office (the "PTO")
issued guidelines in July 1995 that address the requirements for demonstrating
utility for biotechnology inventions. In accordance with these guidelines,
patents have been granted in the United States on full-length gene sequences for
which a utility is demonstrated. With respect to partial gene sequences, in
February 1997, the PTO reversed its prior position and indicated that expressed
sequence tags ("ESTs") having a defined utility constitute patentable subject
matter. There can be no assurance that PTO examiners will continue to follow the
1995 guidelines or that the PTO's position will not change with respect to the
utility requirements for partial or full-length gene sequences and products and
methods based on such sequences.

A recent decision by the U.S. Court of Appeals for the Federal
Circuit interpreted strictly the written description requirement in relation
to patent claims covering genes. This case reaffirms the patentability of
human genes, but suggests that claims to full-length human genes may require
disclosure of the complete gene sequence in the specification of the patent
application.

Since the coming into force on June 8, 1995 of the U.S. legislation
implementing the General Agreement on Tariffs and Trade, the term of patent
protection in the United States, as it is in Europe, is of 20 years from the
earliest effective filing date of the application. Due to the large number of
biotechnology patent applications being filed and the complex issues involved,
the time from filing to issuance is uncertain in the biotechnology field. A bill
has been introduced before the Congress in the United States which would, in
some cases, extend patent exclusivity past the legislative 20 years from filing
to compensate companies for delays in patent processing. There can be no
assurance, however, that the bill will be enacted.

In October 1996, the PTO announced a restriction requirement policy
under which it will not generally consider more than ten independent and
distinct nucleotide sequences in a single application. Divisional applications
would be required to claim additional nucleotide sequences. This requirement is
likely to increase the time required and the cost to obtain patent protection
for large numbers of sequences.

The European Patent Office (the "EPO") and the French patent
authorities issue a "search report" approximately nine months after an
application is filed which, based on a survey of existing patents, patent
applications and scientific publications, provides an initial indication of the
probability that the patent will be granted. Based on such reports, the Company
decides whether to continue prosecution of its patent application, whether to
extend the application to foreign countries and whether to amend the application
in such countries. In the United States, on the other hand, patent applications
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries by several months, the Company cannot be certain that it was the
first creator of inventions covered by pending patent applications or the first
to file patent applications on such inventions. However, the bill discussed
above also provides for the publication of U.S. patent applications 18 months
after filing. There can be no assurance, however, that the bill will be enacted.

The Company's Patent Portfolio and Strategy

Generally, patents must first be filed in the country in which the
product or process was developed. The Company has typically initially filed its
applications in France or, in some cases permitted under French regulations, in
the United States. All of the Company's initial or "priority" applications have
been extended within 12 months after the initial filing, either through the
procedure prescribed by the Patent Cooperation Treaty ("PCT") or, independently
from the PCT procedure, to selected countries. The Company currently decides on
a case-by-case basis whether and in which countries to extend any particular
application. The PCT procedure requires that, within eight or 18 months after
the general PCT extension, the applicant selects those countries among the PCT
signatories, which include notably the 18 countries covered by the EPO as well
as the United States, Canada, Australia, and Japan, in which it wishes to pursue
its application. Whichever procedure it chooses to extend a particular patent
application, the Company typically claims the priority date of its initial
filing for all extensions. The Paris Convention provides that, if an applicant
so chooses, the priority date of an extension will correspond to the date of the
initial filing so long as the invention covered by the extension is the same as
that covered by the initial filing.

As of April 30, 1998, the Company had filed a total of 40 priority
applications, including 21 in France, one directly before the EPO, and 18 in the
United States, out of which the Company had been granted 14 patents in France, 4
EPO patents and 2 Australian patents.

In its disease gene discovery and pharmacogenomics business areas, the
Company's strategy is to file comprehensive patent applications that combine
full-length gene sequences with genomic information of pharmaceutical relevance,
including typically the corresponding proteins and a functional characterization
and related polymorphic markers and functional mutations, together with disease
or drug response association data, all to

the extent that information is available at the time of filing. In the context
of its research collaboration agreement with Synthelabo, the Company has filed
one patent application related to chromosomal regions suspected to contain
genes associated with prostate cancer and one patent application related to a
novel gene associated with prostate cancer. The Company has filed a joint
patent application with INSERM on a novel gene coding for a receptor related to
obesity. The Company has also filed several other gene specific priority
applications, one of which is a joint application, each covering a gene and
related information of pharmaceutical relevance.

In addition, the Company has filed two patent applications relating to
the complete genome sequence of two related infectious microorganisms, one of
which, Chlamydia pneumoniae, has recently been identified as being potentially
associated with the occurrence of cardiovascular diseases, especially
atherosclerosis. Both patent applications claim therapeutic, diagnostic and
vaccine applications.

In its gene library business area, the Company's strategy is to seek
patent protection for partial and full-length gene sequences for which it has
identified a particular potential therapeutic value. The Company has filed U.S.
patent applications covering over 2,500 sequences corresponding to the 5 prime
ends of genes encoding secreted proteins. Although the Company believes that 5
prime ESTs for secreted proteins have a utility level that is relatively high
compared to that of random ESTs, there can be no assurance that these patent
applications will be granted and there is a high degree of uncertainty as to the
claim coverage that can be obtained. The Company has filed patent applications
covering a large number of full length cDNA sequences corresponding to its
SignalTag-TM- 5 prime ESTs. It is the Company's intention to file patent
applications covering all such full length cDNA sequences. Despite the
therapeutic potential of secreted proteins, the Company cannot predict the claim
coverage, if any, that will be granted in these patents. In addition, the number
of sequences filed in related patent applications being very high, it is
difficult to estimate the time required for patent prosecution and issuance.

There is currently a large number of both public and private third
parties generating genomics information. As the quantity of such information
that is either patented or published increases, so too does the risk that the
Company will not be able to obtain patent protection for its sequences or that
it will have to undertake interference procedures, negotiate licenses, or enter
into agreements with third parties with respect to partially overlapping
information.

In addition to protecting the results of its disease gene discovery,
pharmacogenomics and gene library programs, the Company seeks patent protection
for selected proprietary technologies that support these programs in certain
cases where trade secret methods do not offer optimal protection. The Company
has filed several patent applications covering technologies for high-throughput
cloning, sequencing and mapping, methods to generate and use its high resolution
biallelic marker map, as well as a large number of biallelic markers. There has
been significant controversy regarding whether biallelic markers, and more
generally SNPs, meet the utility requirements for patentability. The PTO's
position on this question is uncertain, and there can be no assurance that
patent applications filed by the Company that cover such markers would be
granted. In its gene library business area, the Company has been granted two
patents in France relating to techniques for identifying 5 prime sequences
technique, which enables it to isolate and clone with high specificity the
beginning sequences of genes.

In the field of synthetic DNA production, the Company has been granted
two EPO patents, and has international extension applications pending in
countries outside Europe, that cover its synthesizer and reactor designs and
related processes for the preparation of oligonucleotides. In this field, the
Company has developed and continues to develop proprietary processing software,
synthesizer designs and improvements, and purification and quality control
techniques, which it has chosen to protect using trade secret methods.

In addition to the patents and patent applications covering its
genomics programs, the Company has been granted a patent relating to circular
oligonucleotides and several patents related to the uses of specific types of
oligonucleotides, including sense and antisense therapies. The Company was
principally involved in these fields prior to launching its genomics research
and is currently pursuing prosecution of the international extensions of these
patents which it may license to third parties.

Proprietary Rights

With respect to proprietary know-how which is not patentable or to
potentially patentable processes for which patents are difficult to enforce, the
Company has chosen to rely on trade secret methods, notably confidentiality
agreements, to protect its interests. See " -- Employees."

The Company believes that several elements of its integrated technology
platform involve proprietary know-how, technologies or data which are not
covered by a patent or patent application, including its sequencing using
advanced process control and sequence verification software, BioIntelligence
software, functional polymorphism scanning and statistical association methods.
There can be no assurance that trade secret methods will provide meaningful
protection or adequate remedies in case of breach for the Company's proprietary
know-how or technology.

The Company's NetGene-TM- and SignalTag-TM- databases contain
sequence and related data which is not or has not yet been protected by
patents. The Company has instituted security measures to protect these
databases, which are not linked to any exterior network. In the case of a
strategic partnership or other collaborative arrangement which requires the
sharing of data, the Company's policy is to make available to its partner
only such data as is relevant to the partnership or arrangement, under
controlled circumstances and only during the term of the strategic
partnership or other collaborative arrangement. There can be no assurance,
however, that such measures will adequately protect the Company's sequencing
data.

Government Regulation

Regulation by governmental authorities in France, the European Union,
the United States and other countries is a significant factor affecting the
collection and use of the DNA samples necessary for the Company's research, the
development and commercialization by the Company's strategic partners of drugs
and diagnostic products based on the Company's research, and the safety and
quality procedures governing the Company's research and manufacturing
activities.

Although the Company does not conduct clinical research programs, its
research requires DNA samples obtained through such programs. These are
typically conducted by research organizations and doctors with whom the Company
has a collaboration agreement relating to a specific disease. In addition, the
Company intends to increasingly obtain DNA samples from the strategic partners
for which it is doing research; this will notably be the case for
pharmacogenomics programs. See "-- Strategic Partnerships and Collaborative
Agreements." Clinical research programs are subject to the regulations of the
country where they are performed, and generally require, among other things,
that the research protocol pursuant to which the samples will be collected be
approved by an ethical and scientific committee, that each donor consent to the
use that is to be made of the sample and that the samples and related clinical
data be communicated in an anonymous fashion so as to protect the identity of
their donor. The ability of the Company to obtain DNA samples and related
clinical data therefore depends on the ability of its collaborators and
strategic partners to obtain and maintain required authorizations.

In addition, the Company is directly subject to certain regulations,
both as the promoter or sponsor of several clinical research programs in France
and as a result of its genomics research programs themselves. For example, a
French law enacted in 1996 governing genetic research will require the Company
to declare any research it performs using a collection of DNA samples and
empowers the administration to suspend any such research which does not respect
criteria concerning the appropriate use and safety of the collection and the
confidentiality of resulting data. The

government decree specifying the applicable criteria and the declaration
procedure has not yet been promulgated. The increasing public scrutiny of
biotechnology research generally, and genomics research in particular, is
leading to additional regulation of both the collection and the use of DNA
samples. There can be no assurance that such regulation will not limit either
the ability of the Company or its collaborators or strategic partners to obtain
appropriate DNA samples and related clinical data or the use which the Company
can make of them in a manner which would have a material adverse impact on the
Company's research.

The ultimate success of the Company's commercial strategy depends on
the successful development and marketing of products based on the genomic
information provided by the Company. The ability of the Company's strategic
partners to successfully manufacture and market such human drugs or diagnostic
products will be subject to strict regulatory controls on the clinical testing,
manufacture, labeling, supply and marketing of these products. Of particular
importance is the requirement in most countries to obtain and maintain
regulatory approval for a product from the relevant regulatory authority to
enable it to be marketed in that country. The process of obtaining these
approvals and the subsequent compliance with appropriate statutes and
regulations are time consuming and require the expenditure of substantial
resources.

The submission of an application to a regulatory authority does not
guarantee that an approval to market the product will be granted by that
authority. Furthermore, each regulatory authority may impose its own
requirements and may refuse to grant, or may require additional data before
granting, an approval even though the relevant product has been approved by
another authority. Even if regulatory approvals are obtained, the marketing and
manufacturing of drugs and diagnostic products are subject to continuing
regulatory review, and later discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market. Any delay in
obtaining, or the failure to obtain, such approval would adversely affect the
Company's ability to generate product royalty revenues.

France and other European countries and the United States have very
high standards of technical appraisal and consequently, in most cases, a lengthy
approval process for pharmaceutical products. The trend in recent years has been
towards greater regulation and higher standards. The time taken to obtain such
approval in particular countries varies, but generally takes from six months to
four years from the date of application, depending upon the nature of the
product, the degree of control exercised by the regulatory authority, and the
efficiency of its review procedures.

Because certain of the products which may result from the Company's
research and development programs are likely to involve the application of new
technologies, such products may be subject to substantial additional review by
various governmental regulatory authorities. As a result, regulatory approvals
may require more time than for products using more conventional technologies. In
addition, ethical concerns about the use of genetic predisposition testing, and
in particular about the risk that such testing could lead to discrimination by
insurance providers or employers, may lead to poor market acceptance or to
regulatory controls that would adversely affect the development of or demand for
diagnostic products based on the Company's research.

The Company's research and manufacturing activities involve the
generation, use and disposal of hazardous materials and wastes, including
various chemicals and radioactive compounds. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by French, European Union and U.S. federal and state
regulations, the risk of environmental contamination or injury from these
materials cannot be eliminated. In the event of such an occurrence, the Company
could be held liable for any damages that result and such liability could have a
material adverse effect on the financial condition of the Company. The Company
cannot predict, however, whether new regulatory restrictions on the production,
handling and marketing of biotechnology products will be imposed by French,
E.U., U.S. or other governments.

Manufacturing and Marketing

Synthetic DNA

On the basis of its capacity, the Company believes it is the world's
largest manufacturer of short strands of synthetic DNA, or oligonucleotides,
with capabilities to synthesize, label and purify thousands of oligonucleotides
per day. The Company believes that it is a highly efficient producer due to its
proprietary Ultrafast Parallel Synthesizer, large-scale synthesizer, robotics,
software and novel order processing and materials handling procedures. By
utilizing quality suppliers and regular preventive maintenance, the Company has
a low error rate which is continuing to decline. Very little inventory is
maintained as synthetic DNA is made to order, with a typical turnaround time of
two days. The Company has introduced an electronic mail ordering system which
enables customers to input their orders directly into the oligonucleotide
synthesizers of the Company's production units, thus reducing the risk of errors
and accelerating turnaround time.

Genset's Ultrafast Parallel Synthesizer is capable of synthesizing 24
oligonucleotides in parallel in 40 minutes. This unique proprietary instrument
has significantly reduced nucleotide coupling time, the key step in production,
and consumption of phosphoramidites, the primary raw material, compared to the
most advanced instruments currently available commercially, and has
substantially reduced the Company's manufacturing costs. The Ultrafast Parallel
Synthesizer, produced in the Company's Evry facility, is installed in its Paris,
La Jolla and Singapore production lines. The Company has been granted two
patents relating to its synthesizer and reactor designs together with related
processes for nucleic acid synthesis. See " -- Patents and Proprietary Rights."

During 1997, the Company established a separate Oligonucleotides
Division for its synthetic DNA business, which is responsible for the
manufacturing and marketing of synthetic DNA to customers worldwide and for the
production of synthetic DNA used in the Company's genomics research programs. In
addition, this division has operating responsibility for all manufacturing and
selling activities performed at its locations in France, the. U.S. and Asia.

The Company has a current monthly capacity nearing 100,000
oligonucleotides and an aggregate of 65 employees in Paris, La Jolla and
Singapore dedicated to the production and quality control of synthetic DNA. A
significant increase in production capacity was achieved during 1997,
principally in Paris. The Company believes its Paris production facility is the
largest production unit in the world, able to produce 3,000 DNA fragments per
day. Along with Paris and La Jolla, a third production site started in Singapore
currently contributes to total production capacity. Genset Corporation in La
Jolla, California is responsible for production for the U.S. market, except for
certain complex or very large orders. The Company's Paris production facility
supplies all orders from customers in Europe and Japan and also provides nearly
all of the synthetic DNA used by the Company at its Genomics Research Center.
Genset Singapore Biotechnology Pte. Ltd. is responsible for production for
Asia-Pacific markets outside Japan. The Company will relocate its Japanese
office from Tokyo to Kyoto in June 1998 at which time it will add a production
facility to its activities. The following table sets out the Company's
approximate percentage sales of synthetic DNA by geographic region in each of
1997, 1996, and 1995.

1997 1996 1995

France 35% 41% 50%
Europe (outside France) 25% 21% 23%
United States 33% 29% 22%
Japan 7% 6% 4%
Rest of the World - 3% 1%

Drugs and Diagnostics

The Company currently anticipates that any drugs or diagnostic product
resulting from the Company's proprietary technology will be manufactured and
marketed primarily through strategic partnership arrangements. See " --
Strategic Partnerships and Collaborative Agreements -- Strategic Partnerships."

Suppliers

The Company currently relies on Applied Biosystems to provide all of
its DNA sequencing machines for production, on one additional supplier for DNA
sequencing machines used in research activities and on a limited number of
suppliers to provide reagents for DNA sequencing. While other DNA sequencing
machines are available, the Company does not believe that such other machines
are as efficient as the machines currently used by the Company. Nonetheless, the
Company believes that other new machines as efficient or possibly more efficient
than the machines currently used by the Company could become available in the
coming months. The Company will consider such new machines for its future
capacity extensions.

The Company believes that there are adequate alternative suppliers of
all reagents required for its sequencing and functional polymorphism scanning
programs. In the case of a few selected reagents, however, alternative suppliers
are either significantly more expensive or their products would permit less
efficient sequencing or scanning. For each of these reagents, the Company has
agreements guaranteeing the supply of a certain quantity at a certain price over
periods of one year. There can be no assurance that the Company will be able to
renew such agreements on commercially acceptable terms. The Company orders other
reagents by submitting purchase orders at the time of purchase. The Company
continually seeks to develop additional sources of reagents, including through
internal production, and experiments with potential new reagents. No assurance
can be given, however, that reagents will remain available in commercial
quantities at costs that are not economically prohibitive. Should the Company be
unable to obtain an adequate supply of reagents or other ingredients at
commercially reasonable rates, its ability to continue to identify genes through
gene sequencing and functional polymorphism scanning in accordance with its
current business plan may be adversely affected.

Principal Customers

The Company has more than 3,000 customer accounts in 40 countries
for its synthetic DNA. Many of the large laboratories involved in the
international effort to map and sequence the human genome are customers,
including institutions such as the Centre National pour la Recherche
Scientifique (The French National Scientific Research Center), Columbia
University, the Curie Institute, Genethon, Harvard Medical School, the
Institut National pour la Recherche Agronomique (The French National
Institute for Agricultural Research), INSERM, Lawrence Livermore Laboratory,
the U.S. NIH, the Pasteur Institute, the Salk Institute, the Sanger Centre,
the University of California, Berkeley, the University of California, San
Diego, and Washington University School of Medicine. In addition, many of the
Company's customers are private as well as public biotechnology and
pharmaceutical companies. The Company's single largest customer account
represented approximately 8%, 12% and 10% in 1997, 1996 and 1995,
respectively, of the Company's consolidated net sales; however, in each year,
the largest customer account was a different institution.

Competition

Genomics Research

A number of entities are attempting to rapidly identify and patent
genes responsible for causing diseases or an increased susceptibility to
diseases. Competition in this field is intense and expected to increase. The
Company faces competition from pharmaceutical and biotechnology companies,
including several companies in the United States which have also undertaken
large-scale gene sequencing programs. In addition, significant research to
identify genes is being conducted by universities, other non-profit research
institutions and French, U.S. and other government-sponsored entities.

The Company is aware that certain entities are pursuing a gene
identification and characterization and product development strategy based upon
positional cloning. The Company believes, however, that its comprehensive
approach using genome-wide association studies will enable it to identify genes
related to a given common disease or drug response more quickly than its
competitors. In particular, the Company believes that among the various elements
of its comprehensive approach, each of its high resolution mapping, BAC library,
sequencing using advanced process control and sequence verification software, 5
prime sequence identification, gene expression pattern screening, NetGene(TM)
and SignalTag(TM) databases and BioIntelligence analysis software, and
functional polymorphism scanning involves proprietary know-how, technology or
data and provides it with a competitive advantage. See " -- The Company's
Technology" and " -- Strategy -- Technological Strategy." In addition, the
Company believes that its low-cost access to the synthetic DNA necessary for
genomic sequencing and high resolution mapping is a competitive advantage.

There can be no assurance, however, that other companies have not or
will not develop approaches to identify disease-related and drug response genes
more rapidly than the Company. In addition, there can be no assurance that any
of the Company's competitors using current technology will not discover and
establish a competitive advantage in connection with one or more of the diseases
which the Company has identified as a target or with its pharmacogenomics
programs. In particular, the Company is aware of other programs to identify
genes associated with prostate cancer, of three corporate and several academic
genomic research programs targeting schizophrenia, of two competitors which have
entered into strategic partnerships with pharmaceutical companies targeting
osteoporosis, and of several competitors which have indicated their intention to
perform pharmacogenomics studies. Some of the Company's competitors have already
reported gene discoveries related to other diseases, including the discovery of
genes implicated in human breast cancer, Alzheimer's disease, asthma, diabetes,
coronary artery disease and obesity in mice and humans. Other entities may have
identified and characterized other disease genes, which discoveries have not yet
been publicly reported.

The Company believes that its ability to compete is also dependent, in
part, upon its ability to continue to create and maintain scientifically
advanced technology, its ability to find appropriate strategic partners, and its
strategic partners' abilities to develop and commercialize drugs or diagnostic
products based upon the Company's gene discoveries. The Company is also
dependent upon its ability to attract and retain qualified personnel, obtain
patent protection or otherwise develop proprietary technology or processes and
secure sufficient capital resources for the expected substantial time period
between technological conception and commercial sales of products based upon the
Company's gene discoveries.

Many of the Company's competitors have substantially greater research
and product development capabilities and financial, scientific, marketing and
human resources than the Company. These competitors may succeed in identifying
genes or developing drugs earlier than the Company or its strategic partners,
obtaining authorization from therapeutic product regulatory agencies for such
products more rapidly than the Company or its strategic partners, or developing
products that are more effective than those proposed to be developed by the
Company or its strategic partners. Any potential products based on genes
identified by the Company will face competition both from companies developing
gene-based products and from companies developing other forms of treatment for
particular diseases targeted by the Company. Certain competitors of the Company
or its strategic partners may be further advanced than the Company in
identifying genes and developing potential products that may compete with
potential products of the Company or its strategic partners. There can be no
assurance that research and development by others will not render the products
which the Company or its strategic partners may seek to develop obsolete or
uneconomical or result in treatments or cures superior to any other therapy
developed by the Company or its strategic partners, or that any therapy
developed by the Company or its strategic partners will be preferred to any
existing or newly developed technologies.

Synthetic DNA

On the basis of its capacity, the Company believes it is the world's
largest manufacturer of synthetic DNA. The Company competes in this industry on
the basis of its technical capabilities and customer service. The importance
of various competitive factors depends on the market segment being served.
Large-scale genomics research projects require large numbers of different
oligonucleotides. The Company believes that the highly automated organization of
its production facilities, proprietary Ultrafast Parallel Synthesizer and
automated patented nucleic acid synthesis processes enable it to produce greater
numbers of oligonucleotides more quickly, accurately and economically than most
if not all of its competitors. See " -- Manufacturing and Marketing -- Synthetic
DNA."

Other market segments, including academic research and some biology and
clinical chemistry laboratories, typically require smaller quantities and
numbers of oligonucleotides that can be provided by a much greater range of
producers. Most of these producers are considerably smaller, have lower fixed
costs than the Company and serve a local or regional market. The Company
believes its ability to compete in these markets depends, in part, upon its
ability to deliver a wide range of synthetic oligonucleotides at competitive
prices and as flexible and rapid a service as smaller, local producers. The
Company's electronic mail ordering system enables customers to input their
orders directly into the Company's oligonucleotide synthesizers, thus reducing
the risk of errors and accelerating turnaround time. Alternatively, orders can
be placed through the Company's server on the World Wide Web, which also serves
to enhance the Company's global exposure and customer service. In addition, the
Company believes its recognized research, chemical and analytical chemical
expertise provides it with a unique competitive advantage with respect to
customers requiring complex and specially processed oligonucleotides as well as
extremely high quality standards.

Employees

As of April 30, 1998, the Company had 378 full-time employees,
including 338 in France (Paris and Evry), 30 in La Jolla, California, five in
Singapore and five in Tokyo. This total includes 245 dedicated research and
development personnel; 53 of the Company's employees have Ph.D.s and seven
(including six of the employees with Ph.D.s) have M.D.s. The Company
believes that employing its principal scientists on a full-time basis rather
than on a temporary consulting basis has resulted and will continue to result
in improved cooperation among its researchers and in more rapid technological
development.

The Company anticipates hiring approximately 80 employees by the end
of 1998 to reach a level of approximately 450 employees. While the Company
has been able to attract and retain skilled and experienced scientific
personnel, there can be no assurance that the Company will continue to be
able to attract and retain such personnel.

In order to protect its proprietary know-how and data, the Company has
required all of its employees, other than its three Directeurs Generaux, and
each of its strategic partners and collaborators to enter into confidentiality
agreements. In addition, Genset has required all of its research and development
and marketing employees, other than its three Directeurs Generaux and its
employees in the United States, to enter into non-compete agreements with terms
of eighteen months to three years after termination of employment with the
Company. There can be no assurance, however, that these agreements and
provisions will provide meaningful protection or adequate remedies in case of
breach for the Company's proprietary know-how or technology. See " -- Patents
and Proprietary Rights -- Proprietary Rights."

Employment contracts are in place for all personnel other than the
three Directeurs Generaux. Under French law, Directeurs Generaux have a special
status as senior executives which precludes them from having employment
contracts. The employment contracts with all of the Company's French employees
are subject to the provisions of the

Convention Collective des Industries Chimiques (Collective Agreement for the
Chemical Industries). As required by French law, the Company's management holds
periodic meetings with representatives of employees. See "Directors and Officers
of the Registrant." Management considers its relations with its employees to be
good.

ITEM 2: Description of Property

Genset's corporate headquarters are in Paris at 24, rue Royale, 75008
Paris, a central downtown location. At this location, the Company leases 843
square meters (approximately 9,000 square feet) of office space, used
principally for executive offices. The lease term is nine years from February 3,
1997, and the Company maintains an option to lease additional space in the
building. In addition, Genset leases approximately 2,050 square meters (22,000
square feet) of laboratory, production and office space in a complex located at
1, rue Robert & Sonia Delaunay, 75011 Paris. This location is occupied
principally by the Paris synthetic DNA production facility and by offices for
the Company's synthetic DNA, bioinformatics and accounting activities. The lease
term is nine years from January 31, 1991. Space for expansion is available in
the complex.

The Company's Genomics Research Center is housed in a modern complex
located in Evry, outside of Paris. The Genomics Research Center contains the
Company's integrated sequencing, mapping, gene libraries, and functional
polymorphism scanning activities, as well as industrial office space and
engineering support. It currently occupies approximately 6,700 square meters
(72,000 square feet), out of the total surface area of approximately 12,000
square meters (129,000 square feet) covered by the lease, which expires on March
31, 2005.

The Company's U.S. subsidiary leases two facilities in La Jolla,
California. Genset Corporation's production facility and synthetic DNA sales
office are located at 505 Coast Boulevard South, Suite 200, La Jolla, California
92037, where it occupies 11,161 square feet under a lease which expires on
January 1, 2003. Similar to the Paris production facility, it contains a fully
automated synthetic DNA production line with electronic-mail ordering, SPARC
workstations to drive and control the synthesizers, bar-code identification of
the oligonucleotides during synthesis, and proprietary robot handling systems
for post-synthesis steps. The Company is also establishing a research effort at
this location to support its phamacogenomics programs. Administrative offices
are located at 875 Prospect Street, Suite 206, La Jolla, California 92037, where
the Company occupies approximately 3,000 square feet of office space pursuant to
a lease expiring in 1998, which the Company expects to renew.

The Company's Japanese subsidiary, Genset K.K., is located in Tokyo,
Japan, where it leases office space for its sales and marketing activities for
its expanding Japanese business. Genset K.K. has canceled this lease and will
relocate to Kyoto in June 1998, where it will add a production facility to its
activities.

Genset Singapore Biotechnology Pte Ltd leases a production facility of
115 square meters (approximately 1,240 square feet) in a modern building in the
Science Park II of the National University of Singapore. The lease is for two
years from February 16, 1998, with an option to extend for a further twelve
months.

ITEM 3: Legal Proceedings

The Company is not party to any material legal proceedings.

ITEM 4: Control of Registrant

PRINCIPAL SHAREHOLDERS

At December 31, 1997, there were 7,189,087 Ordinary Shares
Outstanding. At April 30, 1998, there were 7,252,787 Ordinary Shares issued
and outstanding of which 3,117,085 were represented by 9,351,255 ADSs. The
fully diluted number of Ordinary Shares at such date, assuming the exercise
of all authorized options (whether or not allocated by the Board of
Directors) and warrants, was 8,663,487.

The following table sets forth certain information regarding all
owners of greater than 5% of the Company's Ordinary Shares as of March 31,
1998 or, where indicated, a more recent date.

Number of Percent
Ordinary Shares of
Shareholder Owned(1) Class(2)

Fidelity Investment Services Limited(3) 558,817 7.7%
Merrill Lynch(4) 555,000 7.7%
Deutsche Bank (5) 525,399 7.2%
Financiere & Immobiliere Marcel Dassault ("FIMD") (6)(7) 414,166 5.7%
Old Mutual Group(8) 372,303 5.1%
--------- -----
Total 2,425,685 33.4%
--------- -----
--------- -----

- ----------

(1) Including both Ordinary Shares and ADSs.

(2) Calculated based on the total number of Ordinary Shares outstanding
at April 30, 1998.

(3) Held by investment management subsidiaries of Fidelity Investment
Services Limited on behalf of discretionary fund managed clients.

(4) Held by investment management subsidiaries of Merrill Lynch & Co., Inc.
on behalf of discretionary fund managed clients.

(5) The number of Ordinary Shares owned is that provided in Deutsche Bank
AG's Schedule 13D/A filed April 28, 1998. Held by investment management
subsidiaries of Deutsche Bank AG, Morgan Grenfell Asset Management
Limited, and Morgan Grenfell Investment Management Limited on behalf
of discretionary fund managed clients.

(6) The number of Ordinary shares owned is provided as of April 30, 1998.
FIMD is a director of the Company, represented on the Board of
Directors by Benoit Habert. See "Directors and Officers of the
Registrant -- Board of Directors." FIMD holds outstanding warrants
to purchase 3,800 Ordinary Shares.

(7) Together with certain shareholders, FIMD has entered into an agreement
with Banque Nationale de Paris and Hambrecht & Quist EuroMarkets
("HQEM") pursuant to which Banque Nationale de Paris and HQEM are
entitled to purchase Ordinary Shares through June 11, 1999 in order to
fulfill their obligations as market-makers on the Nouveau Marche. See
"Market Information."

(8) Held by ten funds managed by Old Mutual Asset Managers (UK) Limited.

As of April 30, 1998, the total number of Ordinary Shares owned by
directors of the Company as a group (eight persons) and by executive officers
and senior management (excluding directors) of the Company as a group (17
persons) was 843,236 and 102,873 respectively, or approximately 11.6% and 1.4%,
respectively, of Genset's outstanding Ordinary Shares. If such directors and
executive officers and senior management exercised all their outstanding options
and warrants to purchase Ordinary Shares (including options that have not yet
vested), they would own as a group 22.4% of Genset's fully diluted share
capital, of which 546,366 Ordinary Shares or 6.3% of the share capital would be
held by FIMD and Oxford Bioscience Partners (the venture capital firm of which
Edmund Olivier de Vezin, a director of the Company, is a partner), 808,800
Ordinary Shares or 9.3% would be held by the three directors that are executive
officers of the Company, 44,270 Ordinary Shares or 0.5% of the share capital
would be held by the other directors, and 540,173 Ordinary Shares, or 6.2% of
the share capital would be held by executive officers and senior management
(excluding directors) as a group (17 persons). See "Options to Purchase
Securities from Registrant or Subsidiaries."

ITEM 5: Nature of Trading Market

MARKET INFORMATION

Prior to the June 1996 initial public offering, there was no public
market for the Ordinary Shares or the American Depositary Shares ("ADSs"). In
the United States, the Ordinary Shares trade in the form of ADSs, each ADS
representing one-third of one Share. The ADSs are listed on the Nasdaq National
Market (the "Nasdaq"), the principal trading market for the Ordinary Shares,
under the symbol "GENXY". American Depositary Receipts evidencing the ADSs are
issuable by The Bank of New York, as Depositary. The Ordinary Shares are also
listed on the Nouveau Marche of the Bourse de Paris (the "Nouveau Marche").

The Paris Bourse

Securities listed on the Bourse de Paris (the "Paris Bourse" or Paris
Stock Exchange) are traded in one of five markets. The securities of most large
public companies are listed on the Premier Marche, with the Second Marche
available for small and medium-sized companies. Trading on the Nouveau Marche
was introduced in March 1996 to allow companies seeking development capital to
access the stock market. Securities of certain other companies are traded on the
hors-cote, or over-the-counter market; however, since this market will be phased
out in July 1998, no new admissions can be granted for listing on this market.
Since September 1996, securities of certain other companies have also been
traded on a non-regulated over-the-counter market, the Marche Libre OTC which is
operated by the SBF-Bourse de Paris.

The Nouveau Marche

The Nouveau Marche is a regulated market, managed and operated by the
Societe du Nouveau Marche ("SNM") which is responsible for membership and
listing, organizing admissions and defining clearing and settlement regulations.
The SNM is a subsidiary of the SBF-Bourse de Paris, the organization which
manages and operates the Paris Bourse. The Nouveau Marche, however, is neither a
new section of an existing market, nor a stepping stone to the Paris Bourse's
Second Marche.

The Nouveau Marche has a limited operating history. As of March 31,
1998, only 41 companies were listed on the Nouveau Marche, which was established
in February 1996. There can be no assurance that the Nouveau Marche will develop
into a stable and liquid market for securities or that price fluctuations of the
Ordinary Shares on the Nouveau Marche will not have a negative impact on the
market price of the ADSs on Nasdaq.

The Nouveau Marche is an electronic market which combines a central
orderbook with market-making to ensure greater liquidity. Member firms of the
Nouveau Marche may act in one or more capacities: Listing Advisers/Market-Makers
(Introducteurs/Teneurs de Marche, or ITMs), broker-dealers
(Negociateurs-Courtiers) or clearers (Compensateurs). ITMs operate in a dual
capacity as listing advisors and as market-makers for the Ordinary Shares
assigned to them. An ITM must be open for business as of 8:30 a.m. and close no
earlier than 5:00 p.m.

Admission to the Nouveau Marche is subject to certain capital adequacy
and liquidity requirements determined by the SNM. In addition, companies
applying for listing on the Nouveau Marche are required to publish comprehensive
information regularly and to keep the public informed of all events likely to
affect the market price of their securities.

Retail orders on the Nouveau Marche are matched by the central system
at two daily fixings, at 10:30 a.m. and 4:30 p.m. Between such fixings, ITMs
display bid/ask spreads for a minimum number of each of the securities for which
they act as market-makers, and trades with the ITM are executed from time to
time throughout the day. Trading in the securities listed on the Nouveau Marche
may be suspended by the SNM if quoted prices exceed certain price limits defined
by the regulations of the SNM. In particular, unless market conditions otherwise
require, the SNM may suspend trading of a security if the SNM believes that the
offers and demands for such security would cause the next quoted price of a
security to vary by more than 10% from the quoted price resulting from the last
fixing. The SNM may also suspend trading of a listed security in certain other
limited circumstances, including, for example, the occurrence of unusual

trading activity in such security.

Prior to any transfer of securities held in registered form on the
Nouveau Marche, such securities must be converted into bearer form and
accordingly inscribed in an account maintained by an accredited intermediary
with the Societe Interprofessionnelle pour la Compensation des Valeurs
Mobilieres ("SICOVAM"), an organization that maintains securities accounts of
French listed companies and acts as a clearing house for trades in such
securities. Dealings in securities are initiated by the owner giving
instructions (through an agent, if appropriate) to the relevant accredited
intermediary. Trades of securities listed on the Nouveau Marche are cleared and
settled through SICOVAM, using a continuous net settlement system. A fee or
commission is payable to the ITM or broker-dealer or other agent involved in the
transaction.

Banque Nationale de Paris and certain of its affiliates and HQEM have
been appointed market-makers or ITMs on the Nouveau Marche. In connection with
their obligations as ITMs, Banque Nationale de Paris and HQEM have entered into
agreements with certain shareholders of the Company (including FIMD) pursuant to
which such shareholders are together obligated to sell from time to time to the
ITMs up to a total of 70,000 Ordinary Shares upon request by ITMs to allow them
to comply with their market-making obligations in accordance with the Nouveau
Marche regulations.

Trading Activity

The table below sets forth, for the periods indicated, the reported
high and low sales prices in U.S. dollars for the ADSs on the Nasdaq and the
reported high and low sales prices in French francs for the Ordinary Shares on
the Nouveau Marche and the average daily volume of shares traded on each
exchange.

Nasdaq Nouveau Marche
Avg. Daily Avg. Daily
Price per ADS Volume(1) Price per Share Volume(2)
-------------------- -------------------

Calendar Period High Low High Low

1996
Second quarter................... $ 21.50 $ 18.13 291,103 FF 350 FF 287 20,221
Third quarter.................... $ 19.25 $ 15.25 29,375 FF 295 FF 235 4,161
Fourth quarter................... $ 18.38 $ 15.25 8,422 FF 289 FF 238 2,094

1997
First quarter.................... $ 17.25 $ 13.25 17,331 FF 294 FF 230 6,001
Second quarter................... $ 20.87 $ 15.87 16,038 FF 359 FF 255 6,027
Third quarter.................... $ 25.00 $ 18.00 43,448 FF 472 FF 325 9,254
Fourth quarter................... $ 23.43 $ 17.75 36,210 FF 414 FF 303 5,233

1998
First quarter.................... $ 29.00 $ 19.62 29,998 FF 536 FF 363 8,718
Second quarter (through April 30) $ 36.38 $ 28.88 37,287 FF 639 FF 525 8,228

- ----------

(1) Average of the daily number of ADSs traded on the NASDAQ, each ADS
representing one-third of one Ordinary Share. The purchase and sale of
the same ADS is counted as one transaction.

(2) Average of the daily number of Ordinary Shares traded on the Nouveau
Marche.

At April 30, 1998, there were 7,252,787 Ordinary Shares issued and
outstanding of which 3,117,085 were represented by 9,351,255 ADSs.

Trading by the Company in its Securities

In France, companies may not purchase or otherwise trade in their own
securities without prior shareholder authorization, except if such purchases are
made for the purpose of attributing Ordinary Shares so acquired to the Company's
employees in connection with certain employee savings plans. French law requires
an issuer to file a copy of the shareholders' resolution authorizing any such
transactions with the COB prior to engaging in such transactions, and thereafter
a publicly available monthly report must be filed with both the COB and the
Conseil des Marches Financiers ("CMF" or Council of Financial Markets, the
self-regulatory organization that has general regulatory authority over the
French stock exchanges and whose members include representatives of French
stockbrokers) which provides certain information about the transactions. In
addition, the COB may require the issuer to provide additional information on,
or justification for, such transactions. Subject to a waiver by the COB in
special circumstances, purchases by the issuer of its equity securities may only
be made to ensure the liquidity of the market and to reverse the trend reflected
in the last quoted price of the securities. Purchases by the issuer of its own
securities may generally not account for more than 25% of the average total
daily trading volume on the Paris Bourse in the shares during a reference period
30 trading days immediately preceding such purchase. Securities acquired by an
issuer in stabilization transactions may be resold by the issuer at any time, in
accordance with the prior authorization of its shareholders. Except during the
issue period of any new issue of securities, such transactions may be executed
on behalf of the issuer by only one intermediary in each stock

exchange session. In addition, under French law an issuer may not own any of its
outstanding shares except in certain limited circumstances. In such cases, the
shares must be held in registered form and be fully paid-up, and are deemed
outstanding under French law but not entitled to dividends, voting rights or
preferential subscription rights.

On May 22, 1997, the Company received shareholder approval to engage in
such stabilizing transactions and in connection with such activities is
authorized to purchase up to a maximum of 10% of the outstanding Ordinary Shares
of the Company. This approval is subject to the condition that the share
purchase price must not exceed FF 320 and the share selling price must not be
lower FF 220. Such authorization will expire on June 30, 1998. On May 19, 1998,
the shareholders will vote on a resolution extending such authorization, subject
to the condition that the share purchase price not exceed FF 600 and the share
selling price not be lower than FF 350.

Such authorization, if approved, would expire on June 30, 1999.

ITEM 6: Exchange Controls and Other Limitations Affecting Security Holders

LIMITATIONS AFFECTING SHAREHOLDERS OF A FRENCH COMPANY

Ownership of ADSs or Ordinary Shares by Non-French Residents

Under French law, there is no limitation on the right of non-French
residents or non-French security holders to own, or where applicable, to vote
securities of a French company. However, both E.U. and non-E.U. residents must
file a declaration administrative, or administrative notice, with French
authorities in connection with the acquisition of a controlling interest in any
French company. Under existing administrative rulings, ownership of 20 percent
or more of a listed company's share capital or voting rights is regarded as a
controlling interest, but a lower percentage may be held to be a controlling
interest in certain circumstances (depending upon such factors as the acquiring
party's intentions, its ability to elect directors or financial reliance by the
French company on the acquiring party).

Exchange Controls

Under current French exchange control regulations, there are no
limitations on the amount of payments that may be remitted by a French company
to non-French residents. Laws and regulations concerning foreign exchange
controls do require, however, that all payments on transfers of funds made by a
French resident to a non-French resident be handled by an accredited
intermediary. In France, all registered banks and substantially all credit
establishments are accredited intermediaries.

Requirements for Holdings Exceeding Certain Percentages

French law provides that any individual or entity (including a holder
of ADSs), acting alone or in concert with others, that acquires, directly or
indirectly, more than 5%, 10%, 20%, 33 1/3%, 50% or 66 2/3% of the outstanding
voting shares or the rights thereof of a listed company, or that increases or
decreases its shareholding or voting rights thereof by any such percentage, must
notify such company within fifteen calendar days of the date such threshold has
been crossed, of the number of shares it holds and the voting rights attached
thereto. Such individual or entity must also notify the CMF, within five trading
days of the date such threshold has been crossed. In addition, any shareholder
who fails to comply with the above requirements may have all or part of its
voting rights suspended for up to five years by the commercial court at the
request of the company's chairman, any shareholder or the COB.

In addition, the Company's statuts provide that every shareholder
(including a holder of ADSs) who, directly or indirectly, acting alone or in
concert with others, acquires ownership or control of Ordinary Shares
representing 2%, or any multiple of 2%, of the Company's share capital or voting
rights, or whose holdings fall below any such limit, shall be required to notify
the Company of such fact within 15 calendar days of such acquisition or
disposition. Failure to

comply with such notification provisions will result in the suspension of the
voting rights attached to the Ordinary Shares exceeding such 2% threshold held
by such shareholder if requested by one or more shareholders holding Ordinary
Shares representing at least 2% of the Company's share capital or voting rights.

In order to permit shareholders to give the notice required by French
law, the Company is obligated to publish information with respect to the total
number of votes available as of the date of the Company's annual general meeting
in the Bulletin des Annonces Legales Obligatoires ("BALO") not later than 15
calendar days after such meeting. In addition, if the number of available votes
changes by at least 5% between two ordinary general meetings, the Company is
required to publish in the BALO, within 15 calendar days of such change, the
number of votes then available and provide the CMF with a written notice. In
order to facilitate compliance with the notification requirements provided for
in French law, a holder of ADSs may deliver any such notification to the
Depositary with respect to shares represented by ADSs and the Depositary shall
immediately forward such notification to the Company and the CMF.

Under COB regulations, any person or persons, acting alone or in
concert with others, who acquires more than 10% or 20% of the voting rights of a
listed company, must file with the CMF, the COB and such company a report
disclosing its future intentions with respect to the company. Such report must
be filed with the CMF and the COB within five trading days of the date such
threshold has been crossed and with such company within ten calendar days of the
date such threshold has been crossed. The CMF makes the notice public and the
person or persons who have acquired such voting rights are required to publish a
press release in a financial newspaper having national circulation in France,
stating whether or not such person or persons intend, within 12-month period
following the acquisition, to increase its shareholdings and request a seat on
such company's Board of Directors and whether such person or persons are acting
in concert with others.

Form, Holding and Transfer of Ordinary Shares

Genset's statuts provide that Ordinary Shares may be held in registered
or bearer form.

In accordance with French law concerning "dematerialisation" of
securities, the ownership rights of holders of the Ordinary Shares are not
represented by share certificates but by book entries. Banque Nationale de
Paris, on behalf of the Company, and acting as its agent, maintains a share
account with SICOVAM in respect of all Ordinary Shares held in registered form
(the "Company Share Account"). Ordinary Shares are inscribed in the name of each
shareholder (either directly, or, at the shareholder's request, through such
shareholder's accredited intermediary) in separate accounts (the "Shareholder
Accounts") maintained by Banque Nationale de Paris. Each Shareholder Account
shows the name of the holder and such shareholder's shareholdings and, in the
case of Ordinary Shares inscribed through an accredited intermediary, shows that
they are so held. Genset, as a matter of course, issues confirmations as to
holdings of Ordinary Shares inscribed in the Shareholder Accounts to the persons
in whose names the shareholdings are inscribed, but these confirmations do not
constitute documents of title.

In the case of Ordinary Shares held in bearer form, the shares are held
on the shareholder's behalf by an accredited intermediary and are inscribed in
an account maintained by the accredited intermediary with SICOVAM separate from
the Company Share Account. Ordinary Shares held in this manner are referred to
as being in bearer form. Each accredited intermediary maintains a record of
Ordinary Shares held through it and will issue certificates of inscription in
respect thereof. Transfers of Ordinary Shares held in bearer form may only be
effected through accredited intermediaries and SICOVAM. The Company's statuts
permit it to request SICOVAM at any time to provide the Company with the
identity of the holders of bearer Ordinary Shares and with the number of
Ordinary Shares so held.

An owner of Ordinary Shares resident outside France may trade Ordinary
Shares on the Paris Bourse. Should such owner, or the broker or other agent
through whom a sale is effected, require assistance in this connection, an
accredited intermediary should be contacted. A fee or commission is payable to
the societe de bourse (the French broker, accredited intermediary or other
agent) involved in the transaction.

Shares Issued before the Dividend Payment Date

Under French law, whether or not dividends are eventually paid, shares
of a listed company issued in any year prior to the dividend payment date are
generally not fungible with the other outstanding shares of the company. Until
the annual ordinary meeting of shareholders has determined whether dividends
will be paid in respect of the preceding fiscal year and, if so, until such
dividends are paid, the shares issued since January 1 generally trade at a
discount to those issued previously since they do not have the potential right
to a dividend from the preceding year. If only a limited number of shares are
issued during this period such as, for example, pursuant to the exercise of
options or warrants, it is unlikely that a liquid market for these newly-issued
shares will develop and the owners thereof may therefore encounter difficulties
in trading the shares until the dividend payment date, at which time they become
fungible with all the other shares of the company.

ITEM 7: Taxation

FRENCH TAXATION

The following is a general summary of the material French tax
consequences for a holder who is not a French tax resident of owning and
disposing of Ordinary Shares. The statements relating to French tax laws set out
below are based on the laws in force as of the date hereof, and are subject to
any changes in applicable French tax laws or in any applicable double taxation
conventions or treaties with France occurring after such date.

This discussion is intended only as a descriptive summary and does not
purport to be a complete analysis or list of all potential tax effects of the
purchase or ownership of the Ordinary Shares.

Potential purchasers of Ordinary Shares are urged to consult their own
tax advisers concerning the consequences of ownership and disposal of Ordinary
Shares.

Taxation on Sale or Disposal of Ordinary Shares

Subject to the provisions of any relevant double tax treaty, persons
who are not French residents for the purpose of French taxation (as well as,
under certain conditions, foreign states, international organizations and
certain foreign public bodies) and who have held not more than 25%, directly or
indirectly, of the dividend rights ("benefices sociaux") of the Company at any
time during the preceding five years, are not generally subject to any French
income tax or capital gains tax on any sale or disposal of Ordinary Shares.

If a share transfer is evidenced by a written agreement, such share
transfer agreement is, in principle, subject to registration formalities and
therefore to a 1% registration duty assessed on the higher of the purchase price
and the market value of the Ordinary Shares (subject to a maximum assessment of
FF 20,000 per transfer), provided that, under certain circumstances, no duty is
due if such written share transfer agreement is executed outside France.

Taxation of Dividends

In France, dividends are paid out of after-tax income. French residents
are entitled to a tax credit, known as the avoir fiscal, equal to one-half of
the dividend paid. Dividends paid to non-residents are normally subject to a 25%
French withholding tax and, under French domestic law, non-residents are not
eligible for the benefit of the avoir fiscal. Under most tax treaties entered
into between France and other countries, such withholding tax may, subject to
certain conditions, be reduced and give rise in such other country to a tax
credit of the amount of the tax withheld or, in the case of certain tax
treaties, be eliminated.

Furthermore, the following countries and Territoires d'Outre-Mer and
other territories have

entered into treaties with France whereby tax residents of such countries and
territories may, under certain circumstances, obtain from the French tax
authorities a reduction (generally to 15%) of all or part of such withholding
tax and a refund of the avoir fiscal (net of applicable withholding tax), or in
the case of German tax residents, a tax credit in an amount equal to the
aggregate of the amount of the applicable avoir fiscal and the amount of the
applicable withholding tax.

Australia Finland Italy Mauritius Senegal Turkey
Austria Gabon Ivory Coast Mexico Singapore United Kingdom
Belgium Germany Japan Netherlands South Korea United States of America
Bolivia Ghana Luxembourg New Zealand Spain Venezuela
Brazil Iceland Malaysia Niger Sweden
Burkina Faso India Mali Norway Switzerland
Cameroon Israel Malta Pakistan Togo

Territoires d'Outre-Mer and Other Territories

New Caledonia
Saint-Pierre et Miquelon
Mayotte

Treaties with some of the countries and territories listed above
contain specific limitations applicable to corporate entities entitled to
benefit from the avoir fiscal, or limit the rights to the avoir fiscal strictly
to individual residents (as opposed to corporate entities).

Dividends paid to non-residents of France benefiting from the avoir
fiscal in accordance with a tax treaty (other than German residents) will be
subject, on the date of payment, to the withholding tax at the reduced rate
provided for by such treaty (subject to certain filing formalities) rather than
to the French withholding tax at the rate of 25% to be later reduced to the
treaty rate; provided, however, that they establish their entitlement to such
reduced rate before the date of payment.

If Ordinary Shares are sold in a trade executed during the month of a
dividend payment date, the seller rather than the purchaser will generally be
entitled to the avoir fiscal with respect to such dividends.

Amounts distributed as dividends by French companies out of profits
which have not been taxed at the ordinary corporate income tax rate or which
have been earned and taxed more than five years before the distribution are
subject to a precompte or prepayment by such companies. The precompte is paid by
the distributing company to the French tax authorities and is equal to one-half
of the nominal dividend distributed. When a tax treaty in force does not provide
for a refund of the avoir fiscal or when the non-resident investor is not
entitled to such refund but is otherwise entitled to the benefits of a tax
treaty, such investor may obtain from the French tax authorities a refund of
such precompte actually paid in cash by the Company, if any (net of applicable
withholding tax).

Estate and Gift Tax

France imposes estate and gift tax on certain real and personal
property acquired by inheritance or gift from a non-resident of France if such
property is deemed to be situated in France. France has entered into estate and
gift tax treaties with a number of countries pursuant to which, assuming certain
conditions are met, residents of the treaty countries may be exempted from such
tax or obtain a tax credit. Prospective investors in Ordinary Shares should
consult their own advisors concerning the applicability of French estate and
gift tax to their shareholding in the Company and the availability of, and the
conditions for claiming exemption under, such a treaty.

Wealth Tax

In the absence of a more favorable tax treaty, the French wealth tax
(impot de solidarite sur la fortune) does not apply to non-French resident
individual investors owning directly or indirectly less than 10% of the
Company's share capital.

TAXATION OF U.S. INVESTORS

The following is a general summary of the material United States
federal income and French tax consequences to owners of one or more ADSs or
Ordinary Shares (a) who own, directly and indirectly, less than 10% of the
capital of the Company, (b) who are (i) citizens or residents of the United
States for United States federal income tax purposes, (ii) United States
domestic corporations or (iii) otherwise subject to United States federal income
taxation on a net income basis in respect of the ADSs or Ordinary Shares, (c)
who are entitled to Treaty benefits under the "limitation on benefits"
provisions contained in the Treaty, as discussed below ("U.S. Holders"), (d) who
hold the ADSs or Ordinary Shares as capital assets and (e) whose functional
currency is the U.S. dollar. Certain holders (including, but not limited to,
United States expatriates, insurance companies, tax-exempt organizations,
financial institutions, persons subject to the alternative minimum tax,
securities broker-dealers and persons holding the ADSs or Ordinary Shares as
part of a conversion transaction) may be subject to special rules not discussed
below. Because this is a general summary, prospective purchasers are advised to
consult their own tax advisor with respect to the purchase and ownership of ADSs
and Ordinary Shares.

The statements of United States and French tax laws set forth below
assume that each obligation in the Deposit Agreement and any related agreement
will be performed in accordance with its terms and are based on United States
and French laws and the double taxation conventions between the United States
and France in force, and on the practice of the French tax authorities, as of
the date hereof, and as a consequence are subject to any changes in such laws,
conventions or practice occurring after such date. In this regard, the
Convention between the United States of America and the French Republic for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income and Capital of August 31, 1994 (the "Treaty"), entered into
force on December 30, 1995 and the French tax authorities issued tax regulations
on June 7, 1994 and March 1, 1996 (the "Regulations").

For purposes of the Treaty and the United States Internal Revenue Code
of 1986, as amended (the "Code"), U.S. Holders of ADRs will be treated as owners
of the ADSs evidenced thereby and the Ordinary Shares represented by such ADSs.

Taxation of Dividends

Avoir Fiscal

Under the Treaty, the rate of French withholding tax on dividends paid
to a U.S. Holder whose ownership of the ADSs or Ordinary Shares is not
effectively connected with a permanent establishment or a fixed base in France
is reduced to 15%. Dividends paid to an Eligible U.S. Holder as defined below
will be immediately subject to the reduced rate of 15%, provided that such
holder establishes before the date of payment that such holder is a resident of
the United States under the Treaty in accordance with the procedures described
below. An Eligible U.S. Holder would also be entitled to a payment equal to the
avoir fiscal, less a 15% withholding tax. As noted below, such payment will not
be made to an Eligible U.S. Holder until after the close of the calendar year in
which the dividend was paid and only upon receipt by the French tax authorities
of a claim made by the Eligible U.S. Holder for such payment in accordance with

the procedures set forth below.

An Eligible U.S. Holder is a U.S. Holder whose ownership of ADSs or
Ordinary Shares is not effectively connected with a permanent establishment or
fixed base in France, and who is (i) an individual or other non-corporate holder
that is a resident of the United States as defined pursuant to the provisions of
the Treaty, (ii) a United States corporation, other than a regulated investment
company, (iii) a United States corporation which is a regulated investment
company only if less than 20% of its Ordinary Shares are beneficially owned by
persons who are neither citizens nor residents of the United States or (iv) a
partnership or trust that is treated as a resident of the United States as
defined pursuant to the provisions of the Treaty, but only to the extent that
its partners, beneficiaries or grantors would qualify under clause (i) or (ii)
above.

In general, under the Treaty, an Eligible U.S. Holder may receive a
payment of the avoir fiscal only if such holder (or its partners, beneficiaries
or grantors, if the holder is a partnership or trust) attests that it is subject
to United States federal income taxes on the payment of the avoir fiscal and the
related dividend. Certain entities are not entitled to the full avoir fiscal.
Tax-exempt "U.S. Pension Funds", as discussed below, and certain other
tax-exempt entities (including certain State-owned institutions, not-for-profit
organizations and individuals with respect to dividends beneficially owned by
such individuals and derived from an investment in a tax-favored retirement
account) ("Other Tax-Exempt Entities") that own, directly and indirectly, less
than 10% of the capital of the Company, and that satisfy certain filing
formalities specified in the Regulations (i) are entitled to a payment, subject
to French withholding tax, equal to 30/85 of the gross avoir fiscal (the
"partial avoir fiscal") and (ii) are eligible for the reduced withholding tax
rate of 15% on dividends. A "U.S Pension Fund" includes the exempt pension funds
established and managed in order to pay retirement benefits subject to the
provisions of Section 401(a) (qualified retirement plans), Section 403(b) (tax
deferred annuity contract) or Section 457 (deferred compensation plans) of the
Code.

Dividends paid to an Eligible U.S. Holder will be subject to the
reduced withholding tax rate of 15% at the time the dividend is paid if (i) such
holder duly completes and provides the French tax authorities with Treasury Form
RF 1 A EU-NO. 5052 (the "Form") before the date of payment of the relevant
dividend together with, if such Eligible U.S. Holder is not an individual, an
affidavit attesting that it is the beneficial owner of all the rights attached
to the full ownership of the ADSs or Ordinary Shares, including, but not limited
to dividend rights, or (ii) if completion of the Form is not possible prior to
the payment of dividends, such holder duly completes and provides the French tax
authorities with a simplified certificate (the "Certificate") stating that (a)
such holder is a U.S. resident as defined pursuant to the provisions of the
Treaty, (b) such holder's ownership of the ADSs or Ordinary Shares is not
effectively connected with a permanent establishment or fixed base in France,
(c) such holder owns all the rights attached to the full ownership of the ADSs
or Ordinary Shares, including but not limited to dividend rights, and (d) such
holder meets all the requirements of the Treaty for obtaining the benefit of the
reduced rate of withholding tax and the right to payment of the French avoir
fiscal. Dividends paid to a U.S. Holder that is not entitled to the avoir fiscal
(i.e., not an Eligible U.S. Holder) or to an Eligible U.S. Holder that has not
filed a completed Form or Certificate before the dividend payment date will be
subject to French withholding tax at the rate of 25%. Such holder may claim a
refund of the excess withholding tax and an Eligible U.S. Holder may claim the
avoir fiscal by completing and providing the French tax authorities with the
Form before December 31st of the year following the end of the calendar year
during which the dividend is paid. U.S. Pension Funds and Other Tax-Exempt
Entities are subject to the same general filing requirements as Eligible U.S.
Holders except that they may have to supply additional documentation evidencing
their entitlement to these benefits.

Eligible U.S. Holders, U.S. Pension Funds and Other Tax-Exempt Entities
must file the Form and, when applicable, the affidavit in order to receive
payment of the avoir fiscal or partial avoir fiscal (whichever is applicable).
The avoir fiscal or partial avoir fiscal is generally expected to be paid to
Eligible U.S. Holders, U.S. Pension Funds and Other Tax-Exempt Entities within
12 months of filing the Form, but not before January 15th following the end of
the calendar year in which the related dividend is paid. Similarly, any French
withholding tax refund is generally expected to be paid to U.S. Holders within
12 months of filing the Form, but not before January 15th following the end of
the calendar year in which the related dividend is paid.

The Form or the Certificate, together with their respective
instructions, will be provided by the Depositary to all U.S. Holders of ADRs
registered with the Depositary and are also available from the United States
Internal Revenue Service. The Depositary will arrange for the filing with the
French tax authorities of all Forms or Certificates completed by U.S. Holders of
ADRs that are returned to the Depositary within the time period specified by the
Depositary in its distribution to registered U.S. Holders of ADRs.

For United States federal income tax purposes, the gross amount of a
dividend and the amount of the avoir fiscal paid to a U.S. Holder, including any
French withholding tax thereon, will be included in gross income as dividend
income in the year each such payment is received (which, in the case of a U.S.
Holder of ADRs, will be the date of receipt by the Depositary) to the extent
paid or deemed paid out of the Company's current or accumulated earnings and
profits as calculated for United States federal income tax purposes. No
dividends received deduction will be allowed with respect to dividends paid by
the Company. Such dividends will generally constitute foreign source "passive"
or (in the case of certain holders) "financial services" income for foreign tax
credit purposes. The amount of any dividend paid in francs, including the amount
of any French taxes withheld therefrom, will be equal to the dollar value of the
francs on the date such dividend is included in income (which, for a U.S. Holder
of ADRs, will be the date of receipt by the Depositary), regardless of whether
the payment is in fact converted into dollars. A U.S. Holder will generally be
required to recognize a United States source ordinary income or loss upon the
sale or disposition of francs. Moreover, a U.S. Holder may be required to
recognize foreign currency gain or loss, which will generally be United States
source ordinary income or loss, upon the receipt of a refund of amounts, if any,
withheld from a dividend in excess of the Treaty rate of 15%.

French withholding tax imposed at the Treaty rate of 15% on dividends
paid by the Company and on any related payment of the avoir fiscal is treated as
payment of a foreign income tax and, subject to certain conditions and
limitations, may be taken as a credit against such U.S. Holder's United States
federal income tax liability.

Precompte

A U.S. Holder not entitled to the full avoir fiscal may generally
obtain a refund from the French tax authorities of any precompte paid by the
Company with respect to the dividends distributed. Pursuant to the Treaty, the
amount of the precompte refunded to United States residents is reduced by the
15% withholding tax applicable to dividends and by the partial avoir fiscal paid
to U.S. Pension Funds and other Tax-Exempt Entities. A holder is only entitled
to a refund of precompte actually paid in cash by the Company and is not
entitled to a refund of the precompte paid by the Company by off-setting French
and/or foreign tax credits.

A U.S. Holder entitled to the refund of the precompte must apply for
such refund by filing a French Treasury form RF 1 B EU-NO. 5053 before the end
of the year following the year in which the dividend was paid. The form and its
instructions are available from the United States Internal Revenue Service or at
the Centre des Impots des Non Residents (9 rue d'Uzes, 75094 Paris Cedex 2).

For United States federal income tax purposes, the amount of the
precompte paid to a U.S. Holder will be included in gross income as dividend
income in the year each such payment is received. Such amounts will generally
constitute foreign source "passive" or (in the case of certain holders)
"financial services" income for foreign tax credit purposes. The amount of any
precompte paid in francs, including the amount of any French taxes withheld
therefrom, will be equal to the dollar value of the francs on the date such
precompte is included in income (which, for a U.S. Holder of ADRs, will be the
date of receipt by the Depositary), regardless of whether the payment is in fact
converted into

dollars. A U.S. Holder will generally be required to recognize a United States
source ordinary income or loss upon the sale or disposition of francs.

Taxation of Capital Gains

A U.S. Holder who is a resident of the United States as defined
pursuant to the provisions of the Treaty will not be subject to French tax on
any capital gain from the sale or exchange of ADSs or Ordinary Shares unless
these ADSs or Ordinary Shares form part of the business property of a permanent
establishment or fixed base that the U.S. Holder has in France. Special rules
apply to individuals who are residents of more than one country. The deposit or
withdrawal of Ordinary Shares by U.S. Holders under the Deposit Agreement will
not be subject to United States federal income tax. In general, for United
States federal income tax purposes, a U.S. Holder will recognize a capital gain
or loss on the sale or exchange of ADRs or Ordinary Shares in the same manner as
on the sale or exchange of any other Ordinary Shares held as capital assets.
Such gain, if any, will generally be United States source gain. U.S. Holders
should consult their tax advisors regarding the source of loss recognized on the
sale or other disposition of ADSs or Ordinary Shares. In the case of a U.S.
Holder who is an individual, any capital gain generally will be subject to U.S.
federal income tax at preferential rates if specified minimum holding periods
are met.

Passive Foreign Investment Company Status

The Company may be classified as a "passive foreign investment company"
(a "PFIC") for United States federal income tax purposes if certain tests are
met. The Company will be a PFIC with respect to a U.S. Holder if for any taxable
year in which the U.S. Holder held the Company's Ordinary Shares, either (i) 75%
or more of the gross income of the Company for the taxable year is passive
income; or (ii) the average value of its assets during the taxable year which
produce passive income or which are held for the production of passive income is
at least 50% of the average fair market value of all the Company's assets for
such year. Passive income means, in general, dividends, interest, royalties,
rents (other than rents and royalties derived in the active conduct of a trade
or business and not derived from a related person), annuities, net gains from
the sale or exchange of assets that produce passive income, net gains from
commodities transactions, net gains from foreign currency transaction and income
equivalent to interest. For the purpose of the PFIC test, if a foreign
corporation owns directly or indirectly at least 25% by value of the stock of
another corporation, the foreign corporation is treated as owning its
proportionate share of the assets of the other corporation, and as if it had
received directly its proportionate share of the income of such other
corporation. The effect of this special provision with respect to the Company
and its direct and indirect ownership of its subsidiaries is that the Company,
for purposes of the income and assets tests described above, will be treated as
owning directly its proportionate share of the assets of the subsidiaries and of
receiving directly its proportionate share of each of those companies' income,
if any, so long as the Company owns, directly or indirectly, at least 25% by
value of the particular company's stock. Active business income of the Company's
subsidiaries will be treated as active business income of the Company, rather
than as passive income.

If the Company were to be classified as a PFIC, a U.S. Holder would be
subject to various adverse U.S. tax consequences. Such adverse consequences
include an interest charge on taxes deemed deferred by them on receipt of
certain "excess" dividend distributions by the Company to the U.S. Holder and on
realization of gain on disposition of any of the U.S. Holder's Company stock
(all of which distributions and gains would be taxable as ordinary income), or
if a U.S. Holder were to so elect to, and the Company were to agree with certain
reporting requirements, such U.S. Holder would be currently taxable on the U.S.
Holder's pro rata share of the Company's ordinary earnings and profits and
long-term capital gains for each year (at ordinary income or capital gains
rates, respectively), even if no dividend distributions were received. Based on
the nature of the Company's expected income, assets and activities, the Company
does not believe that it is currently a PFIC. No assurance can be made, however,
that the IRS will not challenge this position or the Company will not
subsequently become a PFIC.

French Estate and Gift Taxes

Pursuant to "The Convention Between the United States of America and
the French Republic for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Estates, Inheritance and Gifts of
November 24, 1978," a transfer of Ordinary Shares or ADSs by gift or by reason
of the death of a U.S. Holder that would otherwise be subject to French gift or
inheritance tax, respectively, will not be subject to French tax unless (i) the
donor or the transferor is domiciled in France at the time of making the gift,
or at the time of his or her death, or (ii) the Ordinary Shares or ADSs were
used in, or held for use in, the conduct of a business through a permanent
establishment or fixed base in France.

French Wealth Tax

The French wealth tax does not generally apply to a U.S. Holder who is
a resident of the United States as defined pursuant to the provisions of the
Treaty.

Information Reporting and Backup Withholding

In general, information reporting requirements will apply to dividends
paid in respect of ADSs or Ordinary Shares the proceeds received in the sale,
exchange or redemption of the ADSs or Ordinary Shares by a non-corporate U.S.
Holder, and a 31% backup withholding tax may apply to such amounts if the U.S.
Holder fails to provide an accurate tax identification number or to report
interest and dividends required to be shown on its federal income tax returns.
Finalized Treasury regulations have generally expanded the circumstances under
which information reporting and backup withholding may apply for payments made
after December 31, 1999. Holders of ADSs or Ordinary Shares should consult their
tax advisors regarding the application of the information reporting and backup
withholding rules.

ITEM 8: Selected Consolidated Financial Data

The selected consolidated financial data set forth below should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto appearing elsewhere herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
consolidated financial data for the five years ended December 31, 1993, 1994,
1995,and 1996 and 1997 have been extracted or derived from the Consolidated
Financial Statements of the Company, which have been prepared in accordance with
U.S. GAAP and audited by Ernst & Young Audit, France, independent auditors.

Year Ended and at December 31,
------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997(1)
------------------------------------------------------------------------------
FF FF FF FF FF U.S. $
(in thousands, except per share data)

Consolidated Statement of
Operations Data:
Net sales...................... 18,194 27,346 27,290 32,426 34,458 5,725
Research and development
revenues.................... 5,180 3,986 472 16,135 64,232 10,671
----- ----- --- ------ ------ ------
Total Revenues. 23,374 31,332 27,762 48,561 98,690 16,396
------ ------ ------ ------ ------ ------

Cost of goods sold............. (12,190) (17,394) (18,419) (21,398) (20,764) (3,450)
Research and development
expenses ................... (12,930) (14,845) (32,478) (88,006) (152,349) (25,311)
Selling and marketing expenses. (2,614) (3,187) (3,508) (4,767) (7,296) (1,212)
General and administrative
expenses.................... (11,907) (15,083) (17,162) (30,865) (45,927) (7,630)
-------- -------- -------- -------- -------- -------
Total Expenses. (39,641) (50,509) (71,567) (145,036) (226,336) (37,603)
-------- -------- -------- --------- --------- --------

Loss from (16,267) (19,177) (43,805) (96,475) (127,646) (21,207)
-------- -------- ------- -------- --------- --------
operations.....................
Interest income (expense), net. 303 (904) 1,742 9,220 12,554 2,086
Foreign Exchange gain (loss)... (36) (433) (891) 298 1,941 322
Other income (expense) net..... 47 33 10 56 150 25
-- -- -- -- --- --
Loss before income
tax benefit. (15,953) (20,481) (42,944) (86,901) (113,001) (18,774)
-------- -------- -------- -------- --------- --------

Income tax benefit(3).......... 2,608 3,474 7,942 21,815 19,147 3,181
------ ------ ------ ------- ------ -----
Net loss....... (13,345) (17,007) (35,002) (65,086) (93,854) (15,593)
======== ======== ======== ======== ======== ========

Loss per ordinary share(2)(4).. (4.80) (5.64) (7.96) (11.66) (13.54) (2..25)
Weighted average number of Ordinary
Shares outstanding(2)(4).... 2,782 3,016 4,396 5,581 6,932 6,932

Loss per ADS (American
Depositary Share)(2)(4)..... (1.60) (1.88) (2.65) (3.89) (4.51) (0.75)
Weighted average number of equivalent
ADSs outstanding(2)(4)..... 8,346 9,048 13,188 16,743 20,796 20,796

Consolidated Balance Sheet
Data:
Cash and cash equivalents 5,100 63,420 42,071 518,773 461,437 76,663
Total assets .......... 45,668 112,456 114,010 662,633 674,916 112,131
Long-term liabilities
(excluding current 15,410 20,355 35,860 42,142 41,014 6,814
portion).......................
Accumulated Deficit..... (33,147) (50,154) (85,156) (150,242) (244,096) (40,554)
Shareholders' equity.... 15,327 69,105 57,591 560,443 552,537 91,799

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

(1) Dollar amounts are translated solely for convenience at the Noon Buying
Rate in New York on December 31, 1997, of 6.0190 French Francs per U.S.
dollar.

(2) See "Item 19: Financial Statements -- Note 1 of the Notes to the
Consolidated Financial Statements."

(3) See "Item 19: Financial Statements -- Note 8 of the Notes to the
Consolidated Financial Statements."

(4) Figures for 1993, 1994 and 1995 have been adjusted to reflect the
100-for-1 share split approved by the shareholders on April 29, 1996.

Dividend Policy

The Company currently intends to retain all earnings for use in the
operation and expansion of its business and correspondingly does not anticipate
paying any cash or share dividends on its Ordinary Shares in the foreseeable
future. To date, the Company has never declared or paid cash or share dividends
on its Ordinary Shares. Dividends if and when declared by the Company will be
declared in francs but paid to holders of ADSs in dollars.

Dividends paid to ADR holders will be net of fees and charges of the Depository,
net of French withholding tax and may be affected by exchange rate fluctuations.
See " -- Exchange Rate Information" and "Taxation."

ITEM 9: Management's Discussion and Analysis of Financial
Condition and Results of Operations

Overview

Genset is a fully integrated genomics company engaged in providing
tailored genomics information to the pharmaceutical industry through focused
strategic partnerships. The Company's mission is to assist pharmaceutical
companies in the discovery, development and marketing of their drugs through the
discovery of common disease and drug response genes. The Company's commercial
strategy is to create and provide proprietary genomics information to the
pharmaceutical industry in three key business areas: disease gene discovery
programs, pharmacogenomics programs for drug response, and gene libraries.
Through these targeted services, the Company expects to derive multiple revenue
streams from research and development, clinical milestones and royalties on drug
sales that will lead to a sustained revenue growth.

In the area of disease causing gene discovery programs, the Company
has two ongoing funded collaborations. The first program to discover genes
associated with prostate cancer began in May 1996 on signing a strategic
alliance with Synthelabo, a French pharmaceutical company. The initial phase
of this program was completed on May 8, 1998 and Synthelabo has extended the
program for a third year. The second program to discover genes associated
with schizophrenia began in September 1996 on signing an agreement with a
subsidiary of Johnson & Johnson. The Company has also initiated programs in
cardiovascular diseases, osteoporosis, CNS disorders and obesity which are
available for partnering.

In 1997, Genset formed strategic alliances in two new business areas:
pharmacogenomics and gene libraries. On July 17, 1997, the Company entered into
a pioneering strategic alliance with Abbott Laboratories in the field of
pharmacogenomics to analyze variations in patient response to drug therapy. As
part of the alliance, Genset will use its high density biallelic marker map to
identify markers and genes associated with the response to the administration of
given drugs, while Abbott will develop diagnostic systems derived from these
markers and genes. Together, Genset and Abbott will collaborate on additional
pharmacogenomics research programs for third party pharmaceutical companies for
drugs in clinical development and for marketed compounds with limited efficacy
and side effects. In parallel, Genset began an 18 month program to study patient
response to treatment with an Abbott's drug for the treatment of asthma,
Zileuton, making Abbott the alliance's first customer. For this program, Abbott
will provide up to $22.5 million in research funding and milestones. Pursuant
to the agreement, Abbott made an equity investment of $10 million in Genset
stock and the Company has a one-year put option exercisable beginning in
September 1998 for an additional investment of $10 million. The Company believes
that this is the first of many potential collaborative agreements in
pharmacogenomics which may contribute significant revenues in the near and
mid-term.

On July 25, 1997, the Company entered into an exclusive license
agreement with Genetics Institute ("GI"), a subsidiary of American Home
Products. As part of this alliance, Genset will provide approximately 2,000
new full length secreted protein genes from its SignalTag-TM- library for
expression and inclusion in GI's DiscoverEase-Registered Trademark- protein
development platform. Genset will receive payments of up to approximately FF
120 million based on the delivery of clones to GI and orders received from
DiscoverEase-Registered Trademark- subscribers. Through this platform, Genset
gains access to numerous potential pharmaceutical partners for protein
evaluation for future drug development, including, Bayer, Chiron, Chugai,
Genentech, Immunex, Kirin, Ontogeny and Scios. Development and
commercialization of Genset's secreted proteins by these potential partners
will result in the generation of revenues from development milestones and
royalties on future drug sales.

During 1997, the Company expanded its network of collaborations with
clinical and research institutions to secure access to well-characterized, high
quality phenotypic samples for analysis of common diseases. Through its
collaboration with the Royal College of Surgeons in Ireland, a clinical research
center specializing in the cardiovascular field, the Company has obtained access
to a substantial DNA bank, which is being constituted using samples from large
clinical trials involving in the aggregate up to 20,000 subjects. The Company
also has collaborations with hospitals and research institutes in France,
Germany, Israel and Argentina to obtain clinical samples for association studies
on prostate cancer, osteoporosis, obesity and CNS disorders.

The Company was organized in 1989 to discover, develop and market
products derived from DNA and genetics research. In pursuit of these objectives,
the Company initially developed a commercial activity in the manufacture of
synthetic DNA. With expertise in chemistry, industrial production techniques and
automation, the Company believes it has become the largest manufacturer of
synthetic DNA worldwide. The Company is also its own largest customer, using
approximately half of its production output for its internal genomics research
programs.

During 1996 and 1997, the Company has invested significantly in the
expansion of its personnel and facilities and the further development of its
integrated technology platform at industrial-scale in order to fulfill its
corporate mission and strategic objectives. In particular, the Company has
developed all the necessary tools to complete its proprietary high density
biallelic marker map of the human genome. This map is key to the Company's

genome-wide approach to perform association studies in unrelated individuals to
identify low penetrance genes responsible for many common diseases and clinical
traits. This approach has allowed the Company to secure new strategic
partnerships and generate potential future revenue streams.

Based upon its current plans, the Company believes that its existing
resources and loans, together with the net proceeds from the June 1996 initial
public offering and the September 1997 sale of equity to Abbott, will be
adequate to satisfy its capital requirements through the end of 1999. The
Company has made this estimate assuming that: (i) it will not exercise its
Abbott put option exercisable as of September 1998; (ii) no significant
milestones under existing agreements with strategic partners are attained; and
(iii) no additional strategic partnerships are entered into during this period.
Any or all of such additional resources would extend the period during which the
Company is able to satisfy its capital requirements. There can be no assurance,
however, that the Company's research and development plans or other changes
affecting the Company's operating expenses will not result in the need for
additional funding before such time or that, if needed, such additional funding
would be available. See " -- Liquidity and Capital Resources."

The Company has incurred losses since its inception and anticipates
that it will incur losses for the next few years. The Company's primary sources
of revenue are, and for the next several years will be limited to, payments made
pursuant to the terms of existing and future strategic alliances with
pharmaceutical companies, licensing arrangements, if any, revenues from its
synthetic DNA activities and interest income. Certain payments under existing
strategic alliance arrangements are contingent upon the Company meeting certain
milestones.

The timing and amount of revenues under strategic alliance arrangements
will be subject to significant fluctuations and therefore the Company's results
of operations for any period may not be comparable to the results of operations
for any other period. In addition, historical results should not be viewed as
indicative of future operating results.

Results of operations

Years ended December 31, 1997 and 1996

Genset reported total revenues of FF 98.7 million for the year ended
December 31, 1997, an increase of more than two-fold compared to total revenues
of FF 48.6 million for the year ended December 31, 1996. Research and
development revenues comprised FF 64.2 million, or 65% of total revenues
compared to 33% of total revenues for the year ended December 31, 1996 and a
four-fold increase over the prior year, while product sales accounted for FF
34.5 million. The increase in revenue from R&D for the year was due primarily to
the initiation of new research collaborations, as well as ongoing research
collaborations and the completion of research milestones. During the year,
Genset signed a pioneering alliance with Abbott Laboratories for
pharmacogenomics and a collaboration with Genetics Institute for secreted
proteins.

Genset's research and development expenses increased 73% to FF 152.3
million during 1997 from FF 88 million in 1996. This increase was due to costs
associated with the 50% increase in staffing to fulfill ongoing and new research
contracts, the increase in consumption of oligonucleotides for production of the
high resolution map, and the amortization of leasehold improvements and
additional laboratory equipment for the Genomics Research Center. The Company
also recognized a deferred compensation expense of FF 12.2 million in 1997
related to stock options and warrants granted to research and development
personnel. The percent of research expenses funded by external research
collaborations increased significantly to 42% in 1997 from 18% in 1996. Genset
expects research and development expenses to continue to increase as additional
personnel are hired, facilities are expanded and

additional programs for gene discovery and pharmacogenomics are initiated.

Cost of goods sold and selling and marketing expenses amounted to FF
20.8 million and FF 7.3 million, respectively. Both relate to synthetic DNA
sales.

General and administrative expenses increased 50% to FF 45.9 million
during 1997 from FF 30.9 million in 1996. General and administrative expenses
are expected to continue to increase during 1998 due to the significant
expansion of patent, licensing and business development activities. The Company
recognized a deferred compensation expense of FF 1.5 million in 1997 related to
stock options granted to general and administrative personnel.

The amortization of total deferred compensation over the next four
years with respect to stock options and warrants outstanding as of December 31,
1997 will amount to approximately FF 11.5 million.

Net interest income increased significantly to FF 12.6 million in 1997
from FF 9.2 million in 1996 due to a substantial cash position during all of
1997, which was invested in money market funds and certificates of deposit.
Foreign exchange gains of FF 1.9 million in 1997 compared to FF 0.3 million in
1996 are attributable to the appreciation of dollar-denominated accounts
receivable.

Genset recorded a small decrease in income tax benefit to FF 19.1
million in 1997 compared to FF 21.8 million in 1996. This benefit, which is
calculated based on the increase of qualifying research expenditures in France,
was lower due to a marginally lower increase in 1997 . As of December 31, 1997,
the Company had a research-related income tax credit receivable of FF 52.3
million, of which FF 3.5 million is recoverable in 1998, FF 7.9 million in 1999,
FF 21.8 million in 2000 and FF 19.1 million in 2001.

The Company's net loss increased to FF 93.9 million in 1997 from FF
65.1 million in 1996. The Company expects to continue to report losses for the
next several years. At December 31, 1997, the Company's accumulated deficit was
FF 244.1 million compared to FF 150.2 million at December 31, 1996.

Years ended December 31, 1996 and 1995

Net sales increased 18.8% from FF 27.3 million in 1995 to FF 32.4
million in 1996. This progression was due primarily to the 54% increase in sales
in the United States and the near doubling of sales in Japan, resulting from a
large number of new customers for synthetic DNA.

Research and development revenues comprised FF 16.1 million in 1996,
compared to FF 0.5 million in 1995. This increase was due primarily to the
initiation in 1996 of genomics programs with pharmaceutical collaborators,
Synthelabo and Janssen Pharmaceutica, an affiliate of Johnson & Johnson, and the
completion of the first milestone under the Synthelabo collaboration for the
discovery of genes related to prostate cancer.

Cost of goods sold increased 16.2% from FF 18.4 million in 1995 to FF
21.4 million in 1996, less than the increase in sales, due to economies of scale
and automation. Research and development expenses increased substantially to FF
88.0 million in 1996 from FF 32.5 million in 1995, due to the creation of the
mapping laboratory in Evry, France and the expansion of the sequencing and
bioinformatics laboratories in connection with the development of gene discovery
programs. The Company also recognized deferred compensation expenses related to
stock options and warrants granted to research and development employees of FF
11.7 million in 1996 compared with none in 1995. Selling and marketing expenses
of FF 4.8 million in 1996 relate to synthetic DNA sales.

General and administrative expenses increased 79.8% to FF 30.9 million
in 1996 from FF 17.2 million in 1995 due to the expansion of business
development, patent and licensing, and investor relations activities to support
the genomics programs and the Company's initial public offering and listings on
the Nasdaq National Market and the Nouveau Marche. The Company expects general
and administrative expenses to continue to increase in support of its growing
research and development efforts and its gene discovery programs. The Company
also recognized deferred compensation expenses related to stock options granted
to general and administrative personnel of FF 1.3 million in 1996, compared with
FF 0.6 million in 1995.

The amortization of total deferred compensation and prepaid research
and development expenses over the next four years with respect to stock options
and warrants outstanding as of December 31, 1996 will amount to approximately FF
20.5 million.

Net interest income, increased significantly to FF 9.2 million in 1996
from FF 1.7 million in 1995 following the cash received from the initial public
offering in June 1996, which was invested in money market funds and certificates
of deposit. Foreign exchange gains of FF 0.3 million in 1996 were attributable
to the appreciation of dollar-denominated accounts receivable and payable,
whereas the losses of FF 0.9 million in 1995 were attributable to the
depreciation of dollar-denominated accounts receivable and payable.

As of December 31, 1996, the Company's deferred tax assets included
French net operating loss carry forwards of FF 50.1 million and French
capitalized and amortized research and development costs of FF 15.6 million.

The Company had a FF 21.8 million research-related income tax credit in
1996, compared with FF 7.9 million in 1995. Under current French tax policy, the
credit in a given year can be carried forward and is recoverable in cash from
the French government, if not used to offset taxes payable, in the fourth year
following its generation. As of December 31, 1996, the Company had a
research-related income tax credit receivable of FF 35.8 million, of which FF
2.6 million is recoverable in 1997, FF 3.5 million in 1998, FF 7.9 million in
1999, and FF 21.8 million in 2000.

The Company's net loss increased 85.9% to FF 65.1 million in 1996 from
FF 35.0 million in 1995. At December 31, 1996, the Company's accumulated deficit
was FF 150.2 million compared to FF 85.2 million at December 31, 1995.

Liquidity and Capital Resources

The Company has financed its operations through the private placement
of equity securities, loans, conditional interest-free loans received from
ANVAR, a French government agency, French government grants and the June 1996
initial public offering of its equity securities. From its inception in mid-1989
through December 1997, the Company received FF 515.5 million gross proceeds from
the initial public offering; FF 59.7 million in cash proceeds from the sale of
equity to Abbott Laboratories in September 1997; FF 216.0 million gross proceeds
from private placements; FF 66.5 million in bank loans; approximately FF 15
million in government grants; FF 10.5 million in conditional interest-free
loans; and FF 16.0 million from the Association Francaise contre les Myopathies
(the "AFM loan"), in connection with the research agreement signed in 1994. At
December 31, 1997, the Company's long term debt (including current portion and
excluding the AFM loan) amounted to FF 46.2 million compared with FF 34.6
million at December 31, 1996. This increase was due to two new bank loans to
finance

partially the construction of the bioinformatics and mapping laboratories. At
December 31, 1997, cash and cash equivalents and short term investments (less
than three months) totaled FF 461.7 million.

For the year ended December 31, 1997, the Company's principal uses of
cash were funding of research and development expenses, purchases of additional
equipment for sequencing and new equipment for mapping and construction of the
mapping facility.

The Company's future capital requirements, the timing and amount of
expenditures and the adequacy of available funds will depend upon many factors,
including the progress of the Company's research and development programs and
the magnitude of these programs, the Company's ability to develop and maintain
strategic partnerships and collaborative agreements, the progress of the
development and commercialization of potential drugs resulting from the
Company's programs, competing technological and market developments, the process
of preparing, filing, maintaining and enforcing patent claims and other
intellectual property rights and related costs, the regulatory process and other
factors. Based upon its current plans, the Company believes that its existing
resources and loans, together with the net proceeds from the June 1996 initial
public offering and the September 1997 sale of equity to Abbott, will be
adequate to satisfy its capital requirements through the end of 1999. The
preceding discussion contained forward-looking statements relating to Genset's
expectations regarding funding. There can be no assurance, however, that the
Company's research and development plans or other changes affecting the
Company's operating expenses will not result in the need for additional funding
before such time or that, if needed, such additional funding would be available.

Impact of Currency Fluctuations

The Company publishes its Consolidated Financial Statements in French
francs; however, substantial portions of the Company's revenues and expenses are
denominated in currencies other than French francs. The primary functional
currencies for the Company's operations are the French franc, the U.S. dollar
and the yen. A strengthening or weakening of the French franc against these
other currencies could affect operating income (loss). The Company's
manufacturing operations in the United States partially limit its exposure to
fluctuations between the French francs and the U.S. dollar. The Company does not
engage in hedging transactions.

Asian Financial Crisis

The recent financial crisis in Asia had no effect on the 1997 results
of the Company and the Company does not believe the crisis will have a material
effect on its 1998 results. The Company does not expect the financial crisis in
Asia to have a significant impact on its core research business. With respect to
its Oligonucleotides Division, other than a minimal amount of synthetic DNA
sales to Asian countries other than Japan, the Company had no exposure to the
economies of these countries in 1997 and expects that its overall exposure to
developments in these countries and their currencies will continue to be
limited. The Company currently denominates, and intends to continue to
denominate, all sales in South-East Asia outside Japan and Singapore in U.S
dollars. This policy may, due to the relative increase in the value of the U.S.
dollar, adversely affect the growth in sales of synthetic DNA in certain
South-East Asian countries, while the value in French francs of sales in Japan
and Singapore has and may continue to decrease in line with the relative
decrease of the value of their currencies. In addition, the economic problems
affecting the region generally may result in a decrease in funds spent on
scientific research and hence in the regional market for the Company's synthetic
DNA. The Company is unable at this point to appreciate the extent of this risk.
With respect to costs, the relative decline in the value of the Singapore dollar
and the Japanese yen has resulted in a decrease in the plant and labor costs
related to the establishment of the Company's production facilities in Singapore
and Kyoto, respectively. Raw materials, however, are imported and typically
denominated in U.S.

dollars. See " -- Description of Business -- Manufacturing and Marketing --
Synthetic DNA."

Year 2000

The Company has analyzed its principal accounting, management and
research software and determined that none of such software should be subject to
year 2000 failures. The Company intends to communicate with its principal
collaborators, customers, suppliers, financial institutions and others with
which it has business relations to coordinate with respect to any potential year
2000 issues. The Company does not anticipate that it will incur significant
operating expenses or be required to invest heavily in computer systems
improvements, or that it will experience any significant disruptions in business
or research operations as a result of the millennium change.

The EURO

The Company installed new accounting software in early 1998 which is
adapted for the conversion to accounting in EUROs and the Company intends,
beginning with its first semester 1998 accounts, to publish its accounts in
EUROs, as well as in French francs. The Company expects to convert its
accounts to EUROs only beginning in 1999. The Company does not expect
significant delays or costs to be associated with the conversion of its
accounts to EUROs. There can be no assurance, however, that systemic
difficulties at the national level or among the Company's clients and
suppliers related to the conversion to EUROs will not adversely impact the
Company's conversion or result in additional costs.

ITEM 10: Directors and Officers of the Registrant

Management

In accordance with French law governing a societe anonyme, the
Company's affairs are managed by its Board of Directors and by its Chairman of
the Board and Chief Executive Officer, who has full authority to manage the
affairs of the Company, subject to the prior authorization of the Board of
Directors for certain decisions.

Board of Directors

Under French law, the Board of Directors is responsible, among other
things, for presenting accounts to the shareholders and convening shareholders'
meetings. In addition, the Board of Directors reviews and monitors the Company's
economic, financial and technological strategies. The Company's Board of
Directors consists of between three and 24 members elected by the Company's
shareholders at their general meetings. Each director must own at least one
share of Genset. Under French law a director may be an individual or a
corporation.

Directors are required to comply with applicable law and Genset's
statuts (or charter and by-laws). Under French law, the Chairman of the Board
and Chief Executive Officer may be responsible individually for actions taken by
such person that are contrary to the company's interests, and the directors may
be responsible for such actions both individually and jointly.

The Company has a compensation committee which is responsible for
proposing the salaries and incentives of the Company's executive officers and
senior management to the Board. The Company also has an audit committee.

The following table sets forth the names of the directors of the
Company, their current positions with the Company, the dates of their initial
appointment as directors and the expiration dates of their current term.
Genset's statuts provide that each director is elected for a maximum six-year
period. Directors need not be French nationals and there is no limitation on the
number of terms that directors may serve.

Initially Term
Name Age Current Positions Appointed(1) Expires

Pascal Brandys 39 Chairman of the Board of Directors 1989 1998(2)
and Chief Executive Officer (President
Directeur General))

Marc Vasseur 48 Director, Chief Biology Officer and 1992 1998(2)
Directeur General

Daniel Cohen 47 Director, Chief Genomics Officer and 1996 2002
Directeur General

Laurent Degos 52 Director and President of the Scientific 1989 1998(2)
Advisory Board

Jean Deleage(3) 56 Director 1992 1998(2)

FIMD (represented by
Benoit Habert(3)) 32 Director 1994 2000

Martyn Greenacre(4) 56 Director and President of the 1993 1999
Compensation Committee

Edmund Olivier de Vezin(4) 60 Director 1994 2002

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

(1) Dates specified for directors representing corporations relate to the
entity represented.

(2) The Board of Directors has proposed to the annual general meeting of
shareholders that is expected to be held on May 19, 1998 that the terms
of Pascal Brandys, Marc Vasseur and Laurent Degos be renewed for a
further six years. Jean Deleage did not present himself for reelection.

(3) Member of the Audit Committee.

(4) Member of the Compensation Committee.

Pascal Brandys has been Chairman of the Board of Directors and Chief
Executive Officer (President Directeur General) of the Company since he
co-founded the Company in 1989 and President and Chief Executive Officer of
Genset Corporation since its founding in 1992. Mr Brandys is also President
of France Biotech, the professional association of French biotechnology
companies. Prior to founding the Company, from 1988 to 1989, Mr. Brandys was
a Partner at Eurocontinental Ventures in London. At Eurocontinental Ventures
Mr. Brandys managed technology and biotechnology investments in Europe. In
1986 he founded and became Chief Executive Officer of Unihon Services
(Tokyo), a venture capital fund, acquired in 1989 by Credit Agricole. From
1984 to 1986, Mr. Brandys acted as the Deputy General Manager for the French
Industrial Development Agency in Tokyo. Mr. Brandys is a graduate of the
Ecole Polytechnique, has an M.S. in Civil Engineering from the Ecole
Nationale des Ponts et Chaussees and an M.S. in Economic Systems from
Stanford University.

Marc Vasseur, Ph.D., co-founded the Company in 1989 and has been Chief
Biology Officer and Directeur General of the Company since 1992. He is on leave
of absence from the University of Paris where he is a Professor of Virology and
Head of the Molecular Virology Laboratory. Professor Vasseur is a molecular

biologist specializing in the regulation of gene expression and transcriptional
regulation of cellular and viral genes. From 1980 to 1987, Professor Vasseur was
a scientist in the Cell Genetics Laboratory at the Pasteur Institute (Paris).
From 1975 to 1980, he was a scientist at the Institute of Cancer Research
(Villejuif, France). He started his research career at the Institute of
Physico-Chemical Biology, where he worked from 1971 to 1975. Professor Vasseur
has served on a number of boards and committees at the University of Paris and
at CNRS; he was a member of CNRS' National Board for five years. Professor
Vasseur received his Ph.D. from the University of Paris. He is the author of
more than 50 scientific publications and the book, Oncogenic Viruses.

Daniel Cohen, M.D., Ph.D., joined the Company in 1996 as Chief Genomics
Officer and Directeur General. Professor Cohen is a Professor of Medical
Genetics at the University of Paris VII. Before joining the Company, Professor
Cohen was a co-founder and Scientific Director of CEPH. Professor Cohen was also
a co-founder and Scientific Director of Genethon and has served as a scientific
advisor for another genomics company. He is Doctor Honoris Causa of Shanghai,
Xi'an and Ben Gourion University, and has received UNESCO's Prize of New Human
Rights, the Daniel Bauperthuy Prize from the French Academy of Sciences for
epidemiology, and the Grand Prize for Medical Literature for the book, The Genes
of Hope, which has been translated into seven languages. Professor Cohen
received the Legion of Honor in 1998. He has authored more than 100 scientific
publications. Professor Cohen has an M.D. and a Ph.D. in Immunology and
Immunogenetics from the University of Paris VII.

Laurent Degos, M.D., Ph.D., a co-founder of the Company and the
President of its Scientific Advisory Board, is a Professor of Hematology at the
University of Paris VII-Denis Diderot. He is also the Director of the Institute
of Hematology at the University of Paris VII-Denis Diderot and head of the
Hematology Department (adult) leukemia) at Hopital Saint-Louis in Paris.
Professor Degos is president of the Scientific Council of the Institute of
Health Policy and the author of three books and 200 publications. He is a past
director of INSERM Unit, and the past president of the Committee of Hematology
of the National Council of French Universities and is a member of several
editorial boards in hematology and leukemia. Professor Degos is the recipient of
a number of international honors and awards (including from the General Motors
Cancer Foundation in 1994). He is also a correspondent member of French Science
Academy and president of the Scientific Board of Paris Hospitals. He has an M.D.
and a Ph.D. in Human Biology from the University of Paris.

Jean Deleage, Ph.D., is a managing partner of Burr, Egan, Deleage &
Co., the venture capital firm he co-founded in 1979, and a managing partner of
Alta Partners, founded in 1996. He founded Sofinnova S.A. and Sofinnova Inc.,
the wholly owned U.S. subsidiary of Sofinnova S.A., and was the President of
Sofinnova, Inc. until 1980. He is a director of JTS Corp., Flamel Technologies,
Diatide, Inc., OraVax Inc., DepoTech Corporation and other private companies.
Dr. Deleage received the Legion of Honor in 1993. He received a doctoral degree
in Economics from the Sorbonne and an M.S. in Electrical Engineering from the
Ecole Superieure d'Electricite.

Benoit Habert is President of Dassault Development, the venture capital
company of Financiere & Immobiliere Marcel Dassault ("FIMD"). Mr. Habert is also
a member of the Board of Directors of Dassault Industries, the industrial
holding of the Dassault Group Industries and a member of the Board of Directors
of Dassault Electronique. Prior to joining Dassault Development, he was a member
of the New Issue Department at Banque Indosuez which he joined in 1991. Mr.
Habert has two masters degrees in business and tax law from the University of
Paris and holds an M.B.A. from INSEAD.

Edmund Olivier de Vezin has been a partner at Oxford Bioscience
Partners L.P. ("Oxford Bioscience Partners") since 1992. Prior to entering the
venture capital field in 1984, he managed domestic and international operations
for Diamond Shamrock, Corning Glass Works and Conoco Chemicals. He is a Life
Fellow and Member of the National Council of the Salk Institute and a former
Chairman of Biotechnology Venture Investors Group.

Mr. Olivier de Vezin has an M.B.A. from Harvard University and a B.S. in
Chemical Engineering from Rice University.

Martyn Greenacre joined Delsys Pharmaceutical Corp. as President and
CEO in 1997. Previously he was at Zynaxis Inc. as President and CEO from 1993 to
1997 and at SmithKline Beecham plc since 1973, where from 1989 he was
responsible for the strategic direction and operational management of
pharmaceutical subsidiaries in Europe and for planning and executing European
aspects of the merger between SmithKline Beckman and Beecham Pharmaceutical. He
is also a director of Cephalon Inc. and Creative BioMolecules. Mr. Greenacre
received his M.B.A. and B.A. degrees from Harvard University.

Executive Officers and Senior Management

Under French law, the Chairman of the Board and Chief Executive Officer
has full executive authority to manage the affairs of the Company. The Board of
Directors has the power to appoint and remove, at any time, the Chairman of the
Board and Chief Executive Officer. Pursuant to Genset's statuts, the Chairman of
the Board and Chief Executive Officer has broad powers to act on behalf of the
Company and to represent the Company in dealings with third parties, subject
only to those powers expressly reserved to the Board of Directors or the
shareholders. The Chairman of the Board and Chief Executive Officer determines
and is responsible for matters such as the implementation of the goals,
strategies and budget for the Company's different business activities.

Pursuant to French law and Genset's statuts, the Board of Directors can
appoint up to five Directeurs Generaux proposed by the Chairman and Chief
Executive Officer, whose powers and responsibilities are determined by the
Board, together with the Chief Executive Officer. Each such Directeur General
generally has broad powers to represent and bind the Company in dealing with
third parties.

The Company is highly dependent on the principal members of its
management and scientific staff, the loss of whose services might adversely
affect the Company's prospects for success. Furthermore, recruiting and
retaining qualified scientific personnel will be critical to the Company's
success. Although the Company believes it will be able to attract and retain
skilled and experienced scientific personnel, there can be no assurance,
given the competition between pharmaceutical and health care companies,
universities and non-profit research institutions for experienced scientists,
that it will be able to do so. While most of the Company's personnel have
signed employment contracts which contain non-compete and confidentiality
clauses, there can be no assurance that these provisions will provide
meaningful protection for the Company's know-how or technology or adequate
remedies in case of breach. In addition, the Company's three Directeurs
Generaux have not signed employment contracts or non-compete or
confidentiality agreements and none of the Company's employees in the United
States have signed non-compete agreements. The Company has not obtained
key-man life insurance coverage during 1998 with respect to its three
Directeurs Generaux.

The following table sets forth the names of the executive officers and
senior management of the Company, their current positions with the Company and
the first dates as of which they served as executive officers or senior
management of the Company.

Executive Officers

Name Age Current Position(s) Since

Pascal Brandys 39 Chairman of the Board of Directors and 1989
Chief Executive Officer (President
Directeur General)

Marc Vasseur 48 Director, Chief Biology Officer and 1992
Directeur General

Daniel Cohen 47 Director, Chief Genomics Officer and 1996
Directeur General

Marta Blumenfeld 42 Vice President, Genomics Analysis 1990

Jerome Chailloux 48 Chief Information Officer 1995

Ilya Chumakov 48 Vice President, Mapping 1996

Catherine Faure-Cachard 39 Director of Administration and Finance 1991

Audrey D. Keane 38 Vice President, Business Development 1996

Agnes Le Saux-Narjoz 32 Vice President, Marketing 1993

Jay Lichter 36 Vice President, Pharmacogenomics 1998

Bruno Poddevin 33 Vice President, Oligonucleotides Division 1997

Deborah A. Smeltzer 44 Chief Financial Officer 1996

Pascal Brandys. See " -- Board of Directors."

Marc Vasseur, Ph.D. See " -- Board of Directors."

Daniel Cohen, M.D., Ph.D. See " -- Board of Directors."

Marta Blumenfeld, Ph.D., Vice President, Genomics Analysis, joined the
Company in 1990. From 1986 to 1990, she was a postdoctoral scientist studying
oncogenic viruses at the Pasteur Institute (Paris). Dr. Blumenfeld has a Ph.D.
in Biochemistry from the University of Buenos Aires and is the author of more
than 25 scientific publications.

Jerome Chailloux, Ph.D., Chief Information Officer, joined the Company
in 1995. From 1987 to 1995, Dr. Chailloux was co-founder, Chief Scientific
Officer and member of the board of Ilog, a subsidiary of INRIA, the French
National Institute of Computer Science. Ilog is a world leader in C++
development tools and traded on the Nasdaq. Prior to founding Ilog, Dr.
Chailloux was directing research at INRIA in the fields of artificial
intelligence, Lisp and functional programming. Dr. Chailloux is a developer of
the Lisp language and author of 30 publications. He received his Ph.D. in
Computer Science from the University of Paris VI in 1980.

Ilya Chumakov, Ph.D., Vice President, Mapping, joined the Company in
1996. Prior to joining the Company, Dr. Chumakov was employed as a research
scientist at CEPH (1990-1996), most recently as its Scientific Director, where,
together with Professor Cohen, he lead the effort to produce the first physical
map of the human genome. Before joining CEPH, Dr. Chumakov was the leading staff
scientist at the Institute of Molecular Biology in Moscow, where he worked from
1977 to 1990. He received a Ph.D. from Moscow State University in 1971 and a
D.Sc. in Molecular Biology from the Institute of Molecular Biology of the
Russian Academy of Sciences in Moscow in 1990. He has authored more than 70
scientific publications.

Catherine Faure-Cachard, Director of Administration and Finance,
joined the Company in 1991 and has been the Secretary of Genset Corporation
since its founding in 1992. From 1988 to 1990, she was a financial analyst at
Banque Indosuez. From 1987 to 1988, she was the financial controller at
Eurosept Group, a management consulting firm acquired recently by EDS, where
she was responsible for accounting, tax, budget control, payroll and human
resources procedures. Earlier she was Director of Accounting at an industrial
concern. She began her career in 1981 as an auditor with BEFEC-Price
Waterhouse. Ms. Faure-Cachard received her M.B.A. from Ecole Superieure de
Commerce in Paris.

Audrey D. Keane, Vice President, Business Development, joined the
Company in 1996. Previously, she was Vice President of Business Development at
Sequana Therapeutics where she was responsible for structuring and negotiating
strategic alliances with major pharmaceutical and biotechnology companies for
the commercial development of therapeutics and diagnostic products. Ms. Keane
received her M.B.A. from Harvard Graduate School of Business Administration and
a B.S. in Chemical Engineering from Case Western Reserve University.

Agnes Le Saux-Narjoz joined the Company in 1989 as the Market
Development Manager and became Vice President, Marketing in 1993. In this role,
she is responsible for strategic marketing for the Company and developing and
managing advertising, pricing, and sales policies worldwide. Ms. Le Saux-Narjoz
has held a variety of market and strategic assessment positions within the
biotechnology sector prior to joining the Company, most recently at Bioinvest
and Transgene. She received her M.S. in Pharmaceutical Sciences from the
University of Paris, with concentrations in pharmaceutical marketing and health
economics.

Jay Lichter, Ph.D., Vice President, Pharmacogenomics, joined the
Company in 1998. Prior to joining the Company, Dr. Lichter was Senior Director
of Pharmacogenetics and Diagnostics at Sequana Therapeutics where he held
various positions since its inception in 1993. Before joining Sequana, he was
involved with pharmacogenetics research at Dupont Merck Pharmaceutical company,
and prior to that he studied population genetics at Yale University. Dr. Lichter
received his Ph.D. in Biochemistry from the University of Illinois in Chicago in
1992. He has authored more than 35 scientific publications.

Bruno Poddevin, Ph.D., joined the Company in 1992, became Director of
Production in 1994 and Vice President, Oligonucleotides Division in 1997. Prior
to joining the Company, he was a post-doctoral fellow at the National Cancer
Institute (Bethesda, MD). Dr. Poddevin has a Ph.D. in Molecular Biology from the
University of Paris-Orsay and an M.S. in Engineering from the Ecole Centrale de
Paris. He has authored more than 15 publications.

Deborah A. Smeltzer joined the Company in 1996 as Chief Financial
Officer. From 1990 to 1996 she was a Managing Director and from 1988 to 1989 she
was a Vice President of the general partner of the Grotech Partners venture
funds in Baltimore, Maryland and managed both public and private investments in
the biomedical and environmental industries. From 1985 to 1987, Ms. Smeltzer was
an Associate in the Corporate Finance Department of Baker, Watts & Co. Ms.
Smeltzer received an M.B.A. from Stanford University Graduate School of Business
and a B.S. in Biological Science and an M.S. in Medical Microbiology from the
University of California, Irvine.

Senior Management

Name Age Current Position Since

Johanne Alsayed 36 Director of Quality 1992
Christian Blourde 43 Director of Automation and Engineering 1990
Jonathan Burnham 31 Director of Legal Affairs 1998
Jean-Baptiste Dumas Milne Edwards 40 Director of Gene Libraries 1994
Laurence Faure 37 Director of Collections and Genotyping 1996
Pierre Le Ber 34 Director of Sequencing 1995
Cecile Tharaud 32 Director of Patents and Licenses 1996
Naceur Tounekti 33 Director of Mapping Production 1996

Johanne Alsayed, Ph.D., Director of Quality since 1992, joined the
Company in 1991 as a Senior Scientist. Dr. Alsayed's duties include the
implementation of a Total Quality Management System for the Company's production
and research activities. Dr. Alsayed earned a doctorate in Molecular Biology
with a specialty in Human Genetics from the University of Paris VII. Dr. Alsayed
also holds an M.S. in Human Genetics from the Cochin Institute (1986) and a B.S.
in Cellular Biology and Genetics from the University of Rennes (1985).

Christian Blourde, Director of Automation and Engineering, joined the
Company in 1990. From 1981 to 1990, he was Manager of Research and Development
and involved in several major projects of protein processing at the Regional
Transfusion Center in Lyon. He was responsible for setting up a large scale cell
culture plant for hybridoma and was an adviser to Rhone-Poulenc for
microfiltration membranes of cell cultures. Mr. Blourde received his M.S. in
Engineering from the National Institute of Applied Sciences.

Jonathan Burnham, Director of Legal Affairs, joined the Company in
1998. From 1994 to 1997, he was an associate with the law firm of Shearman &
Sterling in their New York, London and Paris offices, practicing in the fields
of corporate finance and mergers and acquisitions. From 1993 to 1994, he was a
trainee at the Legal Service of the European Commission. A member of the New
York State Bar, Mr. Burnham received a B.A. from Dartmouth University, LL.B.
(common law) and B.C.L. (civil law) degrees from McGill University and a Masters
in International Law from the University of Aix-Marseille.

Jean-Baptiste Dumas Milne Edwards, Ph.D., Director of Gene Libraries,
joined the Company in 1994. Prior to joining the Company, he was a scientist at
Genethon. During his Ph.D. studies at University Paris VI, he invented a
strategy to isolate the 5 prime end of messenger RNAs (SLIC) which is now used
worldwide. Dr. Dumas Milne Edwards has authored 14 publications, and was granted
the French government's aggregation as professor of biology. He is also a
graduate of the Ecole Normale Superieure.

Laurence Faure, M.D., joined the Company in 1996 as Director of
Collections and Genotyping. From 1990 to 1996, Dr. Faure occupied a series of
positions with CEPH, specializing in polymorphism of genes related to
cardiovascular diseases, with her most recent role as Director of Genetic
Laboratories. Dr. Faure received her M.D. from the University of Paris VI in
1990, with high honors and a specialization in ecocardiography and has authored
more than 10 scientific publications.

Pierre Le Ber, Ph.D., Director of Sequencing, joined the Company in
1995. From 1989 until joining the Company, Dr. Le Ber was employed by the French
pharmaceutical company Synthelabo, first as Project Manager in the Research
Department where he was responsible for Synthelabo's Virology Program
(1989-1992), and then as the Assistant to the Director of Chemical Production
(1993--1994). Dr. Le Ber is a graduate of the Ecole Polytechnique in Paris and
has a Ph.D. in Molecular Pharmacology from the University of Paris-Orsay.

Cecile Tharaud, Ph.D. joined the Company in 1996 as Director of Patents
and Licenses. Prior to joining the Company, she was Director of Business
Development at SmithKline Beecham, France from 1995 to 1996, and was Director of
New Products for Glaxo Laboratories, France from 1993 to 1995. Dr. Tharaud
received an M.B.A. from INSEAD, a doctorate in Molecular Genetics and Applied
Immunology from the Institut National Agronomique Paris-Grignon and an M.S. in
Cellular and Molecular Biology from the University of Paris VI. Dr. Tharaud is
also a graduate of the Ecole Polytechnique.

Naceur Tounekti, Ph.D., Director of Mapping Production, joined the
Company in 1996. Prior to joining the Company, he was employed by the Health and
Beauty Care Division of Procter & Gamble France, first as production Team
Manager (1992-1993) and then as Industrial Hygiene & Safety and Environmental
Control Manager (1994-1995). Dr. Tounekti received his M.S. in Engineering from
the Ecole Centrale de Paris and has a Ph.D. in Molecular Biology from the
University of Paris-Orsay.

Scientific Advisory Board

The Company has organized a Scientific Advisory Board ("SAB") composed
of six individuals with expertise in the fields of molecular biology, genetics,
transcription regulation DNA chemistry and hematology. The SAB is international
in scope and its members are affiliated with institutions in France, Germany,
Japan and the United States. The Company consults with individual members of the
SAB periodically when advice is required in their particular area of expertise.
The members of the SAB receive a fee for each meeting with the Company and are
reimbursed for expenses incidental to their attendance of these meetings. In
addition, certain members of the SAB have been granted stock options. The
members of the SAB are:

Jean-Francois Bach, M.D., Professor of Immunology at Necker Hospital in
Paris. He is also Director of an INSERM Unit devoted to the genetics and
treatment of autoimmune diseases. More recently he has developed major interest
in the genetic diseases of the adult, notably polygenic diseases. Professor Bach
is member of the French Academy of Sciences and of the French Academy of
Medicine. He has received several major national and international scientific
prizes.

Stephen K. Burley, M.D., Ph.D., Director of the Laboratory of Molecular
Biophysics and Professor at The Rockefeller University. He is also an
investigator at the Howard Hughes Medical Institute. Dr. Burley is a Fellow of
the Royal Society of Canada and was awarded the Leon Reznick Memorial Prize for
excellence and accomplishment in research by Harvard Medical School. He is a
member of the New York Academy of Sciences and has authored more than 65
scientific publications.

Laurent Degos, M.D., Ph.D., President of the Scientific Advisory Board.
See " -- Board of Directors."

Yoshiyuki Sakaki, Ph.D., Professor and the Director of the Human Genome
Center at the University of Tokyo. Dr. Sakaki is also a member of the council of
HUGO, the Human Genome Organization. He has authored more than 150 scientific
publications.

Gunther Schutz, Ph.D., Professor of Physiological Chemistry and
Director of the Department of Molecular Biology of the Cell at the Institute of
Cell and Tumor Biology, German Cancer Research Center in Heidelberg. Prior to
1980, Dr. Schutz led an independent research group at the Max-Planck Institute
for Molecular Genetics at the Freie University in Berlin. He has authored
approximately 200 publications and received the Gottfried-Wilhem-Leibnitz Prize
of the Deutsche Forschungagemeinschaft in 1987.

Moshe Yaniv, Ph.D., Professor at the Department of Biotechnology at the
Pasteur Institute in Paris, where he heads the Unit on oncogenic viruses, Dr.
Yaniv is a member of the French Academy of Sciences. He was the Vice Chairman
(1992-95) and Chairman (1996) of the Council of EMBO (European Molecular Biology
Organization). His research is focused on transcription regulation and he has
authored more than 200 publications. He received the Charles-Leopold Mayer prize
of the French Academy of Science (1995).

ITEM 11: Compensation of Directors and Officers

The aggregate amount of compensation paid by the Company to all of its
directors as a group (eight persons in 1997, including five independent
directors who receive limited compensation for services as directors, and
reimbursement of expenses incidental to their attendance at Board of Directors
meetings) for services in all capacities for 1997 was approximately FF 5.5
million. The aggregate amount of compensation paid by the Company to all of its
executive officers (excluding directors) and senior management as a group (15
persons) for their services in 1997 was approximately FF 8.2 million.

The Company does not contribute to any pension, retirement or other
plans for its executive officers or senior management.

ITEM 12: Options to Purchase Securities from Registrant or Subsidiaries

Stock Option Plans

Pursuant to resolutions adopted by the shareholders on July 27, 1992,
October 25, 1994, March 19, 1996, April 15, 1996 and May 22, 1997, the Board of
Directors has granted options to purchase Ordinary Shares to certain officers
and employees of the Company. The following table sets out certain information
relating to the various option plans, as of April 30, 1998:

Options Ordinary Option Exercise
Option Plan Options Options Out- Shares Price per Expiration
Issuable Issued standing Issuable Share(FF) Date(1)(2)

July 27, 1992 784 784 63 6,300(3) 28.80 November 8, 2002

October 25, 1994 1,000 1,000 520 5,200(3) 40 April 30, 2004

March 19, 1996 7,000 7,000 6,768 676,800(3) -(4) July 31, 2006

April 15, 1996 2,000 2,000 1,908 190,800(3) - (5) June 30, 2006

May 22, 1997 400,000 165,568 165,568 165,568 -(6) March 31, 2007

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

(1) The options under each plan have various expiration dates. In each
case, the latest expiration date of options already issued under the
plan is indicated.

(2) All plans contain restrictions limiting the exercise of options after
the employee is no longer an employee of the Company.

(3) Adjusted to reflect the 100-for-1 share split approved by the
shareholders on April 29, 1996.

(4) The exercise prices of the outstanding options, which depend on the
date at which they were issued, range from FF 160 to FF 295.

(5) The exercise prices of the outstanding options, which depend on the
date at which they were issued, range from FF 172.08 to FF 254.

(6) The exercise prices of the outstanding options, which depend on the
date at which they were issued, range from FF 254 to FF 390.

As of April 30, 1998, an aggregate of 519,300 Ordinary Shares could be
purchased pursuant to outstanding options held by the President Directeur
General and the two Directeurs Generaux of the Company as a group (three
persons) and an aggregate of 437,300 Ordinary Shares could be purchased pursuant
to outstanding options held by the

other executive officers and senior management of the Company as a group (17
persons).

Warrant Plans

Pursuant to resolutions adopted on July 27, 1992, October 25, 1994,
March 28, 1995, March 19, 1996, and May 22, 1997, the shareholders have
authorized the issuance of warrants to purchase Ordinary Shares to certain
directors and consultants of the Company and certain other non-employees. The
following table sets out certain information relating to the various warrant
plans, as of April 30, 1998:

Warrants Ordinary Warrant Exercise
Warrant Plan Warrants Warrants Out- Shares Price per Expiration
Authorized Subscribed standing Issuable Share(FF) Date(1)

July 27, 1992 784 784 20 2,000(2) 28.80 October 5, 2000

October 25, 1994 1,176 1,176 432 43,200(2) 60 October 24, 1999

March 28, 1995 162 162 39 3,900(2) 60 December 31, 1999

March 19, 1996 1,000 308 257 25,700(2) 160 March 18, 2001

May 22, 1997 4,000 4,000 2,000 2,000 250 May 21, 2002

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

(1) The warrants under each plan may have various expiration dates. In each
case, the latest expiration date of warrants issued under the plan is
indicated.

(2) Adjusted to reflect the 100-for-1 share split approved by the
shareholders on April 29, 1996.

As of April 30, 1998, an aggregate of 36,900 Ordinary Shares could be
purchased pursuant to outstanding warrants held by directors (other than
executive officers) of the Company as a group (five persons), and no outstanding
warrants were held by executive officers or senior management of the Company.

In addition, the Board of Directors has proposed resolutions for the
consideration of the extraordinary meeting of shareholders scheduled for May 19,
1998 that concern the issuance of 32,000 additional warrants to certain
specified consultants of the Company and of 2,000 additional warrants to the
independent members of the Board of Directors. The proposed resolutions provide
that the subscription price of these warrants would be FF 4 per warrant, and
that each warrant would give the holder thereof the right to purchase one
Ordinary Share of the company for FF 450.

ITEM 13: Interest of Management in Certain Transactions

None.

PART II

ITEM 14: Description of Securities to be Registered

Not applicable.

PART III

ITEM 15: Defaults upon Senior Securities

None.

ITEM 16: Changes in Securities and Changes in Security
for Registered Securities and Use of Proceeds

Modification of Depositary Arrangements

Effective as of April 10, 1998, the Company and The Bank of New York,
as Depositary, amended the Deposit Agreement governing the ADSs of the Company.
This amendment was intended to simplify the procedures enabling ADS holders to
effectively vote the Ordinary Shares underlying their ADSs. Pursuant to these
amended procedures, all beneficial owners of ADSs as of the record date fixed
for a given shareholders' meeting shall receive, among other materials, a
summary in English or an English version of the notice of such meeting and a
copy of the materials provided by the Company to enable the beneficial owners to
give voting instructions regarding the resolutions being considered by the
meeting.

In order to instruct the Depositary to vote the Ordinary Shares
underlying their respective ADSs, beneficial owners must complete, sign and
return the voting instruction card or form provided to the person indicated
thereon. In signing and returning the card or form, the beneficial owner (a)
certifies that it was the beneficial owner on the record date of the ADSs being
voted and is entitled to exercise the right to vote with respect thereto, (b)
undertakes to be the beneficial owner of such ADSs during the five calendar days
immediately prior to and on the meeting date, and (c) certifies or undertakes
such other matters as may from time to time be necessary to permit the exercise
of voting rights by beneficial owners of ADSs in accordance with French law or
the statuts of Genset. The beneficial owners may, by completing, signing and
returning voting instruction cards or forms without providing specific voting
instructions on the resolutions, instruct the Depositary to vote the
corresponding Ordinary Shares in favor of all the resolutions proposed by the
Board of Directors of Genset.

Use of Proceeds

The Company conducted a registered initial public offering of its
Ordinary Shares in June 1996, pursuant to a registration statement with file
number 33-34758, which was declared effective on June 4, 1996.

The net proceeds from the offering after underwriting discounts and
commissions and other expenses were $90,203,350. In the period from the
effectiveness of the registration statement to December 31, 1997, the Company
has expended (U.S. dollar amounts converted from French francs at the
December 31, 1997 Noon Buying Rate of FF 6.0190 to $1.00):

FF 37 million ($6.1 million) on the construction of plant, building
and facilities;

FF 63 million ($10.5 million) on the purchase and installation of
machinery and equipment;

FF 16 million ($2.7 million) on the repayment of indebtedness; and

FF 83 million ($13.8 million) as working capital (including research
and development and general and administrative expenditures).

As the period for which the above amounts are presented do not
correspond precisely to accounting periods of the Company and as the categories
do not in all cases correspond to those used by the Company in its accounting
procedures, these amounts represent reasonable estimates made by the Company for
each category of expenditures.

As of December 31, 1997, the Company had FF 458.6 million ($76.2
million) invested in money market funds and short-term certificates of
deposit.

Other than the compensation paid to directors and officers in
connection with their respective duties, all of such payments were made to
persons other than directors, officers or affiliates of the company. See " --
Directors and Officers of the Registrant."

The expenditures set forth above are consistent with the use of
proceeds described in the prospectus.

PART IV

ITEM 17: Financial Statements

Not applicable.

ITEM 18: Financial Statements

See Item 19 for a list of financial statements filed under Item 18.

ITEM 19: Index to Financial Statements and Exhibits and Signature

The following financial statements of Genset S.A. and its
Subsidiaries are filed as part of this Annual Report, together with the
report of the independent accountants. Financial statement schedules are
omitted as the information is not required, is not applicable, or the
information is presented in the financial statements or notes thereto.

INDEX TO FINANCIAL STATEMENTS

Page

Independent Auditor's Report............................................................. F-1

Consolidated Balance Sheets as of December 31, 1996 and 1997............................ F-2

Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997................................................ F-4

Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997............................................... F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997............................................... F-6

Notes to the Consolidated Financial Statements.......................................... F-7

INDEX TO EXHIBITS

1.1 P Statuts of Genset S.A. amended through September 19, 1997

1.2* Form of Amended and Restated Deposit Agreement among Genset and The
Bank of New York as Depositary and Owners and Beneficial Owners of
American Depositary Receipts

2.1+P Agreement dated as of September 26, 1996, between the Company and
Janssen Pharmaceutica, N.V.

2.2+P Alliance Agreement dated as of July 15, 1997, between the Company and
Abbott Laboratories

2.3+P Research and License Agreement dated as of July 15, 1997, between the
Company and Abbott Laboratories

2.4+P Subscription Agreement dated as of July 15, 1997, between the Company
and Abbott Laboratories

2.5+P License Agreement dated as of July 25, 1997, between the Company and
Genetics Institute, Inc.

2.6+P Technology License Agreement dated as of December 28, 1997, between
the Company and Ceres, Inc.

2.7+P Services Agreement dated as of December 28, 1997, between the Company
and Ceres, Inc.

2.8+P Series A Preferred Stock Issuance Agreement dated December 28, 1997,
between the Company and Ceres, Inc.

2.9 P Warrant of the Company dated December 28, 1997, to purchase shares of
Series B Preferred Stock of Ceres, Inc.

2.10 P Amended and Restated Right of First Refusal and Co-Sale Agreement
dated as of April 6, 1998, by and among Ceres, Inc., certain founders
of Ceres, Inc., the Company and the other investors in Ceres, Inc.

2.11 P Amended and Restated Investors' Rights Agreement dated as of April 6,
1998, by and between Ceres, Inc., the Company and the other investors
in Ceres, Inc.

2.12 P Commercial Lease, dated March 26, 1996, between the Company and
S.N.E.C.M.A.

2.13P Amendment dated April 8, 1997 to the Commercial Lease between the
Company and S.N.E.C.M.A.

2.14+P Amendment N2 dated April 29, 1998 to the Collaboration Agreement
between the Company and Synthelabo

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

* Incorporated by reference from the Registration Statement on Form F-6
N333-4760 filed with the Securities and Exchange Commission on
March 20, 1998.

+ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.

P Filed concurrently with the Security and Exchange Commission in
paper format under cover of Form SE.

Report of Independent Auditors

The Directors and Shareholders

Genset, S.A.

We have audited the accompanying consolidated balance sheets of
Genset, S.A. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles in the United States.

/s/ Deborah Choate
------------------------------------
Deborah Choate
Ernst & Young Audit

Paris, France
February 12, 1998

F-1

Genset

Consolidated Balance Sheets
(Amounts in thousands)

ASSETS

December 31,
---------------------------------
1997 1997 1996
------- ------- -------
US$ FF FF

Current Assets:
Cash and cash equivalents .......................................... 76,663 461,437 518,773
Short-term investments ............................................. 47 285 697
Accounts receivable (less allowance for doubful accounts
of FF 415 in 1997, FF 293 in 1996) .............................. 2,371 14,273 14,511
Receivable from State .............................................. 2,948 17,745 8,597
Inventory .......................................................... 648 3,901 2,827
Prepaid expenses and other current assets .......................... 1,720 10,347 14,207
-------- -------- --------
Total current assets ............................................ 84,397 507,988 559,611
-------- -------- --------
Property and equipment:
Leasehold improvements and fixtures ................................ 10,012 60,264 25,562
Laboratory equipment ............................................... 12,702 76,452 52,797
Office and computer equipment ...................................... 4,571 27,510 15,613
Construction in progress ........................................... 2,222 13,372 12,937
-------- -------- --------
Total property and equipment .................................... 29,507 177,598 106,909
Less accumulated depreciation and amortization ..................... (10,745) (64,673) (40,337)
-------- -------- --------
Property and equipment - net ....................................... 18,762 112,925 66,572
-------- -------- --------
Other assets:
Research and development tax credit receivable, less current portion 8,136 48,973 33,298

Patent development costs (less accumulated amortization of
FF 3,004 in 1997, and FF 1,875 in 1996) ......................... 448 2,693 1,373
Other long term assets ............................................. 388 2,337 1,778
-------- -------- --------
Total assets .................................................... 112,131 674,916 662,633
-------- -------- --------
-------- -------- --------

See notes to consolidated financial statements.

Certain prior year amounts have been reclassified to conform to the current year
presentation. The financial information expressed in U.S.$ is presented solely
for the convenience of the reader and is translated from French francs at the
noon buying rate in New York on December 31, 1997 which was FF 6.0190 for each
U.S.$.

F-2

Genset

Consolidated Balance Sheets
(continued)
(Amounts in thousands, except share data)

LIABILITIES AND SHAREHOLDERS' EQUITY

December 31,
----------------------------------
1997 1997 1996
-------- -------- --------
US$ FF FF

Current liabilities:
Current portion of long term debt
(including FRF 4,000 due to the AFM in both years) .............. 3,063 18,436 11,129
Current portion of capital lease obligation ........................ 243 1,462 1,706
Accounts payable ................................................... 7,049 42,431 39,397
Accrued expenses ................................................... 1,403 8,442 6,667
Deferred revenues .................................................. 1,760 10,594 1,149
-------- -------- --------
Total current liabilities ....................................... 13,518 81,365 60,048
-------- -------- --------
Long-term debt, less current portion ............................... 5,274 31,742 27,452
Amounts due to the AFM, less current portion ....................... 1,329 8,000 12,000
Capital lease obligation, less current portion ...................... 211 1,272 2,690

Shareholders' equity:
Common stock, FF 17 nominal value; 7,189,087 and 6,769,985 shares
issued and outstanding - December 31, 1997 and 1996, respectively 20,305 122,214 115,090
Additional paid- in capital ........................................ 114,052 686,479 606,186
Accumulated deficit ................................................ (40,554) (244,096) (150,242)
Less advances by the Company to fund employees' exercise of options (99) (596) (1,639)
Deferred compensation .............................................. (1,918) (11,542) (9,421)
Cumulative translation adjustment .................................. 13 78 469
-------- -------- --------
Total shareholders' equity ...................................... 91,799 552,537 560,443
-------- -------- --------
Total liabilities and shareholders' equity ...................... 112,131 674,916 662,633
-------- -------- --------
-------- -------- --------

See notes to consolidated financial statements.

F-3

Genset

Consolidated Statements of Operations
(Amounts in thousands, except per share data)

Year ended December 31,
----------------------------------------------
1997 1997 1996 1995
------- ------- ------- -------
US$ FF FF FF

Net sales ............................................ 5,725 34,458 32,426 27,290
Research and development revenues .................... 10,671 64,232 16,135 472
------- ------- ------- -------
Total revenues ................................ 16,396 98,690 48,561 27,762
------- ------- ------- -------
Cost of goods sold ................................... (3,450) (20,764) (21,398) (18,419)
Research and development expenses .................... (25,311) (152,349) (88,006) (32,478)
Selling and marketing expenses ....................... (1,212) (7,296) (4,767) (3,508)
General and administrative expenses .................. (7,630) (45,927) (30,865) (17,162)
------- ------- ------- -------
Total expenses ............................... (37,603) (226,336) (145,036) (71,567)
------- ------- ------- -------
Loss from operations .......................... (21,207) (127,646) (96,475) (43,805)
------- ------- ------- -------
Interest expense ..................................... (576) (3,466) (2,668) (1,965)
Interest income ...................................... 2,662 16,020 11,888 3,707
Foreign exchange gain (loss) ......................... 322 1,941 298 (891)
Other income ......................................... 25 150 56 10
------- ------- ------- -------
Loss before income tax benefit ................ (18,774) (113,001) (86,901) (42,944)
------- ------- ------- -------
Income tax benefit ................................... 3,181 19,147 21,815 7,942
------- ------- ------- -------
Net loss ...................................... (15,593) (93,854) (65,086) (35,002)
------- ------- ------- -------
------- ------- ------- -------

Loss per ordinary share .............................. (2.25) (13.54) (11.66) (7.96)
Weighted average number of Ordinary Shares outstanding 6,932 6,932 5,581 4,396
Loss per ADS (American Depositary Share) ............. (0.75) (4.51) (3.89) (2.65)
Weighted average number of equivalent ADSs
outstanding ......................................... 20,796 20,796 16,743 13,188

See notes to consolidated financial statements.

F-4

Genset
Consolidated Statements of Shareholders' Equity
(Amounts in thousands, except share and per share data)

Ordinary Shares Additional Cumulative Share-
--------------- Paid-in Accumulated Advances to Deferred Translation Holders'
Shares * Amount Capital Deficit Shareholders Compensation Adjustment Equity
-------- ------ ----------- ----------- ------------ ------------ ----------- -------

At January 1, 1995 ......................... 3,643,100 61,933 58,262 (50,154) (1,062) 126 69,105
Issuance of Ordinary Shares
at FF 60 per share ....................... 404,700 6,880 14,802 21,682
Exercise of stock options from FF 11.25 to
FF 28.80 per share ....................... 27,600 468 (154) 314
Exercise of warrants from FF 11.25 to
FF 60 per share .......................... 23,500 400 116 516
Deferred compensation arising from stock
option grants ............................ 603 (603) --
Amortization of deferred compensation ...... 587 587
Translation adjustment ..................... 389 389
Net loss ................................... (35,002) (35,002)
--------- ------- ------- -------- ------- ------- ---- -------
At December 31, 1995 ....................... 4,098,900 69,681 73,629 (85,156) (1,078) 515 57,591
--------- ------- ------- -------- ------- ------- ---- -------
Exercise of stock options .................. 97,800 1,663 886 2,549
Exercise of warrants ....................... 76,300 1,297 2,999 4,296
Shares issued to employee savings plan ..... 7,485 127 1,362 1,489
Exercice of options and warrants funded by
advances to shareholders .............. (1,639) (1,639)
Issuance of Ordinary Shares at
FF 166.86 per share ...................... 419,500 7,132 62,866 69,998
Issuance of Ordinary Shares in public
offering, less costs of raising capital .. 2,070,000 35,190 431,772 466,962
Deferred compensation arising from stock
option grants ............................ 14,247 (14,247) --
Grant of warrants to CEPH .................. 18,300 18,300
Subscription of warrants ................... 125 125
Amortization of deferred compensation ...... 5,904 5,904
Translation adjustment ..................... (46) (46)
Net loss ................................... (65,086) (65,086)
--------- ------- ------- -------- ------- ------- ---- -------
At December 31, 1996 ....................... 6,769,985 115,090 606,186 (150,242) (1,639) (9,421) 469 560,443
--------- ------- ------- -------- ------- ------- ---- -------
Exercise of stock options from FF 28.80
to FF 207.50 per share ................... 36,600 622 2,547 3,169
Exercise of warrants from FF 28.80
to FF 250 per share ...................... 205,000 3,484 15,414 18,898
Exercice of options and warrants funded by
advances to shareholders .............. 1,043 1,043
Issuance of Ordinary Shares at
FF 336.39 per share ...................... 177,502 3,018 56,692 59,710
Deferred compensation arising from
stock option grants ...................... 5,624 (5,624) --
Subscription of warrants ................... 16 16
Amortization of deferred compensation ...... 3,503 3,503
Translation adjustment ..................... (391) (391)
Net loss ................................... (93,854) (93,854)
--------- ------- ------- -------- ------- ------- ---- -------
At December 31, 1997 ....................... 7,189,087 122,214 686,479 (244,096) (596) (11,542) 78 552,537
--------- ------- ------- -------- ------- ------- ---- -------
--------- ------- ------- -------- ------- ------- ---- -------
At December 31, 1997 (in thousands of $) ... 20,305 114,052 (40,554) (99) (1,918) 13 91,799
------- ------- -------- ------- ------- ---- -------
------- ------- -------- ------- ------- ---- -------

* Restated to reflect April 1996 100-for-1 stock split.

See notes to audited consolidated financial statements.

Certain prior year amounts have been reclassified to conform to the
current year presentation. The financial information expressed in U.S.$
is presented solely for the convenience of the reader and is translated
from French francs at the noon buying rate in New York on December 31,
1997 which was FF 6.0190 for each U.S.$.

F-5

Genset

Consolidated Statements of Cash Flows
(Amounts in thousands)

Year ended December 31,
---------------------------------------------
1997 1997 1996 1995
------ ------- ------- ------
US$ FF FF FF

Cash flows from operating activities:
Net loss ................................................... (15,593) (93,854) (65,086) (35,002)
Adjustments to reconcile net loss to net cash used in
operating activities :
Depreciation and amortization of property and
equipment and intangibles ........................... 4,193 25,235 14,908 12,494
Stock compensation expense ............................. 582 3,503 5,902 587
Increase (decrease) in cash from :
Accounts receivable ................................. 74 448 (6,225) (2,345)
Receivable from State ............................... (4,124) (24,821) (23,036) (5,770)
Inventory ........................................... (177) (1,065) (1,415) (23)
Prepaid expenses and other current assets ........... 647 3,896 (1,499) (52)
Accounts payable .................................... 2,615 15,739 7,330 79
Accrued expenses .................................... 226 1,358 3,299 460
Deferred revenues ................................... 1,569 9,445 1,115 (72)
Other ............................................... (89) (536) (818) 835
------ ------- ------- ------
Net cash used in operating activities ........... (10,077) (60,652) (65,525) (28,809)
------ ------- ------- ------
Cash flows from investing activities:
Proceeds from sale of investments ...................... 6,268
Purchases of investments ............................... 84 508 (1,083)
Purchases of property and equipment .................... (13,752) (82,773) (23,609) (28,312)
Payment of patent development costs and
acquisition of other intangibles .................... (407) (2,449) (516) (630)
------ ------- ------- ------
Net cash used in investing activities ........... (14,075) (84,714) (17,857) (30,025)
------ ------- ------- ------
Cash flows from financing activities :
Proceeds from loans .................................... 5,076 30,554 18,178 18,882
Repayment of loans ..................................... (3,778) (22,742) (5,720) (3,784)
Principal payments on capital lease obligations ........ (290) (1,747) (3,225) (754)
Cash proceeds from sale of common stock ................ 13,763 82,837 550,954 22,512
------ ------- ------- ------
Net cash provided by financing activities ....... 14,771 88,902 560,187 36,856
------ ------- ------- ------
Effect of exchange rate changes on cash and cash equivalents (145) (872) (103) 629
Net increase (decrease) in cash and cash equivalents ....... (9,526) (57,336) 476,702 (21,349)
Cash and cash equivalents, beginning of period ............. 86,189 518,773 42,071 63,420
------ ------- ------- ------
Cash and cash equivalents, end of period ................... 76,663 461,437 518,773 42,071
------ ------- ------- ------
------ ------- ------- ------

See notes to consolidated financial statements.

F-6

Genset

Notes to Consolidated Financial Statements
(Amounts in thousands of French francs, except share and per share data)

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business

Genset, S.A. (the "Company") is incorporated as a societe anonyme or
limited liability corporation under the laws of the Republic of France. The
Company was organized in 1989 to discover, develop and market products derived
from DNA and genetics research.

Principles of Consolidation

The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying footnotes. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries world-wide (described below in "the
Company").

All intercompany accounts and transactions have been eliminated.

The financial information expressed in U.S. dollars is presented solely
for the convenience of the reader and is translated from French francs at the
noon buying rate in New York on December 31, 1997 which was FF 6.0190 for each
U.S. dollar. Certain prior year amounts have been reclassified to conform to the
current year presentation.

Translation of Financial Statements of Foreign Subsidiaries

Each foreign entity's results are measured in the currency in which
that entity primarily conducts its business (the functional currency). The local
currency is the functional currency for the Group's foreign subsidiaries. The
reporting currency of the Company is the French franc. For consolidation
purposes, the financial statements of entities whose functional currency is
other than the French franc are translated into French franc equivalents at
exchange rates as follows: (1) balance sheet accounts at year-end rates; and (2)
income statement accounts at weighted average exchange rates for the year.
Translation gains or losses are recorded in shareholders' equity and transaction
gains and losses are reflected in net income. The Company has not undertaken
hedging transactions to cover its currency translation exposure.

Revenue Recognition

Revenues from sales of synthetic DNA (oleonucleotides) and related
products are recognized upon shipment. Revenues from research collaborations
with strategic alliance partners are recognized on a basis consistent with the
performance requirements of the contract. Certain fees payable to the Company
under these contracts are milestone-related and are due in accordance with the
terms of each contract when the milestone is achieved. The Company recognizes
this milestone-related revenue only when each milestone has been fully

F-7

performed, as agreed by the parties. Costs incurred under these contracts are
considered costs in the period incurred, regardless of when the related revenue
is recognized. Payments received in advance of performance are recorded as
deferred revenue.

The Company recognizes revenue from unconditional, non-refundable
grants received from governmental agencies in the period granted. Revenue from
conditional grants received are recognized when all conditions stated in the
grant have been met. Revenue from grants funding long-term research programs are
recognized on the percentage-of-completion method when there are no set
milestones or other technical requirements. Once stated conditions, milestones
or other requirements have been met, such grants are non-refundable.

Research and Development Expense and Related Tax Credit

Research and development costs are expensed as incurred. Such expenses
form the basis for a tax credit in France, which is recorded as a current tax
benefit in the period in which the qualifying expenses are incurred and the
credit claimed. The credit is recoverable in cash, if not used to offset taxes
payable, in the fourth year following its generation.

Concentration of Credit Risk and Significant Customers

The Company markets its products principally to research centers,
including hospitals and other state- and privately-owned entities throughout
Europe, the United States and Asia. The Company performs ongoing credit
evaluations of its customers' financial condition, and generally no collateral
is required. The Company maintains provisions for potential credit losses, and
such losses have been within management's expectations. The activity in the
allowance for doubtful accounts may be summarized as follows (in thousands of
French francs) :

1997 1996 1995

Allowance balance at January 1 293 90 154
Amounts charged to expense 170 210 8
Amounts written off (48) (7) (72)
---- --- ----
Allowance balance at December 31 415 293 90

In 1997, three strategic alliance partners accounted for approximately
FF 55,275, or 56%, of consolidated revenues. Amounts receivable from these three
partners at December 31, 1997, totaled FF 6,030. No oligonucleotide customer
accounted for a significant amount of consolidated revenues or accounts
receivable in 1997.

In 1996, one strategic alliance partner accounted for approximately FF
11,445, or 24%, of consolidated revenues. Amounts receivable from this partner
at December 31, 1996, totaled FF 6,030. The three most significant
oligonucleotide customers together accounted for approximately FF 7,062, or 15%,
of consolidated revenues. Amounts receivable from these customers at December
31, 1996 totaled FF 1,754.

In 1995, one oligonucleotide customer accounted for approximately FF
3,200, or 12%, of consolidated revenues. The three most significant
oligonucleotide customers together accounted for approximately FF 6,176, or 22%,
of consolidated revenues. Amounts receivable from these customers at December
31, 1995 totaled FF 2,224.

Net Loss per Share

On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earning Per Share" ("SFAS 128"). Prior to the
adoption of SFAS 128, net loss per share has been calculated in

F-8

accordance with the provisions of Accounting Principles Board Opinion 15,
"Earning Per Share" ("APB 15"), using the weighted average number of shares and
dilutive equivalent shares from stock options and warrants using the treasury
stock method. SFAS 128 replaces the calculation of primary and fully diluted
earnings per share with basic and diluted earning per share. Unlike primary
earning per share, basic earning per share excludes any dilutive effects of
stock options and warrants. Pursuant to SFAS 128, the Company is required to
change the method currently used to compute loss per share and to restate all
prior periods.

There is no impact of adopting SFAS 128 on the previous calculation of
loss per share for the years ended December 31, 1996 and 1995. As net losses
have been reported in these periods, the dilutive effects of stock option and
warrants were excluded from the calculation of net loss per share under APB 15.

Cash Equivalents and Investments

The Company considers all highly liquid investments with insignificant
interest rate risk and purchased with an original maturity of three months or
less to be cash equivalents. Such investments totaled FF 458,587 and FF 511,545
at December 31, 1997 and 1996, respectively.

Cash equivalents and investments, all classified as available-for-sale,
include marketable securities which are principally money market funds and
short-term certificates of deposit. The cost associated with such securities
approximates fair value.

Gross realized and unrealized gains and losses on sales of
available-for-sale securities during 1997, 1996 and 1995 were immaterial.

Inventories

Inventories are stated at the lower of average cost (first-in,
first-out) or market and consist primarily of materials and supplies. Provision
is made for obsolete and slow-moving inventories.

Property and Equipment

Property and equipment is stated at cost. Depreciation and amortization
are charged to expense over the expected useful lives of the assets as follows:

Method Period

Leasehold improvements straight-line 5 to 10 years
Laboratory equipment accelerated 3 to 5 years
Office and computer equipment straight-line 5 years
Office furniture straight-line 5 to 7 years

Assets under capital leases are amortized over the asset life, when
there is a bargain purchase option, or over the remaining lease term.
Amortization of capital leases is included in depreciation expense.

In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
SFAS 121 requires recognition of impairment of long-lived assets in the event
that the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. Adoption of SFAS 121 did not have a material
impact on the Company's financial position or results of operations.

F-9

Intangible Assets

Intangible assets include principally patent development costs. Such
costs, principally legal fees, related to the development of patents are
capitalized and amortized on a straight-line basis over five years.

The Company's policy is to evaluate, at each balance sheet date, the
appropriateness of the carrying values of the unamortized balances of intangible
assets on the basis of estimated future cash flows and other factors. If such
evaluations were to indicate a material impairment of these intangible assets,
such impairment would be recognized by a write-down of the applicable asset.

Income Taxes

The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is recorded if it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.

Employee Stock Option Plans

In 1996, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". As permitted by SFAS 123, the Company has elected to continue to
account for its employee stock option plans in accordance with the provisions of
the Accounting Principles Board opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees", which requires that compensation expense be recorded when
the option exercise price is less than the market value of the underlying share
on the grant date.

2. Research and Collaboration Agreements

On December 29, 1997, the Company entered into a series of agreements
with Ceres, Inc. ("Ceres"), a company specialized in the field of agricultural
biotechnology. The collaboration consists of:

- the acquisition of 20% equity participation in Ceres by the Company;

- an agreement for sequencing and bioinformatics services provided by the
Company for which Ceres will make quarterly payments and issue
additional equity to the Company; and

- an exclusive license agreement providing Ceres access to certain of the
Company's technologies for applications to agricultural genetics.

On July 25, 1997, the Company entered into an exclusive license
agreement with Genetics Institute, a subsidiary of American Home Products.
Under this agreement, the Company will provide access to its SignalTag-TM-
sequence database and full-length clones for secreted proteins for inclusion
in Genetics Institute's DiscoverEase-Registered Trademark- program. The
Company will receive payments of up to $20 million based on the delivery of
clones to Genetics Institute and orders received from DiscoverEase-Registered
Trademark- subscribers.

On July 17, 1997, the Company entered into a strategic alliance with
Abbott Laboratories ("Abbott") in the field of pharmacogenomics for the
development of genetic markers and diagnostic tests for the analysis of drug
response. This alliance has three major components:

- an agreement to collaborate on additional pharmacogenomics research
programs for third party pharmaceutical companies;

- a research and license agreement for the development of genetic markers
and discovery of genes associated with drug response and side effects
of an Abbott drug. Pursuant to the agreement, Abbott

F-10

agreed to provide research and development funding of up to $22.5
million for the 18 month program; and

- an equity investment in the Company with the purchase of 177,502
Ordinary Shares for cash of FF 59,710.

In addition, the Company and Abbott will share revenues resulting from
pharmacogenomics collaborations with third parties based on the relative
contribution of their respective technologies. The Company will receive
commercial milestone payments and royalties on the sales of drugs and diagnostic
tests developed as a result of this alliance.

In September 1996, the Company entered into a strategic alliance with
Janssen Pharmaceutica N.V., a subsidiary of Johnson & Johnson, for the discovery
of genes associated with schizophrenia. The term of the agreement is for a
period of two years, commencing on September 26, 1996. In anticipation of the
agreement, on May 10, 1996, Johnson & Johnson Development Corporation purchased
119,900 Ordinary Shares of the Company for FF 20,007.

In May 1996, the Company entered into a strategic alliance with the
French pharmaceuticals company Synthelabo to discover genes involved in or
associated with prostate cancer. The term of the agreement is for a minimum of
two years, commencing on May 9, 1996, and may be extended at Synthelabo's
option. Pursuant to the Agreement, Synthelabo purchased 299,600 Ordinary Shares
of the Company for FF 49,990 and agreed to provide research and development
funding and milestone payments of up to an aggregate of FF 355,000, in the event
that Synthelabo exercises their option to extend. In addition, the Company will
receive royalty payments on any future drug sales.

Aggregate revenues of FF 55,275 and FF 15,517 were recorded from these
research and collaboration agreements during 1997 and 1996, respectively.

3. Agreements with Clinical and Research Institutions

In October 1997, the Company formed a strategic research collaboration
with the Royal College of Surgeons in Ireland ("RCSI") to perform large scale
cardiovascular genomic research programs based on association studies. As part
of the collaborative arrangement, the Company and RCSI have formed Surgen, a
50:50 owned dedicated joint venture located in Dublin, Ireland. Surgen conducts
sample collection and storage, DNA extraction, cell immortalization, and, more
generally, all operations connected with the DNA banking part of this project.

In April 1996, the Company entered into an agreement with the Centre
d'Etude du Polymorphisme Humain ("CEPH") setting out the terms of the transfer
to the Company of CEPH's mapping team and of certain proprietary materials and
data and the terms of collaboration between the Company and CEPH relating to
research on aging. Pursuant to the agreement, CEPH provided to the Company the
exclusive availability until December 31, 1997 of certain biological materials
and databases pertaining to the mapping program. The Company granted warrants to
CEPH for the purchase of 209,800 Ordinary Shares of the Company at an exercise
price of FF 100 per share. These warrants have been valued at a total of FF
18,300 and have been recorded as prepaid research and development expense. Such
prepaid expense is being amortized over the period that services are provided to
the Company. Amortization expense of FF 10,457 and FF 7,175 was recorded in the
years ended December 31, 1997 and 1996, respectively.

F-11

The Company entered into an agreement with the Association Francaise
contre les Myopathies (the "AFM"), a private non-profit association founded to
combat neuromuscular diseases, and Genethon, a private non-profit association,
effective as of July 1, 1994. Pursuant to this agreement, the AFM made an equity
investment of approximately FF 11,000 in the Company and agreed to loan the
Company FF 16,000 over a two-year period commencing on January 1, 1995. The loan
is repayable with interest calculated at the French daily money market rates,
which was 3.37% at December 31, 1997, in four annual installments due December
31, 1997 through 2000.

4. Inventories

The Company's inventories at December 31 comprised (in thousands of
French francs) :

1997 1996

Raw materials and supplies 3,641 2,788
Work-in-process 260 39
--- --
Total 3,901 2,827

No provisions were recorded in 1997 or 1996.

5. Fixed Assets

The Company's fixed assets at December 31 are broken down as follows
(in thousands of French francs) :

1997 1996

Leasehold improvements 60,254 25,562
Laboratory equipment 76,452 52,797
Furnishings - office and computers equipment 27,510 15,613
Fixed assets under construction 13,372 12,937
------ ------
Total cost 177,598 106,909

Less: accumulated depreciation (64,673) (40,337)
-------- --------
Net fixed assets 112,925 66,572

In the current year presentation, the increase in fixed assets resulted from:

- the construction and relocation costs for the Genomics Research Center
at Evry; and

- the new laboratory equipment for this Center and the additional
sequencing machines in the high-throughput sequencing laboratory.

F-12

6. Long-Term Debt

The Company's long-term debt at December 31 comprised (in thousands of
French francs) :

1997 1996

Bank loans bearing interest at rates of 4.25% to 8.25% 44,678 24,200
Conditional interest-free loan from French governmental agency 1,500 10,000
----- ------
Total 46,178 34,200

Less current portion (14,436) (6,748)
-------- -------
Total long term debt less current portion 31,742 27,452

The loans are to be repaid in monthly or quarterly installments through
the year 2002. The average interest rates on these loans are 6.76% and 8.23% in
1997 and 1996, respectively.

The Company has received interest-free loans from ANVAR (Agence
Nationale de Valorisation de la Recherche), an agency of the French government
that provides financing to French companies for research and development.
Repayment of the loans is contingent upon the technical and commercial success
of the research programs to which it relates. In 1997, the Company recorded FF
8,500 in research revenues following the declaration of the technical and
commercial failure of an early research program.

At December 31, 1997, bank debt with a balance due of FF 5,433 is
secured by equipment with a net book value of FF 54.

Scheduled repayments of long-term debt are as follows (in thousands of
French francs) :

1998 14,436
1999 11,856
2000 8,914
2001 7,802
2002 3,170
-----
Total 46,178

Interest paid in the years ended December 31, 1997, 1996 and 1995 was
approximately FF 2,605, FF 1,610 and FF 1,296, respectively.

7. Shareholders' Equity

All the equity amounts described below have been adjusted to reflect a
100-for-1 stock split which occurred in April 1996.

General

At December 31, 1997, the issued and outstanding share capital of the
Company consisted of 7,189,087 Ordinary Shares, nominal value FF 17 per share.

In September 1997, the Company issued 177,502 Ordinary Shares to Abbott
Laboratories corresponding to a capital increase of FF 59,710.

F-13

In June 1996, the Company issued 2,070,000 Ordinary Shares in the
United States and France in a public offering generating net proceeds of FF
466,962. Simultaneous with the public offering, the Company effected a 100-for-1
stock split, reducing the nominal value of Ordinary Shares from FF 1,700 to FF
17.

Approximately concurrent with the public offering, the Company issued
7,485 Ordinary Shares at a price of FF 199.22 per share in connection with the
Genset Employee Savings Plan.

In May 1996, the Company issued 299,600 Ordinary Shares to Synthelabo
for cash consideration of FF 49,990 and 119,900 Ordinary Shares to Johnson &
Johnson Development Corporation for aggregate cash consideration of FF 20,007.

In 1995, the Company issued for cash 404,700 shares at FF 60 per share
for a total of FF 21,682, net of costs of raising capital.

Preemptive Subscription Rights

Shareholders have preemptive rights to subscribe for additional shares
issued by the Company for cash on a pro rata basis. Shareholders may waive such
preemptive subscription rights at an extraordinary general meeting of
shareholders under certain circumstances. Preemptive subscription rights, if not
previously waived, are transferable during the subscription period relating to a
particular offer of shares.

Warrants

Under the authorized plans approved by shareholders in 1996, 1995,
1994, 1992 and 1990, the Company issued a certain number of warrants to purchase
Ordinary Shares (including the warrants issued to CEPH).

Number of Ordinary Shares
underlying the warrants

Balance at December 31, 1994 170,600
-------
Subscriptions 18,200
Exercised (17,300)
Expired or Canceled (2,000)
---------

Balance at December 31, 1995 169,500
-------
Subscriptions 240,600
Exercised (76,300)
Expired or Canceled -
---------

Balance at December 31, 1996 333,800
-------
Subscriptions 4,000
Exercised (205,000)
Expired or Canceled (8,000)
---------

Balance at December 31, 1997 124,800
---------
---------

F-14

Issued warrants outstanding at December 31, 1997:

Number of Ordinary Shares Exercise Price (FF) Expiration Date

2,000 28.8 October 5, 2000
43,200 60.0 October 24, 1999
4,700 60.0 December 31, 1999
27,000 160.0 March 18, 2001
44,900 100.0 March 18, 2001
3,000 250.0 May 21, 2002

Stock Options

Under the authorized plans approved by Shareholders in 1997, 1996,
1994, 1992 and 1990, the Company has issued stock options entitling the holder
the right to subscribe for one ordinary share per option under the 1997 Plan and
100 Ordinary Shares per option under all other plans. Options generally vest
ratably over a four-year period from the date of grant and expire five years
from date of vesting.

A summary of activity under the plans is as follows:

Options outstanding
-------------------------------------------
Number of Weighted average
shares price per share in FF

Balance at December 31, 1994 143,800 23.74
--------

Granted 70,000 40.00
Exercised (27,600) 11.38
Canceled or expired (40,000) 40.00
--------

Balance at December 31, 1995 146,200 55.59
-------
Granted 930,400 159.87
Exercised (97,800) 26.04
Canceled or expired (13,900) 47.68
--------

Balance at December 31, 1996 964,900 165.91
-------
Granted 77,668 257.57
Exercised (36,600) 86.58
Canceled or expired (19,800) 148.45
--------

Balance at December 31, 1997 986,168 166.03
--------
--------

Of the total options granted in November 1996, 334 gave the holder the
right to purchase 33,400 Ordinary Shares subject to the achievement of certain
milestones. Compensation expense corresponding to the difference between the
exercise price and the market value on the date the milestone is achieved will
be recorded on the milestone date.

At December 31, 1997 and 1996, options to purchase 423,100 and 290,500
Ordinary Shares, respectively, were exercisable at weighted-average exercise
prices of FF 154.84 and FF 148.22, respectively.

F-15

At December 31, 1997, 1,349,600 Ordinary Shares were reserved for
issuance to option holders (986,168 under outstanding options at an exercise
price ranged from FF 28.80 to FF 295 plus 363,432 under options authorized but
not yet granted).

The weighted average remaining contractual life of all options
outstanding is 5.1 years at December 31, 1997.

The exercise of options by certain employees in 1996 was financed by a
loan from the Company. The outstanding balance of this loan at December 31, 1997
and 1996 has been shown as a reduction of shareholders' equity.

In December 1996, the French parliament adopted a law that requires
French companies to pay French social contributions and certain salary-based
taxes, which may represent, for the Company, up to 39% of the taxable salary, on
the difference between the exercise price of a stock option and the fair market
value of the underlying shares on the exercise date if the beneficiary disposes
of the share (or converts them to bearer form) before a five-year period
following the grant of the option. The new law is consistent with personal
income tax law that requires individuals to pay income tax on the difference
between the option exercise price and the fair value of the shares at the grant
date if the shares are sold or otherwise disposed of within five years of the
option grant. The law applies to all options exercised after January 1, 1997.

The Company has not recorded a liability for social charges which may
be assessed for options granted as of December 31, 1997 as the liability, being
dependent on future trading values of the Company's Ordinary Shares and the
timing of employees' decisions to exercise options and sell the related shares,
cannot be estimated. The Company also does not consider that the liability is
probable due to the income tax disincentives to employees of exercising options
and selling the shares in less than a five year period.

Pro forma information regarding net loss and loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following average assumptions for 1997 and 1996,
respectively: risk-free interest rate of 3.65% in both years; dividend yields of
0% in both years; volatility factors of the expected market price of the
Company's Ordinary Shares of 0.5 and 0.4 in 1997 and 1996, respectively; and a
weighted-average expected life of the option of 5-8 years.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for loss per share
information):

1997 1996 1995

Pro forma net loss (107,322) (90,257) (35,069)
Pro forma loss per share (15.48) (16.17) (7.98)

These initial pro forma disclosures are not likely to be representative
of the effects of applying FAS 123 in future years as the 1997, 1996 and 1995
amounts reflect expense for only three, two and one year's vesting,
respectively.

F-16

The weighted-average fair values of options granted during 1997, 1996
and 1995 were as follows:

1997 1996 1995

Options whose price was greater than market price of the
underlying shares on the grant date NA 90.49 NA

Options whose price was less than the market price of the
underlying shares on the grant date 212.99 84.93 37.57

8. Income Taxes

For financial reporting purposes, loss before income tax benefit
includes the following components (in thousands of French francs, at December
31) :

1997 1996 1995

France (108,819) (85,403) (39,665)
United States (2,753) (450) (2,035)
Asia (1,429) (1,048) (1,244)
------- ------- -------
Total (113,001) (86,901) (42,944)

The income tax benefit in 1997, 1996, and 1995 is due to research and
development tax credits earned by the French company and recorded as current tax
benefit. There was no current tax expense or benefit in the Company's
subsidiaries, nor any deferred tax in any country, due to the continuing losses
of all companies in the consolidated group.

A reconciliation of income taxes computed at the French statutory rate
(41.66% in 1997, 36.66% in 1996 and in 1995) to the income tax benefit is as
follows (in thousands of French francs, at December 31) :

1997 1996 1995

Income tax benefit computed at the French statutory rate 47,077 31,858 15,718
Operating losses not utilized (47,077) (31,858) (15,718)
Research and development tax credit 19,172 21,815 7,942
------ ------ -----
Total 19,172 21,815 7,942

Significant components of the Company's deferred tax assets and
liabilities consist of the following (in thousands of French francs, at December
31) :

1997 1996

Deferred tax liabilities:
Intangibles expensed upon acquisition for tax purposes (1,122) (841)

Deferred tax assets:
Net operating loss carry forwards 86,457 50,085
Research and development costs capitalized and amortized for tax purposes 33,329 15,558

Other 191 30
------- ------
Total deferred tax assets 119,977 65,673
------- ------
Valuation allowance (118,855) (64,832)
Net deferred tax -- --
------- ------
------- ------

As of December 31, 1997, the Company has French net operating loss
carry forwards of approximately FF 191,193 of which FF 169,257 has no expiration
date. The remaining FF 21,936 net operating loss carryforwards

F-17

will expire in the years 1998 through 2001, if not utilized, as follows (in
thousands of French francs, at December 31) :

1998 1,761
1999 8,142
2000 175
2001 11,858
------

Total 21,936
------
------

The Company also has research income tax credits receivable of FF
52,471 which are recoverable if not used to offset taxes payable in the fourth
year following their generation. Of the total amount receivable, FF 3,498 is
recoverable in 1998.

The Company has U.S. net operating loss carry forwards of approximately
FF 11,916 which expire in the years 2008 through 2011 for federal tax purposes,
and FF 5,312 which expire in the years 1998 through 2002 for State of California
tax purposes. The Company has net operating loss carry forwards from its other
subsidiaries of approximately FF 4,165 which expire in 1999, 2000, 2001 and
2002. The utilization of these net operating loss carry forwards is limited to
the future operations of the Company in the tax jurisdictions in which such
carry forwards arose.

9. Compensation Expense and Employee Retirement Plans

Salary expenses in the years 1997 and 1996 are FF 76,582 and FF 48,380,
respectively.

The Company contributes to pensions for personnel in France in
accordance with French law, by contributions based on salaries to the relevant
state-sponsored organizations. The Company has no further liability in
connection with these plans.

French law also requires payment of a lump sum retirement indemnity to
employees based upon years of service and compensation at retirement. Benefits
do not vest prior to retirement. The Company's obligation at December 31, 1997
and 1996 was immaterial.

As of December 31, 1997, the U.S. subsidiary had established a 401(K)
retirement plan for its employees; there is no obligation to make employer
contributions. As of December 31, 1997, other subsidiaries had no pension plans.

10. Fair Value of Financial Instruments

At December 31, 1997 and 1996, the carrying values of financial
instruments such as cash and cash equivalents, trade receivables and payables,
other receivables and accrued liabilities, and the current portions of long-term
debt and capital lease obligations approximated their market values, based on
the short-term maturities of these instruments. At December 31, 1997 and 1996,
the fair value of long-term debt was FF 30,042 and FF 28,852, respectively. Fair
value is determined based on expected future cash flows, discounted at market
interest rates, and other appropriate valuation methodologies.

F-18

11. Lease Commitments

The Company leases certain of its equipment under capital leases.
Capitalized costs of approximately FF 10,717 and FF 10,738 are included in
property and equipment at December 31, 1997 and 1996, respectively. Accumulated
amortization of these leased assets was approximately FF 7,969 and FF 7,112 at
December 31, 1997 and 1996, respectively.

Future minimum lease payments under capital lease obligations due for
the fiscal years ending December 31 are as follows:

1998 1,655
1999 1,129
2000 216
2001 11
2002 -
-------

Total minimum lease payments 3,011
Less amount representing interest (277)
-----
Present value of net minimum lease payments 2,734
Less current portion (1,462)
-------
Long-term portion 1,272
-------
-------

The Company leases certain office, laboratory and research facilities
under operating leases which expire through 2000. The majority of these leases
have nine-year terms, but are cancelable at the Company's option at each
three-year anniversary. Future minimum lease payments under operating leases due
for the fiscal years ending December 31 are as follows:

1997 8,719
1998 6,543
1999 3,021

Rental expense for the years ended December 31, 1997, 1996, and 1995
was approximately FF 6,077, FF 4,261, and FF 3,364, respectively.

12. Industry and Geographic Information

The Company operates in one sector of activity, the discovery,
development and marketing of products derived from DNA and genetics research.

Information about the Company's operations by geographic area is as
follows (in thousands of French francs, at December 31) :

United
France States Asia Elimination Consolidated

1997

Customers 84,728 11,543 2,419 - 98,690
Intercompany 2,475 184 - (2,659) -
Total revenues: 87,203 11,727 2,419 (2,659) 98,690

Operating loss (123,284) (2,740) (1,508) (114) (127,646)
Identifiable assets 684 572 6,274 1,727 (17,657) 674 916

F-19

1996

Customers 37,169 9,266 2,126 - 48,561
Intercompany 1,779 199 - (1,978) -
Total revenues: 38,948 9,465 2,126 (1,978) 48,561

Operating loss (95,026) (345) (1,104) - (96,475)
Identifiable assets 668,254 6,994 1,426 (14,041) 662,633

1995

Customers 20,568 6,014 1,180 - 27,762
Intercompany 1,670 324 - (1,994) -
Total revenues: 22,238 6,338 1,180 (1,994) 27,762

Operating loss (40,544) (2,010) (1,278) 27 (43,805)
Identifiable assets 118,163 5,156 719 (10,028) 114,010

Intercompany sales between geographic regions are accounted for at cost plus a
gross margin.

The Company's export sales from France of synthetic DNA were divided as follows
(in thousands of French francs, at December 31:

1997 1996 1995

United States 555 487 885
United Kingdom 3,483 2,396 -
Italy 1,508 1,425 1,483
Other European countries 2,039 2,430 4,233
Asia and Middle East 2,132 1,478 948
Others 1,268 1,266 365
----- ----- ---
Total 10,985 9,482 7,914

In June 1997, the FASB released Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Information on Sector Activity", that defined the
information to be disclosed quarterly and annually to shareholders regarding
each sector of activity in which a company operates. According to SFAS 131, the
Company must disclose certain information regarding its products and services,
the geographical zones in which it operates, and its customers. Since SFAS 131
is applicable for fiscal years beginning after December 15, 1997, the Company
will adopt the standard retroactively in 1998. Following review of this
standard, management does not believe its adoption will have a significant
impact on the information on sector activity disclosed.

F-20

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities and
Exchange Act 1934, the Registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

GENSET S.A.

Dated: May 11, 1998 By: /s/ DEBORAH A. SMELTZER
-------------------------

Name: Deborah A. Smeltzer
Title: Chief Financial Officer