SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS  PURSUANT TO SECTIONS 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2003
OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM  TO

COMMISSION FILE NO. 000-30981

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GENAISSANCE PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

06-1338846(I.R.S. Employer Identification No.)Five Science Park
New Haven, Connecticut(Address of principal executive offices)

06511(Zip Code)


Registrant's
telephone number, including area code:(203) 773-1450

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Securities registered pursuant to Section 12(b) of the Act:    NONE

Securities
registered pursuant to Section 12(g) of the Act:    COMMON STOCK, $.001 PAR VALUE
(Title of each class)

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 ý    No o

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o    No ý

The aggregate market value of Common Stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in the
calculation is an affiliate) was $31,016,101 based on the last reported sale price of the Common Stock on The NASDAQ National Market on June 30, 2003.

Number
of shares of the registrant's Common Stock outstanding as of March 15, 2004: 23,378,120.

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Documents
Incorporated By Reference:

Items
10, 11, 12, 13 and 14 of Part III (except for information required with respect to our executive officers which is set forth under "Executive Officers" in Item 1A of
Part I of this report) have been omitted from this report and are incorporated by reference to the definitive proxy statement to be filed with the Securities and Exchange Commission relating to
the registrant's 2004 annual meeting of stockholders.

This
Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose,
statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management, other than statements of
historical fact may be forward-looking statements. The words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions or expectations expressed or implied in our forward-looking
statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied. These important
factors include our "critical accounting estimates" and the factors set forth under the heading "Factors Affecting Future Operating Results." Although we may elect to update forward-looking statements
in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date
subsequent to the date of this Annual Report.

DecoGen® and HAP are either registered trademarks or trademarks of Genaissance Pharmaceuticals, Inc. in the United States and/or
other countries. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners

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ITEM 1. BUSINESS

Genaissance

Company Overview

We are a leader in the understanding and application of human gene variation to pharmaceutical development and marketing. Our technology, services and clinical
development expertise are marketed to pharmaceutical, biotechnology and diagnostic companies, as a comprehensive solution for their pharmacogenomic needs. Pharmacogenomics is the study of how an
individual's genetic inheritance affects the body's response to a drug. Our ultimate goal is to have genetic variation information used to define a population of patients who would respond to a drug
and are least likely to suffer an adverse reaction. In addition, we provide what the U.S. Federal Drug Administration defines as Good Laboratory Practices, or GLP compliant DNA banking, research
sequencing and research and GLP compliant genotyping as well as related services to a variety of companies and entities, including those involved in agriculture. We are also receiving royalties from
one pharmacogenomic-based test that is used by physicians as a genetic assessment of a patient's ability to metabolize the thiopurine class of drugs and soon expect to offer, through our own
laboratory, a molecular test for genetic mutations that predispose affected individuals to an abnormal heart rhythm. Our total net revenues were $5.3 million in 2001, $8.1 million in
2002 and $12.5 million in 2003.

We
were incorporated in Delaware on February 22, 1992 and changed our name to Genaissance Pharmaceuticals, Inc. on March 18, 1997. Our principal executive offices
are located at Five Science Park, New Haven, Connecticut 06511. Our telephone number is (203) 773-1450 and our website is located at http://www.genaissance.com. The information on our Internet
website is not incorporated by reference into this filing.

Industry Overview



The pharmaceutical, biotechnology and healthcare industries face intense pressure to become more productive and deliver more cost effective healthcare. Two of the
pharmaceutical and biotechnology industry's most challenging issues are the high cost and low success rate of developing drugs and the need to differentiate approved drugs in highly competitive
markets. At the same time, healthcare providers and payers are spending a growing proportion of their resources on prescription drugs.

The
drug development process is costly and subject to a high failure rate. The Tufts Center for the Study of Drug Development estimates that the average cost of developing a drug is
$802 million, including the cost of unsuccessful drug candidates. Even with recent technological advances, including advances in areas such as genomics, which is the knowledge and use of all of
the genetic information of an organism, the failure rate of clinical trials remains very high. In the United States, only one in five drug candidates that enters clinical trials reaches the market.
Seventy percent of the drug candidates that enter clinical trials successfully complete phase I, 33% complete phase II, 25% complete phase III and only 20% achieve regulatory approval. The decision to
enter phase III, the most costly phase of clinical trials, is generally based upon the results obtained from the limited number of individuals, often fewer than 200, typically studied in phases I and
II. The typical patient population in phase III is between 1,000 and 5,000 individuals, and the average amount of money spent in a single phase III clinical trial is estimated to be greater than
$40 million.

Approved
drugs often face intense competition. The period of market exclusivity for the first drug in a new therapeutic class is typically much shorter today than it was a few years ago.
Consequently, marketing expenditures have increased rapidly as companies attempt to maintain or increase market share. For example, in 2001, U.S. based pharmaceutical companies spent over
$19 billion on promotional activities, including sales representatives, product samples and journal advertising.

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Marketing
departments are also under pressure to maximize the revenue generated from approved products in order to meet corporate-wide revenue and earnings goals. In addition, pharmaceutical companies
continue to face increasing competition from generic drugs, as patents on brand-name drugs, representing $32.3 billion in U.S. sales in 2002, will expire over the next five years. Thus, in
order to maintain revenue growth rates and profitability, pharmaceutical companies must both improve the success rate of clinical trials and differentiate their drugs in a crowded market place.

Sales
of prescription drugs in the United States grew at a slower rate of 11.3% in the first quarter of 2003 as compared to 16.9% in the first quarter of 2002. Nevertheless, retail
spending on outpatient prescription drugs has approximately doubled since 1997. In an attempt to contain the rising cost of drug expenditures, healthcare providers and payers face the difficult task
of deciding which drugs should be prescribed to specific patients and are suitable for reimbursement. Healthcare providers make these decisions using medical outcome studies and economic benefit
factors but they have little, if any, knowledge of which individual patients are most likely to benefit from a specific drug, if at all. Thus, healthcare providers and patients would benefit from
using drugs that are targeted for a patient population that would have the best drug response and safety profile and, thus, allow for more appropriate and safer intervention.



The medical community generally acknowledges that most drugs work more effectively for some patients than for other patients. The pharmaceutical and biotechnology
industry often poorly appreciates this variability in patient response. Consequently, pharmaceutical and biotechnology companies may unnecessarily discontinue further drug development, fail to obtain
regulatory approval for promising drug candidates or, even if a drug obtains approval, be unable to market an approved drug effectively or to obtain approval for third party reimbursement.

Scientists
have known for a long time that genomic differences influence how patients respond to drugs. Population genomics is the analysis of genomic variation within groups of people.
The genomic blueprint each person inherits from his or her biological parents, is contained within a person's DNA and determines differences, such as height, hair color and eye color. As scientists
better understand variation at the molecular or genomic level, they are more certain that an individual's response to a drug is dependent upon that individual's unique DNA sequence and that more than
one gene is probably involved in a drug response. Scientists know that every drug generally interacts, directly and indirectly, with a variety of different proteins produced by different genes.
Therefore, in order to predict a specific drug response, scientists must analyze genomic variation in multiple genes.



At the DNA level, genomic variation occurs mainly as a result of variation at a single position in the DNA sequence, commonly referred to as a single nucleotide
polymorphism or SNP. Geneticists historically studied genetic variation by analyzing the inheritance of traits within an extended family. Classical population geneticists coined the term haplotype to
describe the physical organization of genetic variation as it occurs in an individual. The haplotype is the standard for measuring genetic variation. At the molecular level, a haplotype consists of
multiple, individual SNPs that are organized
into one of the limited number of combinations that actually exist as units of inheritance in humans. Each haplotype contains significantly more information than individual, unorganized SNPs. As a
result, clinicians need fewer patients to define a patient population with a different drug response if they use haplotypes rather than individual, unorganized SNPs.

In
October 2002, an international consortium, composed of non-profit biomedical research groups and private companies in Japan, the United Kingdom, Canada, China and the United
States, initiated an effort to create a genome-wide haplotype map. This venture is aimed at speeding the discovery of

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genes
that are related to common illnesses, such as asthma, cancer, diabetes and heart disease. The consortium expects that the International HapMap Project will take three years to complete at an
estimated cost of $100 million. The resulting haplotype map could contain anywhere from 300,000 to 600,000 SNPs. Using this genome-wide haplotype map, researchers may only identify a genomic
region that is involved in causing a disease or drug response rather than the specific gene that is responsible. Researchers are, thus, likely to need a database of gene haplotypes to determine which
of the genes that are contained within the identified genomic region is actually the gene responsible for causing the disease or drug response.

Pharmaceutical
and biotechnology companies generally have not considered genomic differences between patients in developing and implementing clinical trials or in the marketing of
approved drugs. However, if, in clinical trials, pharmaceutical and biotechnology companies were able to use gene haplotypes, together with sophisticated software programs to identify patient
populations that would have different drug responses, they could improve the drug development and marketing process. For example, pharmaceutical and biotechnology companies could use gene haplotypes,
which are identified in phase I and phase II clinical trials as being predictive of a clinical outcome, to determine the size of the patient population that would likely benefit from the drug under
development. They would also know the size of the clinical group needed for a phase III clinical trial to obtain statistically significant data to support the clinical development program. In
addition, if pharmaceutical and biotechnology companies could identify the patients most likely to have a side effect, they could more closely monitor these patients or eliminate them from
participating in clinical trials and receiving the drug and, hence, increase the safety profile of a drug. The pharmaceutical and biotechnology companies would, therefore, have a better understanding
of the cost required to complete the development of a drug and the likely economic return on their investment before proceeding to a phase III clinical trial. In addition, if pharmaceutical and
biotechnology companies could use gene haplotypes to predict a drug response, they would be able to improve the marketing of their drugs by identifying those patient populations for which particular
drugs are likely to be most effective with the least likelihood of having an adverse reaction. Furthermore, healthcare providers and payers would likely benefit economically from predictive
information that would enable a physician to prescribe the most appropriate and safest medication at the earliest possible time. Recently, the FDA issued draft guidance that encourages pharmaceutical
and biotechnology companies to use pharmacogenomics during the drug development process.

The Genaissance Solution

We have developed a combination of technologies and expertise that we call ourHAPTechnology, which allows
population genomics to be integrated into the development, marketing and prescribing of new and existing medicines.

The
key components of ourHAPTechnology are:



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We
designed ourHAPTechnology to permit pharmaceutical and biotechnology companies to use population genomics in a variety of ways for
drug development and commercialization.



We designed ourHAPTechnology to improve the success rate of drugs in clinical trials by:





We also designed ourHAPTechnology to help maximize the value of an approved drug by:



Our HAPTechnology should also be useful for improving the drug discovery process through the selection and validation of drug targets. In
addition, pharmaceutical and biotechnology companies could incorporate data obtained during clinical trials into the drug discovery process to develop second-generation drugs. If widely adopted, our HAPTechnology could enable the healthcare system to personalize treatment based upon an individual's unique genome.

Our Strategy

Our strategy consists of the following:

Generate current revenues from commercializing our HAP Technology in various markets.The specific revenue sources would
include:



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The
different markets that we target include:



Establish contractual rights for royalties from the sale of drugs and diagnostic tests.The revenue sources would include
developing, with or without others, drug response pharmacogenomic tests from the intellectual property created using ourHAPTechnology or in our
internal programs. In addition, we seek royalties from the sale of drugs and diagnostics, which use ourHAPMarkers in a diagnostic test that:



Our
commercialization programs include the following:

Commercialize our HAP Technology.We offer pharmaceutical and biotechnology companies access to our HAPTechnology and our clinical genetics development expertise for use throughout each phase of drug development and marketing. Potential customers can
obtain access to our proprietaryHAPMarkers, ourDecoGenInformatics System, our DNA banking,
sequencing and genotyping facilities, and our clinical genetics development expertise. In return, we seek annual subscription fees and payments for our collaborative contributions to our customer's
specific drug development or marketing projects and for pharmacogenomic support services. In addition, we seek license fees, as well as milestone and royalty payments, for the commercial use of our HAPMarkers. In some instances, we seek to retain all intellectual property rights in ourHAPMarkers.
In other instances, we offer our customers an option to obtain licenses for the use of particularHAPMarkers for the development of therapeutic and
diagnostic products. We currently have relationships and/or are providing pharmacogenomic support services to a number of major pharmaceutical and biotechnology companies. We are in discussions and
negotiations with additional pharmaceutical and biotechnology companies to enter into programs that will utilize ourHAPTechnology, including
pharmaceutical companies in such regional markets as Japan, where we are using Intec Web and Genome Informatics Corporation as our sales representative.

Commercialize the intellectual property that we license from others or develop with our HAP Technology.We currently have
four programs from which we have or expect to have intellectual property to commercialize.



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We
examined five statins in two prospective STRENGTH clinical trials. The goal of these two trials was to identify which of ourHAPMarkers define a patient population that has the best therapeutic response to one or more of these statins with a superior safety profile. In April 2001, we began enrollment for the first of
the two STRENGTH trials, in which patients were randomized and then enrolled into one of four treatment arms, in which a patient was treated with one of four statins. The four drugs used were
atorvastatin (sold by Pfizer Inc. as Lipitor®), cerivastatin (sold by Bayer AG as Baycol®), pravastatin (sold by Bristol-Myers Squibb Company as Pravacol®)
and simvastatin (sold by Merck as Zocor®). Following the withdrawal of cerivastatin from the market in August 2001, we discontinued treating all of the patients who were taking this
product. In October 2001, we began enrollment in our second STRENGTH trial, in which enrolled patients received lovastatin (sold by Merck as Mevacor®). The trial protocol for both
STRENGTH trials was to treat each patient for eight weeks with the lowest dose recommended on the drug label followed by then treating each patient for eight weeks with the highest dose recommended on
the drug label. At least 149 patients were enrolled into each treatment arm. Enrollment was completed for STRENGTH I in July 2001 with the last patient receiving the last examination in
November 2001. Enrollment was completed for STRENGTH II in November 2001 with the last patient receiving the last examination in March 2002.

In
January 2003, we signed an agreement with Bayer AG and with Bayer HealthCare LLC to commercialize exclusively the diagnostic rights and non-exclusively the drug product
development rights from our STRENGTH trials. As of December 31, 2003, we had not received any royalties under this

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agreement.
In September 2003, we signed a license agreement with AstraZeneca PLC, under which AstraZeneca received non-exclusive access to the STRENGTH study database for research purposes for
a limited period of time.



We
plan to use patient samples with ourHAPTechnology to identifyHAPMarkers that define
the population most likely to develop this adverse reaction. If we are successful in identifying these genomic markers, we plan to seek a suitable customers to commercialize these HAPMarkers either
through a diagnostic test or a diagnostic test associated with a drug. In September 2003, we announced that we had reached
enrollment goals in order to initiateHAPMarker discovery and that we expected initial results from the study in the second half of 2004.

Commercialize our HAP Technology in numerous markets.We also offer all the components of our HAPTechnology, including our sequencing and genotyping services, to potential customers, including research groups in government and academia and
companies involved in the sale of nutraceuticals and companies involved in agriculture.

Pursue strategic acquisitions.We continually evaluate opportunities that may provide us with, among other things,
intellectual property, key personnel, capabilities that could augment our recurring revenues or technologies that will enhance and complement ourHAPTechnology. From time to time, we intend to pursue acquisitions, which we believe will meet these goals.

In
May 2003, a United States bankruptcy judge approved our acquisition of substantially all of the assets and certain liabilities of DNA Sciences, Inc. for
$1.35 million in cash. These assets included:



In
December 2003, we entered into an agreement and plan of merger with Lark Technologies, Inc., under which we plan to acquire Lark in a stock-for-stock exchange. Lark
provides contract, GLP compliant and research sequencing and associated molecular services to the pharmaceutical, biotechnology and agricultural industries. A joint proxy statement/prospectus was
declared effective by the SEC and the stockholder meetings to vote on the merger is scheduled to take place on April 1, 2004. We expect to close this acquisition early in the second quarter of
2004.

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In license drugs under clinical development.We are also pursuing opportunities either to in-license or work with a
third-party with respect to drugs in clinical development that have encountered problems, which might be addressed by applying ourHAPTechnology and
clinical genetics capabilities. We have established criteria for use in evaluating these drug opportunities, which include:



We
have a business development group to commercialize ourHAPTechnology and identify in licensing opportunities and a national sales
manager to sell our service offerings.

Asthma Clinical Study as a Proof of Principle

To demonstrate how the pharmaceutical and biotechnology industry and healthcare providers could use ourHAPTechnology, we conducted a clinical study to determine whether we could use ourHAPMarkers or SNPs to define an asthma patient population that
responded to the drug albuterol (sold by GlaxoSmithKline as Ventolin®), a standard treatment for persons with asthma. We
conducted the study in collaboration with Dr. Stephen Liggett, a member of our scientific advisory board and a professor of medicine at the University of Cincinnati Medical Center. We examined
genomic variation in the target of the drug, the beta2-adrenergic receptor (beta2-AR). Dr. Liggett recruited 121 asthmatic individuals for clinical treatment and made a
large number of standard pulmonary measurements, before and after he treated the patients with albuterol. The response to the drug differed significantly from patient to patient and the drug was
clinically effective in only 40% of these patients as measured by generally accepted clinical criteria. Dr. Liggett and his staff drew blood samples and extracted the DNA. We did the genotyping
and, using ourDecoGenInformatics System, identified specific pairs ofHAPMarkers in the
beta2-AR receptor gene that were carried by patients that exhibited a positive drug response and specific pairs ofHAPMarkers that were
carried by patients that exhibited a poor drug response. By contrast, no individual SNP was found to have such predictive power in this study. This study, which was similar in sample size typically
used for a phase II clinical trial, showed that a patient's response to albuterol correlated, in a statistically significant manner, with specificHAPMarkers.

We
published a more detailed description of this study in a peer reviewed scientific journal in September 2000. In July 2003, we received a U.S. Patent (Number 6,586,183),
entitled "Association of beta2-Adrenergic Receptor Haplotypes with Drug Response," which contains claims based on these findings. In addition, we worked with a company that has an FDA
approved, DNA-based diagnostic platform and verified the SNP assays they developed for defining the predictiveHAPMarkers. This proof of principle
diagnostic assay and our clinical study demonstrate that a pharmacogenomic test for drug response can be developed for point of care use with currently available technology.

Our Technology



Our process for discoveringHAPMarkers eliminates the need, which is inherent in family-based approaches, to find
and then test large numbers of families or related individuals to determine genomic variation. Initially, we discover individual SNPs by high-throughput sequencing of DNA samples of unrelated and
related individuals that are representative of the individuals who constitute the major pharmaceutical markets of the world. Sequencing is the process of determining the order of the chemical units in
a molecule of DNA, which in turn defines the chemical units that make up the proteins that are encoded in a DNA molecule. We use our proprietary algorithms to organize the SNPs

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intoHAPMarkers. Using these algorithms, we find that the number of actualHAPMarkers per gene is
significantly less than the theoretically large number of ways in which SNPs could be organized.

Our DecoGenInformatics System contains a number of components. OurHAPDatabase contains
ourHAPMarkers, including information about their sequence, frequency and distribution. OurDecoGenInformatics System also contains a proprietary collection of algorithms and a search engine that correlates a patient'sHAPMarkers with a particular
response to a drug. To handle large amounts of information, we developed a proprietary tool that we call RuleFinder that allows us to identify rapidly potential associations between
clinical endpoints and genetic variation. Then using standard analytical tools, we have been able to determine, with statistical accuracy, the correlation between HAPMarkers and drug response in a
small population of the size commonly seen in phase I and phase II of a clinical trial.

Genotyping
is the process for measuring whichHAPMarker pairs are present in a patient's DNA sample. Our research genotyping process uses
proprietary software, robotics and Sequenom's MassARRAY platform to determine, on a high-throughput basis, which twoHAPMarkers for a gene
are present in a patient's DNA sample. We integrate the resulting data into ourDecoGenInformatics System to search for a correlation with a patient's
drug response. We have a customized facility in New Haven, dedicated to genotyping, which is licensed under CLIA regulations to do high-throughput research genotyping and testing.

The
human genomic DNA, which is needed from patients in clinical trials to do genetic association studies, can be isolated and stored under GLP compliant conditions in our facility in
Research Triangle Park in Morrisville, North Carolina. We can develop GLP compliant genotyping assays for validating a genetic association in our Research Triangle Park facility, through which we also
offer a range of GLP compliant P450 cytochrome genotyping assays for genes whose protein products are involved in the metabolism of drugs by the human body. Our Research Triangle Park facility is also
licensed under CLIA regulations to do testing.

The
following outlines the components of ourHAPTechnology and how we use ourHAPTechnology to define a patient population with a specific drug response.



Our goal is to discoverHAPMarkers for pharmaceutically relevant genes. We prioritize these genes for HAPMarker discovery based upon the needs of our customers. We obtain genomic information relevant for gene selection from publicly available sources
and from proprietary databases. We have discoveredHAPMarkers for genes that are, or will likely become, drug targets; are associated with drug target
pathways; are involved in how drugs modify cell communication or regulate other genes; and are involved in the metabolic process by which the body absorbs a drug and breaks it down.



We constructed an Index Repository, a collection of diverse DNA samples, to discover the SNPs that are present in genes. We designed our Index Repository to
contain genomic information that would be representative of the people who constitute the major pharmaceutical markets of the world; to aid in the quality control analysis of the SNPs we discover; and
to facilitate the organization of SNPs intoHAPMarkers.

To
build our Index Repository, we recruited over 650 individuals whose parents and grandparents came from specified geographical regions. We obtained personal information from each
individual, including sex, date of birth, and general medical information, as well as a detailed family history and drew blood samples so that we could create continually multiplying cells from the
white cells present in the blood. The resulting cells, called permanent cell lines, provide us with a supply of DNA from which

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to
discover SNPs. We store frozen samples of each cell line at multiple locations to ensure that all of these cell lines are available in the future. To supply sufficient DNA for the production
process, we grow the cell lines in our cell culture facility. We employ quality control procedures that permit each DNA sample to be unambiguously matched to its corresponding cell line. We store all
of the information about a cell line in our proprietaryHAPDatabase that is a component of ourDecoGenInformatics System.



We use a subset of our Index Repository to discover SNPs. We employed principles of population statistics to determine the minimum number of unrelated individuals
that we needed to have a 99% probability of detecting a SNP orHAPMarker that occurs in at least 5% of the general population or in at least 10% of a
population from a specific geographical region.

We
sequence individual samples of DNA so that we can accurately determine the frequency of a SNP in the population. Our procedure allows us to detect SNPs that are present at lower
frequencies than if we were to analyze a mixture of DNA from different individuals. We sequence 93 individual, human DNA samples, or 186 individual genomes, from our Index Repository in the following
genomic regions for each selected gene: the region responsible for controlling when a gene is active, the control region; the regions containing coding information that is found in the protein product
of the gene, the coding regions; the boundaries between the genomic regions containing coding information and those interspersed regions that do not contain coding information, the non-coding regions;
and the region at the end of a gene immediately after the last region containing coding information.

Our
sequencing process is highly automated, from picking the regions to be sequenced through loading the samples onto one of our sequencing machines. We have also developed a proprietary
laboratory information management system to track genes as they progress through the production pipeline. We use this system to monitor the overall quality of data we produce to ensure that the
sequencing process is operating according to our established standards. The sequence information undergoes two forms of quality control analysis. We use electronic procedures and established
population genomic principles to identify and validate that a SNP exists at a given position.



Geneticists use the term haplotype to describe how SNPs are organized on a chromosome. Typically, geneticists study the inheritance of genetic variability in
extended families in order to determine haplotypes. We do not need to conduct family studies to discover haplotypes. Rather than relying on family studies, we have developed an entirely computerized
process for discovering haplotypes. Our proprietary method works because it analyzes a large number of individual samples and it has members of extended families in its sample set. We have validated
the accuracy of our computerized process by conventional family studies and molecular techniques. We use our proprietary computational methods and algorithms to determine how the SNPs in a gene are
organized on each of the two chromosomes in each sample we sequence from our Index Repository. We use the termHAPMarker, derived from haplotype, to
describe the organization of SNPs we find for a gene.

Our
computerized process assigns a confidence value to eachHAPMarker we discover. If the HAPMarkers we discover for a gene fall below a defined confidence
level, we subdivide the gene into regions. We reexamine each region until we identify HAPMarkers that meet our acceptance level. We then enter eachHAPMarker into our proprietary HAPDatabase. We also enter other relevant population information, such as the distribution and frequency of each HAPMarker
among people from different geographical regions. We also include, in ourHAPDatabase,
genomic markers that others have identified and are available in public databases.

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As
of December 31, 2003, we had processed in excess of 7,616 pharmaceutically relevant genes through our production process and deposited their HAPMarkers and associated information into ourHAPDatabase. All of the nearly 500 current drug
targets, with identified genomic structure, have gone through our production process. To date, we have found an average of approximately 18 SNPs per gene. There are generally two possible forms of a
SNP that are found at a site of genomic variation. Therefore, these 18 SNPs could theoretically be organized into 218 or 262,144 potential HAPMarkers. Using our proprietary algorithms, we
found that these SNPs are organized into an average of only approximately 19 HAPMarkers per gene.



We have constructed a proprietary informatics system, calledDecoGen, which contains our proprietary HAPDatabase ofHAPMarkers. These databases can accommodate information from a variety of populations,
including individuals suffering from a specific disease and patients in clinical trials, as well as associated data, such as detailed medical histories, including responses to drugs. The portal to
these databases is theDecoGenInformatics System's search engine, which we designed with an intuitive, graphical user interface so that drug development
clinicians can easily manage their data to find a correlation betweenHAPMarkers and a drug response.

OurDecoGenInformatics System can use either qualitative or quantitative clinical measurements as a clinical endpoint to search for a
correlation with ourHAPMarkers. The informatics system has the ability to exchange information with standard software packages used in the
pharmaceutical industry and additional tools are also available within the system to help in the design and operation of clinical trials.



Genotyping is the process of determining whichHAPMarker is present for each of the two versions of each gene in
a patient's clinical sample. We designed our high-throughput genotyping capabilities to support our clients who are using ourHAPTechnology as well as
to provide pharmacogenomic support services to pharmaceutical, biotechnology and diagnostic companies, to government and academic groups and to other entities. The first step in searching for a
clinical correlation is to do genotyping on clinical samples. OurDecoGenInformatics System contains a proprietary computational tool that determines
the minimal number and combination of variable sites, which we must analyze in order to identify, with high confidence, the twoHAPMarkers that are
present for each gene in a clinical sample of DNA. This proprietary tool exploits an established genetic principle. That is, the presence of a given form of genomic variation at one position can be
highly predictive of the form of genomic variation present at another site in a gene. This predictability reduces the complexity of the information needed to identify a HAPMarker in a genomic DNA
sample. We can determine this predictability, however, only if we already know the haplotype or the organization of SNPs in
a gene. OurHAPMarkers contain this needed information.

OurHAPTechnology Customers

Our total license and service revenues were $5.3 million in 2001, $8.1 million in 2002 and $10.4 million in 2003. For more financial
information, including our total net revenues, net loss and assets for each of the last three years, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements included in this Annual Report on Form 10-K.

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In
the fiscal year ended December 31, 2003, we entered into the following licenses and collaborations:



Effective January 7, 2003, we entered into a multi-year agreement with Millennium Pharmaceuticals, Inc., under which we granted Millennium a
non-exclusive license to ourHAPTechnology in exchange for the payment of annual subscription fees. Millennium granted us certain rights to support
their DNA biomarkers and pharmacogenomic efforts. Millennium has an option to pay specified annual fees to
extend the agreement beyond the defined expiration date. Either party may terminate the agreement early if the other party breaches the agreement.



Effective January 15, 2003, we entered into a research collaboration and an exclusive license agreement with Bayer AG and with Bayer Healthcare LLC through
its Diagnostics Division to develop pharmacogenomic markers of drug safety and efficacy for a defined drug category and for certain disease fields. Under the terms of the agreement, each party has
contributed portions of intellectual property derived from its respective programs. We are receiving funding to apply ourHAPTechnology to Bayer's
clinical samples. Bayer will receive exclusive rights to develop and market tests based on the results of the collaboration. We are entitled to receive royalties and rights to perform these diagnostic
tests in our CLIA licensed diagnostic laboratories. There are mutual royalty provisions for any pharmaceutical drugs derived from the collaboration. The collaboration will terminate at the end of
defined safety and efficacy studies. The agreement will terminate upon the expiration of all licenses and other granted rights and of the obligation to pay royalties. Either party may terminate the
agreement early if the other party breaches the agreement.



Effective March 11, 2003, we entered into an agreement with Wayne State University (WSU) to support WSU's research contract with the National Institute of
Child Health and Human Development's Perinatology Research Branch (PRB), which is located at the WSU School of Medicine in Detroit, Michigan. Under the agreement, WSU gained access to specific HAPMarkers and obtained a limited license to use ourDecoGenInformatics System. We have developed
assays for the selectedHAPMarkers and are providing high-throughput genotyping on clinical samples provided by WSU and the PRB. We receive a license
fee and other payments from WSU. Either party may terminate the agreement early if the other party breaches the agreement. We expect to complete the genotyping in 2004.



Effective September 5, 2003, we entered into a non-exclusive agreement with AstraZeneca UK Limited, under which AstraZeneca was granted, for a limited
period of time, a limited research license to use ourDecoGenInformatics System, the gene associations from our STRENGTH study and their underlying
clinical and genetic data to investigate the genetic basis of variable response to the statin
class of drugs. AstraZeneca granted us certain rights to support their outsourced genotyping and their diagnostic efforts. AstraZeneca has an option to pay a specified fee to extend the term of the
limited research license beyond the defined expiration date.



Effective November 17, 2003, we entered into a multi-year agreement with Sciona Limited, a private company based in the United Kingdom, under which we
licensed ourHAPTechnology to

13

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Sciona
for use in the development and marketing of consumer products. In exchange for a license to ourHAPTechnology, Sciona granted us a 30% fully
diluted equity position in Sciona as well as certain rights to support their pharmacogenomic research and customer genotyping. We are also entitled to receive royalties on any products that are
developed by Sciona, which incorporate ourHAPTechnology. We may terminate the agreement early if Sciona fails to obtain or achieve certain cumulative
combined sales revenues and third party financing within a specified period of time, in which case the equity interest we received will revert back to Sciona.

Other Agreements

During 2003, we entered into other agreements, which included an agreement with Ferring Pharmaceuticals A/S under which we will provide certain pharmacogenomic
services and technology. We licensed ourHAPTechnology to Novo Nordisk A/S for use in a drug development program. In addition, we signed an amendment
to our agreement with Pfizer Inc., which extended Pfizer's access to selected data from ourHAPDatabase through August 31, 2004.

Intellectual Property

We rely on patents, trade secrets, non-disclosure agreements, copyrights and trademarks to protect our proprietary technologies and information. In addition, our
goal is to license to third parties certain components of our intellectual property that is peripheral to our core products and services.

As
of December 31, 2003, our patent portfolio included a total of 31 issued patents, 10 of which we own, one of which is co-owned with the University of Cincinnati, for which we
have an exclusive commercial license, and 19 of which we are the exclusive licensee in certain fields of use. One patent is co-owned with Yale University. Our issued patents and pending patent
applications include those for:



The
U.S. patents owned and licensed by us are currently set to expire at various dates ranging from July 2013 to June 2021.

We
also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We generally
protect this information with reasonable security measures, including confidentiality agreements that provide that all confidential information developed or made known to others during the course of
the employment, consulting or business relationship shall be kept confidential except in specified circumstances. Agreements with employees provide that all inventions conceived by the individual
while employed by us are our exclusive property.

14

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Competition

There is significant competition among entities attempting to use genomic variation data and informatics tools to develop and market new and existing medicines.
We expect the intensity of the competition to increase. We face, and will continue to face, competition from numerous pharmaceutical, biotechnology and diagnostic companies, both in the United States
and abroad. Several entities have identified and assembled SNP and haplotype databases for use as a measure of genomic variation. These databases are based on various technologies and approaches,
including the sequencing of either cDNA or genomic DNA and a genome-wide approach or a candidate gene approach. Entities such as Perlegen Sciences, Celera Genomics Group and the International HapMap
Project have developed or plan to develop databases containing gene sequence, genomic variation or other genomic information and are marketing or plan to market their data to pharmaceutical and
biotechnology companies or plan to make freely available their databases. In addition, numerous pharmaceutical and biotechnology companies, such as GlaxoSmithKline plc, either alone or in
collaboration with our competitors, are developing genomic research programs that involve the use of information that can be found in these databases. Furthermore, companies, such as deCODE
genetics, Inc., have technologies for using genetic variation in diagnostics and in the drug development process and have collaborations with companies employing these technologies. In order to
compete successfully against existing and future entities, we must demonstrate the value of ourHAPTechnology and that our informatics technologies and
capabilities are superior to those of our competitors. Many of our competitors have greater resources, gene variation discovery capabilities and informatics development capabilities than do we.
Therefore, our competitors may succeed in identifying an association between a phenotype and gene variation and applying for patent protection more rapidly than do we.

We
expect that our ability to compete will be based on a number of factors, including:



Government Regulation

Regulation by governmental entities in the United States and other countries will be a significant factor in the development, manufacturing and marketing of any
product that we or our customers develop. Various federal and, in some cases, state statutes and regulations govern or influence the manufacturing, safety, labeling, storage, record keeping,
performance and marketing of human therapeutic and diagnostic products or services. The extent to which these regulations may apply to us or our customers will vary depending on the nature of the
product or service.

Currently,
the FDA does not require companies seeking product approvals to provide data regarding the correlation between therapeutic response and genomic variation. On
November 3, 2003, however, the FDA issued draft guidance that encourages pharmaceutical and biotechnology companies to use pharmacogenomics during the drug development process and clarifies how
the FDA will evaluate the resulting data. The FDA is expected to release its final guidance before the end of 2004.

15

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Virtually
all of the pharmaceutical products developed by our customers will require regulatory approval by governmental agencies prior to commercialization. In particular, the FDA and
similar health authorities in foreign countries will impose on these products an extensive regulatory review process before they can be marketed. This regulatory process typically involves, among
other requirements, preclinical studies, clinical trials and often post-marketing surveillance of each compound.
This process can take many years and requires the expenditure of substantial resources. Delays in obtaining marketing clearance could delay the commercialization of any therapeutic or diagnostic
products developed by our customers, impose costly procedures on our customers' activities, diminish any competitive advantages that our customers may attain and lessen our potential royalties. Any
products our customers develop may not receive regulatory approval in a timely fashion or at all.

The
FDA regulates human therapeutic and diagnostic products in one of three broad categories: drugs, biologics or medical devices. Products developed using our technologies could
potentially fall into any of these three categories.

The
FDA generally requires the following steps for pre-market approval of a new drug or biologic product:



The
FDA classifies medical devices, which include diagnostic products, as class I, class II or class III, depending on the nature of the medical device and the
existence in the market of any similar devices. Class I medical devices are subject to general controls, including labeling, pre-market notification and good manufacturing practice
requirements. Class II medical devices are subject to general and special
controls, including performance standards, post-market surveillance, patient registries and FDA guidelines. Class III medical devices are those which must receive pre-market approval, or PMA,
by the FDA to ensure their safety and effectiveness, typically including life-sustaining, life-supporting, or implantable devices or new devices which have been found not to be substantially
equivalent to currently marketed medical devices. It is impossible to say at this time, which of these categories, will apply to any diagnostic product incorporating our technologies.

Before
a new device can be introduced into the U.S. market, it must, in most cases, receive either pre-market notification clearance under section 510(k) of the Food, Drug, and
Cosmetic Act or approval pursuant to the more costly and time-consuming PMA process. A PMA application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the
device, typically including the results of clinical trials, bench tests, laboratory and animal studies. A 510(k) clearance will be granted if the submitted information establishes that the proposed
device is "substantially equivalent" to a legally marketed class I or class II medical device or a class III medical device for which the FDA has not called for PMAs. While less
expensive and time-consuming than obtaining PMA clearance, securing 510(k) clearance may involve the submission of a substantial volume of data, including clinical data, and may require a lengthy
substantive review.

Even
if regulatory clearance is obtained, a marketed product and its manufacturer are both subject to continuing review. Discovery of previously unknown problems with a product may
result in

16

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withdrawal
of the product from the market, which could reduce our revenue sources and hurt our financial results, in addition to exposing us to product liability claims. Violations of regulatory
requirements at any stage during the process, including preclinical studies and clinical trials, the review process, post-marketing approval or in manufacturing practices or manufacturing
requirements, may result in various adverse consequences to us, including:



Generally,
similar regulatory requirements apply to products intended for marketing outside the United States.

We
use DNA isolated from clinical samples of blood from individuals in developing our intellectual property consisting ofHAPMarkers and HAPMarker
associations. In some cases, a clinical research organization, or CRO, with which we have a contract, collects these blood samples, plus
personal and medical information about each individual. In other cases, we contract directly with clinical sites to collect the blood samples plus personal and medical information without the
assistance of a CRO. Our CRO prepares, subject to our approval, the sample collection protocol and the patient informed consent form, as well as identifying the clinical sites, which collect the
samples. The individual clinical sites recruit the patients for each clinical study and, following the study protocol, explain and obtain the signed and witnessed informed consent documents from each
patient. The informed consent form includes the patient's authorization to use the patient's blood sample and data derived from it for developing commercial products. Our contract with the CRO and
contracts with individual clinical sites require an independent institutional review board to approve the study protocol, the patient informed consent form and the transmission of the samples to us.
Either we do not know the identity or we have in place procedures to maintain the confidentiality of any of the individuals from whom we receive clinical samples. We believe that these procedures
comply with all applicable federal, state and institutional regulations.

While
the FDA does not currently regulate our genotyping facility, CLIA defines standards that constitute good clinical laboratory practice. Although this is a federal law, each state is
responsible for administering the statute. The state of Connecticut issued a CLIA license for our facility in New Haven and the state of North Carolina issued a CLIA license for our facility in
Research Triangle Park. Both of these facilities can provide diagnostic test results in support of therapeutic or medical interventions. A CLIA licensed diagnostic laboratory can be inspected by the
state at any time to insure that we are in compliance with CLIA.

Research and Development

For the years ended December 31, 2003, 2002 and 2001, we spent approximately $20.1 million, $23.9 million and $46.4 million,
respectively, on research and development activities.

Significant Customers and Foreign-Based Revenue

We market and sell our technology, services and clinical development expertise primarily to a limited number of biopharmaceutical and diagnostic development
companies, including Johnson & Johnson Pharmaceutical Research & Development, which is a division of Janssen Pharmaceutica, N.V. (J&J PRD), Millennium Pharmaceuticals, Inc. and
Pfizer, Inc. Each of these customers accounted for more than 10% of our revenues in the year ended December 31, 2003. Our agreement with J&J PRD, which accounted for 23%, 46% and 41% of
our revenues in 2003, 2002 and 2001, respectively, expired

17

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in
January 2004. We do not expect the expiration of the J&J PRD to have a significant impact on future revenue.

For
the 2003, 2002 and 2001, approximately 0%, 4% and 6%, respectively, of our revenues resulted from foreign-based customers.

Sole Supplier

We have an agreement with Sequenom, Inc. under which it is the sole provider of silicon chips for one time use on their MassARRAY System,
which is our genotyping platform. Under the terms of the agreement and subject to specific conditions, we have the authority to reuse these chips should Sequenom be unable to supply new chips to us.
We believe that we could prepare for reuse the requisite supply of chips that we would need without unreasonable cost or delay, if we were required to do so.

Human Resources

As of December 31, 2003, we had 127 full-time employees, 108 of whom were engaged in research and development activities, 6 of whom were engaged in
business development and 13 of whom conducted general and administrative functions. Of the 108 employees engaged in research and development activities, 52 were engaged in providing pharmacogenomic
support services, 37 were engaged in bioinformatics, software development and information technology, 10 were engaged in medical affairs activities, 5 were engaged in population
genomics and 4 were engaged in intellectual property. Twenty-nine of our employees hold Ph.D. and/or M.D. degrees and 22 hold other advanced degrees.

None
of our employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be good.

ITEM 1A. EXECUTIVE OFFICERS

Set forth below is certain information regarding our current executive officers, including their respective ages as of March 15, 2004:

|Name                     |  | Age |  | Position                                             
|------------------------ |  | --- |  | -----------------------------------------------------
|Kevin Rakin              |  | 43  |  | President, Chief Executive Officer and Director      
|Gerald F. Vovis, Ph.D.   |  | 61  |  | Executive Vice President and Chief Technology Officer
|Richard S. Judson, Ph.D. |  | 45  |  | Senior Vice President and Chief Scientific Officer   
|Ben D. Kaplan            |  | 46  |  | Senior Vice President and Chief Financial Officer    

Kevin Rakin.Mr. Rakin was appointed as our Chief Executive Officer, in addition to President, in August 2002.
He co-founded Genaissance and has served as a Director since 1995. Mr. Rakin has served as our President since October 2000. From January 1997 through August 2002,
Mr. Rakin also served as Chief Financial Officer and, from January 1997 to October 2000, as our Executive Vice President. Prior to 1998, Mr. Rakin was also a Principal at
the Stevenson Group, a consulting firm, where he provided financial and strategic planning services to high-growth technology companies and venture capital firms. Prior to this, Mr. Rakin was a
manager with Ernst & Young's entrepreneurial services group. Mr. Rakin
holds a B.S. in business and a M.S. in finance from the University of Cape Town and a M.B.A. from Columbia University.

Gerald F. Vovis, Ph.D.Dr. Vovis was appointed as our Executive Vice President, in addition to our Chief Technology
Officer, in April 2002. He has served as our Chief Technology Officer since October 2000. From October 2000 to April 2002, Dr. Vovis was our Senior Vice President
and, from April 1999 to October 2000, was our Senior Vice President of Genomics. From 1980 to 1999, he was affiliated with Genome Therapeutics Corporation, a genomics company, most
recently as Senior Vice

18

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President
of Scientific Affairs. Dr. Vovis has twenty-three years of experience in the management of genetic research and in the development and management of collaborative research programs
with pharmaceutical and biotechnology companies. Dr. Vovis holds a B.A. in chemistry from Knox College and a Ph.D. in biology from Case Western Reserve University.

Richard S. Judson, Ph.D.Dr. Judson was appointed Senior Vice President and Chief Scientific Officer in
September 2003. He had served as our Senior Vice President of Medical Affairs and Informatics since August 2002. From April 2000 to August 2002, Dr. Judson was our
Senior Vice President of Informatics and, from November 1999 to April 2000, was our Vice President of Informatics. He joined Genaissance in February 1999 as our Associate
Director, Bioinformatics. From January 1997 to February 1999, Dr. Judson served as Group Leader in the Bioinformatics Department of CuraGen Corporation, a genomics company, where
he was responsible for developing software for protein-protein interactions and DNA sequence analysis. From January 1990 to December 1996, he served as Senior Member of the Technology
Staff at Sandia National Laboratories, leading modeling projects in several areas including computational drug design, protein modeling and sequence analysis. He holds a B.A. in chemistry and physics
from Rice University and a M.A. and a Ph.D. in chemistry from Princeton University.

Ben D. Kaplan.Mr. Kaplan has served as our Senior Vice President and Chief Financial Officer since May 2003.
From January 2003 to May 2003, Mr. Kaplan was Senior Vice President Finance and Administration and CFO of Ikonisys, Inc., an emerging diagnostic company. From
November 2002 to January 2003, he was a consultant to Ikonisys, Inc. From November 2001 to November 2002, following the sale of Packard Bioscience Company to
PerkinElmer, Inc., Mr. Kaplan was a consultant to PerkinElmer. From February 1997 to November 2001, he was Vice President and CFO at Packard Bioscience Company. At Packard,
Mr. Kaplan was involved in all aspects of corporate transactions, including the $750 million sale of the company to PerkinElmer as well as nine acquisitions over a four-year period. In
addition, he led the company's $100 million initial public offering in April 2000 and $300 million corporate recapitalization. Mr. Kaplan also had responsibility for
treasury, risk management, accounting, information technology and other administrative departments. A certified public accountant, he was previously an audit partner in the Hartford and New Haven,
Connecticut offices of Arthur Andersen LLP. Mr. Kaplan received a B.S. in business administration and a M.S. in public accounting from the University of Hartford.

ITEM 2. PROPERTIES

Our executive offices and laboratories are located at Five Science Park, New Haven, Connecticut. We lease nearly 72,000 square feet of space, under a lease
expiring on September 30, 2006, which we may extend for two 5 year periods. We have approximately 20,000 square feet of laboratory and office space at 2500 Paramount Parkway,
Morrisville, North Carolina, which is on an annual lease renewable through February 2005, under which either party may cancel the lease by providing 6 months notice to the other party.
We expect to move to a different facility in North Carolina in the second half of 2004.    We believe that our current facilities in Connecticut, including an option we have for additional
space, are suitable to meet the needs of our Connecticut operations for the foreseeable future. We believe additional space in Connecticut will be available on commercially reasonable terms, if
required.

ITEM 3. LEGAL PROCEEDINGS

We from time to time, are subject to legal claims arising in connection with our business. While the ultimate results of the legal claims cannot be predicted with
certainty, at December 31, 2003, there were no asserted claims against us which, in the opinion of management, if adversely decided would have a material adverse effect on our financial
position and cash flows.

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

No matters were submitted to stockholders for a vote during the fourth quarter of 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSURER PURCHASES OF EQUITY SECURITIES

Our common stock is currently quoted on The NASDAQ National Market under the symbol "GNSC."

Our
common stock began trading on August 1, 2000 and the high and low closing sale prices per share, as reported on The NASDAQ National Market for the periods indicated, were as
follows:

High

Low2002First Quarter

$
4.58

$
2.47Second Quarter

$
2.68

$
1.32Third Quarter

$
1.35

$
0.46Fourth Quarter

$
1.40

$
0.40


High

Low2003First Quarter

$
1.75

$
0.87Second Quarter

$
2.00

$
1.16Third Quarter

$
1.99

$
1.11Fourth Quarter

$
3.20

$
2.10


As
of March 15, 2004, there were approximately 234 holders of record of our common stock. As of March 15, 2004, the last reported sale price of our common stock on The
NASDAQ National Market was $3.45 per share.

Dividend Policy

We have never paid cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain
future earnings, if any, for use in the development, operation and expansion of our business. Covenants in our term loan agreement with Comerica Bank impose restrictions on our ability to pay cash
dividends. In addition, we cannot pay dividends on our common stock without the prior consent of holders of 662/3% of the outstanding shares of our series A preferred stock. The
holders of shares of our outstanding series A preferred stock would share pro rata in any dividends we pay on our common stock.

Recent Sales of Unregistered Securities

In October 2003, we sold 270,000 shares of newly designated redeemable convertible Series A preferred stock to a new stockholder for an aggregate
price of $6.1 million and net proceeds of approximately $5.9 million. In addition, we issued the investor a warrant, exercisable through December 31, 2005, to purchase an
additional 190,000 shares of series A preferred stock at a purchase price of $22.50 per share.

In
September 2003, in connection with our loan agreement, we issued a warrant to Comerica Bank, N.A., exercisable through September 30, 2010, to purchase 132,000 shares of
our common stock at a purchase price of $1.90 per share.

We
offered and sold the series A shares and warrants to these investors, who are "accredited investors," without registration under the Securities Act of 1933, as amended, or the
securities laws of certain states, in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D thereunder and in reliance on similar exemptions under
applicable state laws.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K. In May 2003, we acquired certain assets of DNA Sciences, Inc.,
which we accounted for under the purchase method of accounting. Accordingly, the financial data below includes the results of operations of DNA Sciences from the date of acquisition. The selected
balance sheet data set forth below, as of December 31, 2003 and 2002 and the statements of operations data for the years ended December 31, 2003 and 2002, are derived from our financial
statements, which have been audited by PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere in this Annual Report on Form 10-K. Financial statements for fiscal years
1999 through 2001 were audited by Arthur Andersen LLP (Andersen) which has ceased operations. A copy of the report previously issued by Andersen on our financial statements as of December 31,
2000 and 2001 and for each of the three years in the period ended December 31, 2001 is included elsewhere in this Annual Report on Form 10-K. Such report has not been reissued by
Andersen. The historical results are not necessarily indicative of the results we expect for future periods. This data is in thousands, except per share data.

|                                                                      |                             | Year Ended December 31, |        
|--------------------------------------------------------------------- | --------------------------- | ----------------------- | -------
|
|Consolidated Statements of Operations Data:                           |                             |                         |        
|Revenues:                                                             |                             |                         |        
|                                                                      | License and service         |                         | $      
|                                                                      | Laboratory service          |                         |        
|                                                                      |                             |                         |        
|Total revenue                                                         |                             |                         | 12,519 
|                                                                      |                             |                         |        
|Operating expenses:                                                   |                             |                         |        
|                                                                      | Cost of laboratory services |                         |        
|                                                                      | Research and development    |                         |        
|                                                                      | General and administrative  |                         |        
|                                                                      | Impairment of fixed assets  |                         |        
|                                                                      | Other                       |                         |        
|                                                                      |                             |                         |        
|Total operating expenses                                              |                             |                         | 31,005 
|                                                                      |                             |                         |        
|Operating loss                                                        |                             |                         | (18,486
|Interest expense                                                      |                             |                         | (872   
|Interest income                                                       |                             |                         | 320    
|State income tax benefit (expense)                                    |                             |                         | 580    
|Equity in loss of affiliate                                           |                             |                         | (100   
|                                                                      |                             |                         |        
|Net loss                                                              |                             |                         | (18,558
|Preferred stock dividends and accretion                               |                             |                         | (74    
|Beneficial conversion features                                        |                             |                         | (2,204 
|                                                                      |                             |                         |        
|Net loss applicable to common stockholders                            |                             | $                       | (20,836
|                                                                      |                             |                         |        
|Net loss per common share, basic and diluted                          |                             | $                       | (0.91  
|                                                                      |                             |                         |        
|Shares used in computing net loss per common share, basic and diluted |                             |                         | 22,969 
|                                                                      |                             |                         |        

|                                                   |  | December 31, |         
|-------------------------------------------------- |  | ------------ | --------
|
|Consolidated Balance Sheet Data:                   |  |              |         
|Cash, cash equivalents and marketable securities   |  | $            | 16,804  
|Total assets                                       |  |              | 35,589  
|Long-term liabilities                              |  |              | 12,713  
|Redeemable convertible preferred stock and warrant |  |              | 5,932   
|Accumulated deficit                                |  |              | (212,160
|Total stockholders' equity (deficit)               |  |              | 8,397   

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

You should read the following discussion and analysis of our financial condition and results of operations together with "Selected
Consolidated Financial Data" and our financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. In addition to the historical information, the discussion
in this Annual Report contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking
statements due to the factors set forth under "Factors Affecting Future Operating Results" below and elsewhere in this Annual Report

Common Terms

HAPTechnologythe key components of ourHAPTechnology are: a database of highly-informative, proprietary measures of genomic variation, or haplotypes, which we callHAPMarkers, for
pharmaceutically relevant genes; a proprietary informatics system, which we callDecoGen, including unique algorithms, for defining patient populations
with different drug responses; a cost-effective, efficient process for measuring genomic variation in clinical DNA samples, which we callHAPTyping;
GLP compliant DNA banking and genotyping services and clinical genetics development skills.

STRENGTH
program (Statin Response Examined by GeneticHAPMarkers)this program was designed to apply our HAPTechnology and our clinical genetics development
skills to the statin class of drugs, which doctors use to treat patients with high cholesterol and
lipid levels and who are, therefore, at risk for cardiovascular disease.

CARING
program (Clozapine and Agranulocytosis Relationships investigated by Genetics (HAP Markers))this program was designed to identify which of our HAPMarkers define the patients who are most likely
to develop agranulocytosis, a potentially life-threatening depletion of white blood cells, if
treated with clozapine.

Cardiac
Channelopathies programThis program was designed to develop a CLIA compliant genetic test for detecting cardiac ion channel mutations. Cardiac channelopathies,
including familial Long QT (LQT) and Brugada Syndromes, are conditions that affect the electrical system of the heart. These conditions are caused by genetic mutations that result in structural
abnormalities in the potassium and sodium channels of the heart and predispose affected individuals to an abnormal heart rhythm (arrhythmia). Familial LQT and Brugada Syndromes are commonly seen in
apparently healthy, active adolescent patients. If left undiagnosed and untreated, these conditions can be fatal. This DNA-based test utilizes intellectual property that we acquired when we purchased
substantially all of the assets of DNA Sciences, Inc. in May 2003. We will also seek to discover genetic markers that are predictive of QT prolongation and arrhythmias, which are drug
induced and occur in patients with other disorders, such as congestive heart failure.

Overview

We are a leader in the discovery and use of human gene variation for the development of a new generation of DNA-based diagnostic and therapeutic products. Our
technology, services and clinical development expertise are marketed to pharmaceutical, biotechnology and diagnostic companies, as a comprehensive solution to their pharmacogenomic needs. Our goal is
to improve drug development, drug therapy prescribed by physicians and the quality of a patient's life by elucidating the role of genetic variation in drug response. Additionally, we provide DNA
banking and research, and genotyping and related services, to a variety of companies in accordance with Good Laboratory Practices.

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Since
our inception, we have incurred significant operating losses, and, as of December 31, 2003, we had an accumulated deficit of $212.2 million. The majority of our
operating losses have resulted from costs we incurred developing ourHAPTechnology, in our clinical trials and administrative costs associated with
operations. As part of ourHAPTechnology platform, we continue to populate our database withHAPMarker
information for pharmaceutically relevant genes. As of December 31, 2003, we had a total of 7,616 genes in our database with 1,428 of these genes having been added during the year ended
December 31, 2003, and 1,403 genes having been added during the year ended December 31, 2002. There is not necessarily any correlation between the costs incurred in any period and the
number of genes added to the database in that period. This is due to the fact that the size of the gene and, therefore, the amount of work involved varies from gene to gene. In addition, after a gene
is sequenced it must be analyzed and go through an internal quality assurance check before it is added to the database. This process may cause a gene sequenced in one period to be added to the
database in a different period. Furthermore, since additional information about genes continues to be discovered, we may resequence genes previously included in the database and do further quality
assurance analysis. We expect to dedicate a significant portion of our resources for the foreseeable future to servicing ourHAPTechnology customers
and STRENGTH program customers, our pharmacogenomics support services customers, our CARING program, to develop our LQT genetic program and to maintain our HAPTechnology. To date, our revenue has been
primarily from licensing and service fees from our agreements with AstraZeneca UK Limited, Biogen
Idec, Inc., Gene Logic, Inc., Johnson & Johnson
Pharmaceutical Research & Development (J&J PRD), Millennium Pharmaceuticals, Inc. and Pfizer, Inc., as well as a sublicensing agreement with Visible Genetics, Inc. and, to
a lesser extent, government grants.

Acquisitions



On December 18, 2003, we entered in to an Agreement and Plan of Merger (the "Merger Agreement") with Lark Technologies, Inc. ("Lark") under which we
plan to acquire Lark in a stock-for-stock exchange. Each Lark shareholder would receive 1.81 shares of our common stock for each share held of Lark. If the merger had occurred on December 31,
2003, the former Lark shareholders would have held approximately 19.8% of total outstanding shares of Genaissance on a fully diluted basis. A joint proxy/prospectus has been declared effective by the
SEC and the shareholder meetings to vote on the merger are scheduled to take place on April 1, 2004. We expect to close this transaction early in the second quarter of 2004.

Lark
provides contract molecular biology services to the pharmaceutical, biotechnology and agbio industries at its facilities in Houston and the UK. Lark's contract research service
portfolio consists of over a hundred different molecular biology services in the areas of nucleic acid extraction services, DNA sequencing services, genetic stability testing services, gene expression
and detection services, and custom molecular biology services.

We
will record the transaction as a purchase for accounting purposes and allocate the purchase price of approximately $22.8 million to the assets purchased and liabilities assumed
based upon their respective fair values. We will allocate the excess of the purchase price over the estimated fair market value of the net tangible assets acquired to identified intangibles with
estimated useful lives as follows: backlog1 year; customer relationships15 years; and GLP certification and trade nameindefinite. We currently
estimate the resulting goodwill will be approximately $9.3 million however, the ultimate amount will be dependent upon the closing balance sheet of Lark. Based on our initial estimates of
acquired intangibles, we would expect to incur charges for amortization of intangibles of approximately $680,000 in the first twelve months post-closing and approximately $480,000 per year thereafter.

23

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Our
consolidated financial statements will include the results of operations and cash flows of Lark from the closing date. We expect that although Lark will contribute positive operating
results, we will still incur net losses in the foreseeable future. The extent of the benefits received from the acquisition will depend upon how quickly we are able to integrate Lark's operations with
our operations including sales forces and operational efficiencies.



On May 15, 2003, under order of the United States Bankruptcy Court, we acquired certain assets and assumed certain liabilities of DNA Sciences, Inc.
for $1.8 million, inclusive of related fees and expenses. Included in the fees and expenses is $74,700 which represents the fair value of warrants exercisable for up to an aggregate of 75,000
shares of our common stock at an exercise price of $2.00 per share issued in connection with investment banking services performed, as well as $35,000 which represents the fair value of 25,000 shares
of our common stock we issued to a licensor in connection with a license modification. The primary assets acquired consisted of a GLP compliant DNA banking and a GLP compliant and CLIA licensed
genotyping services business and licenses and patent estates surrounding Long QT Syndrome and a thiopurine S-methyltransferase (TPMT) test as well as certain trade accounts receivable and fixed
assets. Subsequent to the closing, we entered into an amendment to an existing license agreement (the TPMT Amendment) with Prometheus Laboratories, Inc. under which we provided certain
additional rights to the TPMT test for a $675,000 cash payment, which is included in License and Service Revenue in the accompanying 2003 statement of operations. By combining DNA Sciences' offerings
of GLP compliant DNA Banking and GLP compliant genotyping services with ourHAPTechnology and high-throughput research genotyping capabilities, we
provide a broader range of offerings for the application of pharmacogenomics to the clinical development and marketing of drugs.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Our significant
accounting policies are described in Note 2 to the Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the Financial Statements and accompanying footnotes. We base our estimates on historical experience and on various other assumptions that we believe to
be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from estimates, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition
and results and require management's most subjective judgments.

Our
critical accounting policies are as follows:



Revenue recognition.We earn our revenues primarily through the licensing of our HAPTechnology and by providing research genotyping services and GLP compliant DNA banking and genotyping services. We have also entered into agreements
which provide for us to receive future milestones and royalty payments. We recognize revenue in accordance with Staff Accounting Bulletin No. 104,Revenue
Recognition(SAB 104) (which supercedes Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements),
Statement of Position 97-2,Software Revenue Recognition

24

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(SOP 97-2),
as amended by Statement of Position 98-9, and Emerging Issues Task Force Issue 00-21,Arrangements with Multiple Deliverables(EITF
00-21). In accordance with SAB 104 and EITF 00-21, we recognize annual license and subscription fees over the term of the agreement and service fees as the services are performed. For agreements with
multiple deliverables, revenue is not recognized unless the fair value of the undelivered elements can be determined and the elements delivered have stand-alone value to the customer. Future
milestones and royalty payment, if any, will be recognized when received provided that the milestone is substantive and a culmination of the earnings process has occurred. Deferred revenue results
from cash received or amounts receivable in advance of revenue recognition. The timing of revenue recognition is dependent on when contracts are signed and data is delivered and can fluctuate
significantly between periods.

Valuation of long-lived assets.We assess the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. Factors which could trigger an impairment review, include:



If
we determine that the carrying value of the long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment, we compare the
carrying value of the asset group to the undiscounted cash flows expected to be generated by the group. If the carrying value exceeds the undiscounted cash flows, an impairment charge may be needed.
To determine the amount of the impairment charge, we compare the carrying value of the applicable fixed asset group to its fair value. We determine the fair value of the fixed asset group by
discounting expected future cash flow using a discount rate determined by us to be commensurate with the risk inherent in our current business. If the fair value is less than the carrying value, such
amount is recognized as an impairment charge. If an impairment charge is required in future periods, it could result in a material, non-cash charge in our statement of operations.

During
the second quarter of 2002, we recorded a $6.0 million charge for the impairment of fixed assets. This charge related to sequencing equipment, computer hardware and
software and leasehold improvements in our DNA sequencing facility that we determined needed to be reviewed for potential impairment. As a result of our review, we determined that the carrying value
of the assets was in excess of discounted future cash flows to be generated by the asset group and we recorded a write-down of $6.0 million. We continue to review our fixed assets for potential
impairment and, based upon our current cash flow projections, have determined that there has not been an additional impairment of our fixed assets.

Research and development expenses.We record research and development expenses when they are incurred. Research and
development expenses include the following major types of costs: salaries and benefits, material and reagent costs, research license fees, clinical trial expenses, depreciation and amortization of
laboratory equipment and leasehold improvements and building and utility costs related to research space. We expense clinical trial costs as incurred based on information we receive from third parties
and estimates that we make. Our estimates may change as additional information becomes available which could cause results to vary from period to period.

25

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Results of Operations



Revenue consists primarily of revenue recognized in connection with the licensing of ourHAPTechnology and from HAPTyping and GLP compliant DNA banking and genotyping services. Revenue increased to $12.5 million in 2003 from $8.1 million in 2002.
The increase in revenue is attributable to the $675,000 license fee received from Prometheus for their expanded rights to the TPMT test under the TPMT Amendment and the approximately
$2.1 million of laboratory services revenue recognized for services provided by our GLP compliant and CLIA licensed laboratory which we acquired through the purchase of certain of the net
assets of DNA Sciences on May 15, 2003. The increase is also due to increased commercialization of ourHAPTechnology, including agreements
entered into with Millennium during 2003 and Pfizer during 2002. Revenue from J&J PRD, Millennium and Pfizer accounted for 63% of our total revenue for 2003. Revenue from Gene Logic, Inc., J&J
PRD and Pfizer, Inc. accounted for 82% of our total revenue in 2002. The contract with J&J PRD, which accounted for 23% of our revenue in 2003 expired in January 2004.

Cost
of laboratory services consists of payroll and benefits for personnel, materials and reagent costs, depreciation and maintenance and facility-related costs incurred by our GLP
compliant facility which we acquired through the acquisition of certain of the assets of DNA Sciences in May, 2003. The cost of laboratory services is $1.9 million for 2003 or 88% of the
revenue recognized by the GLP facility. We expect the cost of laboratory services to decrease as a percentage of sales as we grow our revenue in our GLP operation.

Research
and development expenses consist primarily of payroll and benefits for research and development personnel, materials and reagent costs, costs incurred in connection with
clinical trials, depreciation expense and maintenance costs for equipment used forHAPMarker discovery and HAPTyping, technology license fees and
facility-related costs. We expense our research and development costs as incurred. Research and development
costs decreased to $20.1 million in 2003 from $23.9 million in 2002. Except for clinical trial expenses, substantially all of our research and development expenditures are incurred in
processing and analyzing gene information added to ourHAPDatabase. The following is a breakdown of research and development expenses (in
thousands):

Year ended
December 31, 2003

Year ended
December 31, 2002Payroll and benefits

$
8,100

$
8,030Depreciation and amortization


6,190


7,390Material and reagent costs


2,460


1,790Technology license fees


500


3,520Repairs and maintenance


650


1,040Stock based compensation


160


100Clinical trial expenses





(720
)Other


2,040


2,750Total

$
20,100

$
23,900


The
decrease in research and development expenses in 2003 is primarily attributable to a decrease of approximately $3.0 million in technology license fees and a decrease of
approximately $1.2 million in depreciation and amortization, which were partially offset by an increase of approximately $700,000 in material and reagent costs associated with the discovery of
newHAPMarkers. In addition, in 2002 we recognized a net credit of $720,000 for clinical trial expense based on revised information received from a
clinical research organization for work performed in 2001. The decrease in technology license fees is due to the expiration of a license agreement in December 2002. The decrease in depreciation
and amortization is primarily due to the asset impairment charge recorded in the quarter end June 30, 2002

26

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as
a result of the removal of the majority of our DNA analyzers from production. The increase in material and reagent costs is primarily due to an increase in production, particularly in our HAPTyping
laboratory. We expect to continue to devote substantial resources to research and development expenses in the near future as we continue to
develop ourHAPTechnology and continue to invest in ongoing product development and improvements related to our DecoGenInformatics System. One of our
strategic goals is to in-license a compound for clinical development. Should that occur, our research and
development expenses would increase.

General
and administrative expenses consist primarily of payroll and benefits for executive, business development, finance and other administrative personnel, as well as facility related
costs and outside professional fees incurred in connection with corporate development, general legal and financial matters. General and administrative expenses decreased to approximately
$8.7 million in 2003 from $8.8 million in 2002. The decrease in general and administrative expenses in 2003 is due to a general reduction in expenses as part of our cost reduction
program initiated during 2002.

Other
expense for 2003 represents a loss on leased equipment of approximately $368,000, as a result of our disposition of assets upon an early termination of capital lease agreements.

Interest
expense decreased to approximately $872,000 in 2003 from $3.5 million in 2002. The decrease is primarily due to recording additional interest expense during 2002, in
connection with certain events of default under our capital lease agreements with GE and Finova. During 2002, we received notices from GE and Finova claiming that an event of default had occurred
under our lease agreements. Because of the alleged default, GE and Finova each declared that all principal and future interest obligations were immediately due and payable. In March 2003, we
settled the default claim with GE. As a result of Finova's outstanding default claim, we recorded an additional interest charge of approximately $1.8 million, which represented the future
interest due under the Finova lease agreements in 2002. During 2003, we terminated our agreements with both GE and Finova and paid all outstanding amounts due under the lease agreements.

Interest
income decreased to approximately $320,000 in 2003 from $1.0 million in 2002. The decrease is the result of higher cash, cash equivalents and short-term investment
balances in 2002 and lower interest rates on investments during 2003.

State
income tax (expense) benefit increased to a benefit of $580,000 in 2003 from an expense of $35,000 in 2002. The benefit represents a net tax benefit from the State of Connecticut
(the State) as a result of legislation which allows companies to receive cash refunds from the State at a rate of 65% of their incremental research and development tax credit, as defined, in exchange
for foregoing the carryforward of the research and development tax credit. The State had allowed the exchange program to lapse for the 2002 tax year, however, during 2003, the State passed legislation
to reinstate the program for the 2002 through 2004 tax years and, therefore, we recorded a benefit for the 2002 and 2003 tax years during 2003.

Equity
in loss of affiliate of $100,000 in 2003 represents our percentage interest in the unaudited losses of Sciona Limited (Sciona) based on our 37% equity interest in Sciona. In
November 2003, we granted Sciona a license to our technology in exchange for an equity interest. The loss recognized relates only to the portion of the year in which we had an equity interest
in Sciona. We expect that the loss from Sciona will average approximately $150,000 per quarter for 2004 as Sciona develops its products and commercialization plans.

During
the fourth quarter of 2003, we issued shares of Series A Redeemable Convertible Preferred Stock and immediately recognized a charge of $2.2 million associated with
the beneficial conversion feature embedded in the preferred stock. In addition, we granted a warrant to purchase additional shares of Preferred Stock and will recognize a charge of approximately
$49,000 for the beneficial conversion feature embedded in the warrant over the life of the warrant. If the warrant is exercised

27

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prior
to its expiration, we will immediately recognize any remaining charges associated with this beneficial conversion feature.



Revenue consists primarily of proceeds received in connection with the licensing ourHAPTechnology, service
revenue and sublicensing of patents. Revenue increased to $8.1 million in 2002 from $5.3 million in 2001. The increase in license revenues is attributable to the commercialization of our HAPTechnology, including agreements entered into with Biogen during 2002, AstraZeneca during 2001 and J&J PRD during 2000. Revenue from Gene Logic, J&J
PRD and Pfizer accounted for 82% and 94% of our total revenue in fiscal 2002 and 2001, respectively. Revenue from each of these customers accounted for 10% or more of our total revenue for 2002 and
2001, respectively. Revenue for fiscal 2002 includes a payment received from J&J PRD in the fourth quarter for achieving a milestone. We are recognizing the annual license and subscription fees over
the term of the agreements and the service fees as the services are performed. Future milestone and royalty payments, when and if received, will be recognized when earned. Revenue also includes the
amortization, over the remaining
life of the sublicensed patent, of upfront payments received in connection with the sublicensing of a patent.

Research
and development costs decreased to $23.9 million in 2002 from $46.4 million in 2001. Except for clinical trial expenses, substantially all of our research and
development expenditures are incurred in processing and analyzing gene information added to ourHAPDatabase. The following is a breakdown of research
and development expenses (in thousands):

Year ended
December 31, 2002

Year ended
December 31, 2001Payroll and related expenses

$
8,030

$
10,570Depreciation and amortization


7,390


7,850Consumables


1,790


7,120Technology license fees


3,520


4,670Repairs and maintenance


1,040


1,100Stock based compensation


100


350Clinical trial expenses


(720
)

8,740Other


2,750


5,900Total

$
23,900

$
46,300


The
decrease in research and development expenses in 2002 is primarily attributable to a decrease of approximately $9.5 million in expenditures related to our clinical trials, a
decrease of approximately $5.3 million in material and reagent costs associated with the discovery of newHAPMarkers, a decrease of
approximately $2.5 million in payroll and related costs and a decrease of approximately $1.2 million in technology license fees. The decrease in clinical trial expenses is primarily due
to the STRENGTH Trials, which were substantially completed by December 31, 2001. The decrease in material and reagent costs is primarily due to a reduction in DNA sequencing consistent with the
removal of the majority of our DNA analyzers from production in the quarter ended June 30, 2002. The decrease in payroll and related costs is primarily due to the work force reduction in
connection with our restructuring program.

General
and administrative expenses consist primarily of payroll and benefits for executive, business development, finance, public affairs and other administrative personnel, as well as
facility related costs and outside professional fees incurred in connection with corporate development, general legal and financial matters. General and administrative expenses decreased to
approximately $8.8 million in 2002 from $11.9 million in 2001. The decrease in general and administrative expenses in

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2002
is primarily due to a $2.8 million decrease in consulting and professional service fees and a general reduction in expenses as part of our cost reduction program initiated during 2002.

The
$6.0 million impairment of fixed assets charge relates to sequencing equipment, computer hardware and software and leasehold improvements in our DNA sequencing facility.
During the quarter ended June 30, 2002, management determined that certain conditions had arisen during the quarter that triggered the need for a review of our long-lived assets for potential
impairment. These conditions included, but were not limited to, the overall business climate in which we operate and a significant change in the manner in which we were utilizing our DNA sequencing
facility and related assets. In particular, during the quarter ended June 30, 2002, we determined that our sequencing production capacity significantly exceeded our forecasted demand for the
foreseeable future, which resulted in our decision to remove from production the majority of its ABI Prism® 3700 DNA Analyzers, the primary assets of the group. Accordingly, we performed
an impairment review on our sequencing long-lived assets. As a result of the review, we determined that the carrying value of the assets was in excess of the projected undiscounted cash flows to be
generated by the asset group. To determine the amount of the impairment charge, we compared the carrying value of the applicable fixed assets to their fair value. We determined the fair value of the
fixed assets by discounting expected future cash flows using a discount rate determined by management to be commensurate with the risk inherent in its current business. As a result of the analysis, we
determined that the carrying value of the assets was in excess of discounted future cash flows to be generated by the asset group and we recorded a write-down of $6.0 million. The impairment
charge has been allocated to the individual assets on a pro-rata basis. The revised carrying value of the assets is being depreciated over the average remaining life of the primary assets of the
group.

Interest
expense increased to approximately $3.5 million in 2002 from $2.6 million in 2001. The increase is primarily due to recording additional interest expense during
the quarter ended December 31, 2002, in connection with certain events of default. In December 2002, we received a notice from GE claiming
that an event of default had occurred under our lease agreement as a result of an alleged material adverse change in our business. Because of the alleged default, GE declared that all principal and
future interest obligations were immediately due and payable. GE also filed a complaint in the Superior Court of the State of Connecticut, demanding payment of all amounts due under the lease
agreement. We also received a notice from Finova, stating that as a result of the default claim by GE, there had been a cross-default under the agreement with Finova. Finova declared that all
principal and future interest obligations were immediately due and payable. In March 2003, we settled the claim with GE and simultaneously amended our lease agreement. In connection with the
amendment, GE retroactively rescinded their default claim and both parties have withdrawn from any legal action. As we had not entered into a settlement agreement with Finova, we recorded an
additional charge to interest expense to reflect the fact that all future interest and principal is currently due and payable under the Finova capital lease agreement.

Interest
income decreased to approximately $1.0 million in 2002 from $3.9 million in 2001. The decrease is the result of higher cash, cash equivalents and short-term
investment balances in 2001 and the much lower interest rates on investments during 2002.

State
income tax expense (benefit) decreased to an expense of $35,000 in 2002 from a benefit of $4.1 million in 2001. The benefit represents a net tax benefit from the State of
Connecticut as a result of legislation which allowed companies to receive cash refunds from the State at a rate of 65% of their incremental research and development tax credit, as defined, in exchange
for foregoing the carryforward of the research and development tax credit. The State of Connecticut rescinded the legislation in 2002.

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Liquidity and Capital Resources

Our liquidity requirements have historically consisted, and we expect that they will continue to consist, of capital expenditures, working capital, business
development expenses, debt service, research and development expenses, general corporate expenses and acquisitions.

We
have financed our operations primarily through the private and public sale of common and preferred stock, government research grants, payments under licensing agreements, loans and
capital leases. From inception through December 31, 2003, we have received aggregate gross proceeds of approximately $169.3 million from the issuance of common and preferred stock. In
addition, through December 31, 2003, we have received $4.5 million of government grant funding and $26.8 million from license and service fees, royalties and research contracts.
We also have received $26.2 million from capital lease financing arrangements and $13.2 million from other loans. Through December 31, 2003, we
have acquired $43.0 million of property and equipment. These assets were largely financed through capital lease financing arrangements and other loans.

Cash and Cash Equivalents

At December 31, 2003, cash, cash equivalents and short-term investments totaled $16.8 million compared to approximately $34.2 million at
December 31, 2002. Our cash reserves are held in interest-bearing, high-grade corporate bonds and money market accounts.

2003 Financing Activities



In October 2003, we sold 270,000 shares of newly designated Redeemable Convertible Series A Preferred Stock (Preferred Stock), $.001 par value per
share, to an accredited investor for $22.50 per share, resulting in proceeds of approximately $5.9 million, net of issuance costs of approximately $150,000. In addition, the investor was
granted a warrant to purchase an additional 190,000 shares of Series A Preferred Stock through December 31, 2005 at $22.50 per share. We recorded the warrant at its estimated relative
fair market value of $880,000 as a discount to the Series A preferred stock carrying value. The discount is being accreted over the period from the date of issuance to the first potential
redemption date (see below) which results in a higher recorded dividend charge. The investor is required to exercise the warrant if our stock closes above $4.00 for 23 consecutive business days. The
Preferred Stock earns dividends at the rate of 2% per annum payable in cash semi-annually in January and July. Each share of Preferred Stock is convertible into ten shares of common stock at the
option of the shareholder. On or after October 29, 2006, we can require the conversion of the Preferred Stock if our stock has traded above $7.00 for 23 consecutive business days. We will be
required to redeem, unless the holders of at least 662/3% of the Preferred Stock elect otherwise, all of the outstanding shares if a significant event, as defined, occurs prior to
October 29, 2008 or if we breach certain representations or covenants included in the certificate of designations, purchase agreement or registration rights agreement relating to the Preferred
Stock. The redemption price would equal the sum of the accreted value of the Preferred Stock, plus all accrued dividends, plus the sum of all dividends that would have accrued through
October 29, 2008. In addition, the investor has the option to require that we redeem all of the outstanding shares of Preferred Stock on either October 29, 2006, 2007 or 2008, at a
redemption price equal to the accreted value of the Preferred Stock plus all accrued dividends. We may delay such payment for up to one year, in which case the dividend rate would increase to 10% per
annum. During the fourth quarter of 2003, we immediately recognized a charge of $2.2 million associated with the beneficial conversion features embedded in the preferred stock. In addition, we
will recognize a charge of approximately $49,000 for the beneficial conversion features embedded in the warrant over the warrant exercise period.

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In September 2003, we entered into a $5.0 million Loan and Security Agreement with Comerica Bank, N.A. (Comerica). The agreement requires equal
monthly payments of principal over a 36-month period and bears interest at prime (4.0% at December 31, 2003) plus 2.5%. Borrowings under the agreement are secured by certain of our assets.
Under the terms of the agreement, we are required to satisfy certain financial covenants, including maintenance of a minimum unrestricted cash balance and a minimum quick ratio, as defined. We were in
compliance with such financial covenants as of December 31, 2003. In connection with our loan agreement, we also issued a warrant to Comerica,
exercisable through September 30, 2010, to purchase 132,000 shares of our common stock at a purchase price of $1.90 per share.



Prior to closing the loan agreement with Comerica, we elected to prepay certain capital lease obligations with Finova and Newcourt Financial USA, Inc.
(Newcourt) and paid all amounts due, including any end of lease buy out provisions for equipment retained. In connection with the Finova agreement, we paid a total of $4.2 million, which
included a prepayment discount of approximately $88,000 that was credited to interest expense in 2003. Under their original terms, the lease schedules covered by the Finova agreement would have
expired between November 2003 and August 2004. In connection with the Newcourt agreement, we paid a total of approximately $173,000 which represented all future interest and principal
due under the lease schedules which, by their original terms, would have expired in November and December 2003. We disposed of certain equipment financed under certain of the lease schedules
and recorded an additional charge of approximately $368,000 related to this equipment. In connection with the buyout, Finova and Newcourt released their liens on all purchased equipment.

In
October 2003, we terminated our capital lease obligations with General Electric Capital Corporation (GE) and paid all outstanding obligations due to GE, including the end of
lease buy out provisions. Under their original terms, the lease schedules covered by the GE agreement would have expired between October 2003 and February 2005. We made a payment of
$1.7 million to GE, which represented all principal and interest through the date of buyout as well as a prepayment penalty of approximately $126,000. As a result of the termination of the
lease, $2.1 million of previously restricted cash was released and we received full title to the equipment. During the fourth quarter of 2003 we recorded a charge of approximately $60,000 in
connection with the termination.

Cash Flows

Cash used in operations for the year ended December 31, 2003, was $13.5 million compared with $18.5 million for the same period in 2002. The
cash used in operations for the year ended December 31, 2003 resulted primarily from a net loss of $18.6 million and a $2.8 million increase in accounts receivable and other
current assets, partially offset by $7.9 million of non-cash charges for depreciation and amortization expense, loss on leased equipment, stock based compensation and the loss in the equity of
an affiliate. The cash used in operations for the year ended December 31, 2002 resulted primarily from a net loss of $33.1 million and a $4.9 million decrease in accounts payable
and accrued liabilities, partially offset by $14.2 million of non-cash charges for depreciation and amortization expense and impairment of fixed assets, a $2.6 million increase in
deferred revenue and a $2.0 million decrease in inventory, State income tax receivable and other current assets including the receipt, in September 2002, of $1.0 million from the
State of Connecticut for the sale of research and development tax credits.

Cash
provided by investing activities was $5.8 million in 2003 compared with $16.7 million in 2002. During 2003, we used $1.7 million of cash to purchase certain of
the assets of DNA Sciences, Inc. In

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addition,
during 2003 we used $1.2 million for the purchase of property and equipment, received net proceeds of $6.7 million from the sale and maturity of investments in marketable
securities and had the restriction removed on $2.1 million of cash which was provided as collateral in connection with a certain capital lease agreement we terminated in 2003. In 2002, we used
cash to purchase $70,000 of property and equipment and received proceeds of $28.5 million from the liquidation of investments in marketable securities and used cash to purchase
$9.6 million of marketable securities. In addition, in 2002, we were required to provide cash collateral of $2.1 million in connection with the letter of credit issued as part of an
amendment to a capital lease agreement.

Cash
used in financing activities was $869,000 in 2003 compared to cash used in financing activities of $6.9 million in 2002. During 2003, we received cash of approximately
$5.9 million from the issuance of preferred stock and $5.0 million from long-term debt. In addition, we terminated all of our capital lease agreements which resulted in the repayment of
approximately $11.2 million in lease obligations and the removal of the restriction on $2.1 million of cash provided as collateral in connection with the GE capital lease. During 2002,
we repaid debt of approximately $6.9 million.

Contractual Obligations

Our contractual cash obligations as of December 31, 2003, are as follows:

|                                   |  | Payments Due by Period
(in thousands)
|---------------------------------- |  | -------------------------------------
|
|Long-Term Debt, including interest |  | $                                    
|Operating Leases                   |  |                                      
|Minimum License Obligations        |  |                                      
|                                   |  |                                      
|Total Contractual Cash Obligations |  | $                                    
|                                   |  |                                      

Long-term
debt consists primarily of three financing agreements with Connecticut Innovations, Inc. (CII) and an agreement with Comerica. The funds received from CII were used to
finance certain leasehold improvements and other costs associated with our facility expansion. Each CII agreement provides for monthly payments of principal and interest, based on a 120-month
amortization, with final balloon payments due in March 2009 through June 2011. Borrowings under the agreements bear interest at 6.5% and are secured by the related leasehold
improvements. The funds received from Comerica were used to refinance certain of the amounts due under several capital lease agreements. The agreement requires ratable repayment of principal over a
36-month period and bears interest at the prime rate plus 2.5%. Borrowings under the agreement are secured by certain of our assets. We were in compliance with all debt covenants as of
December 31, 2003.

We
lease our operating facilities located in New Haven, Connecticut and Morrisville, North Carolina. The Connecticut lease agreements require annual lease payments of $1.1 million
per year over the original term which expires in 2006. We have two five-year renewal options to extend the lease agreements beyond the initial term and we have assumed that one five-year renewal
option was exercised in the table above. We are recording the expense associated with the lease on a straight-line basis over the expected term of the lease. The North Carolina agreement requires
annual lease payments of approximately $612,000 through February, 2005. Either party may cancel the North Carolina lease by providing 6 months notice to the other party. We expect to move to a
different facility in North Carolina in the second half of 2004 at a reduced rental rate. In addition to the operating lease agreements for our current facilities, we also have operating leases for
various office equipment.

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In
addition, we periodically enter into agreements with third parties to obtain exclusive or non-exclusive licenses for certain technologies. The terms of certain of these agreements
require us to pay future royalty payments and certain milestone payments based on product sales or sublicense income generated from applicable technologies, if any. The amount of such payments will
depend upon successful commercialization of applicable technologies, if any. The future minimum payments (assuming non-termination of these leases) are included in the minimum license obligations
above.

Short-Term Funding Requirements

We believe that our existing cash reserves will be sufficient to fund our expected net losses, debt obligations and capital expenditures for at least the next
18 months based upon our current activities. For the next 18 months, we expect to continue to finance our operations from cash we received in October 2003 from the sale of our
Series A preferred stock and revenue from ourHAPTechnology customers and our pharmacogenomic support service customers. Our business strategy
depends on, among other things, entering intoHAPTechnology agreements with pharmaceutical and biotechnology companies. If we are unsuccessful in
marketing our programs and growing our service revenues, we may not generate sufficient revenues to sustain our operations at planned levels. During the next 18 months, we expect to expend
substantial funds to conduct research and development activities and other general and administrative activities. Our expenditures for these activities will include required payments under operating
leases and long-term debt agreements and licensing, collaboration and service agreements as noted in the table above. Capital expenditures are not currently expected to exceed $1.5 million for
each of fiscal 2004 and 2005.

Long-Term Funding Requirements

For periods beyond 18 months, even if we grow our revenues significantly, we will need to seek additional funding through public or private equity
financings, debt financings or commercial customers. Our business strategy depends on, among other things, entering into partnership agreements with pharmaceutical and biotechnology companies and
growing the revenue from our pharmacogenomic support services business. We cannot assure you that we will obtain additional customers or capital funding on acceptable terms, if at all. If we are
unsuccessful in obtaining new customers for ourHAPTechnology, growing the revenue from our pharmacogenomic support services business, or obtaining
additional financing funds, we may not generate sufficient funds to sustain our operations at planned levels, and we may have to delay, reduce the scope of, or eliminate one or more of aspects of our
business development activities. In addition, we cannot incur indebtedness above certain levels or issue any capital stock or other equity securities having rights, preferences, privileges or
prioritiespari passuwith or senior to the Series A preferred stock without the vote or written consent of holders of at least
662/3% of the Series A shares then outstanding.

Our
cash requirements in the long term will vary depending upon a number of factors, many of which are beyond our control, including:



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Income Taxes

We have not generated any taxable income to date and, therefore, have not paid any federal income taxes since inception. On December 31, 2003, we had
available unused net operating loss carryforwards of approximately $133.6 million and $131.8 million, which may be available to offset future federal and state taxable income,
respectively. Use of our federal and state net operating loss carryforwards, which will begin to expire in 2007 and 2004, respectively, may be subject to limitations. The future utilization of these
carryforwards may be limited due to changes within our current and future ownership structure. We have recorded a full valuation allowance against our deferred tax assets, which consists primarily of
net operating loss carryforwards, because of uncertainty regarding their recoverability, as required by Statement of Financial Accounting Standards No. 109Accounting
for Income Taxes.

Recent Accounting Pronouncements

In December 2003, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin 104,Revenue
Recognition(SAB 104), which supercedes SAB 101,Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is
to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, as a result of the issuance of EITF 00-21,Accounting for Revenue
Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the SEC'sRevenue Recognition in Financial Statements Frequently Asked Questions
and Answers(the "FAQ") issued with SAB 101 that had been codified in SEC Topic 13,Revenue Recognition. Selected portions of
the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by
the issuance of SAB 104. Adoption of SAB 104 was required immediately and did not have a material effect on our financial statements.

In
December 2003, the Financial Accounting Standards Board (FASB) issued a revision to Interpretation No. 46 (FIN 46R),Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51, which was issued in January 2003. FIN 46R clarifies the application of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R, which was issued in January 2003, requires the
consolidation of these entities, known as variable interest entities ("VIEs"), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of
the entity's expected losses, receive a majority of the entity's expected residual returns, or both. Among other changes, the revisions of FIN 46R clarified some requirements of the original FIN 46,
eased some implementation problems and added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period ending after
March 15, 2004, except that all public companies must, at a minimum, apply the provisions of the Interpretation to entities that were previously considered "special-purpose entities" under the
FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003. During the year ended December 31, 2003, adoption of FIN 46R did
not have a material impact on our financial statements. FIN 46R will require reassessment in future periods.

In
November 2003, the Emerging Issues Task Force reached consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments. EITF Issue No. 03-1 requires tabular disclosure of the amount of unrealized losses and the related fair value of investments with
unrealized losses aggregated for each category of investment that is disclosed in accordance with SFAS No. 115. In addition, it requires sufficient narrative disclosure to allow financial
statement users to understand both the aggregated tabular information and the positive and negative

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information
considered in reaching the conclusion that the impairments are not other-than-temporary. The adoption of EITF Issue No. 03-1 did not have a material impact on our financial
statements.

In
May 2003, the FASB issued Statement No. 150 (SFAS No. 150),Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. SFAS No. 150 specifies that instruments within its scope embody obligations of the issuer and that the issuer must classify them as liabilities.
SFAS No. 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments,
(2) obligations to repurchase the issuer's equity shares by transferring assets, and (3) certain obligations to issue a variable number of shares. SFAS No. 150 defines a
"freestanding financial instrument" as a financial instrument that (1) is entered into separately and apart from any of the entity's other financial instruments or equity transactions or
(2) is entered into in conjunction with some other transaction and can be legally detached and exercised on a separate basis. For all financial instruments entered into or modified after
May 31, 2003, SFAS No. 150 is effective immediately. For all other instruments of public companies, SFAS No. 150 went into effect at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our financial statements. In November 2003, the FASB deferred the effective date for
selected provisions of SFAS No. 150, limited to mandatorily redeemable, noncontrolling interests associated with finite-lived subsidiaries. The deferral of those selected provisions is not
expected to have a material impact on our financial statements.

Factors Affecting Future Operating Results

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. For this purpose, statements contained herein regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and
objectives of management, other than statements of historical fact may be forward-looking statements. The words "believes," "anticipates," "plans," "expects" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions or
expectations expressed or implied in our forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ
materially from those expressed or implied. These important factors include our "critical accounting estimates" and the factors set forth below.

We are an early stage company with a history of losses and we expect to incur net losses for the foreseeable future such that we may never be profitable.

We have incurred substantial operating losses since our inception. For example, for the fiscal years ended December 31, 2003 and 2002, we had an operating
loss of approximately $18.5 million and $30.6 million, respectively. As of December 31, 2003, we have generated only minimal revenue from our HAPTechnology and our pharmacogenomic
support services, and we do not expect to generate significant revenues for several years. From inception through
December 31, 2003, we had an accumulated deficit of approximately $212.2 million. Our losses to date have resulted principally from costs we incurred in the development of our HAPTechnology,
in our clinical trials and from general and administrative costs associated with operations. We expect to devote substantially all of
our resources to service ourHAPTechnology customers and STRENGTH program customers, our pharmacogenomic support services customers and our CARING and
Long QT genetic programs and to maintain ourHAPTechnology.

We
expect to incur additional losses this year and in future years, and we may never achieve profitability. In addition, pharmaceutical and biotechnology companies are only now beginning
to use products such as ours in their drug and diagnostic development or marketing efforts and, accordingly, they may not choose to use ourHAPTechnology. We do not expect our losses to be substantially mitigated by revenues from ourHAPTechnology customers and STRENGTH programs, and our
CARING and Long QT genetic programs, if any, or from our pharmacogenomic support services for a number of years.

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We currently rely on a limited number of licensing and service arrangements for substantially all of our revenues. As a result, the loss of one major customer or our inability
to secure additional significant customers during a given period would have an adverse effect on our business and operating results.

We are dependent upon a limited number of licensing and service arrangements that represent substantially all of our revenues. In the year ended
December 31, 2003, three of our customers, J&J PRD, Millennium Pharmaceuticals, Inc. and Pfizer, Inc., accounted for 63% of our revenues. The agreement with one of the
customers who accounted for 23% of the revenue for the year expired in the first quarter of 2004. No other customer accounted for 10% or more of our revenues in the year ended December 31,
2003. If we are unable to replace in a timely fashion, upon substantially similar financial terms, the agreement that expired in the first quarter of 2004, or if we lose and are not able to replace
customers that provide us with significant revenues, it could have a material adverse effect on our revenues and on our business in general and could cause volatility or a decline in our stock price.

To generate significant revenues, we must obtain additional customers for ourHAPTechnology and our STRENGTH, CARING and Long
QT genetic programs and for our pharmacogenomic support services.

Our strategy depends on entering into agreements with pharmaceutical and biotechnology companies for ourHAPTechnology and our STRENGTH, CARING and Long QT genetic programs and obtaining additional customers for our pharmacogenomic support services. Our contracts with many of our HAPTechnology customers and
for our pharmacogenomic support services are for specific limited-term projects. We may not be successful in obtaining
additional customers for ourHAPTechnology and our STRENGTH program or obtaining any customers for our CARING or Long QT genetic programs or obtain
sufficient new customers for our pharmacogenomic support services to replace our current projects. If we are unsuccessful in finding additional customers for our HAPTechnology and our STRENGTH program
or in finding any customers for our CARING or Long QT genetic programs or new customers for our pharmacogenomic
support services, we may never generate sufficient revenues to sustain our operations. In addition, we expect that some of our futureHAPTechnology
collaborations, like some of our currentHAPTechnology collaborations, will be limited to specific, limited-term projects or that some of these
collaborations may not be renewed. Accordingly, we must continually obtain new customers to be successful. To date, the integration of pharmacogenomics into drug development and marketing has not
achieved widespread market acceptance.

Our operating results may fluctuate significantly and any failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in our
common stock price.

Our operating results have fluctuated in the past and we expect they will fluctuate in the future. These fluctuations could cause our common stock price to
decline. Some of the factors that could cause our operating results to fluctuate include:



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Due
to volatile and unpredictable revenues and operating expenses, we believe that period-to-period comparisons of our results of operations may not be a good indication of our future
performance. It is possible that our operating results may be below the expectations of securities analysts or investors. In this event, the market price of our common stock could fluctuate
significantly or decline.

If the estimates we make, and the assumptions on which we rely, in preparing our financial statements prove inaccurate, our actual results may vary from those reflected in our
projections.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges we accrue and related
disclosure of contingent assets and liabilities. For example, we have recorded certain patent estates as long-term intangible assets based on their value at the date of acquisition. Events could occur
that would cause us to re-evaluate the life of those assets and, therefore, whether those assets have been impaired, resulting in an impairment charge. We based the estimates we make on historical
experience and on various other assumptions that we believed to be reasonable at the time and under the circumstances. If the estimates relating to our patent estate are determined to be incorrect, a
write-down may be required, which could have a material adverse effect on our financial condition. There can be no assurance that any of our estimates or the assumptions underlying our estimates will
be correct.

We may require additional funding to fund operations and repay debt and we may not be able to obtain any.

We have used substantial amounts of cash to fund our research and development activities. We will continue to spend funds to service our HAPTechnology customers and STRENGTH program customers, our pharmacogenomic support services customers and our CARING and Long QT genetic programs and
to maintain ourHAPTechnology. We plan to pay for these activities with funds from:



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We
intend to rely on our currentHAPTechnology customers and STRENGTH program customers and future program customers, if any, and our
current pharmacogenomic support services customers and future customers, if any, for significant funding in the future to support our development efforts. To execute our business plans, we will need
to grow our revenues significantly each year. We cannot be certain when we will begin to receive additional income, if at all, from ourHAPTechnology
and STRENGTH programs and our pharmacogenomic support services and income, if any, from our CARING and Long QT genetic programs. If we do not receive this income or do not receive it as rapidly as we
expect, we would spend our existing cash and investment securities more rapidly than we currently plan.

We
believe that our existing cash reserves will be sufficient to support our expected net losses, debt obligations and capital expenditures for at least 18 months. We cannot
assure you that we will be able to obtain new customers or to generate the increased revenues required to meet our business plan objectives. In addition, to execute our business plans, we may need to
seek additional funding through public or private equity offerings, debt financings or through commercial customers. We cannot assure you that we will obtain additional customers or capital funding on
acceptable terms, if at all. If we are
unable to generate sufficient revenues or access capital on acceptable terms, we may be required to obtain funds on unfavorable terms that may require us to relinquish rights to certain of our
technologies or that would significantly dilute our stockholders and/or significantly scale back current operations. Either of these two possibilities would have a material adverse effect on our
business.

OurHAPTechnology may not allow our commercial customers to develop commercial products or to increase sales of their marketed
products.

We developed ourHAPTechnology on the assumption that information about gene variation and gene variation
associated with drug response may help drug development professionals better understand the drug response of particular populations and complex disease processes. Although the pharmaceutical and
biotechnology industries are increasing their use of genomics in analyzing drug response and diseases, we are aware of only one successful drug program applying population genomics.

We
discoverHAPMarkers for pharmaceutically relevant genes. If we are unable to findHAPMarkers for pharmaceutically relevant genes in a timely manner, our potential customers may lose confidence in ourHAPTechnology and in our company,
which could decrease our ability to generate revenues. Even if we are able to discoverHAPMarkers for pharmaceutically relevant genes, this information
may not prove to be superior to genomic variation information discovered by our competitors. Furthermore, pharmaceutical and biotechnology companies may not choose our HAPTechnology over competing
technologies.

OurDecoGenInformatics System may also be less effective than we expect or may not allow us or our commercial customers to determine a
correlation between drug response and genomic variation. Furthermore, even if we or our customers are successful in identifying such a correlation, our customers may not be able to develop or sell
commercially viable products nor may our customers be able to increase the sales of their marketed products using this correlation. Accordingly, ourHAPMarkers andHAPTechnology may not improve the development, marketing and prescribing of drugs or the development and marketing of diagnostics developed
by ourHAPTechnology customers and STRENGTH program customers.

We may be unable to develop or commercialize our HAP Technology if we cannot establish additional customers and we will depend on our customers to develop or to co-develop
products.

We currently have a number of customers for ourHAPTechnology as well as an agreement with a major diagnostic
company to commercialize exclusively the diagnostic rights and non-exclusively the

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product
development rights from our STRENGTH program. We do not currently have any customers for our CARING or Long QT genetic programs. As a result, part of our current and future revenues will
depend on payments from our currentHAPTechnology customers and STRENGTH program customers and our future HAPTechnology customers if any, and future
STRENGTH, CARING and Long QT genetic program customers, if any, for either the new products they may
develop, or for increased sales of their existing products, made possible through the use of ourHAPTechnology. If we are unable to attract new HAPTechnology customers program and STRENGTH program customers or any customers for our CARING and Long QT genetic programs, we may never generate
sufficient revenues to sustain our operations.

Our
customers for ourHAPTechnology and our customers from our STRENGTH program and our customers, if any, for our CARING and Long QT
genetic programs, will be responsible for pre-clinical study and clinical development of therapeutic and diagnostic products and for regulatory approval, manufacturing and marketing of any products or
enhanced marketing claims that result from the application of ourHAPTechnology. Our current agreements with these customers, and we anticipate that
any future agreements with customers, will allow them significant discretion in pursuing these activities. We cannot control the amount and timing of resources that any such current or potential
customers will devote to our programs or potential products. OurHAPTechnology and STRENGTH program arrangements and our CARING and Long QT genetic
program arrangements, if any, may also have the effect of limiting the areas of research that we may pursue either alone or with others. Because part of our revenues will be dependent on the
successful commercialization or development of our customers' products, if, for any reason, aHAPTechnology or a STRENGTH program customer delays or
abandons its development or commercialization of a product developed using ourHAPTechnology, we may receive reduced royalty or other payments or no
royalty or other payments at all. In addition, because part of our future revenues will be dependent on the successful commercialization by our customers of any therapeutic and diagnostic products
that may result from ourHAPTechnology and STRENGTH programs as well as the successful commercialization of our CARING and Long QT genetic programs
with customers, if, for any reason, a customer delays or abandons its development or commercialization of these aspects of ourHAPTechnology or
STRENGTH program or its development or commercialization of our CARING and Long QT genetic programs, we may receive reduced royalty or other payments or no royalty or other payments at all.

Although
we intend to retain the rights to allHAPMarkers which we discover as well as to any HAPMarkers discovered jointly with ourHAPTechnology customers and STRENGTH program customers and with
our CARING and Long QT genetic program customers, if any, we have not always and may not always be able to negotiate the retention of these rights. Furthermore, disputes may arise in the future over
the ownership of rights toHAPMarkers as well as any other technology we develop with
ourHAPTechnology customers and STRENGTH program customers or with our CARING and Long QT genetic program customers, if any. These and other possible
disagreements between us and ourHAPTechnology customers and STRENGTH program customers or between us and our CARING and Long QT genetic program
customers, if any, could lead to delays in the research, development or commercialization of their products. These disagreements could also result in litigation or require arbitration to resolve. Any
of these events could prevent us from effectively marketing ourHAPTechnology.

We invest considerable amounts of time, effort, and money to license our HAP Technology and, if we are unable to license our technology, we may not generate sufficient revenue
to sustain our operations.

Our ability to obtain customers for ourHAPTechnology and our STRENGTH, CARING and Long QT genetic programs will
depend in significant part upon the pharmaceutical and biotechnology industries' acceptance that ourHAPTechnology can help accelerate or improve their
drug and diagnostic development and marketing efforts. To achieve market acceptance, we must continue to

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educate
the pharmaceutical and biotechnology industries and the public in general as to the potential benefits of ourHAPTechnology, STRENGTH, CARING
and Long QT genetic programs. Most importantly, we must convince the research and development, clinical and marketing departments of pharmaceutical and biotechnology companies that our HAPTechnology
can accelerate and improve the processes for developing, marketing and prescribing drugs and for developing and marketing diagnostics and
that ourHAPTechnology, STRENGTH, CARING and Long QT genetic programs will be commercially viable. If we fail to gain this acceptance, we may never
generate sufficient revenues to sustain our operations. We may expend substantial funds and management effort to market ourHAPTechnology, STRENGTH,
CARING and Long QT genetic programs, without any resulting revenues.

Our ability to make any acquisition is dependent on the availability of adequate cash and the attractiveness of our stock price.

We anticipate that any future acquisitions of businesses or technologies will be financed through cash from operations, the issuance of shares of our common stock
and/or seller financing. We cannot assure you that we will have sufficient existing capital resources or that we will be able to raise sufficient additional capital resources on terms satisfactory to
us, if at all, in order to meet our capital requirements for such acquisitions.

We
also believe that a significant factor in our ability to close acquisitions using stock as consideration will be the attractiveness of our common stock for potential acquisition
candidates. This attractiveness may, in large part, be dependent upon the relative market price and capital appreciation prospects of
our common stock compared to the equity securities of our competitors. The trading price of our common stock on The NASDAQ National Market could in the future materially adversely affect our
acquisition program. Because our strategy envisions that a part of our future revenue growth will come from making future acquisitions of businesses or technologies, if we are unable to identify
suitable acquisition candidates or unable to negotiate successfully their acquisition at a price or on terms and conditions favorable to us, our future revenues may be adversely impacted and we may
experience slower revenue growth.

Integration or acquisitions or strategic investments could interrupt our business and our financial condition could be harmed.

From time to time, we may acquire or make strategic investments in other businesses or technologies. For example, on May 15, 2003, pursuant to the approval
of the United States Bankruptcy Court, we purchased substantially all of the assets and assumed certain liabilities of DNA Sciences. In addition, on December 18, 2003, we entered into a merger
agreement to acquire Lark Technologies, Inc. The acquisition of DNA Sciences and the pending Lark acquisition, as well as any other acquisitions or strategic investments we may make in the
future, entail numerous risks that include the following:



Any
such difficulties encountered as a result of a merger, acquisition or strategic investment could adversely affect our business, operating results and financial condition.

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If we are unable to prevent others from unauthorized use of, or are unable to defend their use of, ourHAPTechnology, trade
secrets or know how, we may not be able to operate our business profitably.

Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. The issuance
of a patent does not guarantee that it is valid or enforceable. Thus, even if we obtain patents, they may not be valid or enforceable against third parties. Because patent applications that were filed
prior to November 29, 2000 in the United States are confidential until patents issue, third parties may have filed patent applications for technology covered by our pending patent applications
without us being aware of those applications, and our patent applications may not have priority over any patent applications of others. We are aware that there are other firms and individuals who have
discovered, or are currently discovering, information similar to the information we are discovering, who may have filed, and in the future are likely to file, patent applications that are similar or
identical to ourHAPTechnology patent applications. In addition, some interest groups are lobbying for restrictions on patenting of genetic tests.

Further,
a patent does not provide the patent holder with freedom to operate in a way that infringes the patent rights of others. A third party may sue us for infringing on its patent
rights. Likewise, we may need to resort to litigation to enforce a patent issued to us or to determine the scope and validity of third party proprietary rights. The cost to us of any litigation or
other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management's focus from our core business concerns.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the
initiation and continuation of any litigation could limit our ability to continue our operations.

We
also rely upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain our competitive position. We generally
protect this information with reasonable security measures, including confidentiality agreements signed by our employees, academic collaborators and consultants that provide that all confidential
information developed or made known to others during the course of the employment, consulting or business relationship will be kept confidential except in specified circumstances. Agreements with
employees, consultants and collaborators generally provide that all inventions conceived by the individual while employed by us are our exclusive property. If employees, consultants or collaborators
do not honor these agreements, we may not have adequate remedies for breach. Furthermore, our trade secrets may otherwise become known or be independently discovered by competitors.

If
any party should successfully claim that the creation or use of ourHAPTechnology or HAPMarker association data infringes upon their intellectual
property rights, in addition to any damages we might have to pay, a court could require us
to stop the infringing activity or obtain a license on unfavorable terms. Moreover, any legal action against us or any of our program customers claiming damages or seeking to enjoin commercial
activities relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require us or ourHAPTechnology customers and our STRENGTH program customers or any CARING and Long QT genetic program customers, if any, to obtain a license in order to continue to manufacture or market the affected
products and processes. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, some licenses may be non-exclusive and, therefore, our
competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to market effectively some of our HAPTechnology, which could limit our profitability and possibly prevent us from generating revenue sufficient to sustain our operations.

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Regulatory oversight of ourHAPTechnology and public opinion regarding ethical issues surrounding the use of genetic
information may adversely affect our ability to market our products and services.

Currently, there is limited Food and Drug Administration (FDA) regulation of genetic tests. The Secretary's Advisory Committee on Genetic Testing, an advisory
panel to the Secretary of the U.S. Department of Health and Human Services, has recommended that the FDA expand its regulation of genetic testing to require FDA approval for all new genetic tests and
labeling of genetic tests. If the FDA adopts this recommendation, it may require that we, or our customers, apply for FDA approval as a prerequisite to marketing genetic tests that incorporate our
products and services. If the FDA were to deny any application of this kind, it could adversely affect our business and we may be unable to generate sufficient revenues to sustain our operations.

The
FDA has only once required that a physician must have genomic variation information determined about a patient before the doctor prescribes a drug. In this one instance, the FDA has
stipulated that this requirement can be fulfilled with either gene expression information or genomic variation information. On November 3, 2003, the FDA issued draft guidance that encourages
drug and biologic developers to conduct pharmacogenomic tests during drug development and clarified how the FDA will evaluate the resulting data. The guidance provides specific criteria and
recommendations on the submission of pharmacogenomic data in connection with Investigational New Drug Applications, New Drug Applications and Biological License Applications. The guidance includes
information on the type of data needed and how the FDA will or will not use such data in regulatory decisions. The FDA asked for voluntary submissions of research information in order to gain
experience as the field of pharmacogenomics evolves. The FDA advised that the agency would not use information from voluntary reports for regulatory decisions on the drug or biologic with which the
voluntary data is associated. In addition, the FDA held a workshop on November 13, 2003 and November 14, 2003 to
discuss its draft guidance and stated that the agency plans in the near future to issue further guidance on the co-development of a pharmacogenomic test and drug. Our success will depend, in part, on
how rapidly the pharmaceutical and biotechnology industry implements the guidance and, accordingly, the validity of our products and services as a basis for identifying genomic variation and for
correlating drug response with genomic variation. Without this implementation by the pharmaceutical and biotechnology industry, we may be unable to market effectively any products we may have as well
as any of our services and we may not generate sufficient revenues to sustain our operations.

Within
the field of personalized health and medicine, governmental and other entities may enact patient privacy and healthcare laws and regulations that may limit the use of genomic
variation data. To the extent that these laws and regulations limit the use of our products and services or impose additional costs on our customers, we may be unable to market effectively our HAPTechnology, STRENGTH, CARING and Long QT genetic programs and we may not generate sufficient revenues to sustain our operations.

Additionally,
public opinion on ethical issues related to the confidentiality and appropriate use of genetic testing results may influence governmental authorities to call for limits on,
or regulation of the use of, genetic testing. In addition, governmental authorities or other entities may call for limits on, or regulation of the use of, genetic testing or prohibit testing for
genetic predisposition to certain conditions, particularly for those that have no known cure. The occurrence of any of these events could reduce the potential markets for our products and services,
which could prevent us from generating sufficient revenues to sustain our operations.

Furthermore,
we may be directly subject to regulations as a provider of diagnostic information. To the extent that these regulations restrict the sale of our products and services or
impose other costs, we may be unable to provide our products and services to our customers on terms sufficient to recover our expenses.

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If our customers do not seek, or do not receive, marketing approval for products developed, if any, using ourHAPTechnology, we
may receive delayed royalty or other payments or no royalty or other payments at all.

Any new drug, biologic or new drug or biologic indication our customers develop using ourHAPTechnology must
undergo an extensive regulatory review process in the United States and other countries before a new product or indication of this kind could be marketed. This regulatory process can take many years
and require substantial expense. Changes in FDA policies and the policies of similar foreign regulatory bodies can prolong the regulatory review of each new drug or biologic license application or
prevent approval of the application. We expect similar delays and risks in the regulatory
review process for any diagnostic product developed by our customers, whenever this regulatory review is required. Even if a product obtains marketing clearance, a marketed product and its
manufacturer are subject to continuing review. A manufacturer may be forced to withdraw a product from the market if a previously unknown problem with a product becomes apparent. Because our future
revenues will be dependent on the successful commercialization or development of products using ourHAPTechnology, any delay of our customers in
obtaining, failing to obtain, or failing to maintain regulatory approval for a product developed using ourHAPTechnology may delay our receipt of
royalty or other payments or prevent us from receiving royalty or other payments sufficient to recover our expenses.

If our customers are unable to obtain FDA approval for therapeutic or diagnostic products developed using ourHAPTechnology,
the lack of regulatory approval will diminish the value of ourHAPTechnology.

To date, no one has developed or commercialized any therapeutic product or commercialized any diagnostic product using our HAPTechnology.
We expect to rely on our customers to file applications for regulatory approval and generally direct the regulatory review process and
obtain FDA acceptance of products developed with ourHAPTechnology and STRENGTH programs and our CARING and Long QT genetic programs, if any. Our
program customers may not submit an application for regulatory review. Even if they do submit applications, they may not be able to obtain marketing clearance for any products on a timely basis, if at
all. If our customers fail to obtain required governmental clearances for therapeutic or diagnostic products, they will not be able to market these products unless and until they obtain these
clearances. As a result, we may not receive royalty or other payments from our customers. The occurrence of any of these events may prevent us from generating revenues sufficient to sustain our
operations.

If we do not successfully distinguish and commercialize ourHAPTechnology, we may be unable to compete successfully with our
competitors or to generate revenue significant to sustain our operations.

Numerous entities are attempting to identify genomic variation predictive of specific diseases and drug response and to develop products and services based on
these discoveries. We face competition in these areas from pharmaceutical, biotechnology and diagnostic companies, academic and research institutions and government and other publicly-funded agencies,
both in the United States and abroad, most of which have substantially greater capital resources, research and development staffs, facilities, manufacturing and marketing experience, distribution
channels and human resources than do we.

These
competitors may discover, characterize or develop important technologies applying population genomics before us or our customers for our HAPTechnology and STRENGTH programs that are more effective than
those technologies which we develop or which our customers for our HAPTechnology and STRENGTH programs develop, or these competitors may obtain regulatory approvals of their drugs and diagnostics more
rapidly than our
customers for ourHAPTechnology and STRENGTH programs do, any of which could limit our ability to market effectively our HAPTechnology.

43

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Some
companies and governments are marketing or developing a number of databases and informatics tools to assist participants in the healthcare industry and academic researchers in the
management and analysis of genomic data. Entities such as Perlegen Sciences, Celera Genomics Group and the International HapMap Project have developed or plan to develop databases containing gene
sequence, genomic variation or other genomic information and are marketing or plan to market their data to pharmaceutical and biotechnology companies or plan to make freely available their databases.
In addition, numerous pharmaceutical and biotechnology companies, such as GlaxoSmithKline plc, either alone or in collaboration with our competitors, are developing genomic research programs that
involve the use of information that can be found in these databases. Furthermore, companies, such as deCODE genetics, Inc., have technologies for using genetic variation in diagnostics and in
the drug development process and have collaborations with companies employing these technologies.

Genomic
technologies have undergone, and are expected to continue to undergo, rapid and significant change. Our future success will depend in large part on maintaining a competitive
position in the genomics field. Others may rapidly develop new technologies that may result in our products or technologies becoming obsolete before we recover the expenses that we incur in connection
with the development of these products. OurHAPTechnology could become obsolete if our competitors offer less expensive or more effective drug
discovery and development technologies, including technologies that may be unrelated to genomics.

We depend on third-party products and services and limited sources of supply for our sequencing and genotyping laboratories.

We rely on outside vendors to supply certain software, products and materials used in our laboratories. Some of these products and materials are obtained from a
single supplier or a limited group of suppliers. For example, we have a written agreement with Sequenom, Inc. pursuant to which it is contractually the sole provider of silicon chips for one
time use on their MassARRAY System, which is our genotyping platform. Under the terms of the agreement and subject to specific conditions, we have the authority to reuse these chips
should Sequenom be unable to supply new chips to us. While we believe that we could prepare for reuse the requisite supply of chips that we would need without unreasonable cost or delay, we may be
unable to do so. We have no other written long-
term supply agreements with our suppliers. Our reliance on outside vendors generally and a sole or a limited group of suppliers in particular involves several other risks, including:



If we fail to maintain our computer hardware, software and related infrastructure, we could experience loss of, or delay in, revenues and market acceptance.

Because our business requires manipulating and analyzing large amounts of data, we depend on the continuous, effective, reliable and secure operation of our
computer hardware, software and related infrastructure. To the extent that any of these elements malfunction, we will experience reduced productivity. We protect our computer hardware through physical
and software safeguards. However, our computer hardware is still vulnerable to fire, weather, earthquake, or other natural disaster and power loss, telecommunications failures, physical or software
break-ins and similar events. In addition, the software and algorithmic components of ourDecoGenInformatics System are complex and sophisticated, and
as such, could contain data, design or software errors that could be difficult to detect and correct. Users of our system may find software defects in current or future products. If we fail to

44

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maintain
the necessary computer capacity and data to support our computational needs and our customers' drug and diagnostic discovery and development efforts, we could experience a loss in revenues,
or a delay in receiving revenues and a delay in obtaining market acceptance for our technology.

The issuance and sale of our securities could have the effect of substantially diluting the interests of our current stockholders.

On October 29, 2003, we issued and sold an aggregate of 270,000 shares of our Series A preferred stock and granted the purchaser of such shares a
warrant, exercisable at any time until December 31, 2005, to purchase an additional 190,000 shares of our Series A preferred stock at $22.50 per share. Under specified circumstances, the
purchaser is required to exercise the preferred stock warrant. Each share of our Series A preferred stock is currently convertible into ten shares of our common stock. Consequently, assuming
the exercise of the preferred stock warrant, on an as-converted basis, an aggregate of 4,600,000 shares of our common stock may be issued to the Series A purchaser. Any issuance of shares of
our common stock upon conversion of shares of our Series A preferred stock could have the effect of substantially diluting the interests of our current stockholders, as well as the interests of
holders of our outstanding options and warrants which, as of December 31, 2003, are exercisable for an aggregate of 4,864,471 shares of our common stock, assuming they elect to exercise such
securities. Moreover, any sale of the shares of common stock issued upon conversion of the Series A preferred stock, as well as any of the 202,500 outstanding shares of our restricted common
stock or any shares of our common stock issued upon exercise of options or warrants, into the public market could cause a decline in the trading price of our common stock. In acquisition transactions,
in financing transactions, for compensatory purposes or in other types of transactions, additional issuances of equity securities could dilute the interests of our current and future stockholders.

Our redemption obligations under our Series A preferred stock could have a material adverse effect on our financial condition.

Under the terms of our Series A preferred stock, we are required, unless the holders of at least 662/3% of our outstanding Series A
preferred stock elect otherwise, to redeem all then outstanding shares of our Series A preferred stock if one or more of the following events occurs:



45

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If
we are required to redeem our Series A preferred stock due to any of the foregoing events, we are required to pay each holder of our Series A preferred stock the
original purchase price, plus an amount equal to the dividends that would otherwise have accrued and been payable on such shares through October 29, 2008 that have not otherwise been paid as of
the redemption date. As of December 31, 2003, the aggregate redemption price we would be required to pay is approximately $6,682,500.

In
addition, the holders of at least 662/3% of the outstanding shares of our Series A preferred stock may elect to require us to redeem all outstanding shares of
our Series A preferred stock for the original purchase price, plus all accrued but unpaid dividends as of the redemption date, on either October 29, 2006, October 29, 2007 or
October 29, 2008.

A
redemption of the Series A preferred stock would reduce the cash we have available to fund operations, research and product development, capital expenditures and other general
corporate purposes. In addition, we have incurred net losses in the past and expect to incur losses in the future, which may impair our ability to generate the cash required to meet our obligations
under our Series A
preferred stock. If we cannot generate sufficient cash to meet these obligations, we may be required to incur additional indebtedness or raise additional capital, which may negatively impact our
stockholders.

The purchaser of our Series A preferred stock owns a substantial portion of our capital stock, which may afford the purchaser significant influence over our affairs.

As of December 31, 2003, the purchaser of our Series A preferred stock held or had the right to acquire 19.6% of our outstanding common stock
(assuming the exercise of the Series A warrant, the conversion of Series A preferred stock to common stock), including shares of our common stock which the purchaser previously purchased
in the open market, which represents approximately 19.6% of the aggregate voting power of our stockholders on an as converted basis. The purchaser of our Series A preferred stock currently has
the right to vote 13.4% of our outstanding common stock (on an as converted to common stock basis, assuming no exercise of the Series A warrant, based on the number of shares of our capital
stock outstanding as of March 15, 2004). As a result, this stockholder has significant influence over any change in control of the company that may be favored by other stockholders and could
otherwise exercise significant influence over all corporate actions requiring stockholder approval, including the approval of some mergers and other significant corporate transactions, such as a sale
of substantially all of our assets or the defeat of any non-negotiated takeover attempt that might otherwise benefit the public stockholders. Consequently, this stockholder may approve a transaction
that in its judgment enhances the value of its investment, but which nonetheless may diverge from the interests of our other stockholders.

The agreements and instruments governing the rights and preferences of our Series A preferred stock impose restrictions on our business and limit our ability to
undertake certain corporate actions.

Our amended and restated certificate of incorporation, which we refer to as our charter, and the Series A purchase agreement, govern the terms of our
Series A preferred stock and impose significant restrictions on our business. These restrictions may limit our ability to operate our business and to take advantage of potential business
opportunities as they arise. Our charter places restrictions on our ability to, without the consent of the holders of at least 662/3% of the outstanding shares of our Series A
preferred stock:



46

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Events
beyond our control, including prevailing economic, financial and industry conditions, may affect our ability to comply with these restrictions. In addition, the holders of our
Series A preferred stock have the right to participate in future capital raising transactions of the company. The existence of this right may substantially reduce our ability to establish terms
with respect to, or enter into, any financing with parties other than the Series A preferred stockholder. The terms of any additional financing we may enter into may impose constraints on our
ability to operate our business as we deem appropriate. These restrictions and covenants could limit our ability to take advantage of financings, mergers and acquisitions or other corporate
opportunities, which could adversely affect our business and financial condition and your investments in our common stock.

Our former independent public accountants, Arthur Andersen LLP, have been found guilty of a federal obstruction of justice charge, and you may be unable to exercise effective
remedies against it in any legal action.

Prior to June 4, 2002, Arthur Andersen LLP served as our independent public accountants. On March 14, 2002, Arthur Andersen LLP was indicted on
federal obstruction of justice charges arising from the government's investigation of Enron Corporation. On June 15, 2002, Arthur Andersen LLP was convicted of those charges and the firm ceased
practicing before the SEC on August 31, 2002.

We
are unable to obtain the consent of Arthur Andersen LLP to include certain financial statements audited by Arthur Andersen LLP in this Annual Report on Form 10-K. As a result,
you may not have an effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission with respect to our audited financial statements that are included in this
Annual Report on Form 10-K or any other filing we may make with the SEC. In addition, even if you were able to assert such a claim, as a result of its conviction and other lawsuits, Arthur
Andersen LLP may fail or otherwise have insufficient assets to satisfy claims made by investors or by us that might arise under federal securities laws or otherwise relating to any alleged material
misstatement or omission with respect to our audited financial statements.

AVAILABLE INFORMATION

Our current reports on Form 8-K, quarterly reports on Form 10-Q and annual reports on Form 10-K are electronically filed with the Securities
and Exchange Commission ("SEC"), and all such reports and amendments to such reports filed have been and will be made available, free of charge, through our website (http://www.genaissance.com) as
soon as reasonably practicable after such filing. Such reports will remain available on our website for at least twelve months. The public may read and copy any materials filed by us with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C.

The
public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that
contains reports,

47

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proxy
and information statements, and other information regarding issuers that file electronically with the SEC.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is principally confined to our cash equivalents and investments, all of which have maturities of less than 12 months. We
maintain a non-trading investment portfolio of investment grade, liquid debt securities that limit the amount of credit exposure to any one issue, issuer or type of instrument. The weighted average
interest rate on marketable securities at December 31, 2003, was approximately 5.5%. In view of the nature and mix of our total portfolio, a 10% movement in market interest rates would not have
a significant impact on the total value of our investment portfolio as of December 31, 2003.

On
December 31, 2003, we had debt of approximately $9.1 million consisting of borrowings outstanding under term loans. The weighted average interest rate on this debt at
December 31, 2003, was approximately 6.5%. A 10% change in the interest rate would cause a corresponding increase in our annual expense of approximately $59,000.

48

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                           |                                                                                                                             | Page 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------- | -----
|REPORT OF INDEPENDENT AUDITORS             |                                                                                                                             | 50   
|CONSOLIDATED FINANCIAL STATEMENTS          |                                                                                                                             |      
|                                           | Consolidated Balance Sheets as of December 31, 2003 and 2002                                                                |      
|                                           | Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001                                  |      
|                                           | Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the Years Ended December 31, 2003, 2002 and 2001 |      
|                                           | Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001                                  |      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |                                                                                                                             | 56-75

49

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Report of Independent Auditors

To the Board of Directors and Stockholders of Genaissance Pharmaceuticals, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and comprehensive loss and of cash flows present fairly, in
all material respects, the financial position of Genaissance Pharmaceuticals, Inc. and its subsidiary at December 31, 2003 and 2002, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements of the Company for the year
ended December 31, 2001 were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in
their report dated January 25, 2002.

/s/
PricewaterhouseCoopers LLP
Hartford, Connecticut
February 12, 2004

50

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THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. THE COMPANY IS UNABLE TO OBTAIN A REISSUE
REPORT OR CONSENT TO INCORPORATION BY REFERENCE OF ARTHUR ANDERSEN LLP'S REPORT FROM ARTHUR ANDERSEN LLP BECAUSE ARTHUR ANDERSEN LLP HAS CEASED OPERATIONS.

Report of Independent Public Accountants

To
the Board of Directors and Stockholders of Genaissance Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Genaissance Pharmaceuticals, Inc. (a Delaware corporation) as of December 31, 2001 and 2000, and the related statements of operations,
stockholders' equity and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2001. 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 financial position of Genaissance Pharmaceuticals, Inc. as of December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in
the United States.

/s/
Arthur Andersen LLP
Hartford, Connecticut
January 25, 2002

51

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GENAISSANCE PHARMACEUTICALS, INC.        Consolidated Balance Sheets        (Amounts in thousands, except per share data)

|                                                                                                                      |                                                                                                                                                                          | December 31,                                                                                |      
|--------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------- | -----
|
|ASSETS                                                                                                                |                                                                                                                                                                          |                                                                                             |      
|CURRENT ASSETS:                                                                                                       |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      | Cash and cash equivalents                                                                                                                                                |                                                                                             | $    
|                                                                                                                      | Restricted cash                                                                                                                                                          |                                                                                             |      
|                                                                                                                      | Marketable securities                                                                                                                                                    |                                                                                             |      
|                                                                                                                      | Accounts receivable and unbilled services, net of allowance for doubtful accounts of $83 and $0 at December 31, 2003 and 2002, respectively                              |                                                                                             |      
|                                                                                                                      | State income tax receivable                                                                                                                                              |                                                                                             |      
|                                                                                                                      | Inventory                                                                                                                                                                |                                                                                             |      
|                                                                                                                      | Other current assets                                                                                                                                                     |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          | Total current assets                                                                        |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|PROPERTY AND EQUIPMENT, net                                                                                           |                                                                                                                                                                          |                                                                                             | 8,776
|DEFERRED FINANCING COSTS, net of accumulated amortization of $81 and $586 at December 31, 2003 and 2002, respectively |                                                                                                                                                                          |                                                                                             | 317  
|INVESTMENT IN AFFILIATE                                                                                               |                                                                                                                                                                          |                                                                                             | 2,531
|OTHER ASSETS                                                                                                          |                                                                                                                                                                          |                                                                                             | 1,223
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          | Total assets                                                                                |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, WARRANT AND STOCKHOLDERS' EQUITY                                 |                                                                                                                                                                          |                                                                                             |      
|CURRENT LIABILITIES:                                                                                                  |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      | Current portion of long-term debt, including amounts due to a shareholder of $422 and $397 at December 31, 2003 and 2002, respectively                                   |                                                                                             | $    
|                                                                                                                      | Current portion of capital lease obligations                                                                                                                             |                                                                                             |      
|                                                                                                                      | Accounts payable                                                                                                                                                         |                                                                                             |      
|                                                                                                                      | Accrued expenses                                                                                                                                                         |                                                                                             |      
|                                                                                                                      | Accrued dividends                                                                                                                                                        |                                                                                             |      
|                                                                                                                      | Current portion of deferred revenue                                                                                                                                      |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          | Total current liabilities                                                                   |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|LONG-TERM LIABILITIES:                                                                                                |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      | Long-term debt including amounts due to a shareholder of $4,114 and $4,501 at December 31, 2003 and 2002, respectively, net of current portion                           |                                                                                             |      
|                                                                                                                      | Deferred revenue, net of current portion                                                                                                                                 |                                                                                             |      
|                                                                                                                      | Other long-term liabilities                                                                                                                                              |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          | Total long-term liabilities                                                                 |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|COMMITMENTS AND CONTINGENCIES (Note 13)                                                                               |                                                                                                                                                                          |                                                                                             |      
|SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK:                                                                      |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      | 460 authorized shares at December 31, 2003; $.001 par value; 270 shares issued and outstanding at December 31, 2003 (Liquidation preference $6,075 at December 31, 2003) |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|WARRANT to purchase Series A Redeemable Convertible Preferred Stock                                                   |                                                                                                                                                                          |                                                                                             | 835  
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|STOCKHOLDERS' EQUITY:                                                                                                 |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      | Common stock, 58,000 authorized shares at December 31, 2003 and 2002; $.001 par value; 23,301 and 22,847 shares issued and outstanding at December 31, 2003 and 2002     |                                                                                             |      
|                                                                                                                      | Preferred stock, 540 and 1,000 authorized shares at December 31, 2003 and 2002, no shares issued or outstanding except Series A included above                           |                                                                                             |      
|                                                                                                                      | Additional paid-in capital                                                                                                                                               |                                                                                             |      
|                                                                                                                      | Accumulated deficit                                                                                                                                                      |                                                                                             |      
|                                                                                                                      | Accumulated other comprehensive income (loss)                                                                                                                            |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          | Total stockholders' equity                                                                  |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      
|                                                                                                                      |                                                                                                                                                                          | Total liabilities, redeemable convertible preferred stock, warrant and stockholders' equity |      
|                                                                                                                      |                                                                                                                                                                          |                                                                                             |      

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

52

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GENAISSANCE PHARMACEUTICALS, INC.        Consolidated Statements of Operations        (Amounts in thousands, except per share data)

|                                                             |                                                                               | Year Ended December 31, |       
|------------------------------------------------------------ | ----------------------------------------------------------------------------- | ----------------------- | ------
|
|REVENUES:                                                    |                                                                               |                         |       
|                                                             | License and service                                                           |                         | $     
|                                                             | Laboratory services                                                           |                         |       
|                                                             |                                                                               |                         |       
|                                                             | Total revenue                                                                 |                         |       
|                                                             |                                                                               |                         |       
|OPERATING EXPENSES:                                          |                                                                               |                         |       
|                                                             | Cost of laboratory services                                                   |                         |       
|                                                             | Research and development                                                      |                         |       
|                                                             | General and administrative                                                    |                         |       
|                                                             | Impairment of fixed assets                                                    |                         |       
|                                                             | Sublicense royalty fees                                                       |                         |       
|                                                             | Loss on leased equipment                                                      |                         |       
|                                                             |                                                                               |                         |       
|                                                             | Total operating expenses                                                      |                         |       
|                                                             |                                                                               |                         |       
|                                                             | Operating loss                                                                |                         |       
|OTHER INCOME (EXPENSE):                                      |                                                                               |                         |       
|                                                             | Interest expense                                                              |                         |       
|                                                             | Interest income                                                               |                         |       
|                                                             |                                                                               |                         |       
|                                                             | Loss before state income taxes and equity in loss of affiliate                |                         |       
|                                                             | State income tax benefit (expense)                                            |                         |       
|                                                             |                                                                               |                         |       
|                                                             | Loss before equity in loss of affiliate                                       |                         |       
|                                                             | Equity in loss of affiliate                                                   |                         |       
|                                                             |                                                                               |                         |       
|                                                             | Net loss                                                                      |                         |       
|PREFERRED STOCK DIVIDENDS AND ACCRETION                      |                                                                               |                         | (74   
|BENEFICIAL CONVERSION FEATURE OF PREFERRED STOCK AND WARRANT |                                                                               |                         | (2,204
|                                                             |                                                                               |                         |       
|                                                             | Net loss applicable to common shareholders                                    |                         | $     
|                                                             |                                                                               |                         |       
|                                                             | Net loss per common share, basic and diluted (Note 2)                         |                         | $     
|                                                             |                                                                               |                         |       
|                                                             | Shares used in computing basic and diluted net loss per common share (Note 2) |                         |       
|                                                             |                                                                               |                         |       

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

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GENAISSANCE PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(Amounts in thousands)

|                             |                                                                                       |                          |     |   |    |   |   |         |        | Accumulated
Other
Comprehensive
Income
(Loss) |          |         |   |     |    
|---------------------------- | ------------------------------------------------------------------------------------- | ------------------------ | --- | - | -- | - | - | ------- | ------ | --------------------------------------------- | -------- | ------- | - | --- | ---
|
|
|
|Balance at December 31, 2000 |                                                                                       | 22,687                   |     | $ | 23 |   | $ | 218,525 |        | $                                             | (112,927 | )       | $ | 54  |    
|                             | Issuance of common stock from exercise of stock options                               |                          | 76  |   |    |  |   |         | 157    |                                               |          |        |   |     |   
|                             | Issuance of common stock from Employee Stock Purchase Plan                            |                          | 20  |   |    |  |   |         | 168    |                                               |          |        |   |     |   
|                             | Non-cash compensation related to issuance of options to purchase common stock         |                          |    |   |    |  |   |         | 498    |                                               |          |        |   |     |   
|                             | Net change in unrealized investment gain                                              |                          |    |   |    |  |   |         |       |                                               |          |        |   |     | 63 
|                             | Net loss                                                                              |                          |    |   |    |  |   |         |       |                                               |          | (47,582 | ) |     |   
|                             |                                                                                       |                          |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|                             |                                                                                       | Total comprehensive loss |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|                             |                                                                                       |                          |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|Balance at December 31, 2001 |                                                                                       | 22,783                   |     | $ | 23 |   | $ | 219,348 |        | $                                             | (160,509 | )       | $ | 117 |    
|                             | Issuance of common stock from exercise of stock options                               |                          | 10  |   |    |  |   |         |       |                                               |          |        |   |     |   
|                             | Issuance of common stock from Employee Stock Purchase Plan                            |                          | 54  |   |    |  |   |         | 53     |                                               |          |        |   |     |   
|                             | Non-cash compensation related to issuance of options to purchase common stock         |                          |    |   |    |  |   |         | 12     |                                               |          |        |   |     |   
|                             | Net change in unrealized investment gain                                              |                          |    |   |    |  |   |         |       |                                               |          |        |   |     | (96
|                             | Net loss                                                                              |                          |    |   |    |  |   |         |       |                                               |          | (33,093 | ) |     |   
|                             |                                                                                       |                          |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|                             |                                                                                       | Total comprehensive loss |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|                             |                                                                                       |                          |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|Balance at December 31, 2002 |                                                                                       | 22,847                   |     | $ | 23 |   | $ | 219,413 |        | $                                             | (193,602 | )       | $ | 21  |    
|                             | Issuance of common stock from exercise of stock options                               |                          | 50  |   |    |  |   |         | 64     |                                               |          |        |   |     |   
|                             | Issuance of common stock from Employee Stock Purchase Plan                            |                          | 176 |   |    |  |   |         | 160    |                                               |          |        |   |     |   
|                             | Non-cash compensation related to issuance of options to purchase common stock         |                          |    |   |    |  |   |         | 318    |                                               |          |        |   |     |   
|                             | Restricted stock issued in payment of an obligation                                   |                          | 203 |   |    |  |   |         | 296    |                                               |          |        |   |     |   
|                             | Warrants issued in connection with debt financing and an acquisition                  |                          |    |   |    |  |   |         | 284    |                                               |          |        |   |     |   
|                             | Shares issued in connection with license amendment                                    |                          | 25  |   |    |  |   |         | 35     |                                               |          |        |   |     |   
|                             | Recognition of beneficial conversion features of Series A preferred stock and warrant |                          |    |   |    |  |   |         | 2,249  |                                               |          |        |   |     |   
|                             | Amortization of beneficial conversion feature of Series A preferred stock and warrant |                          |    |   |    |  |   |         | (2,204 | )                                             |          |        |   |     |   
|                             | Accretion of Series A preferred stock                                                 |                          |    |   |    |  |   |         | (52    | )                                             |          |        |   |     |   
|                             | Series A preferred stock dividends                                                    |                          |    |   |    |  |   |         | (22    | )                                             |          |        |   |     |   
|                             | Net change in unrealized investment gain (loss)                                       |                          |    |   |    |  |   |         |       |                                               |          |        |   |     | (28
|                             | Net loss                                                                              |                          |    |   |    |  |   |         |       |                                               |          | (18,558 | ) |     |   
|                             |                                                                                       |                          |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|                             |                                                                                       | Total comprehensive loss |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|                             |                                                                                       |                          |     |   |    |   |   |         |        |                                               |          |         |   |     |    
|Balance at December 31, 2003 |                                                                                       | 23,301                   |     | $ | 23 |   | $ | 220,541 |        | $                                             | (212,160 | )       | $ | (7  | )  
|                             |                                                                                       |                          |     |   |    |   |   |         |        |                                               |          |         |   |     |    

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

54

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GENAISSANCE PHARMACEUTICALS, INC.        Consolidated Statements of Cash Flows        (Amounts in thousands)

|                                                           |                                                                                      | Year Ended December 31,                                                           |                            
|---------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------- | ---------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                      |                                                                                      |                                                                                   |                            
|                                                           | Net loss                                                                             |                                                                                   | $                          
|                                                           | Adjustments to reconcile net loss to net cash used in operating activities:          |                                                                                   |                            
|                                                           |                                                                                      | Depreciation and amortization                                                     |                            
|                                                           |                                                                                      | Impairment of fixed assets                                                        |                            
|                                                           |                                                                                      | Loss on disposal of leased equipment                                              |                            
|                                                           |                                                                                      | Stock-based compensation                                                          |                            
|                                                           |                                                                                      | Accretion of interest                                                             |                            
|                                                           |                                                                                      | Equity in loss of affiliate                                                       |                            
|                                                           |                                                                                      | Changes in assets and liabilities, net of 2003 acquisition of DNA Sciences, Inc.: |                            
|                                                           |                                                                                      |                                                                                   | Accounts receivable        
|                                                           |                                                                                      |                                                                                   | Inventory                  
|                                                           |                                                                                      |                                                                                   | State income tax receivable
|                                                           |                                                                                      |                                                                                   | Other assets               
|                                                           |                                                                                      |                                                                                   | Accounts payable           
|                                                           |                                                                                      |                                                                                   | Accrued expenses           
|                                                           |                                                                                      |                                                                                   | Deferred revenue           
|                                                           |                                                                                      |                                                                                   |                            
|                                                           |                                                                                      |                                                                                   |                            
|                                                           |                                                                                      |                                                                                   |                            
|CASH FLOWS FROM INVESTING ACTIVITIES:                      |                                                                                      |                                                                                   |                            
|                                                           | Acquisition of the net assets of DNA Sciences                                        |                                                                                   |                            
|                                                           | Investment in affiliate                                                              |                                                                                   |                            
|                                                           | Purchases of property and equipment                                                  |                                                                                   |                            
|                                                           | Proceeds from the sale of property and equipment                                     |                                                                                   |                            
|                                                           | Decrease (increase) in restricted cash                                               |                                                                                   |                            
|                                                           | Investments in marketable securities                                                 |                                                                                   |                            
|                                                           | Proceeds from marketable securities                                                  |                                                                                   |                            
|                                                           |                                                                                      |                                                                                   |                            
|                                                           |                                                                                      |                                                                                   |                            
|                                                           |                                                                                      |                                                                                   |                            
|CASH FLOWS FROM FINANCING ACTIVITIES:                      |                                                                                      |                                                                                   |                            
|                                                           | Net proceeds from issuance of Series A preferred stock                               |                                                                                   |                            
|                                                           | Net proceeds from issuance of common stock and from exercise of options and warrants |                                                                                   |                            
|                                                           | Repayment of long-term debt                                                          |                                                                                   |                            
|                                                           | Proceeds from long-term debt                                                         |                                                                                   |                            
|                                                           | Repayment of long-term debt due to a shareholder, net                                |                                                                                   |                            
|                                                           | Repayment of capital leases                                                          |                                                                                   |                            
|                                                           | Deferred financing costs                                                             |                                                                                   |                            
|                                                           |                                                                                      |                                                                                   |                            
|                                                           |                                                                                      |                                                                                   |                            
|                                                           |                                                                                      |                                                                                   |                            
|NET DECREASE IN CASH AND CASH EQUIVALENTS                  |                                                                                      |                                                                                   | (8,545                     
|CASH AND CASH EQUIVALENTS, beginning of year               |                                                                                      |                                                                                   | 16,578                     
|                                                           |                                                                                      |                                                                                   |                            
|CASH AND CASH EQUIVALENTS, end of year                     |                                                                                      | $                                                                                 | 8,033                      
|                                                           |                                                                                      |                                                                                   |                            
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:           |                                                                                      |                                                                                   |                            
|                                                           | Cash paid for interest                                                               |                                                                                   | $                          
|                                                           |                                                                                      |                                                                                   |                            
|                                                           | Cash paid for income taxes                                                           |                                                                                   | $                          
|                                                           |                                                                                      |                                                                                   |                            
|SUPPLEMENTAL DISCLOSURE AND NON-CASH FINANCING ACTIVITIES: |                                                                                      |                                                                                   |                            
|                                                           | Technology licensed in exchange for stock in affiliate                               |                                                                                   | $                          
|                                                           | Issuance of stock and warrants in connection with an acquisition                     |                                                                                   |                            
|                                                           | Restricted shares issued in payment of an obligation                                 |                                                                                   |                            
|                                                           | Issuance of warrants in connection with debt financing                               |                                                                                   |                            
|                                                           | Acquisition of equipment pursuant to capital lease obligations                       |                                                                                   |                            

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

55

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GENAISSANCE PHARMACEUTICALS, INC.        Notes to Consolidated Financial Statements        (Amounts in thousands, except per share data)

(1) ORGANIZATION AND OPERATIONS

Genaissance Pharmaceuticals, Inc. (the Company) is a leader in the discovery and use of human gene variation for the development of a new generation of
DNA-based diagnostic and therapeutic products. The Company's technology, services and clinical development expertise are marketed to biopharmaceutical and diagnostic development companies, as a
comprehensive solution to their pharmacogenomic needs. The Company's goal is to improve drug development, physicians' ability to prescribe drugs, and patients' lives by elucidating the role of genetic
variation in drug response. Additionally, the Company provides Good Laboratory Practices (GLP) compliant DNA banking and research and GLP compliant genotyping and related services to a variety of
companies.

In
addition to the normal risks associated with a business venture, there can be no assurance that the Company's technologies will be successfully used, that the Company will obtain
adequate patent protection for its technologies, and that any products will be commercially viable. In addition, the Company operates in an environment of rapid change in technology and has
substantial competition from companies developing genomic related technologies. The Company expects to incur substantial expenditures in the foreseeable future for its research and development and
commercialization of its products. The Company's management believes, based upon its current operations and existing financial resources that it will have the ability to fund its expected net losses,
debt obligations and capital expenditures for at least 18 months.

On
December 18, 2003, the Company entered in to an Agreement and Plan of Merger (the "Merger Agreement") with Lark Technologies, Inc. ("Lark") in which the Company would
acquire Lark in a
stock-for-stock exchange whereby each Lark shareholder would receive 1.81 shares of Company stock for each share held of Lark. The Company expects to close on this transaction early in the second
quarter of 2004 (see Note 17).

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue recognition

The Company earns its revenues primarily through the licensing of itsHAPTechnology and by providing research
genotyping services and GLP compliant DNA banking and genotyping services. The Company has also entered into agreements which provide for it to receive future milestone and royalty payments. The
Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition(SAB 104) (which supercedes SAB 101, Revenue Recognition in Financial
Statements), Statement of Position 97-2 (SOP 97-2),Software Revenue
Recognition, as amended by Statement of Position 98-9 (SOP 98-9), and Emerging Issues Task Force Issue 00-21 (EITF 00-21),Revenue Arrangements with
Multiple Deliverables. In accordance with SAB 104 and EITF 00-21, the Company recognizes annual license and subscription fees over the term of the agreement and service fees as
the services are performed. For agreements with multiple deliverables, revenue is not recognized unless the fair value of the undelivered elements can be determined and the elements delivered have
stand-alone value to the customer. Future milestones and royalty payments, if any, will be recognized when received, provided that the milestone is substantive and a culmination of the earnings
process has occurred. Deferred revenue results from cash received or amounts receivable in advance of revenue recognition.

56

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Stock-Based compensation

At December 31, 2003, the Company had one stock-based compensation plan, which is more fully described in Note 11. The Company accounts for the plan
under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB 25),Accounting for Stock Issued to
Employees, and related interpretations.

The
following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123
(SFAS 123),Accounting for Stock-Based Compensation, to stock-based employee compensation. For the years ended December 31, 2003, 2002 and
2001:

2003

2002

2001Net loss applicable to common shareholders, as reported

$
(20,836
)
$
(33,093
)
$
(47,582
)Add: Stock-based employee compensation expense included in reported net loss


222


12


498Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards


(1,780
)

(880
)

(3,664
)Pro forma net loss applicable to common shareholders

$
(22,394
)
$
(33,961
)
$
(50,748
)Net Loss Per Share:Basic and dilutedAs Reported

$
(0.91
)
$
(1.45
)
$
(2.09
)Basic and dilutedPro Forma

$
(0.98
)
$
(1.49
)
$
(2.23
)


Other
disclosures required by SFAS No. 123 have been included in Note 11.

Research and development

Expenditures for research and development are charged to expense as incurred. Research and development expenses consist primarily of payroll and benefits for
research and development personnel, materials and reagent costs, costs incurred in connection with clinical trials, depreciation and maintenance costs for laboratory equipment and facility-related
costs.

Valuation of investments

The Company will assess the value of their investment in affiliate (see Note 6) in accordance with Accounting Principles Opinion No. 18 (APB 18), The
Equity Method of Accounting for Investments in Common Stock. APB 18 stipulates that a loss in value of an investment which is an other-than-
temporary decline should be recognized in the Company's financial statements. The Company will consider several factors when assessing evidence of an other-than-temporary loss in their investment in
affiliate. Those factors will include the Company's ability to recover the carrying amount of the investment in affiliate, the financial performance of the affiliate and whether the current fair value
of

57

---

the
investment in affiliate is less than its carrying value. As of December 31, 2003, the Company does not believe that there was an other-than-temporary decline in their investment in
affiliate.

Patent and licensed technology costs

The Company expenses the costs of obtaining patents and licensed technology until such point that the realization of the carrying value of these costs is
reasonably assured.

Net loss per common share

The Company computes and presents net loss per common share in accordance with Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings
Per Share. There is no difference in basic and diluted net loss per common share as the effect of convertible preferred stock, stock options
and warrants would be anti-dilutive for all periods presented. The outstanding convertible preferred stock,
stock options and warrants (prior to application of the treasury stock method) would entitle holders to acquire 9,464, 3,990 and 3,611 shares of common stock at December 31, 2003, 2002 and
2001, respectively.

Segment reporting

SFAS No. 131,Disclosure about Segments of an Enterprise and Related Informationestablishes annual and
interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. The Company has determined that it
operates in only one segment. In addition, all long-lived assets are maintained in the United States.

Valuation of long-lived assets

SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, requires a company to review
its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors the Company considers important, which
could trigger an impairment review, include, among others, the following:



If
the Company determines that the carrying value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment, the Company
compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the group. If the carrying value exceeds the undiscounted cash flows, an impairment charge may
be needed. To determine the amount of the impairment charge, the Company compares the carrying value of the applicable fixed asset group to its fair value. If the fair value is less than the carrying
value, such amount is recognized as an impairment charge (see Note 4).

58

---

Cash and cash equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Allowance for doubtful accounts

The allowance for doubtful accounts reflects the Company's best estimate of potential losses inherent in the Company's accounts receivable determined on the basis
of specific allowances for known accounts and other currently available evidence.

Inventory

Inventories are stated at the lower of average cost or market value on a first-in, first-out (FIFO) method. Inventories consist primarily of purchased materials
and reagents utilized in laboratory services and other research and development activities.

Software development costs

The Company enters into agreements to license itsHAPTechnology, including its DecoGenInformation System, to third parties. The Company evaluates the establishment of technological feasibility of its products in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86,Accounting for the Costs of Computer Software to be Sold, Licensed or Otherwise
Marketed. The Company has developed a product for a market that is subject to rapid technological change, new product development, and changing customer needs. In addition, the
ability to continue to market the product is contingent upon the Company's ability to successfully populate the database. The Company has concluded that technological feasibility is established when a
product design and working model of the software product has been completed and the completeness of the working model and its consistency with the product design has been confirmed by testing. The
time period during which costs could be capitalized from the point of reaching technological feasibility until the time of general product release is very short and, consequently, the amounts that
could be capitalized are not material to the Company's financial position or results of operations. Therefore, the Company has charged all such costs to research and development in the period
incurred.

Fair value of financial instruments

Financial instruments include cash and cash equivalents, receivables, marketable securities and long-term debt. Cash and cash equivalents and receivables
approximate fair value and marketable securities are carried at fair value. Long-term debt is carried at cost, which management believes approximates fair value based upon recent borrowing rates
obtained over the past twelve months.

Other comprehensive income (loss)

The Company presents its financial statements in accordance with SFAS No. 130,Reporting Comprehensive
Income, which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. Accordingly, the
Company has included this presentation as a component of the consolidated statements of stockholders' equity and

59

---

comprehensive
loss. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than
transactions with owners ("comprehensive income"). The Company's other comprehensive income (loss) arises from net unrealized gains (losses) on marketable securities. The Company has elected to
display comprehensive income (loss) as a component of the consolidated statement of stockholders' equity and comprehensive loss.

Use of estimates in the preparation of financial statements

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

Principles of consolidation

The accompanying consolidated financial statements include Genaissance Pharmaceuticals, Inc. and its wholly owned subsidiary, Brown Acquisition Corp.
(Brown). Brown was formed in December 2003 to acquire the stock of Lark Technologies, Inc. in 2004 (see Note 17). Brown did not transact any business in 2003.

Reclassification

Certain balance sheet amounts from the prior year have been reclassified to conform to the current year presentation.

Recently issued accounting standards

In December 2003, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin 104,Revenue
Recognition(SAB 104), which supercedes SAB 101,Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is
to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, as a result of the issuance of EITF 00-21,Accounting for Revenue
Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the SEC'sRevenue Recognition in Financial Statements Frequently Asked Questions
and Answers(the "FAQ") issued with SAB 101 that had been codified in SEC Topic 13,Revenue Recognition. Selected portions of
the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by
the issuance of SAB 104. Adoption of SAB 104 was required immediately and did not have a material effect on the Company's financial statements.

In
December 2003, the Financial Accounting Standards Board (FASB) issued a revision to Interpretation No. 46 (FIN 46R),Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51, which was issued in January 2003. FIN 46R clarifies the application of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to

60

---

finance
its activities without additional subordinated financial support. FIN 46R, which was issued in January 2003, requires the consolidation of these entities, known as variable interest
entities ("VIEs"), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity's expected losses, receive a majority of the
entity's expected residual returns, or both. Among other changes, the revisions of FIN 46R clarified some requirements of the original FIN 46, eased some implementation problems and added new scope
exceptions. FIN 46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period ending after March 15, 2004, except that all public companies
must, at a minimum, apply the provisions of the Interpretation to entities that were previously considered "special-purpose entities" under the FASB literature prior to the issuance of FIN 46R by the
end of the first reporting period ending after December 15, 2003. During the year ended December 31, 2003, adoption of FIN 46R did not have a material impact on the Company's financial
statements. FIN 46R will require reassessment in future periods.

In
November 2003, the Emerging Issues Task Force reached consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments. EITF Issue No. 03-1 requires tabular disclosure of the amount of unrealized losses and the related fair value of investments with
unrealized losses aggregated for each category of investment that is disclosed in accordance with SFAS No. 115. In addition, it requires sufficient narrative disclosure to allow financial
statement users to understand both the aggregated tabular information and the positive and negative information considered in reaching the conclusion that the impairments are not other-than-temporary.
The adoption of EITF Issue No. 03-1 did not have a material impact on the Company's financial statements.

In
May 2003, the FASB issued Statement No. 150 (SFAS No. 150),Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. SFAS No. 150 specifies that instruments within its scope embody obligations of the issuer and that the issuer must classify them as liabilities.
SFAS No. 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatorily redeemable financial instruments,
(2) obligations to repurchase the issuer's equity shares by transferring assets, and (3) certain obligations to issue a variable number of shares. SFAS No. 150 defines a
"freestanding financial instrument" as a financial instrument that (1) is entered into separately and apart from any of the entity's other financial instruments or equity transactions or
(2) is entered into in conjunction with some other transaction and can be legally detached and exercised on a separate basis. For all financial instruments entered into or modified after
May 31, 2003, SFAS No. 150 is effective immediately. For all other instruments of public companies, SFAS No. 150 went into effect at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our financial statements. In November 2003, the FASB deferred the effective date for
selected provisions of SFAS No. 150, limited to mandatorily redeemable, noncontrolling interests associated with finite-lived subsidiaries. The deferral of those selected provisions is not
expected to have a material impact on the Company's financial statements.

(3) MARKETABLE SECURITIES

The Company classifies its marketable securities as "available for sale" and, accordingly, carries these investments at their aggregate fair value. Unrealized
gains or losses on these investments are

61

---

included
as a separate component of stockholders' equity and comprehensive loss (See Note 2). The Company's marketable securities as of December 31, 2003 and 2002 consisted principally
of corporate bonds. As of December 31, 2003, these securities had a maximum maturity of less than twelve months and carried a weighted average interest rate of approximately 5.5%.

The
following is a summary of marketable securities at December 31, 2003 and 2002:

Amortized
Cost

Unrealized
gains (losses)

Fair
ValueCorporate bonds

$
7,279

$
(7
)
$
7,272Certificates of deposit


1,499





1,499Total marketable securities at December 31, 2003

$
8,778

$
(7
)
$
8,771Corporate bonds

$
15,451

$
21

$
15,472Total marketable securities at December 31, 2002

$
15,451

$
21

$
15,472


(4) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

December 31,2003

2002Equipment, computers and software

$
16,427

$
5,541Equipment under capital leases





11,296Leasehold improvements and office equipment


9,163


8,55925,590


25,396Less-accumulated depreciation and amortization


(16,814
)

(10,842
)Total property and equipment, net

$
8,776

$
14,554


These
assets are stated at cost and are being depreciated and amortized over their estimated useful lives on a straight-line basis as follows:

Equipment, computers and software

3-5 yearsOffice equipment

5 yearsLeasehold improvements

Remaining term of leaseEquipment under capital lease

3-5 years


Depreciation
expense was $6,916, $8,020 and $8,374 for the years ended December 31, 2003, 2002 and 2001, respectively. As a result of the Company's repayment of their capital
lease obligations during 2003 (See Note 9), the Company has obtained title to all equipment previously under capital leases. Accumulated amortization related to equipment under capital leases
was $5,168 at December 31, 2002.

Expenditures
for maintenance and repairs, which do not improve or extend the useful lives of the respective assets, are expensed as incurred.

62

---

During
the year ended December 31, 2002, the Company determined that certain conditions had arisen which triggered the need to review its long-lived assets for potential
impairment. The conditions included, but were not limited to, the overall business climate in which the Company was operating and a significant change in the manner in which the Company was utilizing
its DNA sequencing facility and related assets. The Company's review concluded that the carrying value of the long-lived assets exceeded their fair value by approximately $6,000. The impairment charge
included the write-down of sequencing equipment, computer hardware and software and leasehold improvements and was allocated to the individual assets on a pro-rata basis. (See Note 2)

(5) ACQUISITION OF DNA SCIENCES, INC.

On May 15, 2003, under order of the United States Bankruptcy Court, the Company acquired certain assets and assumed certain liabilities of DNA
Sciences, Inc. for $1,800 including related fees and expenses. Included in the fees and expenses is $75 which represents the fair value of warrants exercisable for up to 75 shares of the
Company's common stock at an exercise price of $2.00 per share issued in connection with investment banking services performed, as well as $35 which represents the fair value of 25 shares issued by
the Company to a licensor in connection with a license modification of a license acquired in connection with the acquisition. The primary assets acquired consisted of a GLP compliant and Clinical
Laboratory Improvement Amendments (CLIA) licensed genotyping services business, licenses and patent estates surrounding Long QT Syndrome and a thiopurine S-methyltransferase (TPMT) diagnostic test, as
well as certain trade accounts receivable and fixed assets.

The
acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets purchased and liabilities assumed
based upon the estimated fair values on the date of acquisition. The fair value of the assets received was greater than the purchase price and, therefore, the fair value of the long-lived assets was
reduced, on a pro-rata basis, by the excess. After consideration of such reduction, included in the accompanying December 31, 2003 consolidated balance sheet is $840 of acquired intellectual
property and other intangible assets, net of accumulated amortization of approximately $75. The intellectual property is being amortized
over its estimated useful life of 5 to 10 years and amortization expense is estimated to be approximately $120 per year for each of the next five years.

The
accompanying consolidated statement of operations includes the operating results of DNA Sciences since the date of the acquisition. Pro forma results of operations have not been
presented, as the acquisition is not deemed to be a material business combination.

In
May 2003, subsequent to the closing, the Company and Prometheus Laboratories, Inc. (Prometheus) amended a license agreement primarily to provide certain additional
rights to the TPMT test to Prometheus in exchange for a $675 cash payment to the Company. The $675 payment is included in License and Service Revenue in the accompanying 2003 consolidated statement of
operations, as the Company had no further obligation to provide any additional information or services to Prometheus under the terms of the agreement.

63

---

(6) INVESTMENT IN AFFILIATE

In November 2003, the Company entered into several agreements with Sciona Limited (Sciona), a private company based in England, whereby the Company granted
a technology license to Sciona (the Technology License) in exchange for a 37% equity interest (30% on a fully diluted basis) in Sciona (the Investment). The Technology License grants Sciona an
exclusive license to the Company'sHAPTechnology for consumer products, as defined in the Technology License, for a period of five years. Sciona is
obligated to pay to the Company specified royalties and service fees subject to minimum annual payments. The Company was also granted specified rights to develop genotyping assays and perform genetic
tests.

The
Company agreed to fund certain expenses until Sciona reaches certain levels of financial performance for up to 18 months (Sciona Milestones). Since entering into the
agreements, the Company has funded $71 of Sciona expenses which are included in other current assets in the accompanying 2003 consolidated balance sheet. Should Sciona not meet the Sciona Milestones,
the Company may terminate the license and the equity interest will revert back to Sciona (the Termination Provision).

Deferred
revenue resulting from the Technology License and the accompanying investment were initially recorded based upon the $2,600 estimated fair value of the equity in Sciona as of
the date of the Technology License. The excess of the Investment over the underlying fair value of the net assets of Sciona is considered to be unamortizable goodwill. Deferred revenue will be
amortized into income over the term of the Technology License once the Termination Provision has lapsed. The Company also
includes in equity in loss of affiliate in the accompanying consolidated statement of operations, its percentage interest in the unaudited losses of Sciona for the period the investment was owned and
reduced the investment by a like amount. For the period ended December 31, 2003, the Company recorded $100 of such losses. Also included in the accompanying 2003 consolidated statement of
operations is $126 of revenues resulting from services provided to Sciona throughout 2003, prior to the technology license. The excess of the investment over the underlying fair value of the net
assets of Sciona is considered to be unamortizable goodwill.

(7) ACCRUED EXPENSES

A summary of accrued expenses is as follows:

December 31,2003

2002Payroll and employee benefits

$
1,269

$
582Professional fees


530


490Other


1,126


679Total accrued liabilities

$
2,925

$
1,751


64

---

(8) FINANCING ARRANGEMENTS

Long-term debt consists of the following:

|                                                                                                                                                                                                          |                                            | December 31, |      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | -----
|
|Notes payable to Connecticut Innovations, Inc. (CII) bearing interest at 6.5%, monthly payments of principal and interest.                                                                                |                                            | $            | 4,536
|Note payable to Comerica Bank (Comerica) bearing interest at the prime rate plus 2.5% (6.5% at December 31, 2003) monthly payments of principal of $139 plus interest are payable through September 2006. |                                            |              | 4,582
|                                                                                                                                                                                                          |                                            |              |      
|                                                                                                                                                                                                          | Total long-term debt                       |              |      
|                                                                                                                                                                                                          | Less-current portion                       |              |      
|                                                                                                                                                                                                          |                                            |              |      
|                                                                                                                                                                                                          | Total long-term debt, less current portion |              | $    
|                                                                                                                                                                                                          |                                            |              |      

The
Company has entered into financing agreements (the Agreements) with CII, a stockholder of the Company, to finance certain leasehold improvements and other costs associated with the
Company's facility expansion. The Agreements provide for payments of principal and interest based on a 120-month amortization, with final balloon payments due in March 2009 through
June 2011. Borrowings under the Agreements are collateralized by the related leasehold improvements.

In
September 2003, the Company entered into a $5,000 Loan and Security Agreement with Comerica. Borrowings under the agreement are secured by certain assets of the Company. Under
the terms of the agreement, the Company is required to satisfy certain financial covenants, including a minimum cash balance and a minimum quick ratio, as defined. The Company was in compliance with
such financial covenants as of December 31, 2003. In addition, the agreement includes a material adverse change
clause which provides that all amounts become due upon such a change. The Company has no indication that it is in default of the material adverse change clause and therefore has classified its debt
based on the scheduled payment dates.

In
connection with the agreement, the Company issued a warrant to Comerica, which is exercisable through September 30, 2010, for the purchase of up to 132 shares of common stock
at an exercise price of $1.90 per share. The relative fair value of the warrant on the date of issue, approximately $209, is being amortized into interest expense over the life of the loan.

Aggregate
future maturities of the notes payable are as follows:

Year Ending December 312004

$
2,0882005


2,1172006


1,7302007


5122008


547Thereafter


2,124$
9,118


65

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(9) CAPITAL LEASES

There were no outstanding capital lease obligations at December 31, 2003. Capital lease obligations related to equipment consist of the following at
December 31, 2002:

Capital lease obligations to Finova Capital Credit Corp. (Finova)

$
7,207Capital lease obligations to Newcourt Financial USA, Inc.


517Capital lease obligations to General Electric Capital Corporation (GE)


3,177Capital lease obligation to IBM Credit Corp.


286Total capital lease obligations

$
11,187


During
2002, the Company received notices from GE and Finova claiming that an event of default had occurred under the lease agreements. Because of the alleged default, GE and Finova each
declared that all principal and future interest obligations were immediately due and payable. In March 2003, the Company settled the default claim with GE and, as additional security for its
payment obligations to GE, the Company delivered a $2,000 irrevocable letter of credit and agreed to additional covenants. The restricted cash which backed the letter of credit was retroactively
reflected in the accompanying financial statements as of December 31, 2002. As a result of the default claims, the Company recorded an additional interest charge of approximately $1,800 during
the fourth quarter of 2002 for future
interest due under the capital lease agreement with Finova. As of December 31, 2002, the amounts due to GE and Finova were classified as current obligations.

In
September 2003, the Company prepaid its capital lease obligations with Finova and Newcourt and paid all amounts due, including any end of lease buy out provisions for equipment
retained. In connection with the Finova agreement, the Company paid a total of $4,200, which included a prepayment discount of approximately $88 that was credited to interest expense during 2003.
Under their original terms, the lease leases covered by the Finova agreement would have expired between November 2003 and August 2004. In connection with the Newcourt agreement, the
Company paid a total of approximately $173, which represented all future interest and principal due under the leases which, by their original terms, would have expired in November and
December 2003. The Company returned certain equipment financed and recorded an additional charge of approximately $368 related to the equipment returned. In connection with the buyout, Finova
and Newcourt released their liens on all purchased equipment.

In
October 2003, the Company terminated its capital lease obligations with GE and paid all outstanding obligations due, including end of lease buy out provisions. Under their
original terms, the leases covered by the GE agreement would have expired between October 2003 and February 2005. The Company made a payment of $1,700 to GE, which represented all
principal and interest through the date of buyout as well as a prepayment penalty of approximately $126. As a result of the termination of the lease, the $2,100 of restricted cash was released and the
Company received full title to the equipment. During 2003, the Company recorded a charge of $60 in connection with the termination.

(10) PREFERRED STOCK

In October 2003, the Company sold 270,000 shares of newly designated Series A Redeemable Convertible Preferred Stock (Series A), $0.001 par
value per share, to RAM Trading, Ltd. (RAM) for

66

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$22.50
per share, resulting in proceeds of approximately $5,925, net of issuance costs of approximately $150. In connection therewith, RAM was issued a warrant to purchase, in whole but not in part,
an additional 190 shares of Series A through December 31, 2005, at $22.50 per share, which if exercised would result in gross proceeds to the Company of $4,275. RAM is required to
exercise the warrant if the sales price for the Company's common stock closes above $4.00 for 23 consecutive business days.

The
Series A and the warrant were recorded at their relative fair market values of $5,195 and $880, respectively, net of the issuance costs. As a result of the put rights
discussed below, the difference in the stated value and the carrying value of the Series A, resulting from the allocation of the proceeds and the issuance costs, is accreted to the earliest Put
Date (as defined below) using the effective
interest rate method. This accretion results in a higher effective dividend and is reflected in net loss applicable to common shareholders in the accompanying 2003 consolidated statement of
operations.

In
connection with the issuance of the Series A, the Company immediately recognized a charge of $2,200 which represents the beneficial conversion feature of the stock on the date
of issuance, which resulted from the difference between the fair value of the Company's common stock and the price paid per common share equivalent. In addition, the Company will recognize a $49
charge for the beneficial conversion feature of the warrant, which will be recognized over the life of the warrant. If the warrant is exercised prior to its expiration date, any outstanding charges
will be immediately recognized. A charge of $4 is included in the accompanying 2003 consolidated statement of operations in connection with the beneficial conversion feature of the warrant. This
beneficial conversion is also reflected in net loss applicable to common shareholders in the accompanying 2003 consolidated statement of operations.

The
rights of the Series A holders are as follows:

Voting
Rightsthe holders of Series A are entitled to vote on all matters and shall be entitled to the number of votes equal to the number of shares of common stock
into which each share of Series A is convertible. The Company has filed a proxy with the Securities and Exchange Commission for a stockholder vote which, among other things, would reduce these
voting rights to 0.88 votes per common equivalent share to comply with certain NASDAQ Marketplace rules.

Dividend
Rightsthe Series A earns a dividend at the rate of 2% per annum payable in cash in arrears semi-annually in January and July. Included in accrued dividends
in the accompanying 2003 balance sheet is $22 related to the Series A dividends.

Conversion
RightsEach share of Series A is convertible into ten shares of common stock at the option of the holder. On or after October 29, 2006, the Company
can require the conversion of the Series A if the common stock has traded above $7.00 for 23 consecutive business days.

Redemption
RightsUnder the terms of the Series A, the Company is required to redeem, unless the holders of at least 662/3% of the Series A elect
otherwise, all of the outstanding shares of Series A if a significant event, as defined, occurs or the Company breaches certain covenants. The redemption value is the original stated purchase
price of $22.50 per share, plus accrued but unpaid dividends. A significant event is generally defined as a dissolution of the company or the sale of the company or substantially all of its assets. If
the significant event or breach occurs prior to October 29, 2008, the face value plus all of the unpaid cash dividends through October 29, 2008 also become payable ($6,700

67

---

at
December 31, 2003). In addition, RAM has the option to require that the Company redeem all of the outstanding shares of Series A on either October 29, 2006, 2007 or 2008 (the
Put Dates). Genaissance may delay such payment for up to one year, in which case the dividend rate would increase to 10% per annum.

In
connection with the issuance of the Series A, the Company is required to maintain certain covenants. The most significant of these covenants restricts the Company from:
(i) incurring indebtedness in excess of $11,000 ($7,000 if the warrant is exercised); (ii) paying dividends on common; and (iii) redeeming any equity securities. The Company was
in compliance with these covenants as of December 31, 2003.

(11) COMMON STOCK, STOCK OPTIONS AND WARRANTS

Common stock

As of December 31, 2003, the Company has authorized 58,000 shares of common stock. As of December 31, 2003, 9,464 shares have been reserved for
issuance upon the exercise of warrants and under the Company's stock option and employee stock purchase plans.

The
Company may issue additional shares of common stock and additional stock options in 2004 under the terms of a proposed merger agreement with Lark Technologies, Inc. (see
Note 17).

Stock option plan

In 1993, the Board of Directors and stockholders approved the Stock Option Plan (as amended in 2000, the Plan) which provides for grants of incentive and
nonqualified stock options and restricted shares. As of December 31, 2003, under the terms of the Plan, stock options and restricted stock may be granted for up to a maximum of 4,787 shares.
Options granted under the Plan are exercisable for a period determined by the Company, but in no event longer than ten years from date of grant. In the event of certain capital stock changes, the
options are subject to adjustment in accordance with anti-dilution provisions.

The
Company has adopted the provisions of SFAS No. 123,Accounting for Stock-Based Compensation. This pronouncement requires the
measurement of the fair value of stock options to be included in the consolidated statement of operations or disclosed in the notes to financial statements. The Company accounts for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and has elected the disclosure-only alternative under SFAS No. 123.

68

---

A
summary of the status of the Company's stock option plan at December 31, 2003, 2002 and 2001 and changes during the periods then ended is presented below:

|                                                               |  | 2003  |   | 2002 |      | 2001
|-------------------------------------------------------------- |  | ----- | - | ---- | ---- | ----
|
|Outstanding, January 1                                         |  | 3,463 |   | $    | 6.31 |     
|Granted                                                        |  | 1,596 |   |      | 2.23 |     
|Cancelled or expired                                           |  | (852  | ) |      | 7.11 |     
|Exercised                                                      |  | (50   | ) |      | 1.27 |     
|Outstanding, December 31                                       |  | 4,157 |   | $    | 4.64 |     
|                                                               |  |       |   |      |      |     
|Options exercisable, December 31                               |  | 1,871 |   | $    | 6.06 |     
|                                                               |  |       |   |      |      |     
|Weighted average fair value of options granted during the year |  |       |   | $    | 1.67 |     

The
following table summarizes information about stock options at December 31, 2003:

|              |  | Options Outstanding |  |     |  |  
|------------- |  | ------------------- |  | --- |  | -
|
|
|
|$0.01-$1.89   |  | 803                 |  | 8.8 |  | $
|$1.90-$2.99   |  | 1,428               |  | 9.4 |  |  
|$3.00-$5.99   |  | 1,027               |  | 6.7 |  |  
|$6.00-$18.99  |  | 813                 |  | 6.6 |  |  
|$19.00-$32.20 |  | 86                  |  | 6.7 |  |  
|              |  |                     |  |     |  |  
|              |  | 4,157               |  | 8.0 |  | $
|              |  |                     |  |     |  |  

During
2003, 2002 and 2001, options to purchase 1,596, 826 and 703 shares, respectively, of common stock were granted at an exercise price equal to the fair value of the common stock on
the date of grant at weighted average exercise prices of $2.23, $1.65 and $6.00, respectively, per share. The weighted average fair value of options at the date of grant, as prescribed by SFAS
No. 123 was $1.67, $1.36 and $4.86 during 2003, 2002 and 2001, respectively. In addition, during 2002, options to purchase 113 shares of common stock were granted at an exercise price greater
than the fair value of the common stock on the date of grant at a weighted average exercise price of $5.31 per share. During 2001, options to purchase 85 shares of common stock were granted at an
exercise price less than the fair value of the common stock on the date of grant at a weighted average exercise price of $8.25 per share. The weighted average fair values of these options at the date
of grant, as prescribed by SFAS No. 123 was $2.67 and $11.42 during 2002 and 2001, respectively.

Total
compensation (benefit) expense recorded in the accompanying consolidated statements of operations associated with employee stock options is $222, $(104) and $391 for the
years ended

69

---

December 31,
2003, 2002 and 2001, respectively. Unamortized compensation expense associated with outstanding stock options at December 31, 2003, is approximately $133.

The
Company accounts for options granted to consultants, which include scientific advisory board members, using the Black-Scholes method prescribed by SFAS No. 123 and in
accordance with Emerging Issues Task Force Consensus No. 96-18. Total compensation expense recorded in the accompanying consolidated statements of operations associated with these consultant
options is $78, $116 and $107 for the years ended December 31, 2003, 2002 and 2001, respectively.

The
Company has computed the pro forma disclosures required under SFAS No. 123 for options granted to employees using the Black-Scholes option pricing model. The weighted average
assumptions used are as follows:

2003

2002

2001Risk-free interest rate

3.13%

3.81%

4.24%Expected dividend yield

None

None

NoneExpected lives

5 years

5 years

5 yearsExpected volatility

97%

116%

117%


Under
the Plan, the Company may grant restricted stock awards entitling recipients to acquire shares of our common stock on such terms as the compensation committee determines, subject
to forfeiture in the event that the conditions specified in the applicable award are not satisfied prior to the end of the applicable restriction period. The Company granted restricted stock awards,
providing for the purchase of shares of common stock at par value to certain employees, with vesting over a four-year period. Compensation expense of $18 and $296 was recognized in 2003 and 2002,
respectively in connection with the issuance of the restricted shares. Additional compensation expense will be recorded over the vesting period based on the fair market value of the shares on the
vesting date.

The
Company is seeking to increase the number of shares authorized under the stock option plan to 7,187. The shareholder vote on the additional 2,400 shares allocated to the plan will
take place at the shareholder meeting on April 1, 2004.

Employee stock purchase plan

During fiscal 2000, the board of directors adopted the Employee Stock Purchase Plan 2000 (ESPP). Under the ESPP, eligible employees may purchase common stock at
not less than 85% of fair value, as
defined. The Company has reserved 250 shares of common stock for issuance under the ESPP. As of December 31, 2003, all 250 shares have been issued under the ESPP.

The
Company is seeking to increase the number of shares authorized under the ESPP to 650. The shareholder vote on the additional 400 shares allocated to the plan will take place at the
shareholder meeting on April 1, 2004.

Common stock warrants

The Company has historically issued warrants in connection with certain of its financing and capital raising activities.

70

---

As
of December 31, 2003, the Company had warrants outstanding to purchase 707 shares of common stock of the Company at a weighted average exercise price of $4.95. The warrants
expire from November 2004 through September 2010. Certain warrants include anti-dilutive provisions, as defined.

(12) INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109,Accounting for Income Taxes.
This statement requires the Company to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been previously recognized in the Company's financial
statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax bases of the
assets and liabilities and the net operating loss carryforwards available for tax reporting purposes, using applicable tax rates for the years in which the differences are expected to reverse.

The
reconciliation of the statutory Federal income tax rate to the Company's effective income tax rate for the years ended December 31, 2003, 2002 and 2001, is as follows:

For the Years Ended December 31,2003

2002

2001Statutory rate

34.0
%
34.0
%
34.0
%State tax benefit, net of Federal taxes

6.4

5.9

12.6Federal research and development tax credit

7.5



Other

(2.2
)
2.1

(1.0
)Increase in deferred tax valuation allowance

(42.7
)
(42.0
)
(37.7
)3.0
%

%
7.9
%


The
Company has available, at December 31, 2003, unused net operating loss carryforwards of approximately $133.6 and $131.8 which may be available to offset future Federal and
state taxable income, respectively, if any. The future utilization of these carryforwards may be limited due to changes in the Company's current and future ownership structure. Federal carryforwards
are scheduled to expire from 2007 through 2023. State carryforwards are scheduled to expire from 2004 through 2023.

As
a result of legislation passed in the State of Connecticut, companies have the opportunity to exchange certain research and development tax credit carryforwards for a cash payment in
exchange for foregoing the carryforward of the research and development credits at a rate of 65% of the annual incremental research and development tax credit, as defined. During 2001, the Company
filed a claim to exchange its 2000 incremental research and development credit and, as a result, recognized a state income tax benefit of approximately $2,600. In addition, during 2001, the Company
recorded an income tax receivable of $1,500 for the estimated proceeds from the 2001 research and development tax credit. The State of Connecticut rescinded the legislation during 2002. During 2003
legislation to reinstate the exchange program for the 2002, 2003 and 2004 tax years was passed. The Company has elected to participate in the exchange program for 2002 and 2003. During 2003, the
Company filed a claim to exchange its 2002 research and development tax credit and, as a result, recorded a state income tax benefit of approximately $330. In addition, the Company recognized a
benefit of approximately $250 for the estimated proceeds from the exchange of the 2003 research and development tax credit.

71

---

Included
in other long-term liabilities the accompanying consolidated balance sheets as of December 31, 2003 and 2002 is a tax reserve related to research and development tax
credits claimed by the Company. Due to the fact that the Company's research and development tax credit claims are subject to audit at any time until all net operating loss carryforwards have been
utilized, the reserve is classified as a long-term liability in the accompanying consolidated balance sheet as of December 31, 2003 and 2002.

The
components of deferred income tax assets as of December 31, 2003 and 2002 are as follows:

For the Years Ended
December 31,2003

2002Deferred tax assets:Net operating loss carryforwards and tax credits

$
61,580

$
52,606Other


4,084


4,882Total deferred tax assets


65,664


57,488Lessvaluation allowance for deferred tax assets


(65,664
)

(57,488
)Net deferred tax assets

$


$



The
Company has not yet achieved profitable operations. Accordingly, management believes the tax benefits as of December 31, 2003 do not satisfy the realization criteria set forth
in SFAS No. 109 and has therefore recorded a valuation allowance for the entire deferred tax asset.

(13) COMMITMENTS AND CONTINGENCIES

401(k) retirement plan

The Company has a 401(k) defined contribution retirement plan covering substantially all full-time employees. The Company provides a matching cash contribution of
25% of employee contributions, up to 8% of employee compensation. The Company contributed $114, $120 and $122 to the plan during 2003, 2002 and 2001, respectively.

Royalty and other commitments

The Company periodically enters into agreements with third parties to obtain exclusive or non-exclusive licenses for certain technologies management believes
important to the Company's overall business strategy. The terms of certain of these agreements provide for the Company to pay future royalty payments based on product sales or sublicense income
generated from the applicable technologies, if any. Additionally, certain agreements call for future payments upon achievement of certain milestones. The aggregate future annual minimum payments
(assuming non-termination of these agreements) for fiscal 2004 through 2008 are $107 per year and $928 thereafter. The Company recorded royalty expenses of $243, $3,205 and $4,728 during 2003, 2002
and 2001, respectively relating to technology licenses.

72

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Operating leases

The Company leases its operating facilities located in New Haven, Connecticut and Morrisville, North Carolina. The New Haven lease agreements require annual lease
payments of $1,100 per year terminating in 2006. The Company has two five-year renewal options to extend the lease beyond its initial term. The Company is recording the expense associated with the
lease on a straight-line basis over the expected ten-year minimum term of the lease. The North Carolina lease agreement requires annual lease payments of $612,000. This lease is renewable annually and
expires in February, 2005, with mutual 6-month termination provisions.

In
addition, the Company also has operating leases for various office equipment.

Rental
expense for all operating leases for the years ended December 31, 2003, 2002 and 2001 was $1,767, $1,168 and $1,055, respectively.

Future
minimum payments under all non-cancelable operating leases in effect as of December 31, 2003 are as follows:

2004

$
1,7792005


1,2052006


1,0222007


1,0132008


1,011Thereafter


2,781


Indemnification provisions

In the ordinary course of its business, the Company enters into agreements with third parties that include indemnification provisions which, in the Company's
judgment, are normal and customary for companies in its industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, the Company
generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses suffered or incurred by the indemnified parties with respect to the Company's products or product
candidates, use of such products or other actions taken or omitted by the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification
provisions is unlimited. The Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the current estimated fair value of
liabilities relating to these provisions is minimal. Accordingly, the Company has not recorded a liability for these provisions as of December 31, 2003.

(14) LEGAL MATTERS

The Company, from time to time, has been subject to legal claims arising in connection with its business. While the ultimate results of the legal claims cannot be
predicted with certainty, at December 31, 2003, there were no asserted claims against the Company which, in the opinion of management, if adversely decided would have a material adverse effect
on the Company's financial position and cash flows.

73

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(15) SIGNIFICANT CUSTOMERS AND FOREIGN BASED REVENUES

For the years ended December 31, 2003, 2002 and 2001 approximately 0%, 4% and 6%, respectively, of the Company's revenues resulted from foreign-based
customers. For the year ended December 31, 2003, revenue from Johnson & Johnson Pharmaceutical Research and Development (J&J PRD), Millennium Pharmaceuticals, Inc. and Pfizer
accounted for 63% of our total revenue. For the years ended December 31, 2002 and 2001, revenue from Gene Logic, Inc., J&J PRD and Pfizer, Inc., accounted for 82% and 94% of our
total revenue, respectively. The contract with J&J PRD, which accounted for 23%, 46% and 41% of our revenue for 2003, 2002 and 2001, respectively, expired in January 2004. The contract with
Gene Logic, Inc., which accounted for 24% and 34% of our 2002 and 2001 revenues, respectively, expired in the fourth quarter of 2002.

(16) QUARTERLY DATAUNAUDITED

|                                           |                   | 2003 |       
|------------------------------------------ | ----------------- | ---- | ------
|
|Total Revenues                             |                   | $    | 2,139 
|Total operating expenses                   |                   |      | 6,798 
|Operating loss                             |                   |      | (4,659
|Net loss applicable to common shareholders |                   |      | (4,726
|Net loss per common share:                 |                   |      |       
|                                           | Basic and diluted |      |       

|                                           |                   | 2002 |       
|------------------------------------------ | ----------------- | ---- | ------
|
|Total Revenues                             |                   | $    | 1,851 
|Total operating expenses                   |                   |      | 10,739
|Operating loss                             |                   |      | (8,888
|Net loss applicable to common shareholders |                   |      | (9,060
|Net loss per common share:                 |                   |      |       
|                                           | Basic and diluted |      |       

(17) SUBSEQUENT EVENTS

In December 2003, the Company entered in to an agreement to acquire Lark Technologies, Inc. (Lark) in a stock-for-stock exchange to be accounted for
as a purchase transaction. A joint proxy/ prospectus was declared effective by the SEC in February 2004 and the shareholder meetings to vote on the merger are scheduled to take place on
April 1, 2004. The transaction is expected to close early in the second quarter of 2004. Lark provides contract molecular biology services to the pharmaceutical, biotechnology and agbio
industries.

Under
the terms of the merger agreement, Lark shareholders will receive 1.81 shares of the Company's common stock in exchange for each Lark share of common stock, or an aggregate of
approximately 6,600 shares of the Company's common stock. In addition, options to purchase approximately 833 shares of Lark common stock will be converted in to options to purchase

74

---

approximately
1,500 shares of the Company's common stock. The total cost of the acquisition is currently estimated to be approximately $22,800 consisting of the following:

(Unaudited)Market value of the Company's common stock to be issued in exchange for outstanding Lark common stock

$
19,730Fair value of Lark stock options to be assumed


2,246Estimated direct transaction costs of the Company


800$
22,776


The
Company will account for the acquisition of Lark under the purchase method of accounting for business combinations and, accordingly, the purchase price will be allocated to the
tangible and identifiable intangible assets of Lark acquired by the Company and the liabilities assumed by the Company of the basis of their fair values on the acquisition date. Based on the financial
statements of Lark as of September 30, 2003, the Company has preliminarily allocated the total costs of the acquisition to the net assets of Lark as follows:

(Unaudited)Tangible assets acquired

$
5,287Intangible assets acquired


11,037Goodwill


9,319Liabilities assumed


(2,867
)Total estimated purchase price

$
22,776


The
allocation of the purchase price is preliminary and will remain as such until the closing balance sheet is obtained. The final determination of the purchase price is expected to be
completed as soon as is practicable after consummation of the merger. The final amounts allocated to assets and liabilities acquired could differ materially from the amounts presented above.
Intangible assets identified include backlog with an estimated useful life of one year, customer relationships with an estimated useful life of 15 years, and GLP certification and trade name
that have indefinite useful lives. Commencing on the date of acquisition, the Company will include the results of operations from Lark in their consolidated financial statements.

75

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

The Board of Directors, based upon a recommendation of its Audit Committee, dismissed Arthur Andersen LLP (Arthur Andersen) as the Company's independent public
accountants on June 4, 2002. We engaged PricewaterhouseCoopers LLP as our independent public accountants to audit our financial statements for the year ended December 31, 2002.
PricewaterhouseCoopers commenced its engagement on June 4, 2002 with the review of the Company's financial statements for the second fiscal quarter ended June 30, 2002.

Arthur
Andersen's reports on our financial statements for the year ended December 31, 2001 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles.

During
the year ended December 31, 2001 and through June 4, 2002, there were no disagreements between us and Arthur Andersen on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen's satisfaction, would have caused it to make reference to the subject matter in
connection with its report on our consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Arthur Andersen
submitted a letter, dated June 4, 2002, stating its agreement with our statements filed on Form 8-K dated June 5, 2002 related to our change in public accountants.

During
the fiscal year ended December 31, 2001 and through June 4, 2002, we did not consult with PricewaterhouseCoopers LLP regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our consolidated financial statements, and neither a written
report was provided to us nor oral advice was provided that PricewaterhouseCoopers LLP concluded was an important factor considered by us in reaching a decision as to the accounting, auditing, or
financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the
related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended) as of December 31, 2003. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of December 31, 2003, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including
our consolidated subsidiaries is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being
prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed in the reports filed or submitted by us under the Exchange Act is recorded,
processed, summarized and reported within the periods specified in the SEC's rules and forms.

No
change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART III

Items 10, 11, 12, 13 and 14 of Part III (except for information required with respect to our executive officers which is set forth under "Executive
Officers" in Item 1A of Part I of this report) have been omitted from this report, since we expect to file with the Securities and Exchange Commission, not later than 120 days after our
fiscal year end, a definitive proxy statement. The information required by Items 10, 11, 12, 13 and 14 of this report, which will appear in the definitive proxy statement, is incorporated by reference
into Part III of this report.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K





On
December 22, 2003, we filed a Current Report on Form 8-K, announcing that we entered into an agreement and plan of merger relating to our acquisition of Lark
Technologies, Inc.

On
December 2, 2003, we filed a Current Report on Form 8-K, announcing that we entered into a technology license agreement with Sciona Limited.

On
November 12, 2003, we furnished a Current Report on Form 8-K, announcing our financial results for the three and nine-month periods ended September 30, 2003.

On
November 5, 2003, we filed a Current Report on Form 8-K, announcing that we had sold shares of newly designated series A preferred stock, together with stock
purchase warrants, and had entered into a term loan with Comerica Bank.

EXHIBIT INDEX

|Exhibit No. |  | Description of Document                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|2.1^(1)     |  | Asset Purchase Agreement between Genaissance and DNA Sciences, Inc., dated March 28, 2003.                                                
|2.2^(1)     |  | Amendment No. 1, dated May 5, 2003, to Asset Purchase Agreement between Genaissance and DNA Sciences, Inc., dated March 28, 2003.         
|2.3^(2)     |  | Agreement and Plan of Merger, dated as of December 18, 2003, by and among Genaissance, Brown Acquisition Corp. and Lark Technologies, Inc.
|3.1(9)      |  | Amended and Restated Certificate of Incorporation, as amended.                                                                            
|3.2(3)      |  | Amended and Restated By-Laws.                                                                                                             
|4.1(3)      |  | Specimen Certificate of Genaissance's Common Stock, $.001 par value.                                                                      
|4.2(3)      |  | Form of Common Stock Purchase Warrant, together with a list of warrant holders.                                                           
|4.3(9)      |  | Warrant, dated as of October 29, 2003, issued by Genaissance to RAM Trading, Ltd.                                                         
|4.4(9)      |  | Specimen Certificate of Genaissance's Series A Preferred Stock, $.001 par value.                                                          
|10.1*(3)    |  | 2000 Amended and Restated Equity Incentive Plan, as amended.                                                                              
|10.1A*(3)   |  | Stock Option Plan.                                                                                                                        
|10.2*(3)    |  | Employee Stock Purchase Plan 2000, as amended.                                                                                            
|            |  |                                                                                                                                           

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|10.3(3)   |  | Form of Indemnification Agreement between Genaissance and its directors.                                                                                                  
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.4(3)   |  | Lease Agreement between Genaissance and Science Park Development Corporation dated September 15, 1998.                                                                    
|10.5(3)   |  | Amendment No. 1 to Lease Agreement between Genaissance and Science Park Development Corporation dated December 1, 1999.                                                   
|10.6(3)   |  | Amendment No. 2 to Lease Agreement between Genaissance and Science Park Development Corporation dated December 16, 1999.                                                  
|10.7*(3)  |  | Genaissance 401(k) Plan                                                                                                                                                   
|10.8(3)+  |  | Collaboration Agreement between Genaissance and Telik, Inc. dated February 11, 1998.                                                                                      
|10.9(3)   |  | First Amendment, dated February 11, 1999, to the Collaboration Agreement between Genaissance and Telik, Inc. dated February 11, 1998.                                     
|10.10(3)+ |  | License Agreement between Genaissance and Visible Genetics, Inc. dated November 21, 1996.                                                                                 
|10.11(3)+ |  | Patent License Amending Agreement between Genaissance and Visible Genetics, Inc. dated March 16, 2000.                                                                    
|10.12(3)  |  | Loan Agreement between Genaissance and Connecticut Innovations, Incorporated dated September 15, 1998.                                                                    
|10.13(3)  |  | Loan Agreement between Genaissance and Connecticut Innovations, Incorporated dated December 1, 1999.                                                                      
|10.14*(3) |  | Employment Agreement with Kevin Rakin dated August 24, 1998.                                                                                                              
|10.15*(3) |  | Employment Agreement with Gerald F. Vovis dated April 15, 1999.                                                                                                           
|10.16(3)+ |  | Strategic Alliance Agreement between Genaissance and Sequenom, Inc. dated as of May 3, 2000.                                                                              
|10.17(3)  |  | Letter Agreement with Connecticut Innovations, Incorporated dated June 2, 2000.                                                                                           
|10.18(3)  |  | Second Amended and Restated Registration Rights Agreement with the purchasers of Series A and Series KBL Non-voting Preferred Stock dated March 10, 2000.                 
|10.19(3)  |  | Amended and Restated Registration Rights Agreement with the purchasers of Series B and Series KBH Preferred Stock dated March 10, 2000.                                   
|10.20(3)  |  | Registration Rights Agreement with purchasers of Series C Preferred Stock dated March 10, 2000.                                                                           
|10.21(3)  |  | Amendment No. 3 to Lease Agreement between Genaissance and Science Park Development Corporation dated June 1, 2000.                                                       
|10.22(3)  |  | Purchase Agreement with Connecticut Innovations, Incorporated dated March 10, 1994.                                                                                       
|10.23(3)  |  | Financing Agreement with Connecticut Innovations, Incorporated dated November 16, 1994.                                                                                   
|10.24(3)  |  | Financing Agreement with Connecticut Innovations, Incorporated dated September 10, 1996.                                                                                  
|10.25(3)  |  | Agreement Concerning Conversion of Convertible Note and Connecticut Presence with Connecticut Innovations, Incorporated dated August 24, 1998.                            
|10.26(3)  |  | Supplemental Agreement to Agreement Concerning Conversion of Convertible Note and Connecticut Presence with Connecticut Innovations, Incorporated dated November 23, 1999.
|10.27(3)  |  | Letter Agreement with Connecticut Innovations, Incorporated dated February 17, 2000.                                                                                      
|10.28(4)  |  | Third Loan Agreement with Connecticut Innovations, Incorporated dated July 26, 2000.                                                                                      
|10.29(5)+ |  | Agreement with Pfizer Inc. dated August 29, 2001.                                                                                                                         
|10.30(5)+ |  | HAP Focus Trial License Agreement with AstraZeneca UK Limited dated as of November 29, 2001.                                                                             
|10.31(5)+ |  | Mednostics Collaboration and License Agreement with Biogen, Inc. dated as of January 31, 2002.                                                                           
|          |  |                                                                                                                                                                           

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|10.32(5)+  |  | International Sales Representative Agreement with Intec Web and Genome Informatics Corporation dated as of February 4, 2002.                                                                                  
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.33(5)+  |  | HAP Focus Trial License Agreement with Biogen, Inc. dated December 21, 2001.                                                                                                                                 
|10.34(5)   |  | Form of Registration Rights Agreement Waiver dated February 18, 2002.                                                                                                                                         
|10.35*(5)  |  | Employment Agreement with Richard Judson dated November 20, 2001.                                                                                                                                             
|10.36(5)   |  | Fourth Amendment to Lease between Science Park Development Corporation and Genaissance dated September 30, 2001.                                                                                              
|10.37+(6)  |  | Amendment, dated May 13, 2002, to Agreement with Pfizer Inc. dated August 29, 2001.                                                                                                                           
|10.38*(7)  |  | First Amendment, dated September 1, 2002, to Employment Agreement with Gualberto Ruano dated August 24, 1998. Filed herewith.                                                                                 
|10.39*(7)  |  | First Amendment, dated September 1, 2002, to Employment Agreement with Kevin Rakin dated August 24, 1998. Filed herewith.                                                                                     
|10.40+(7)  |  | Amendment, dated November 22, 2002, to Collaboration Agreement with Janssen Research Foundation dated November 22, 2000.                                                                                      
|10.41+(7)  |  | Amendment, dated December 18, 2002, to Mednostics Collaboration and License Agreement with Biogen, Inc. dated as of January 31, 2002.                                                                        
|10.42+(7)  |  | Agreement with Pharmacia & Upjohn Company dated December 12, 2002.                                                                                                                                            
|10.43+(7)  |  | Training and License Agreement with Becton, Dickinson and Company dated December 18, 2002.                                                                                                                    
|10.44+(1)  |  | Technology and Database License Agreement between Genaissance and Millennium Pharmaceuticals, Inc., dated January 7, 2003.                                                                                    
|10.45+(1)  |  | Research Collaboration and License Agreement between Genaissance, Bayer AG and Bayer Healthcare LLC, dated January 15, 2003.                                                                                  
|10.46(1)   |  | Amendment, dated February 6, 2003, to Agreement with Pfizer Inc., dated August 29, 2001.                                                                                                                      
|10.47+(1)  |  | Genotyping Services Agreement between Genaissance and Wayne State University, dated March 11, 2003.                                                                                                           
|10.48(1)   |  | Amendment, dated March 12, 2003, to Master Equipment Lease Agreement between Genaissance and General Electric Capital Corporation (successor-in-interest to Oxford Venture Finance, LLC), dated June 10,
1999.
|10.49*(1)  |  | Management Incentive Program Summary.                                                                                                                                                                         
|10.50*(8)  |  | Employment Agreement with Ben Kaplan, dated May 6, 2003.                                                                                                                                                      
|10.51(9)   |  | Series A Preferred Stock Purchase Agreement, dated as of October 29, 2003, by and between Genaissance and RAM Trading, Ltd.                                                                                   
|10.52(9)   |  | Registration Rights Agreement, dated as of October 29, 2003, by and between Genaissance and RAM Trading, Ltd.                                                                                                 
|10.53(10)  |  | Loan and Security Agreement, dated as of September 30, 2003, by and between Genaissance and Comerica Bank.                                                                                                    
|10.54+(11) |  | Consumer Genomics and HAP Technology License Agreement, dated as of November 17, 2003, by and between Genaissance and Sciona Limited.                                                                        
|10.55+(11) |  | Investment Agreement between Genaissance, Prelude Trust PLC, Abbey National Treasury Services Overseas Holdings and Sciona Limited, not dated.                                                                
|10.56+     |  | Agreement, dated as of May 15, 2003, between Genaissance and Prometheus Laboratories, Inc. Filed herewith.                                                                                                    
|10.57*     |  | Employment Agreement with Kevin Rakin dated as of January 1, 2004. Filed herewith.                                                                                                                            
|10.58*     |  | Employment Agreement with Gerald F. Vovis dated as of January 1, 2004. Filed herewith.                                                                                                                        
|10.59*     |  | Employment Agreement with Richard Judson dated as of January 1, 2004 Filed herewith.                                                                                                                          
|10.60*     |  | Employment Agreement with Ben D. Kaplan dated as of January 1, 2004 Filed herewith.                                                                                                                           
|           |  |                                                                                                                                                                                                               

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|14.1     |  | Code of Business Conduct and Ethics. Filed herewith.                                                                                  
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|16.1(12) |  | Letter from Arthur Andersen LLP to the Securities and Exchange Commission, dated June 5, 2002.                                        
|23.1     |  | Consent of PricewaterhouseCoopers LLP. Filed herewith.                                                                                
|31.1     |  | Certification pursuant to Rules 13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. Filed herewith.
|31.2     |  | Certification pursuant to Rules 13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. Filed herewith.
|32.1     |  | Certification pursuant to 18 U.S.C. 1350. Filed herewith.                                                                             
|32.2     |  | Certification pursuant to 18 U.S.C. 1350. Filed herewith.                                                                             

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town of New Haven, Connecticut, on March 30, 2004.

| |  | GENAISSANCE PHARMACEUTICALS, INC.
| |  | ---------------------------------
| |  | By:                              

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

|Signature                                   |  | Title                                                                                          |  | Date           
|------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ---------------
|                                            |  |                                                                                                |  |                
|/s/KEVIN RAKINKevin Rakin                   |  | President, Chief Executive Officer (Principal Executive Officer) and Director                  |  | March 30, 2004 
|/s/BEN D. KAPLANBen D. Kaplan               |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 30, 2004 
|/s/JÜRGEN DREWS, M.D.Jürgen Drews, M.D.     |  | Chairman of the Board                                                                          |  | March 30, 2004 
|/s/KAREN DAWESKaren Dawes                   |  | Director                                                                                       |  | March 30, 2004 
|/s/JOSEPH KLEIN IIIJoseph Klein III         |  | Director                                                                                       |  | March 30, 2004 
|/s/HARRY H. PENNER, JR.Harry H. Penner, Jr. |  | Director                                                                                       |  | March 30, 2004 
|/s/SETH RUDNICK, M.D.Seth Rudnick, M.D.     |  | Director                                                                                       |  | March 30, 2004 
|Christopher Wright                          |  | Director                                                                                       |  | March    , 2004

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