SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                   ----------

   For the fiscal year ended December 31, 1997 Commission File Number 0-22962

                           HUMAN GENOME SCIENCES, INC.
                           (Exact name of registrant)

               Delaware                                22-3178468
        (State of organization)         (I.R.S. employer identification number)

                 9410 Key West Avenue, Rockville, Md. 20850-3338
             (address of principal executive offices and zip code )

                                 (301) 309-8504
                         (Registrant's telephone number)

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

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

                     Common stock, par value $.01 per share

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

Indicate by check mark 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  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

The number of shares of the  registrant's  common stock  outstanding on February
28, 1998 was 22,361,639.

As of February 28, 1998, the aggregate  market value of the common stock held by
non-affiliates  of the  registrant  based on the closing  price  reported on the
National  Association  of Securities  Dealers  Automated  Quotations  System was
approximately $ 576,000,000.*

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Human Genome Sciences, Inc.'s Notice of Annual Stockholder's Meeting
and  Proxy  Statement,  to be  filed  within  120  days  after  the  end  of the
registrant's fiscal year, are incorporated into Part III of this Annual Report.

*Excludes  8,805,932  shares of common  stock  deemed to be held by officers and
directors,  and stockholders  whose ownership exceeds five percent of the shares
outstanding at February 28, 1998.  Exclusion of shares held by any person should
not be construed to indicate  that such person  possesses  the power,  direct or
indirect,  to direct or cause the direction of the management or policies of the
registrant,  or that such person is controlled  by or under common  control with
the registrant.


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                                     PART I

ITEM 1.  BUSINESS

     This  Annual  Report on Form  10-K  contains,  in  addition  to  historical
information,  forward-looking statements that involve risks and uncertainty. The
Company's actual results could differ  significantly  from the results discussed
in the  forward-looking  statements.  Factors that could cause or  contribute to
such  differences  include  those  discussed  in  "Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations,"  as well as those
discussed elsewhere in this Annual Report on Form 10-K.

GENERAL

     Human  Genome  Sciences,  Inc.  (the  "Company" or "HGS") is engaged in the
research and  development of novel,  proprietary  pharmaceutical  and diagnostic
products  based on the discovery  and  understanding  of the medical  utility of
genes. Using automated,  high-throughput gene sequencing technology, the Company
has generated a very large collection of partial human gene sequences, which the
Company  believes  correspond to most of the expressed  genes in the human body,
and  now  possesses  one of the  largest  proprietary  databases  of  human  and
microbial genes. Based on this genomic database, the Company has created a broad
base of product  opportunities.  The  Company's  activities  have  progressed to
focusing  primarily on research and  development of therapeutic  protein product
candidates.  In its efforts to identify the most promising  product  candidates,
the  Company  uses its  advanced  proprietary  bioinformatics  system to analyze
partial gene sequences and identify the genes corresponding to such partial gene
sequences and the proteins  encoded by such genes.  As of February 28, 1998, the
Company has isolated and  characterized  several thousand  full-length genes and
expressed and purified more than 200 potential therapeutic proteins. The Company
is currently  developing  two  proteins,  MPIF-1 and KGF-2,  in phase I clinical
studies  and  evaluating  a number of  additional  therapeutic  protein  product
candidates in preclinical studies. In addition, the Company is investigating for
development  with  its  collaborators   proprietary  product   opportunities  in
diagnostics  and small molecule drugs based on human genes, as well as vaccines,
antibiotics, and diagnostics based on genes of microorganisms.

     The Company has a two-pronged commercialization strategy:

     Product  Development  and  Commercialization.  The  Company  is  using  its
     internal  capabilities  to  research  and develop  recombinant  therapeutic
     proteins, which are proteins that can be produced on a large scale and used
     as drugs to treat  diseases.  The  Company  generally  intends  to  develop
     potential  products to a late  preclinical or early clinical stage and then
     to collaborate with  pharmaceutical or biotechnology  companies for further
     development  and  commercialization.  However,  the  Company  may  consider
     developing certain potential products on its own.

     Corporate   Collaborations.   The  Company   increases  its  resources  and
     capabilities by establishing  collaborations with pharmaceutical  companies
     for the  development  and  commercialization  of new products.  The Company
     believes  that these  arrangements  will  enable  the  Company to focus its
     internal resources on a select number of promising product candidates while
     still exploiting the broader product opportunities presented by its genomic
     database.

     The Company has five collaboration  partners in the area of therapeutic and
diagnostic  products  based on its human gene  database.  The Company's  initial
collaboration  was  formed  with  SmithKline  Beecham  Corporation  ("SmithKline
Beecham") in May 1993 (as amended, the "SB Collaboration Agreements").  To date,
the Company has received $125 million in payments from SmithKline Beecham and is
further entitled to product development milestone payments and royalty payments.
In June 1995, the Company and SmithKline  Beecham  entered into a  collaboration
agreement with Takeda Chemical Industries,  Ltd. ("Takeda"),  whereby Takeda was
granted  certain  rights to  develop  and  commercialize  products  based on the
Company's  and  SmithKline   Beecham's  human  gene   technology   ("Human  Gene
Technology")  and an option  to  develop  and  commercialize  for Japan  certain
products  developed  by the  Company.  In June 1996 the Company  entered  into a
significant  amendment (the "SB Amendment") to the SB  Collaboration  Agreements
which,  among other  things,  allows the Company to  designate  six  therapeutic
proteins  at any  one  time  for  exclusive  development  and  commercialization
(subject to certain restrictions and co-development rights of its collaborators)
and  permits  the  Company  and  SmithKline  Beecham  to enter  into  additional
collaboration   agreements  in  the  field  covered  by  the  SB   Collaboration
Agreements.  In July 1997, the Company entered into another  amendment to the SB
Collaboration   Agreement  to  streamline   the  procedures  for  outlicense  of
diagnostic  products by SmithKline  Beecham and to permit the Company to develop
and market diagnostic tests to support its own therapeutic products.

     In June and July 1996,  the Company and  SmithKline  Beecham  entered  into
collaboration  agreements (the "Additional  Collaboration  Partner  Agreements")
with Schering  Corporation and Schering Plough,  Ltd.  (collectively,  "Schering
Plough"),  Synthelabo  S.A.  ("Synthelabo")  and Merck KGaA  (collectively,  the
"Additional  Collaboration  Partners").   Under  the  terms  of  the  Additional
Collaboration Partner Agreements, $87.5 million of license and research payments
is payable to the  Company  over five  years,  of which  $34.5  million has been
received to date.  In

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addition, the Additional  Collaboration Partner Agreements provide for milestone
and  royalty  payments  with  respect  to each  product  developed  under  these
agreements.  In exchange, the Additional Collaboration Partners received certain
rights to research,  develop and commercialize therapeutic products based on the
Company's and SmithKline  Beecham's Human Gene  Technology.  Schering Plough and
SmithKline  Beecham  have been  granted  the right to develop  jointly  with the
Company  certain of the  therapeutic  protein  product  candidates  to which the
Company has retained the exclusive development rights.

     The Company also has entered into other collaborative agreements in certain
areas where the Company has retained exclusive rights,  including:  the creation
of bacterial vaccines and  immunotherapeutics  and antimicrobial agents based on
genes of infectious  agents;  and corn  genomics.  Pursuant to the terms of such
collaboration  agreements, an aggregate of $29.1 million of license and research
payments is payable to the Company over five years,  of which $21.1  million has
been received to date.

     The Company also has entered into three gene therapy  agreements,  one with
Schering Plough as part of the Additional Collaboration Partner Agreements,  and
two with early stage gene therapy companies,  Vascular Genetics Inc. ("VGI") and
Transgene S.A.  ("Transgene").  The Company has received  equity in VGI and will
receive equity in Transgene in connection  with granting access to certain genes
in its database. In addition, the Company will receive milestone payments and/or
royalties.  The  Company  also  has  certain  co-marketing  rights  to  products
developed under the Transgene agreement.

     The Company also formed during its early  development a collaboration  with
The Institute of Genomic Research ("TIGR").  Under the collaboration  agreement,
the Company  agreed to provide  TIGR with  funding  totaling  $85 million over a
ten-year period ending  September  2002. In return,  the Company was entitled to
exclusive  intellectual  property rights to TIGR's  research.  In June 1997, the
Company  and  TIGR  reached  an  agreement  for  the  early  conclusion  of  the
collaboration,  which relieved the Company of all remaining funding obligations,
totalling  approximately $38 million.  In exchange,  the Company will forego all
intellectual  property rights for future work performed at TIGR, but retains all
intellectual property rights for work performed up to June 1997.

     The  Company   vigorously  pursues  patents  to  protect  its  intellectual
property.  As of February 28, 1998,  the Company has twenty issued U.S.  patents
covering  full-length  genes and has filed  U.S.  patent  applications  covering
substantially  more than 500 full-length genes and the proteins they encode. The
Company makes patent filings outside the United States as it deems  appropriate.
In addition,  the Company has filed patent  applications on a substantial number
of expressed  sequence  tags  ("ESTs")  that  represent  its large  partial gene
sequences,  although there is substantial uncertainty as to the patentability of
partial gene sequences.

GENOME SCIENCE

     Genome science refers to the  characterization of the entire set of genetic
information of any organism,  including humans. All cells contain DNA, a complex
material containing all of the genetic information  necessary to govern a cell's
biological processes. In humans,  approximately 3-5% of DNA consists of segments
called  genes.  The entire human genome is believed to contain at least  100,000
genes, of which only several  thousand were known to have been identified at the
time the  Company  commenced  its  operations.  Each gene  consists  of a linear
sequence of nucleotides,  the basic  structural  units of DNA.  Sequencing genes
involves  determining  the  order of  nucleotides  in the  gene,  which  permits
identification of the gene and the protein produced by the gene.

     Genes act as the fundamental blueprint for all the physiological attributes
of an  individual.  Each gene  contains  the  information  required  to  produce
("express")  a gene  product,  generally a protein.  Proteins are expressed by a
gene according to a set of genetic  instructions  encoded in the DNA and are the
principal  determinants  of an  organism's  characteristics.  A typical  cell of
higher  animals,  such as  humans,  contains  thousands  of  different  proteins
essential to cellular  structure,  growth and function.  The aberrant expression
within a cell by even a  single  gene  can  severely  alter  the  cell's  normal
function and result in a disease condition.

     When a gene is expressed in a cell,  the order of different  nucleotides in
the gene is copied into RNA in a duplication  process  called  transcription.  A
splicing  process within the cell then removes the introns,  or non-coding  gene
segments, from the transcript,  thereby creating a messenger RNA ("mRNA"), which
contains only the exons,  or coding regions,  of the transcribed  gene. The mRNA
then directs the  production of a protein in a process called  translation.  The
order of  nucleotides  in the  mRNA  determines  the  protein  that is made.  By
isolating mRNA from cells,  the Company's  scientists can analyze  primarily the
coding regions of a gene.  However,  mRNA is unstable and therefore is difficult
to  analyze  directly.  To  sequence  the  mRNA,  it is  preferable  to  copy or
transcribe  the mRNA back into DNA. This process  produces a DNA copy  ("cDNA"),
which contains only the exons,  or coding  regions,  of the expressed gene. This
process avoids examination of the majority of human DNA, as approximately 95-97%
of the human genome consists of long stretches of nucleotides  which do not code
for protein.  By focusing on the mRNA,  the Company  examines the portion of the
genome  which it  believes to be the most  important,  because it is the portion
which makes protein.

     Genes  play  an  important  role  in  the   development  of  a  variety  of
therapeutics, diagnostics and other products and services. Proteins expressed by
genes are the targets of most drugs. As a result, the identification of proteins
can
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<PAGE>

play an important role in the  development  of drugs and drug screens.  Proteins
themselves  can also be used as drugs.  Two  examples  of  protein  drugs on the
market are  erythropoietin,  which stimulates the production of red blood cells,
and insulin, which regulates sugar metabolism.  The identification of genes that
code for proteins that may be missing or defective can enable the development of
therapeutics for genetic diseases. In addition, identification of genes that may
predispose  a person to a  particular  disease  may  enable the  development  of
diagnostic tests for the disease.

COMPANY TECHNOLOGY AND RESEARCH

The Human Gene Anatomy Project

     The gene  discovery  activity  of the Company has focused on its Human Gene
Anatomy  Project.  The goal of this project is to identify  virtually  all human
genes, to catalogue the relative  abundance of expressed genes by organ,  tissue
and cell of origin and to identify  changes in gene  expression  associated with
the normal processes of development,  differentiation and activation, as well as
abnormal changes in gene expression  associated with the development of disease.
The Company  believes its Human Gene Anatomy Project  approach is  substantially
different  from most others  engaged in genomic  research,  which seek either to
isolate a single copy of each gene,  determine  the sequence of large regions of
human chromosomes or determine the chromosome  location of genes responsible for
inherited  genetic  diseases.  While such  approaches  will provide  information
valuable for the creation of some new gene-based  pharmaceutical  products,  the
Company  believes  that its Human Gene Anatomy  Project  provides a much broader
opportunity to discover genes of potential medical use.

     The first  component of the Human Gene Anatomy Project is the isolation and
preparation of a set of cDNA libraries from most normal human tissues. A library
is comprised  of cDNA  derived  from  samples of mRNA  expressed in a particular
tissue.  The Company's more than 700 libraries reflect the relative abundance of
the various mRNAs  expressed in each tissue.  The Company  isolates and purifies
individual  cDNA fragments  from each library for sequence  analysis to identify
the structure and possible function of genes. The Company sequences a portion of
each cDNA,  which the Company  believes  is often  sufficient  to  identify  the
expressed gene and represents the best method for rapid gene discovery.

     The Company's gene  sequencing  efforts now focus  principally on comparing
genes expressed in normal, abnormal, and developmental tissues. The Company uses
such  information  to  analyze  changes  in  gene  expression   associated  with
development,  differentiation  and  disease  processes,  such as  tumors  of the
prostate,  breast, colon and ovary. Additional areas of planned research include
changes in gene expression  that occur during the processes of  atherosclerosis,
asthma, emphysema, restenosis,  osteoporosis,  psoriasis, arthritis and a number
of neurological diseases.

Development of Product Opportunities

     The Company has created an advanced  proprietary  bioinformatics  system to
facilitate the selection of genes with potential medical utility. Bioinformatics
refers  to the  use  of  computers  to  process,  analyze,  store  and  retrieve
biological  information.  The Company believes it has one of the largest sets of
human  gene  sequences,  and also uses its  computer  system to access  publicly
available gene sequences.  The Company's high capacity  computer system has been
designed for ease of use by research  scientists,  who readily access the system
through desktop  computers.  The Company's data are also available to scientists
at  SmithKline  Beecham,  Takeda,  Schering  Plough,  Synthelabo  and Merck KGaA
through  bioinformatics  systems created by the Company and SmithKline  Beecham.
See " -- Collaborative Arrangements."

     The  Company  believes  that its  proprietary  bioinformatics  system is an
important  asset for the  identification  and  creation  of  gene-based  product
opportunities. The Company's bioinformatics system has several capabilities that
facilitate  identification  of genes with potential  medical utility,  including
gene similarity detection, sequence motif identification,  sequence assembly and
differential gene expression analysis.

     The Company's  primary focus has progressed  from  identification  of genes
having  potential  medical  utility  to  the  creation  of  proprietary  product
opportunities.  Specifically,  the Company is now engaged in the  identification
and   development   of  product   candidates,   including   the   isolation  and
characterization  of full-length  cDNAs, the purification of proteins encoded by
cDNAs of interest, the creation of cell lines that express specific receptors of
interest,  the mapping of genes of  interest,  the  creation of  polyclonal  and
monoclonal  antibodies,  the testing of the effects of purified proteins in cell
and tissue-based in vitro assays,  the study of the effects of purified proteins
in small laboratory animals, and the initiation of human clinical trials.

     As of February  28,  1998,  the Company has  isolated  and fully  sequenced
several hundred full-length cDNAs,  purified more than 200 potential therapeutic
proteins  and  mapped  more  than 250  full-length  cDNAs  to their  chromosomal
locations.



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RESEARCH AND DEVELOPMENT

     The Company's research and development efforts have been organized into the
following divisions:

     Gene Discovery  Division.  The Gene Discovery  Division is responsible  for
preparing   biological  samples,   extracting  and  amplifying  DNA,  performing
sequencing reactions,  managing production information and monitoring sequencing
quality.  The division manages the operation of 58 automated sequencing machines
along with a variety of laboratory  robots and other  instruments.  The division
has developed  technologies that streamline HGS' efforts to fully sequence genes
of interest in a high-throughput fashion.

     Molecular Biology Division.  The Company's Molecular Biology Division seeks
to  identify  and  evaluate  genes  that  may be  useful  for  the  creation  of
therapeutic  protein  drugs,  small  molecule  drugs,  gene  therapy,  antisense
treatments and diagnostic products.  The Molecular Biology Division contains the
Protein Therapeutics group and Exploratory Research group.

     The Protein  Therapeutics group identifies and evaluates genes which encode
proteins which may be useful as therapeutic protein drugs or for gene therapy or
antisense  applications.  The Protein  Therapeutics  group also identifies genes
that may be useful for diagnostic purposes.  When comparative analysis indicates
that a gene encodes a potential  therapeutic  protein,  this group  isolates the
corresponding  full-length cDNA, determines its pattern of tissue expression and
its entire coding sequence.

     The Company has  commenced a program to identify  from its database what it
believes  to  be  full-length  cDNAs  likely  to  encode  potential  therapeutic
proteins.  To date,  the Company has  identified  what it believes to be several
thousand  secreted  proteins.  The Company is expressing  and  evaluating  these
proteins and assessing their activity using in vitro and in vivo models covering
different therapeutic areas.

     In  addition  to  efforts  relating  to  the  identification  of  potential
therapeutic  proteins,  the Protein  Therapeutics group  characterizes genes and
proteins  that  may  serve  as  targets  for  small  molecule  drug   discovery,
principally  to  support  the work of the  Company's  collaborators.  The  group
isolates  full-length  cDNAs,  performs  experiments to determine the tissue and
cell type in which the genes are expressed and determines the complete  sequence
of the cDNA  corresponding  to each  candidate  gene.  The group has  identified
several  hundred  genes  which  encode  proteins  that may be targets  for small
molecule drug screening.  Full-length cDNAs corresponding to many of these genes
have been isolated and fully sequenced,  and tissue distribution and chromosomal
location of most of these full-length genes have been determined.

     The efforts of the  Exploratory  Research  group are focused on development
and  implementation  of  new  technologies   useful  in  the  identification  of
medically-relevant  gene candidates.  Responsibilities of this group include new
methodologies for cDNA library construction, chromosome mapping, optimization of
full-length gene cloning and development of new methods for gene analysis.  This
group is also  currently  responsible  for  efforts in  microbiology,  including
construction  and  analysis of  microbial  genome  libraries  and  selection  of
candidate genes which may be useful in vaccine and immunotherapeutic programs.

     Microbiology   Division.  The  Microbiology  Division  is  responsible  for
development of microbial gene sequence  information and biological reagents that
support  HGS'  and  collaboration  anti-infective  efforts.  For  the  Company's


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microbial gene sequencing projects,  the division is responsible for preparation
and analysis of the microbial genome database.  These efforts include  obtaining
biological samples and preparation of the microbial genome libraries.  The group
has been involved in the sequencing of several  important  microbial  pathogens,
including  Streptococcus  pneumoniae,  Staphylococcus  aureus  and  Enterococcus
faecalis.  The division also supports internal and collaborative efforts focused
on generation of anti-microbial vaccine and immunotherapeutic products.

     Bioinformatics  Division.  The Company's  Bioinformatics  Division develops
systems for  high-volume  data capture and analysis to support HGS' research and
collaborative  efforts.  The division  applies  advanced  sequence data analysis
techniques  to  identify  candidate  genes  for  biological  screening  and drug
development.  Bioinformatics  manages  database systems for tracking samples and
reagents  during  experimental  procedures  and  sample  storage.  The  division
supports collaborative  relationships with the delivery of software,  databases,
training and support.  The division  also is  implementing  systems for clinical
trial data management and analysis, preparation of drug applications and process
control of manufacturing operations.

     Protein  Development  Division.  The  purpose  of the  Protein  Development
Division  is to provide  proteins  in a form  suitable  for in vitro and in vivo
testing. The Protein Development  Division uses bacterial,  insect and mammalian
expression  systems that have been  engineered  to express  abundant  amounts of
proteins.  The Company's  therapeutic  protein production  facilities include 15
bioreactors  ranging in capacity from 2 to 100 liters.  The Protein  Development
Division  also  purifies  potential  therapeutic  proteins,  enzymes that may be
useful in the discovery of small molecule drugs and bacterial  proteins that may
be useful as vaccine  components.  This  division  also  oversees  the  contract
production of cGMP materials by third parties for preclinical  qualification and
Phase I clinical  studies and the  construction  and  operation of a pilot scale
production  and  process  development  facility,  which will be leased  from the
Maryland Economic Development Corporation ("MEDCO").

     Through  February 28, 1998, the Company has produced and purified more than
200 novel human  proteins in amounts  sufficient to test for  activity.  In some
cases, the Company also provides highly purified  proteins to its  collaborators
for further analysis.

     Cell Biology Division.  The Cell Biology Division determines the activities
of purified  therapeutic  protein  candidates on cells in tissue  culture.  This
division  uses over 75 in vitro  assays to  evaluate  biological  activities  of
therapeutic protein candidates, many of which are used to determine whether such
candidates have biological  activities  relevant to serious unmet medical needs.
Examples of such in vitro tests include assays that detect proteins that have an
anti-viral  effect,  proteins that are capable of prolonging the life of neurons
and of promoting neural cell growth, proteins that have anti-cancer activity and
proteins that affect the growth and differentiation of hematopoietic cells.

     High-Throughput  Screening Division. The High-Throughput Screening Division
was established in early 1998. This group is responsible for the development and
validation  of  high-throughput  screens to access the activity of the Company's
therapeutic protein candidates. This division is also responsible for generation
of cell-based  supernatants that currently represent several thousand individual
genes encoding potential secreted proteins. The High-Throughput  Screening group
works  closely  with  the  Gene  Discovery  and   Bioinformatics   divisions  in
development   of   laboratory   information   management   systems   useful  for
instrumentation control and analysis of test results.

     Pharmacology  Division. The Pharmacology Division tests for in vitro and in
vivo activity of  therapeutic  protein  candidates and is also  responsible  for
safety studies.  The division is responsible  for preclinical  animal testing of
the Company's  therapeutic  protein  product  candidates and employs a number of
standard  assays for  determining  biological  function.  The  division has also
developed  several  specialized  assays to test biological  function of specific
therapeutic  proteins.  The  Company  has  recently  expanded  this  division to
increase its efforts to develop therapeutic protein product candidates,  and the
Company  expects to continue  to expand the  division  as  necessary  to support
preclinical  and  clinical  development.  The  Company  intends to  establish  a
clinical  management  team to manage and oversee  clinical  trials.  The Company
intends to  utilize  contract  research  organizations  to  conduct  toxicology,
pathology and clinical trials on the Company's lead therapeutic  protein product
candidates.

     Medical and  Regulatory  Affairs  Divisions.  The  Medical  and  Regulatory
Affairs  Divisions  manage all  activities  necessary  for the  preparation  and
submission  of  regulatory  documentation  including  Investigational  New  Drug
Applications (INDs), Biologics License Applications,  and New Drug Applications.
The divisions are  responsible  for  developing  and  implementing  clinical and
regulatory  strategies that will ensure  submissions meet U.S. and international
regulatory  requirements  to  initiate  clinical  trials  and  obtain  marketing
approvals for products developed by the Company.

     The Quality Assurance (QA) staff,  within Regulatory Affairs, is supporting
the establishment of current good manufacturing practices (GMPs) for HGS' leased
pilot product manufacturing facility. The QA staff provides guidance and assists
in creation and implementation of standard operating procedures (SOPs),  assures
GMP  training for  facility  employees,  and  maintains  documentation  of these
activities. QA participates in GMP audits of contract vendors.

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     INDs are currently active for two therapeutic protein product candidates --
MPIF-1 and KGF-2.  Leading physicians and investigators have been identified and
consulted for possible new drug  indications  and for optimizing  clinical trial
designs related to investigating  prevention of  chemotherapy-induced  damage to
myeloid  precursors,  treatment of surgical and dermal  wounds,  and  mucositis.
Clinical  investigators  have been  selected  from  this  group to  conduct  the
clinical  trials  sponsored by HGS. The data from these  studies will be entered
into an  electronic  database  and  analyzed  by HGS  medical,  regulatory,  and
statistical  staffs.  Formal reports of clinical and non-clinical data then will
be submitted to the FDA. If the safety and efficacy of the investigational  drug
for the  specified  indication  are  demonstrated  by clinical  trial data,  the
Company intends to submit a biologics license or new drug application to the FDA
for marketing approval.

AREAS OF PRODUCT DEVELOPMENT

     The Company  believes that the genes it identifies have the potential to be
valuable for the  development of a wide range of healthcare  products in some or
all of the following areas:

     Therapeutic  Proteins.  Therapeutic proteins are recombinant human proteins
that  in  native  or  modified  form  exert  medically  useful   physiologic  or
pharmacologic  activity.  By discovering and isolating genes, the Company may be
able to cause the genes that code for  therapeutic  proteins  to  express  those
proteins.  Therapeutic  proteins  may be useful for the  treatment  of diseases,
including  inflammatory  and autoimmune  diseases,  neurodegenerative  diseases,
cardio-pulmonary diseases and other diseases caused by insufficient or defective
proteins  resulting  from a missing  or  defective  gene.  Therapeutic  proteins
currently in clinical use include  interferon,  insulin,  human growth  hormone,
DNAse, G-CSF, GM-CSF and erythropoietin.

     Currently,  the Company is conducting pre-clinical and clinical development
studies  on a  number  of  potential  therapeutic  proteins,  including  Myeloid
Progenitor  Inhibitory Factor-1 (MPIF-1),  Keratinocyte Growth Factor-2 (KGF-2),
and Vascular Endothelial Growth Factor -2 (VEGF-2).

     MPIF-1.  MPIF-1 is a member of the chemokine family.  The Company has shown
that MPIF-1 in in vitro and in vivo  studies  inhibits the  differentiation  and
growth  of  bone  marrow  cells  (myeloid   progenitor  cells)  responsible  for
maintenance of red and white blood cells. Myeloid progenitor cells are destroyed
by  many  forms  of  cancer   chemotherapy   resulting  in  severe   leukopenia,
thrombocytopenia  and anemia.  By  preventing  the growth of myeloid  progenitor
cells during  aggressive cancer  chemotherapy,  it may be possible to reduce the
destruction of these cells allowing the more rapid repopulation of red and white
blood cells in the  circulation.  This,  in turn,  may reduce the  incidence  of
serious  infection,  anemia and  coagulation  disorders  associated  with cancer
chemotherapy.  An Investigational  New Drug application for MPIF-1 was submitted
to the FDA during November of 1997.  Clinical trials were initiated in the first
quarter of 1998.

     KGF-2. KGF-2 is a member of the Fibroblast Growth Factor  superfamily.  The
Company  has  shown  in in vivo  tests  that  KGF-2  stimulates  the  growth  of
epithelial  cells. The protein has potential for use in the treatment of topical
(skin) ulcers, surgical and other wounds and burns and possibly other conditions
affecting epithelial cells. In addition, KGF-2 may be useful in the treatment of
mucositis  (frequently  a toxicity of cancer  chemotherapy)  and/or  acute renal
failure.  An Investigational New Drug application for KGF-2 was submitted to the
FDA during December of 1997. Clinical trials were initiated in the first quarter
of 1998.

     VEGF-2.  VEGF-2  is a member of the  vascular  endothelial/platelet-derived
growth factor superfamily. The Company has shown in in vitro studies that VEGF-2
promotes the growth of certain subsets of vascular endothelial cells. In in vivo
animal  models  performed in  collaboration  with Dr.  Jeffrey  Isner at the St.
Elizabeth's Medical School,  VEGF-2 protein and DNA encoding the VEGF-2 gene had
been shown to reduce the  severity of  ischemia  in a rabbit hind limb  ischemia
model.

     As a result of the SB  Amendment,  in June 1996,  the Company  obtained the
right to designate a limited number of therapeutic protein candidates at any one
time for exclusive  development and  commercialization by the Company,  with the
right  to add  additional  proteins  as  products  enter  clinical  trials,  are
outlicensed  or dropped.  Schering  Plough and  SmithKline  Beecham have certain
co-development  rights  with  respect to these  product  candidates.  Subject to
certain  limitations,  the Company has the right to substitute  new proteins for
proteins (i) that have been licensed to third parties under procedures set forth
in the SB Amendment,  (ii) that are the subject of clinical  trials or (iii) the
rights to which have been  surrendered  by the Company.  See " --  Collaborative
Arrangements."

     All of the Company's  therapeutic  protein  product  candidates  are in the
early stages of preclinical and clinical  testing.  Accordingly,  the results of
testing  to date may not be  indicative  of  results  that will be  obtained  in
further  preclinical  trials or in clinical  trials,  as applicable.  As further
results of tests are received, the Company may abandon particular projects which
it might  otherwise have  considered  promising.  Additionally,  there can be no
assurance  that  clinical  trials as to any  particular  product  candidate,  if
commenced,  will  be  successful,  or  that  any  product  can  be  successfully
commercialized.

                                       7
<PAGE>

     Small  Molecule  Drugs.  The  Company  believes  that  knowledge  of a more
complete set of genes and the proteins  they express will enable  pharmaceutical
companies  to design  and screen  pharmaceutical  products  in a more  efficient
fashion by  providing  logical  specific  targets  for  discovering  drugs.  The
discovery of new drugs often involves  screening a large family of synthetic and
natural  products to  determine  their  impact on proteins  expressed  by genes.
Increasingly,  automated biochemical assays that test the ability of proteins to
bind to and  modify  the  activity  of  purified  proteins  are used to test the
efficacy and selectivity  (i.e.,  the ability to affect only the desired protein
targets and not other  proteins  expressed in the human body) of new drugs.  The
undesired  binding of a drug to other proteins not detected by a screening assay
can result in toxicity or other  undesirable side effects.  The Company believes
that the genes it discovers  may  contribute  to screening  assays by permitting
more complete sets of target  proteins to be assembled for an assay.  SmithKline
Beecham is currently using proteins expressed by genes identified by the Company
in a number of screening assays used to identify new drugs.

     Diagnostics. The Company also believes that the genetic data obtained by it
could lead to the development of diagnostic tests for diseases. Such diagnostics
would likely be focused on four different  applications.  First, the comparative
analysis of genes  expressed  during the  progression  of tissues from normal to
fully  diseased  states may permit more  accurate  staging of diseases,  thereby
facilitating the diagnosis and treatment of the disease.  Proteins  expressed by
"marker" genes associated with a specific disease can be a starting point in the
synthesis of antibodies,  the principal  components in many diagnostic  systems.
Second,  the  Company's  genetic data may enable the  development  of methods to
determine individual  predisposition to disease.  Third, tests could be designed
to detect inherited  diseases in fetal cells.  Fourth, the Company believes that
the genetic data obtained from the sequencing of disease-causing  microorganisms
may  allow  for the  rapid  determination  of the  presence  and  activity  of a
particular  microorganism in an infected person.  The development of diagnostics
based on genes  identified by the Company is part of SmithKline  Beecham's field
under the SB Diagnostic Amendment.

     Antimicrobial  Agents and  Vaccines.  The  Company has  retained  exclusive
rights to utilize its information and technology to develop antimicrobial agents
and vaccines  and,  accordingly,  is  identifying  and  characterizing  genes of
microorganisms,  including bacteria, viruses, fungi and multicellular parasites.
The Company  anticipates using its automated  sequencing  techniques to identify
genes expressed by microorganisms  and parasites during resting,  vegetative and
pathogenic states of infection. The Company believes that genes expressed during
the pathogenic phase of a microorganism may be found to be required for disease.
Each such gene (called a virulence  gene) might be a candidate  target for a new
antibiotic or vaccine.  The Company also  believes  that  knowledge of genes and
proteins  expressed by pathogenic  organisms may facilitate  the  development of
gene-based and antibody-based diagnostic assays for infectious diseases.

     Analysis of the total genome of a  microorganism  should provide a complete
picture of all genes encoded by the  microorganism.  With this information,  the
Company  believes it may be possible to choose  protein  candidates  that may be
useful as  vaccine  components  or  antigens  required  for the  development  of
immunotherapeutics. The Company also believes that a high-throughput approach of
gene identification may identify new genes capable of producing  antibiotics and
other useful secondary metabolites.

     The Company,  either alone or in  collaboration  with TIGR,  has  completed
sequencing pathogenicity islands of Escherichia coli and the majority of the DNA
comprising   the  genome  of  the   bacteria  of  the   Staphylococcus   aureus,
Streptococcus pneumoniae,  Enterococcus faecalis,  Helicobacter pylori, Borrelia
burgdorferi,  Haemophilus  influenzae,  Mycoplasma  genitalium and Methanococcus
jannaschii.  The  Company has  entered  into  agreements  with  MedImmune,  Inc.
("MedImmune"),  Hoffmann-La Roche Inc.  ("Roche") and Pharmacia & Upjohn Company
("Pharmacia")  to  create   vaccines,   immunotherapeutic   products,   and  new
anti-infectives and antibiotics based on the genomes of many of these organisms.
See "-- Collaborative  Arrangements." Patent applications have been filed by the
Company on these genomes.

     Gene Therapy.  The Company believes that its gene discovery  technology may
identify new genes that can be introduced  into the body through the use of gene
therapy techniques.  Many diseases result when specific proteins are produced in
inappropriate  quantities, in a defective manner, or not at all. Gene therapy is
a novel  approach to the treatment of disease in which genes are inserted into a
patient's  cells for the purpose of inducing these cells to produce  therapeutic
proteins or to replace  defective or missing genes. In other  applications,  the
Company  believes  that gene therapy may induce cells to secrete  proteins  that
enhance the immune system's ability to recognize and attack a specific  disease.
Gene therapy might also allow  localized  delivery of proteins that cannot reach
the appropriate site through conventional  methods of administration.  There are
currently  no gene  therapy  products  on the  market,  although  a  number  are
undergoing  clinical  trials.  The  Company  has entered  into  agreements  with
Schering Plough,  Vascular Genetics Inc., and Transgene S.A.,  granting them the
right  to  use  of  the  Company's   technologies  for  gene  therapy.  See  "--
Collaborative Arrangements."

     Antisense  Drugs.  The Company believes that the knowledge of the structure
of genes developed  through the use of its sequencing  technology may facilitate
the development of antisense  drugs.  Antisense  technology  involves the use of
short oligonucleotide sequences,  complementary to the gene, that, after binding
to the mRNA encoded by the gene, inhibit the synthesis of the protein encoded by
the gene. If, for example, the target gene expressed a protein involved in rapid
cell growth leading to a particular cancer, then use of the antisense drug could
have the potential of inhibiting the synthesis of the target protein  encoded by
the particular  gene and lead to restoration of normal growth.  Antisense  drugs

                                       8
<PAGE>


could  also be of  potential  benefit in  diseases  where  production  of excess
protein  leads to the disease  state.  There are  currently no  antisense  drugs
approved for treatment.

COLLABORATIVE ARRANGEMENTS

     Agreements with SmithKline  Beecham.  In May 1993, the Company entered into
the SB Collaboration Agreements pursuant to which SmithKline Beecham was granted
certain exclusive rights to develop and commercialize therapeutic and diagnostic
products  within  the "SB  Field"  (as  defined  below)  based  on  human  genes
discovered  by  the  Company.  Pursuant  to  the  SB  Collaboration  Agreements,
SmithKline  Beecham  has  paid to the  Company  an  aggregate  of $125  million,
including  $55 million  which was  allocated  to the purchase of an aggregate of
1,351,738 shares of common stock.

     In June 1996, the SB Collaboration  Agreements were  substantially  amended
(the "SB  Amendment").  The SB  Amendment  allowed the  Company  and  SmithKline
Beecham  together  to  enter  into  collaboration   agreements  with  additional
pharmaceutical  companies ("Additional  Collaboration Partners") in the SB Field
(other than diagnostics and animal  healthcare in which  SmithKline  Beecham has
generally retained  exclusive rights).  The "SB Field" is the field of human and
animal  healthcare,  other than gene therapy  (excluding gene therapy vaccines),
antisense  products and the use of genes for synthesizing  drugs that were known
at the time the SB Collaboration  Agreements were executed. In addition,  the SB
Amendment  provides  that  each  of  the  Company  and  SmithKline  Beecham  can
independently   designate  potential  therapeutic  proteins  for  its  exclusive
development and  commercialization  (e.g.,  marketing or outlicensing)  provided
that the designating  entity is the first among the Company,  SmithKline Beecham
and the  Additional  Collaboration  Partners  to select the  protein and certain
research requirements are met prior to such designation. Under the SB Amendment,
the Company can designate six therapeutic  protein  candidates for its exclusive
development  and   commercialization   at  any  one  time.  Subject  to  certain
limitations,  the Company may substitute  additional proteins for any of the six
proteins  designated  by the Company (i) which have been licensed by the Company
to third parties in accordance with the SB Amendment, (ii) which are the subject
of  clinical  studies  by the  Company  or (iii) the  rights to which  have been
surrendered by the Company.  SmithKline  Beecham's  right to select  therapeutic
protein  candidates  during the initial  research  term of the SB  Collaboration
Agreements is not limited.  In addition,  the SB Amendment provides that each of
the Company and SmithKline  Beecham may independently (i) research,  develop and
commercialize antibody products directed against antigens derived from the human
genome database created by the Company and (ii) identify and use novel molecular
targets  derived  from the human  genome  database  created  by the  Company  to
discover and develop small molecule pharmaceutical  products,  provided that the
Company  will not  initiate  screening  of such targets for three years from the
effective date of the SB Amendment and will not use certain  targets  subject to
agreements  with third parties,  subject to certain other  restrictions.  The SB
Amendment  restricts the Company from entering  into  collaborations  with third
parties  (other than  Additional  Collaboration  Partners  and Takeda) in the SB
Field (i) during the initial research term,  except with respect to products for
which the Company has exclusive  development  rights and (ii) during the initial
research term and for a period thereafter with respect to certain products which
are the  subject  of  research  plans  submitted  by  SmithKline  Beecham  or an
Additional  Collaboration  Partner  or  Takeda  prior to the  expiration  of the
initial research term.

     The SB  Amendment  provides  that  SmithKline  Beecham and the Company will
share  equally in any license fees and product  development  milestone  payments
paid under Additional  Collaboration  Partner  Agreements,  and that the Company
will receive all royalties and research  support  payments under such Additional
Collaboration  Partner Agreements.  The SB Collaboration  Agreements provide for
payments  to the  Company of  royalties  on net sales of  products  based on the
Company's  patents or  technologies  within the SB Field ("SB Products") sold by
SmithKline  Beecham (or its licensees) and milestone payments in connection with
the  development  of SB  Products.  The Company has an option to  co-promote  SB
Products sold by  SmithKline  Beecham,  on a  country-by-country  basis,  in the
United States,  Canada,  Mexico and Europe (subject to certain limitations as to
rights granted to Takeda and other parties). If the Company develops and markets
or  outlicenses  a product  in the SB Field  pursuant  to its  rights  under the
agreements  with  SmithKline  Beecham,  SmithKline  Beecham  will  generally  be
entitled  to  royalties  or to share in  milestone  payments  and  license  fees
received  by the Company  from  licensees  with  respect to such  products.  The
Additional  Collaboration  Partner  Agreement with Schering  Plough  includes an
option for Schering Plough to co-develop and co-commercialize up to two products
in  the  SB  Field  to  which  the  Company  has   exclusive   development   and
commercialization  rights  under  the  SB  Collaboration   Agreements.   The  SB
Collaboration  Agreements include an option for SmithKline Beecham to co-develop
and co-commercialize products in the SB Field to which the Company has exclusive
development and commercialization  rights under the SB Collaboration  Agreements
and for which  Schering  Plough has not exercised  its option to co-develop  and
co-commercialize.  SmithKline Beecham will also be entitled to royalties on, and
an option to co-promote, products outside the SB Field sold by the Company which
are based on or  incorporate  patents or  information  developed  by  SmithKline
Beecham based on the Human Gene Technology of the Company.

     The initial research term under the SB Collaboration  Agreements  continues
through June 2001.  After  expiration of the initial  research term, the Company
will  have all  rights to the  Company's  Human  Gene  Technology,  except  that
SmithKline  Beecham will retain  rights to the Company's  Human Gene  Technology
pursuant to research plans meeting certain specified criteria submitted prior to

                                       9
<PAGE>

expiration of the initial term,  Takeda will retain rights granted to it under a
license  agreement  prior  to  expiration  of  the  initial  research  term  and
Additional  Collaboration  Partners  will  retain  rights  granted to them under
Additional Collaboration Partner Agreements. See "-- Other Collaborations in the
SB Field."  SmithKline  Beecham has the right to extend the research term for up
to five additional years by making certain payments, which would extend the time
for submitting  research  plans as to  therapeutic  products other than antibody
products and therapeutic protein products.

     The Company has agreed that it will make  available 35 gene  sequencers and
related  personnel and reagents to sequence genes at the direction of a research
committee comprised of representatives of SmithKline Beecham and the Company.

     In July 1997, the SB  Collaboration  Agreements  were further  amended with
respect  to  the  field  of  human  diagnostic   products  (the  "SB  Diagnostic
Amendment").   The  SB  Diagnostic  Amendment  streamlined  the  procedures  for
outlicense by SmithKline Beecham of diagnostic  products based on HGS technology
and specified a royalty on diagnostic products sold by SmithKline Beecham or its
licensees. The agreement also permits HGS to develop and market diagnostic tests
that support its own therapeutic  products, if SmithKline Beecham is not already
developing and marketing such a diagnostic  test. The agreement  provides for an
initial  research term that continues  through June 2001, and may be extended by
SmithKline  Beecham for up to five additional  years by making certain  payments
and provided that the SB Amendment agreement is also extended for a commensurate
period of time.

     Other Collaboration  Agreements in the SB Field. In June and July 1996, the
Company and SmithKline Beecham entered into the Additional Collaboration Partner
Agreements  with  Schering  Plough,  Synthelabo,  and  Merck  KGaA.  Each of the
Additional    Collaboration   Partner   Agreements   provides   the   Additional
Collaboration  Partner the rights and  licenses to access and use the  Company's
Human  Gene  Technology,  as well as  biological  information  developed  by the
Company and SmithKline  Beecham prior to, and in the case of the Company,  after
the effective date of such  Agreement,  to discover,  develop and  commercialize
products  based upon or derived from such Human Gene  Technology in the SB Field
(other than diagnostics and animal  healthcare).  Each Additional  Collaboration
Partner may also  designate,  and receive  exclusive  license  rights  under the
Company and SmithKline Beecham patents and technology to, potential  therapeutic
protein products for its exclusive development and  commercialization,  subject,
in certain  cases,  to  certain  restrictions  as to the  number of  therapeutic
protein  candidates  that can be claimed,  and subject to achievement of certain
research  requirements  prior  to  such  designation.  Each  of  the  Additional
Collaboration  Partners is obligated to pay license fees, research payments, and
milestone  payments  in  connection  with  development  of  products  under  the
agreement and royalties. Each of the Additional Collaboration Partner Agreements
is for  an  initial  research  term  expiring  in  June  2001.  Each  Additional
Collaboration Partner has the right to extend the term for up to five additional
years by making  certain  payments.  The Company  cannot  enter into  additional
agreements  similar to the Additional  Collaboration  Partner Agreements without
the  consent  of  SmithKline  Beecham,  Takeda  and  certain  of the  Additional
Collaboration Partners.

     The Company will be entitled to one-half of all license fees and  milestone
payments and to all royalties due from each Additional Collaboration Partner. In
addition,  each  Additional  Collaboration  Partner will make research  payments
directly  to the Company for the  duration  of the initial  research  term which
continues  through June 2001.  Aggregate  license fees and research payments due
under the New  Collaborative  Partner  Agreements  are $140  million  during the
initial  research  term, of which the Company will be entitled to $87.5 million,
payable in equal  installments over a five-year  period.  $34.5 million has been
received by the Company as of February 28, 1998.

     The  Additional   Collaboration  Partner  Agreement  with  Schering  Plough
includes an option for Schering Plough to co-develop and  co-commercialize up to
two of the Company's products in the SB Field to which the Company has exclusive
development and commercialization rights under the SB Collaborative Agreements.

     SmithKline Beecham and Takeda entered into a License Agreement (the "Takeda
License  Agreement")  relating to the development and sale of products in the SB
Field based upon rights licensed from the Company.  The Company will be entitled
to all royalty  payments and one-half of the milestone  payments due from Takeda
to SmithKline  Beecham under the Takeda  License  Agreement on sales of products
developed by Takeda  under the  agreement.  In  addition,  at the same time that
SmithKline Beecham and Takeda entered into the Takeda License Agreement,  Takeda
and the Company entered into an Option and License  Agreement  pursuant to which
Takeda was granted an exclusive  option to license  rights  under the  Company's
patents  and  technology  in the  field of human  healthcare  (other  than  gene
therapy,  antisense and diagnostics) to make and sell a limited number (equal to
the number of  collaboration  partners other than SmithKline  Beecham and Takeda
with which the Company enters into collaboration  agreements in the SB Field) of
products in Japan. In consideration of the grant of the option,  Takeda paid the
Company $5 million and agreed to pay to the Company  royalties based on the sale
of Takeda  products  covered by the Option and  License  Agreement  and  certain
milestone   payments.   The  option  period  terminates  three  years  following
expiration of the initial research term under the SB Collaboration Agreements.

     Collaboration  Agreements  Outside of the SB Field. The Company has entered
into collaboration  agreements with respect to the development of products based
on the  Company's  gene  discovery  research  outside  of the  SB  Field.  These
collaboration  agreements,  which generally  provide for milestone  payments and
royalties  and in most cases up front  license  fees and/or  research  payments,
include the following:

                                       10
<PAGE>
     A Collaboration and License Agreement with MedImmune,  entered into in July
     1995  and  amended  in  March  and  December  1997,  with  respect  to  the
     development of drugs based upon certain  infectious agents sequenced by the
     Company  or TIGR or as to  which  the  Company  has  licensed  the  rights.
     Programs  under the  agreement  with  MedImmune  include  the  creation  of
     vaccines   and   immunotherapeutics   for   non-encapsulated    Haemophilus
     influenzae, Streptococcus pneumoniae, Escherichia coli, Helicobacter pylori
     and Borrelia burgdorferi;

     A Research Collaboration Agreement with Pioneer Hi-Bred International, Inc.
     ("Pioneer"),  entered into in January 1996 under which  Pioneer was granted
     certain rights in the field of corn genomics;

     A License Agreement with Roche, entered into in March 1996, under which the
     Company  is  responsible  for  sequencing  and  assembling  the  genome  of
     Streptococcus  pneumoniae,  a  bacterial  pathogen  responsible  for severe
     respiratory  and  other   infections  and  under  which  Roche  received  a
     non-exclusive  license to use this  information  to identify  potential new
     anti-infectives  and antibiotics;  a similar  agreement was entered into in
     1997 with  respect  to the genome of  Enterococcus  faecalis,  a  bacterial
     pathogen which is a major component of hospital-acquired infections;

     A Collaboration  and License Agreement with Schering Plough relating to the
     field of human gene therapy  (including gene therapy vaccines to the extent
     the  Company  has the right to do so),  under  which  Schering  Plough  was
     granted  (i) a  non-exclusive  license  to use  the  Company's  Human  Gene
     Technology  to conduct  research  and (ii) an option to obtain an exclusive
     license to specific genes in the field of gene therapy;

     An  agreement  entered  into in October  1996 with  Pharmacia  whereby  the
     Company granted to Pharmacia (i) a nonexclusive license to conduct research
     and to make, use and sell products based on genes of Staphylococcus  aureus
     and the pathogenicity islands of Escherichia coli sequenced by the Company,
     (ii) the right to obtain an exclusive license to certain products and (iii)
     the right to  negotiate  to  obtain  an  exclusive  license  as to  certain
     microbial  genomes as to which the  Company  desires to grant an  exclusive
     license;

     An  agreement  entered  into in  November  1996  with  OraVax  Merieux  Co.
     ("OraVax"),  with respect to an exclusive  license granted by MedImmune and
     the Company with respect to use of the Company's and MedImmune's technology
     for a Helicobacter pylori vaccine;

     An  agreement  entered into in November  1997 with a newly formed  company,
     Vascular  Genetics Inc.,  whereby the Company granted to Vascular  Genetics
     (i) an  exclusive  license in the field of gene  therapy for the  Company's
     vascular  endothelial growth factor 2 (VEGF-2) gene, and (ii) an option for
     up to two additional  genes for use as gene therapy drugs to treat vascular
     disease;  in return the Company received 19.9 percent of Vascular Genetics'
     equity and warrants for the purchase of an additional 5.1 percent interest;
     other initial investors included St. Elizabeth's  Medical Center of Boston,
     Inc., CATO Holding Company, and Jeffrey M. Isner, M.D.; and

     A Collaboration and License Agreement with Transgene S.A.,  entered into in
     February 1998,  relating to the field of human gene therapy (including gene
     therapy  vaccines to the extent the Company has the right to do so),  under
     which  Transgene  was  granted  the right to license  exclusively  up to 10
     genes; the Company obtained a 10 percent interest in Transgene's equity and
     certain   co-development   and  co-marketing   rights;   the  agreement  is
     conditional  on Transgene's  completion of an initial public  offering of a
     specified size and value.

     As of February 28, 1998,  the Company had entered  into  approximately  276
material   transfer   agreements   with  135  academic   institutions   covering
approximately  1,354  gene  sequences,   cDNAs  and  proteins.  The  Company  is
continuing to negotiate additional material transfer and license agreements. The
purpose of these  agreements is to expand research and  development  relating to
the  Company's  gene   information  by  providing   academic   researchers  with
proprietary gene sequence information and related materials which enable them to
explore  the  biological   activity  and  potential  medical  utility  of  newly
discovered human genes. Most of these material transfer  agreements grant to the
Company a license,  with established  royalty rates, to any invention  resulting
from the use of gene sequence  information or related materials  provided by the
Company. A relatively small number of the material transfer agreements signed by
the Company  provide for an option to license any invention  resulting  from the
use of the Company's gene sequencing  information.  The Company has not signed a
material transfer agreement with an academic  institution which does not provide
for a license or option to exclusive rights for inventions resulting from use of
the Company's information. In addition, TIGR, SmithKline Beecham and Takeda have
also entered into material transfer agreements with academic  institutions.  The
Company is also entitled to rights with respect to inventions resulting from use
of sequence information and related materials under such arrangements.

     Agreements  with TIGR. In October 1992 the Company  entered into a Research
Services  Agreement  and  an  Intellectual   Property  Agreement  with  TIGR,  a
not-for-profit  research  institute.  TIGR initially  performed most of the gene
sequencing  and  made  the  sequences  available  to the  Company.  The  Company
subsequently developed its own gene sequencing capability.

     Pursuant to these  agreements,  a Lease Funding  Agreement  entered into in
March 1993 and a subsequent  agreement  entered into in April 1993,  the Company
had committed to provide an aggregate of approximately  $85 million to TIGR over
a ten-year  period,  ending  September 2002, of which $70 million  consists of a
research grant and equipment funding for TIGR's scientific  research relating to
determining human genes and their functions and uses. Through December 31, 1997,

                                       11
<PAGE>

the Company had paid approximately $48 million pursuant to these agreements. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

     Under  the  Research  Services  Agreement  and  the  Intellectual  Property
Agreement,  TIGR was  obligated  to  disclose  to the  Company  all  significant
developments  relating to information or inventions  discovered at TIGR, and the
Company owned (on a royalty-free basis) all of TIGR's interest in inventions and
patent rights  arising out of TIGR's  research  during the term of the agreement
(including  rights  arising from research  funded by third  parties,  except for
research funded by certain  governmental and not-for-profit  organizations as to
which the  Company has been  granted a  royalty-bearing,  worldwide,  perpetual,
exclusive license,  subject to a non-exclusive  royalty-free license retained by
such organization).

     In June 1997,  the Company and TIGR  agreed to an early  conclusion  of the
relationship between the two companies.  Accordingly, the parties terminated the
prior agreements and entered into a new agreement  whereby HGS ceased all future
payments to TIGR in return for relinquishing rights to future work done by TIGR.
The Company  retained  rights to  inventions  and patents  arising out of TIGR's
research prior to June 1997. TIGR agreed not to enter into commercial agreements
for four years on selected therapeutic proteins and associated  diagnostic tests
in  development  by HGS, and further  agreed to share with HGS any proceeds from
all  commercial  arrangements  relating  to  other  human  therapeutic  proteins
completed  prior  to  June  1999.  In  exchange  for  this  limited  non-compete
agreement,  HGS granted to TIGR and its non-commercial  collaborators a research
license  for  its  prior  work.  The  new  agreement  also  eliminated   certain
restrictions  that prevented TIGR from  publishing  sequence  information.  This
agreement relieved HGS of a funding obligation of more than $38 million over the
remaining life of the original agreement.

     The Company  currently has a sequencing and analysis  capacity greater than
that of TIGR.  The Company  believes  that,  while it benefited from the initial
TIGR  agreement,  termination  of the agreement  with TIGR will have no material
impact on its capacity to sequence and analyze human genes.

     The Human cDNA  Database  Agreement.  In July 1994,  the Company,  TIGR and
SmithKline  Beecham  reached an agreement to contribute a number of partial cDNA
sequences  to a database  (the  "Human cDNA  Database")  that is  accessible  to
academic scientists and researchers at non-profit  institutions that sign access
agreements.  To date,  approximately  160,000  human  cDNAs  resulting  from the
collaboration  between the Company and TIGR have been  contributed  to the Human
cDNA Database,  including 50,000 cDNAs sequenced by the Company.  The Human cDNA
Database  Agreement  provides  that the Human cDNA  Database is not available to
persons or entities  engaged in commercial  activities.  In October  1996,  TIGR
notified  SmithKline  Beecham and the Company of its decision to  terminate  the
Human cDNA Database  Agreement  according to its terms,  such  termination to be
effective in April 1997. Upon  termination in April 1997, all Company  sequences
were  removed  from the  database and the  remaining  TIGR  sequences  were made
publicly available without restriction.

PATENTS AND PROPRIETARY RIGHTS

     The  Company's  commercial  success is  dependent in part on its ability to
obtain  patent  protection on genes  discovered  by it. The Company  applies for
patent protection for genes identified by partial sequencing and,  subsequently,
for  those  genes  which  it fully  sequences.  However,  there  is  substantial
uncertainty as to the patentability of genes based on partial sequences. Even if
patent  protection is afforded for such sequences,  it may not provide effective
marketing  exclusivity.  The Company's  business  might be enhanced by obtaining
patent  protection  based on partial  gene  sequences,  but the Company does not
believe that its commercial success will be materially  dependent on its ability
to do so. The Company has isolated and obtained full-length sequence information
for many of the genes that the  Company or its  collaborators  intend to develop
further and has filed,  and continues to file,  for patent  protection  based on
such full-length sequences.  However, the Company does not expect to isolate and
fully sequence a significant portion of the partial gene sequences it discovers.
See "-- Company Technology and Research."

     The patent positions of biotechnology  firms generally are highly uncertain
and involve complex legal and factual questions.  There is a substantial backlog
of biotechnology patent applications at the PTO, and no clear policy has emerged
regarding the breadth of claims  covered in  biotechnology  patents.  There have
been,  and  continue  to be,  intensive  discussions  on  the  scope  of  patent
protection for both gene fragments and full-length  genes.  There have also been
proposals  for  review  of the  appropriateness  of  patents  on genes  and gene
fragments.  There can be no  assurance  that these or other  proposals  will not
result in  changes  in, or  interpretations  of,  the  patent  laws  which  will
adversely  affect  the  Company's  patent  position.  The  biotechnology  patent
situation  outside the United  States is even more  uncertain  and is  currently
undergoing review and revision in many countries.

     As of  February  28,  1998,  the  Company had filed  United  States  patent
applications with respect to substantially more than 500 full-length human genes
and their  corresponding  proteins.  The  Company  has also  filed  U.S.  patent
applications  with respect to all or portions of the genomes of eight infectious
microorganisms  and one non-infectious  microorganism.  As of February 28, 1998,
the Company has twenty issued U.S.  patents  covering  full-length  human genes.
There can be no assurance that the remaining  applications  covering full-length
genes and their  corresponding  proteins  will  result  in the  issuance  of any

                                       12
<PAGE>

patents.  For  example,  the  disclosures  in  these  applications  may  not  be
sufficient to meet the statutory  requirements  for  patentability in all cases.
Additionally,  in view of the substantial number of genes that may be covered by
the Company's  patent  applications,  the Company cannot predict what issues may
arise in connection with the Company's patent  applications or the timing of the
grant of patents  with  respect to genes  covered by such  patent  applications.
Moreover,  in  certain  instances,  the  Company  will  be  dependent  upon  its
collaborators to file and prosecute patent applications.

     The Company also has filed United States patent applications  claiming more
than 200,000 partial human gene sequences.  These  applications  seek to protect
partial human and non-human gene sequences,  the full-length gene sequences that
include the partial  sequences,  as well as products derived  therefrom and uses
therefor.  These applications identify possible biological functions for some of
the genes based in part on a comparison to genes  included in public  databases,
but do not  contain  any  laboratory  or  clinical  data  with  respect  to such
biological  functions.   There  are  certain  court  decisions  indicating  that
disclosure  of  a  partial  sequence  may  not  be  sufficient  to  support  the
patentability  of a full length sequence.  In view of these court decisions,  as
well as the  uncertain  position of the PTO, the Company  believes that there is
significant risk that patents will not issue based on patent disclosures limited
to  partial  gene  sequences.  Finally,  even if  patents  issue on the basis of
partial gene sequences, there is uncertainty as to the commercial meaningfulness
of the protection that might be provided by any such patents.

     Publication of information  concerning  genes prior to the time the Company
applies for patent  protection  based on the  full-length  gene could  adversely
affect the Company's  ability to obtain patent  protection with respect to genes
identified by it.  Washington  University has identified  genes through  partial
sequencing  pursuant to funding  provided by Merck & Co., and has  deposited the
partial  sequences  identified in a public  database.  In January 1997, TIGR, in
collaboration  with the  National  Center  for  Biological  Information  (NCBI),
disclosed  full-length  DNA sequences  (which are reportedly in excess of 35,000
sequences)  assembled from partial gene sequences  (ESTs)  available in publicly
accessible  databases  or sequenced at TIGR.  Such  disclosures  might limit the
scope of claims or make unpatentable subsequent patent applications filed by the
Company  on  full-length  genes.  Moreover,  the  termination  of the Human cDNA
Database  Agreement in April 1997 and the  termination  of the prior  agreements
between  the  Company  and  TIGR  in June  1997  eliminated  limitations  on the
publication of TIGR sequences as of those dates. While the Company believes that
the previous  limitations  on  publication  of  sequences  have  generally  been
sufficient  to permit the  Company to apply for  patent  protection  on genes in
which it is interested in pursuing further  research,  there can be no assurance
that such  publication  has not and will not  affect  the  Company's  ability to
obtain patent protection for some genes in which it may have an interest, which,
in the case of genes of commercial  significance,  could have a material adverse
effect on the Company. See "-- Collaborative  Agreements -- Agreements with TIGR
and -- The Human cDNA Database Agreement."

     In addition,  others have filed and are likely to file in the future patent
applications  which  have  not yet been  published  covering  genes  or  protein
sequences similar or identical to those of the Company.  Moreover, the number of
patent  applications  covering  genes and  proteins  expressed by genes has been
increasing, and is expected to continue to increase, as a result of the increase
in the number of entities conducting genomic research. See "-- Competition." The
Company has been notified that there may be patent  applications filed by others
which  cover  genes for which the Company  has filed  patent  applications.  The
priority  of  competing  patent  claims  would  be  decided  in an  interference
proceeding  before  the PTO.  No  assurance  can be given  that any such  patent
application  of third parties will not have  priority  over patent  applications
filed by the Company or that any patent  applications  filed by the Company will
result in issued patents.

     Accordingly,  there  can  be no  assurance  that  patents  issued  and  any
additional patents, if issued, will provide commercially  meaningful  protection
against  competitors.  There can also be no assurance  that any patent issued to
the  Company  will  provide  it with  competitive  advantages,  or  will  not be
challenged by others.  Furthermore,  there can be no assurance  that others will
not independently develop similar products which could result in an interference
proceeding in the PTO.  Others may be able to design  around  issued  patents or
develop  products  providing  similar effect to products being  developed by the
Company  based on genes or proteins  expressed by genes which are not covered by
patents issued to the Company.  In addition,  others may discover uses for genes
or proteins other than those uses covered in the Company's patent  applications,
and these other uses may be separately patentable. In such case, the holder of a
use patent  covering an invention as to which the Company has a  composition  of
matter  patent claim could  exclude the Company from selling a product for a use
covered by such use patent.

     The Company's  potential  products may conflict with patents that have been
or may be granted to competitors,  universities or others.  As the biotechnology
industry  expands and more patents are issued and other companies  engage in the
business of discovering genes through the use of high speed sequencers, the risk
increases  that the  Company's  potential  products may give rise to claims that
they  infringe  the  patents of others.  Such other  persons  could  bring legal
actions  against the  Company  claiming  damages and seeking to enjoin  clinical
testing,  manufacturing  and  marketing  of the affected  products.  If any such
actions are successful,  in addition to any potential liability for damages, the
Company  could  be  required  to  obtain a  license  in  order  to  continue  to
manufacture or market the affected products.  There can be no assurance that the
Company would prevail in any such action or that any license  required under any
such patent would be made available on acceptable  terms.  The Company  believes
that there will continue to be significant  litigation in the industry regarding
patent and other  intellectual  property rights. If the Company becomes involved

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<PAGE>

in such  litigation,  it could  consume a  substantial  portion of the Company's
resources.

     In  addition,  a small  percentage  of sequences  covered by the  Company's
patent filings were  identified  pursuant to research  funded by grants from the
United States Department of Energy ("DOE").  The DOE has a statutory right under
certain  circumstances  (including  inaction  on the part of the  holder  of the
patent  rights to achieve  practical  application  of the invention or a need to
alleviate  public  health or safety  concerns  not  reasonably  satisfied by the
holder  of the  patent  rights)  to grant to other  parties  licenses  under the
patents which may be granted based on research funded by the DOE.

     The  enactment of the  legislation  implementing  the General  Agreement on
Trade and Tariffs has resulted in certain  changes to United  States patent laws
that  became  effective  on June 8,  1995.  Most  notably,  the  term of  patent
protection for patent applications filed on or after June 8, 1995 is no longer a
period of seventeen years from the date of grant.  The new term of United States
patents will  commence on the date of issuance and  terminate  twenty years from
the earliest  effective  filing date of the  application.  Because the time from
filing to  issuance of patent  applications  is often more than three  years,  a
twenty-year   period  from  the  effective  date  of  filing  may  result  in  a
substantially  shortened term of patent  protection,  which may adversely impact
the Company's patent position.

     The Company also relies on trade secret protection for its confidential and
proprietary  information.  The  Company  believes it has  developed  proprietary
procedures for making cDNA libraries and  sequencing  and analyzing  genes.  The
Company has not sought patent protection for these procedures. Additionally, the
Company has developed a substantial  database concerning genes identified by it.
The Company has taken  security  measures to protect its data and  continues  to
explore  ways to further  enhance  the  security  for its data.  However,  trade
secrets  are   difficult  to  protect.   While  the  Company  has  entered  into
confidentiality  agreements  with employees and academic  collaborators  who are
provided data or materials under material transfer  agreements,  there can be no
assurance that such data or material will not be disclosed, that others will not
independently  develop  substantially  equivalent  proprietary  information  and
techniques or otherwise  gain access to the Company's  trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade secrets.
In addition, certain trade secrets important to the Company's business have been
developed  by,  or  are  in  the  possession  of,  TIGR,  including  information
concerning sequencing procedures. Although TIGR also enters into confidentiality
agreements  with its  employees,  there is an  additional  risk that such  trade
secrets cannot be meaningfully protected.

COMPETITION

     There is a finite  number of genes in the  human  genome,  and the  Company
believes  that the great  majority  of such  genes have been  identified  by the
Company or others  conducting  genomic  research and that  virtually all will be
identified within several years.  While the Company's goal has been to identify,
establish  the  utility  of and  ultimately  patent as many  genes as rapidly as
possible, the Company continues to face substantial competition in these efforts
both from entities using  high-throughput  gene sequencers to discover genes, as
well as from entities using more  traditional  methods to discover genes related
to particular  diseases.  Research to identify genes is also being  conducted by
various institutes and United States and foreign  government-financed  entities,
including  British,  French,  German and Japanese  efforts,  as well as numerous
smaller  laboratories  associated  with  universities  or  other  not-for-profit
entities.  In addition,  a number of pharmaceutical and biotechnology  companies
and government-financed  programs are engaged or have announced the intention to
engage in areas of human  genome  research  similar to or  competitive  with the
Company's focus on gene  discovery,  and other companies are likely to enter the
field.

     The gene sequencing machines used by the Company are commercially available
and are  currently  being  utilized by many other  companies,  in some cases for
business purposes  competitive with those of the Company. In addition,  a number
of other  companies have  announced  plans to engage in gene discovery and could
acquire  similar  machines and develop  procedures  for automated  sequencing of
genes.  Although the Company believes that its large scale,  automated processes
and  lead  time  provide  it with a  competitive  advantage,  any  one of  these
companies or other entities may discover and establish a patent  position in one
or more genes that the  Company  has  identified  and might have  designated  or
considered  designating as a product candidate.  Any potential products based on
genes  identified  by the  Company  will face  competition  both from  companies
developing  gene-based  products and from  companies  developing  other forms of
treatment for diseases that may be caused by, or related to, genes identified by
the Company.

     The Company faces  significant  competition in its product  development and
commercialization   efforts,   including  competition  from  pharmaceutical  and
biotechnology firms, including the Company's  collaborators,  many of which have
substantially   greater  research  and  product  development   capabilities  and
financial,  scientific,  marketing  and human  resources  than the  Company.  In
particular,  although the Company  believes that there are  significant  product
development  opportunities  for  both  it and  its  collaborators  based  on the
Company's  gene  database,   competition   exists  among  the  Company  and  its
collaborators to develop and commercialize  products. In addition, the Company's
competitors  may  succeed  in  developing  products  earlier  than the  Company,
obtaining  approvals  from the United  States  Food & Drug  Administration  (the
"FDA") or other  regulatory  agencies  for such  products  more rapidly than the

                                       14
<PAGE>

Company,  or developing  products that are more effective than those proposed to
be developed by the Company.  Similarly, while the Company through royalties and
co-payment   arrangements  will  share  any  success  of  its  collaborators  in
identifying and  commercializing  products,  they face similar  competition from
other  competitors  who may succeed in  developing  products  more  quickly,  or
developing  products  that are more  effective,  than  those  developed  by such
collaborators.  Certain of these  competitors  may be further  advanced than the
Company  in  developing  potential  products  that may  compete  with  potential
products of the Company. There can be no assurance that research and development
by others will not render the products that the Company or its collaborators may
seek to develop  obsolete  or  uneconomical  or result in  treatments,  cures or
diagnostics  superior to any therapy or  diagnostic  developed by the Company or
its collaborators, or that any therapy or diagnostic developed by the Company or
its  collaborators  will  be  preferred  to  any  existing  or  newly  developed
technologies.The Company expects that competition in this field will intensify.

GOVERNMENT REGULATION

     Regulation of Pharmaceutical  Products. New drugs are subject to regulation
under the Federal Food,  Drug,  and Cosmetic Act, and  biological  products,  in
addition to being subject to certain provisions of that Act, are regulated under
the Public  Health  Service Act. The Company  believes  that the  pharmaceutical
products  developed  by it or its  collaborators  will be  regulated  either  as
biological  products  or  as  new  drugs.  Both  statutes  and  the  regulations
promulgated  thereunder govern, among other things, the testing,  manufacturing,
distribution,  safety, efficacy,  labeling, storage, record keeping, advertising
and other promotional  practices  involving  biologics or new drugs, as the case
may be. FDA  approval  or other  clearances  must be  obtained  before  clinical
testing, and before manufacturing and marketing,  of biologics and drugs. At the
FDA, the Center for Biological  Evaluation and Research  ("CBER") is responsible
for the regulation of biologics, and the Center for Drug Evaluation and Research
("CDER") is responsible for the regulation of new drugs.

     In addition,  any gene therapy products (which is one of the areas in which
the  Company  may  develop  products)  developed  by the  Company  will  require
regulatory  approvals  prior  to  clinical  trials  and  additional   regulatory
approvals  prior to  commercialization.  New human  gene  therapy  products  are
subject to extensive  regulation  by the FDA (CBER) and  comparable  agencies in
other countries.  Currently,  each clinical protocol is reviewed by the FDA and,
in some instances,  the NIH, on a case-by-case  basis.  The FDA and the NIH have
published  a "Points  to  Consider"  guidance  documents,  with  respect  to the
development and submission of gene therapy protocols.

     Obtaining FDA approval has  historically  been a costly and time  consuming
process.  Generally, in order to gain FDA pre-market approval, a developer first
must conduct  preclinical  studies in the laboratory and in animal model systems
to gain  preliminary  information  on an agent's  efficacy  and to identify  any
safety  problems.  The results of these  studies are  submitted  as a part of an
investigational new drug ("IND")  application,  which the FDA must review before
human clinical trials of an investigational  drug can start. The IND application
includes a detailed  description  of the initial  clinical  investigation  to be
undertaken.

     Preclinical  studies can take several  years to  complete,  and there is no
assurance that an IND based on such studies will ever become  effective so as to
permit  clinical  testing to begin. A 30-day waiting period after the receipt of
each IND is required by the FDA prior to the  commencement  of initial  clinical
testing.  If the FDA has not  commented  on or  questioned  the IND within  this
30-day period,  initial  clinical  studies may begin,  although  companies often
obtain  affirmative FDA approval before  beginning such studies.  If the FDA has
comments or questions,  it places the studies on clinical hold and the questions
must be answered  to the  satisfaction  of the FDA before the  initial  clinical
testing may begin.

     In order to  commercialize  pharmaceutical  products,  the  Company  or its
collaborator must sponsor and file an IND and will be responsible for initiating
and overseeing the clinical  studies to demonstrate the safety and efficacy and,
for a biologic product, the potency,  which are necessary to obtain FDA approval
of any such products. For Company or collaborator-sponsored INDs, the Company or
its  collaborator  will be required to select qualified  investigators  (usually
physicians within medical  institutions) to supervise the  administration of the
products,  and ensure that the  investigations  are  conducted  and monitored in
accordance  with  FDA  regulations  and the  general  investigational  plan  and
protocols  contained  in the IND.  Clinical  trials are  normally  done in three
phases,  although the phases may overlap. Phase I trials are concerned primarily
with the safety and preliminary  effectiveness  of the drug,  involve fewer than
100  subjects,  and may take  from six  months  to over a year.  Phase II trials
normally  involve  a  few  hundred  patients  and  are  designed   primarily  to
demonstrate effectiveness in treating or diagnosing the disease or condition for
which the drug is intended, although short-term side effects and risks in people
whose  health is impaired  may also be  examined.  Phase III trials are expanded
clinical trials with larger numbers of patients which are intended to gather the
additional   information  for  proper  dosage  and  labeling  of  the  drug  and
demonstrate its safety and effectiveness.  Clinical trials generally take two to
five years, but may take longer, to complete.  Recent regulations promulgated by
the FDA may shorten the time periods and reduce the number of patients  required
to be  tested  in the  case of  certain  life-threatening  diseases  which  lack
available alternative treatments.

     The FDA receives reports on the progress of each phase of clinical testing,
and it may require the  modification,  suspension,  or  termination  of clinical
trials if an  unwarranted  risk is presented  to patients.  If the FDA imposes a

                                       15
<PAGE>

clinical  hold,   clinical   trials  may  not   recommence   without  prior  FDA
authorization  and then only under terms  authorized by the FDA. The IND process
can thus result in substantial  delay and expense.  Human gene therapy  products
(which is one of the areas in which the Company is seeking to develop  products)
are a new  category  of  therapeutics.  Because  this  is a  relatively  new and
expanding area of novel therapeutic interventions,  there can be no assurance as
to the length of the clinical trial period,  the number of patients the FDA will
require to be enrolled in the clinical  trials in order to establish the safety,
efficacy and potency of human gene therapy  products,  or that the clinical data
generated in these studies will be  acceptable  to the FDA to support  marketing
approval.

     After completion of clinical trials of a new drug or biologic product,  FDA
marketing approval must be obtained.  If the product is regulated as a biologic,
CBER  will  require  the  submission  and  approval,  depending  on the  type of
biologic,  of either a Biologic License Application or, in some cases, a Product
License  Application and an Establishment  License Application before commercial
marketing  of the  biologic.  If the product is  classified  as a new drug,  the
Company must file a New Drug Application  ("NDA") with CDER and receive approval
before commercial  marketing of the drug. The NDA or BLA must include results of
product  development,  preclinical  studies and clinical trials. The testing and
approval  processes  require  substantial  time and  effort  and there can be no
assurance that the FDA will accept the NDA or BLA for filing and, even if filed,
that any  approval  will be granted on a timely  basis,  if at all. In the past,
NDAs and BLAs submitted to the FDA have taken, on average,  two to five years to
receive approval. If questions arise during the FDA review process, approval can
take more than five years.  Notwithstanding the submission of relevant data, the
FDA may  ultimately  decide that the NDA or BLA does not satisfy its  regulatory
criteria for  approval  and require  additional  clinical  studies.  Even if FDA
regulatory  approvals are obtained,  a marketed  product is subject to continual
review,  and later discovery of previously unknown problems or failure to comply
with the applicable  regulatory  requirements  may result in restrictions on the
marketing of a product or  withdrawal  of the product from the market as well as
possible  civil  or  criminal  sanctions.  In  addition,  the FDA may  condition
marketing approval on the conduct of specific  post-marketing studies to further
evaluate safety and effectiveness.

     If a developer  obtains  designation by the FDA of a biologic or drug as an
"orphan" drug for a particular  use, the developer may request small grants from
the federal government to help defray the costs of qualified testing expenses in
connection  with the  development of such drug.  Orphan drug  designation may be
granted  to drugs for rare  diseases  (generally,  a disease or  condition  that
affects  populations of fewer than 200,000  individuals  in the United  States),
including  many  genetic   diseases.   The  first  applicant  who  has  obtained
designation  of a drug for a  particular  use as an orphan drug and then obtains
approval  of a marketing  application  for such drug for the  particular  use is
entitled  to  marketing  exclusivity  for a period of seven  years,  subject  to
certain  limitations.  Essentially,  this means that no other company can market
the same orphan  drug for the use  approved by the FDA for seven years after the
approval.

     Orphan drug  designation  does not convey any  advantage in, or shorten the
duration of, the regulatory approval process. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous,  there can
be no  assurance  that  the  scope  of  protection  or the  level  of  marketing
exclusivity that is currently  afforded by orphan drug designation and marketing
approval will remain in effect in the future.

     Rigorous and extensive FDA regulation of pharmaceutical  products continues
after approval,  particularly with respect to manufacturing,  which must be done
in  compliance  with  cGMP,  reporting  of  adverse  effects,  and  advertising,
promotion, and marketing.

     The Company currently is conducting  clinical  development  activities with
respect to MPIF-1 and KGF-2. The Company is conducting  preclinical  trials with
respect to other  proteins  and expects to continue to conduct  preclinical  and
clinical  studies with respect to additional  potential  products,  as permitted
under its  collaboration  agreements.  Accordingly,  the Company is beginning to
incur  significant  expenses  with  respect  to  its  preclinical  and  clinical
development  activities.  There  can be no  assurance  that the  preclinical  or
clinical trials will lead to the successful  development of any products for the
Company, and as further studies are conducted, the Company may choose to abandon
particular projects which it might have previously considered promising.

     Regulation of Diagnostics. Some of the diagnostic products developed by the
Company or its  collaborators  are likely to be  regulated by the FDA as medical
devices rather than drugs. The nature of the FDA requirements applicable to such
diagnostic  devices  depends on their  classification  by the FDA. A  diagnostic
device  developed  by the Company or its  collaborators  would be  automatically
classified as a Class III device, requiring premarket approval, and would remain
in Class III and require premarket  approval unless the device were reclassified
into Class II or Class I by the FDA or the sponsor could demonstrate to the FDA,
in  the  required  pre-market  notification  procedure,   that  the  device  was
substantially  equivalent to a legally  marketed  existing  device that has been
classified in Class I or Class II or to a legally  marketed Class III device for
which premarket  approval is not required.  Following  submission of a premarket
notification,  a company  may not market the  device for  clinical  use until an
order is issued by the FDA  finding the device to be  substantially  equivalent.
The FDA has no  specific  time  limit by which it must  respond  to a  premarket
notification.  If the Company or its  collaborators  were unable to  demonstrate
such substantial equivalence to the FDA's satisfaction,  it would be required to
undertake  the costly and  time-consuming  process,  comparable  to that for new
drugs, of conducting preclinical studies and conducting clinical tests, filing a
pre-market approval ("PMA") application, and obtaining FDA approval.

                                       16
<PAGE>

     If the Company or its collaborators can demonstrate substantial equivalence
to a Class I product, the "general controls" of the Food, Drug, and Cosmetic Act
--  chiefly  adulteration,   misbranding,   and  "good  manufacturing  practice"
requirements -- will apply. If substantial  equivalence to a Class II device can
be shown,  the general  controls plus "special  controls" -- such as performance
standards,  guidelines for safety and effective, and post-market surveillance --
will  apply.  If  substantial  equivalence  to a Class  III  device  (for  which
premarket  approval is not required) can be shown, the general controls plus any
applicable  special controls will apply, and the product will require  premarket
approval once the FDA requires such approval for the device to which substantial
equivalence  was  shown  and  other  devices  of the same  generic  type.  While
demonstrating  substantial  equivalence  to a Class I,  Class  II or  Class  III
product (for which  premarket  approval is not  required) is not  ordinarily  as
costly  or  time-consuming  as the  premarket  approval  process  for  Class III
devices,  it can in  some  cases  also  involve  conducting  clinical  tests  to
demonstrate  that any differences  between the new device and devices already on
the market do not affect safety or effectiveness.

     In January 1997, the NIH-Department of Energy Task Force on Genetic Testing
issued  proposed  recommendations  including  increased  monitoring  of  genetic
disorders,  and tracking of people with positive and negative  test results,  by
CDC;  establishment  (under the Clinical  Laboratory  Improvement  Amendments of
1988) of  national  program for the  accreditation  of  laboratories  performing
genetic testing,  based on quality assurance,  proficiency  testing, and on-site
inspections;  and  additional  regulation by the FDA. The Task Force's  proposed
recommendations,  if  adopted  and  implemented,  would  significantly  increase
federal  regulation of genetic tests,  whether provided as a product or service,
beginning with their manufacture and continuing through their marketing and use.

     Marketed  devices  are  subject  to  pervasive  and  continuing  regulatory
oversight by the FDA,  including  record-keeping  requirements  and reporting of
adverse  experiences  with the use of the  device.  The Federal  Food,  Drug and
Cosmetic Act requires that medical  devices be  manufactured  in accordance with
the FDA's cGMP regulation.  This regulation  requires,  among other things, that
(i) the manufacturing process be regulated, controlled and documented by the use
of written  procedures,  and (ii) the ability to produce  devices which meet the
manufacturer's  specifications be validated by extensive and detailed testing of
every aspect of the process.  The regulation also requires  investigation of any
deficiencies  in the  manufacturing  process  or in the  products  produced  and
detailed record keeping.  Manufacturing facilities are subject to FDA inspection
on a periodic basis to monitor  compliance with GMP requirements.  If violations
of the applicable  regulations are noted during FDA inspections of manufacturing
facilities, the FDA can prohibit further manufacturing, distribution and sale of
the  devices  until the  violations  are cured.  On  October  7,  1996,  the FDA
published  a revision  of its GMP  requirements,  incorporating  them into a new
regulation  called the  quality  system  ("QS")  regulation.  The QS  regulation
requires,  among  other  things,   pre-production  design  controls,  purchasing
controls,  and  maintenance of service  records.  The QS regulation is effective
June 1, 1997,  except that the FDA has stated that as long as manufacturers  are
taking  reasonable  steps  to come  into  compliance  with  the  design  control
requirements,  the FDA will not initiate action  (including  enforcement  cases)
based on a failure to comply with these  requirements  before June 1, 1998. Once
in effect,  the QS regulation is expected to increase the cost of complying with
the cGMP requirements and related  requirements.  Other applicable  requirements
include the FDA's medical  device  (manufacturer)  reporting  regulation,  which
requires that the device  manufacturer  provide information to the FDA on deaths
or serious injuries alleged to have been associated with the use of its marketed
devices,  as well as product  malfunctions that would likely cause or contribute
to a death or serious injury if the malfunction were to recur.

     Labeling,  advertising and promotional  activities for  investigational and
marketed  devices are subject to scrutiny by the FDA and, in certain  instances,
by the Federal Trade Commission. The FDA enforces statutory prohibitions against
promoting or marketing products for unapproved uses.

     Other. In addition to the foregoing,  the Company's business is and will be
subject to  regulation  under  various  state and  federal  environmental  laws,
including the Occupational Safety and Health Act, the Resource  Conservation and
Recovery Act and the Toxic  Substances  Control Act. These and other laws govern
the Company's  use,  handling and disposal of various  biological,  chemical and
radioactive  substances  used in and wastes  generated  by its  operations.  The
Company believes that it is in material compliance with applicable environmental
laws  and that  its  continued  compliance  therewith  will not have a  material
adverse effect on its business. The Company cannot predict, however, whether new
regulatory   restrictions   on  the   production,   handling  and  marketing  of
biotechnology  products  will be  imposed  by state or  federal  regulators  and
agencies or whether  existing laws and regulations  will not adversely affect it
in the future.

SOURCES OF SUPPLY

     The Company currently relies on a single supplier,  Applied  Biosystems,  a
division of  Perkin-Elmer  Corporation,  to provide  all of its gene  sequencing
machines and certain  reagents  required in connection  with the gene sequencing
process.  The Company has not  experienced  problems  in  obtaining  either gene
sequencing machines or reagents in a timely manner.  While other gene sequencing
machines are  available,  the Company does not believe that such other  machines
are as efficient as the machines currently used by the Company.  The Company has


                                       17
<PAGE>

entered into certain  agreements with Perkin-Elmer  Corporation that (i) provide
for an established  pricing structure with respect to the Company's purchases of
selected  reagents,  although  such  pricing is subject to change if the Company
does not meet certain minimum purchase requirements, and (ii) in the case of one
enzyme, provide that the Company will purchase and Perkin-Elmer Corporation will
sell a stated  quantity at a fixed price.  The Company  orders these reagents by
submitting  purchase  orders at the time of purchase.  No assurance can be given
that either the gene sequencing  machines or the reagents will remain  available
in commercial quantities at costs that are not economically prohibitive.  Should
the Company be unable to obtain  additional  machines  or an adequate  supply of
reagents or other  ingredients at commercially  reasonable rates, its ability to
continue to identify  genes  through  gene  sequencing  in  accordance  with its
current business plan would be adversely affected.

     The Company has contracted for the manufacture of therapeutic  proteins for
preclinical testing and clinical development from a single supplier. The Company
will be dependent on this company for its supply of  therapeutic  proteins until
it is able to produce  therapeutic  proteins at its own facility currently under
construction  (see  Item 2:  Properties).  Any  failure  or delay  in  supplying
therapeutic  proteins could affect the timing of preclinical  tests and clinical
trials and could delay submission of products for regulatory approval.

MANUFACTURING AND MARKETING

     The Company has developed  in-house  capabilities  for the  production  and
purification  of recombinant  proteins for use in its research  activities,  but
does not  currently  have any  manufacturing  facilities  capable  of  supplying
materials  suitable for clinical trials or for commercial sale or any experience
in manufacturing  materials suitable for clinical trials or for commercial sale.
Currently,  the Company relies on a third party for production of certain of its
therapeutic proteins for use in pre-clinical and early clinical development. The
Company   will  depend  on  such  third  party  to  comply  with   current  good
manufacturing  practices  ("cGMPs")  and other  regulatory  requirements  and to
deliver materials on a timely basis, however there can be no assurance that such
party will  perform.  Any failures by the third party may delay  clinical  trial
development or the submission of products for regulatory approval,  or otherwise
impair the Company's competitive position, which could have a materially adverse
effect on the Company's business.

     During 1997,  the Company  designed and the Maryland  Economic  Development
Corporation ("MEDCO") began construction of a process development and production
facility for the  preparation  of clinical trial  quantities of its  therapeutic
proteins in  compliance  with cGMP  requirements.  The  facility  will  comprise
approximately  80,000  square feet and is located in the Johns  Hopkins  Belward
Research   Campus  near  the  Company's   offices  and  research   laboratories.
Construction is expected to be completed in December 1998.  After  construction,
the facility must be validated and inspected by the FDA to determine  compliance
with  cGMP  requirements.  The  facility  has been  designed  to  allow  for the
production  and  purification  of  multiple  recombinant  proteins.  The Company
intends to use the facility for production of preclinical and clinical  supplies
of its therapeutic proteins and for process development and scale-up. A delay in
completion and/or validation of the facility could adversely affect the cost and
timing of clinical trials and could delay  submission of products for regulatory
approval.  The Company has entered into a long term lease arrangement with MEDCO
for the  facility.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Liquidity."

     The  Company's  long range plan is to  establish  additional  manufacturing
capabilities to allow it to meet its full commercial manufacturing requirements.
However,  the Company may contract with third party manufacturers or may develop
products  with  partners  and  take  advantage  of the  partner's  manufacturing
capabilities.  There  can be no  assurance  that  the  Company  will  be able to
successfully establish  manufacturing  capabilities and manufacture its products
economically or in compliance with cGMPs and other regulatory requirements.

     The  Company  generally  expects to rely on its  collaborators  or on third
parties  with whom the Company may  contract to market any  products.  In either
case,  the  Company  will be  dependent  on such third  parties  for  marketing.
However,  in the future,  the Company may  co-promote  or retain U.S.  marketing
rights to certain  of its  products.  Significant  additional  expenditures  and
management  resources  will be required  to develop an external  sales force and
implement  its  marketing  strategy  if the Company  decides to market  products
directly.  There can be no assurance that the Company's  collaborators  or other
third parties will be successful in marketing products, or that the Company will
be able to establish a successful marketing force.

EMPLOYEES

     As of February 28, 1998, the Company had 353 full-time  employees,  of whom
301 were in research and development,  including 63 scientists holding doctorate
degrees.  The Company anticipates hiring  approximately 100 additional employees
during the next  twelve  months.  The  additional  staff is  expected to include
additional  research and development staff,  pilot plant personnel,  and medical
and  regulatory  affairs  staff.  None of the Company's  employees is covered by
collective bargaining agreements and management considers its relations with its
employees to be good.



                                       18
<PAGE>

ITEM 2.  PROPERTIES

     The  Company  currently  leases   approximately   169,000  square  feet  of
laboratory  and office  space in six  buildings  in  Rockville,  Maryland.  This
includes approximately 120,000 square feet of laboratory space and approximately
49,000 square feet of administrative office space. In addition,  the Company has
entered  into a long  term  lease for a process  development  and  manufacturing
facility.  Construction  recently began on the 80,000 square foot facility which
is being  built to the  Company's  specifications  on a site near the  Company's
headquarters  and research and development  laboratories.  When  completed,  the
facility will be used to produce  clinical trial  quantities of its lead product
candidates.

     The Company  considers that its properties are generally in good condition,
are well  maintained  and are  generally  suitable  and adequate to carry on the
Company's business.

ITEM 3.  LEGAL PROCEEDINGS

The Company is not party to any material legal proceedings.

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

None.


                                       19
<PAGE>




                                     PART II

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

     The Company's  common stock is traded on the NASDAQ  National Market System
under the symbol HGSI.  The Company's  common stock began trading on December 2,
1993.  The following  table  presents the quarterly  high and low sales price as
quoted by NASDAQ.


                                    1997             HIGH              LOW
                           --------------            --------          ---------
                           First Quarter             $ 48              $ 32 1/2

                           Second Quarter              39 1/4            30 3/4

                           Third Quarter               43 1/2            30 1/2

                           Fourth Quarter              45 1/4            38 1/8

                                    1996             HIGH              LOW
                           --------------            --------          ---------
                           First Quarter               49 3/4            31 1/2

                           Second Quarter              48 1/4            32 1/2

                           Third Quarter               39 1/2            24 3/4

                           Fourth Quarter              43 1/4            34 3/4


As of February 28, 1998, there were  approximately  502 holders of record of the
Company's  common stock. No cash dividends have been paid on the common stock to
date.

ITEM 6.  SELECTED FINANCIAL DATA

         The  following  selected  financial  data of the  Company for the years
ended  December  31, 1997,  1996 and 1995,  and as of December 31, 1997 and 1996
have been  derived  from the audited  financial  statements  included  elsewhere
herein and should be read in conjunction with such financial  statements and the
accompanying notes. The following selected financial data of the Company for the
years ended  December 31, 1994 and 1993,  and as of December 31, 1995,  1994 and
1993 have been derived from audited  financial  statements not included  herein.
The results of  operations of prior  periods are not  necessarily  indicative of
results that may be expected  for any other  period.  See "ITEM 7.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF  OPERATIONS"  and
"ITEM 1. BUSINESS."




                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                   1997           1996            1995           1994          1993
                                             ------------------------------ ---------------------------------------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
 <S>                                             <C>            <C>             <C>            <C>           <C>    
          STATEMENT OF OPERATIONS DATA:
           Revenue-research and
             development collaborative
             contracts....................      $25,605        $ 36,460        $  5,000       $41,065       $22,000
           Costs and expenses:
             Research and development:
                Direct expenditures.......       39,893         30,409           22,904        17,636         7,611
                Payments under research
                  services agreement......        6,247         10,063           10,075         9,662         8,989
                                                --------      --------         --------       -------       -------
             Total research and
                  development.............       46,140         40,472           32,979        27,298        16,600
             General and administrative...       11,113          9,639            8,745         6,840         3,998
                                                -------       --------         --------       -------       -------
           Total cost and expenses........       57,253         50,111           41,724        34,138        20,598
                                                -------       --------         --------       -------       -------
             Income (Loss) from operations      (31,648)       (13,651)         (36,724)        6,927         1,402
           Net interest income                   10,500          6,092            4,005         2,813            390
                                                 -------       ---------        --------       -------      -------
                                                                                                                
           Income (loss) before taxes.....      (21,148)        (7,559)         (32,719)        9,740         1,792
           Provision for (benefit) from
             income taxes.................          245            208           (1,651)        2,436            (2)
                                                -------       --------         --------       -------       --------
           Net income (loss)..............     $(21,393)      $ (7,767)        $(31,068)      $ 7,304       $ 1,794
                                               ========       ========         ========       =======       =======
           Net income (loss) per share....     $  (0.99)(1)   $  (0.42)(1)     $  (1.98)(1)   $  0.47(1)    $  0.15(1)
                                               ========       ========         ========       =======       =======
           Net income (loss) per share
             assuming dilution............    $(0.99)(1)      $  (0.42)(1)     $  (1.98)(1)   $  0.47(1)    $  0.14(1)
                                              ==========      ========         ========       =======       =======

<CAPTION>
                                                                     AS OF DECEMBER 31,
                                                 ---------------------------------------------------------
                                                   1997          1996         1995         1994       1993
                                                 --------     ----------   ----------   ---------- -------
                                                                        (IN THOUSANDS)
<S>                                              <C>           <C>          <C>         <C>        <C>      
                BALANCE SHEET DATA:
                Cash, cash equivalents and
                  investments................    $205,212      $ 116,116    $ 105,462   $ 76,002   $  69,478
                Total assets.................     236,232        140,117      126,963     95,543      82,450
                Total debt and capital leases,
                  less current portions......       2,224          2,954        4,332      5,346      1,338
                Retained earnings (deficit)..     (55,522)       (34,129)     (26,362)     4,706     (2,598)
                Total stockholders' equity...     223,254        128,521      115,606     83,785     75,929

</TABLE>


--------------------------------------------------------------------------------
(1) The net loss per share  amounts  prior to fiscal 1998 have been  restated as
required to comply with  Statement of Financial  Accounting  Standards  No. 128,
Earnings Per Share. For further  discussion of net loss per share and the impact
of Statement No. 128, see Notes B and O of the notes to the Company's  financial
statements included herein.


                                       21
<PAGE>


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

OVERVIEW

     The  Company  initially  focused  its  efforts  on  developing  proprietary
processes for automating the gene discovery process,  establishing collaborative
arrangements,  and  establishing  and  expanding its  pre-clinical  research and
development  capabilities.  The Company's  activities  are currently  focused on
research and  development of novel,  proprietary  pharmaceutical  and diagnostic
products  based on the discovery  and  understanding  of the medical  utility of
genes.

     The Company has not received any product  sales  revenue or royalties  from
product  sales  and does not  anticipate  revenues  from  product  sales or from
royalties on product sales in the next several years. Through December 31, 1997,
the  Company had  received  (i) $70 million in revenue and $55 million in equity
payments  pursuant to the SB  Collaboration  Agreements,  (ii) payments from the
Additional  Collaboration  Partners of $34.0  million and (iii) an  aggregate of
$23.1  million from other  collaborators,  including  $11.0 million from Pioneer
Hi-Bred International,  Inc. ("Pioneer"), $3.0 million from F. Hoffmann-La Roche
("Roche"),  $6.0 million from  Pharmacia & Upjohn  Company  ("Pharmacia"),  $1.1
million  from  OraVax  Merieux  Co. and  Merieux  OraVax  S.N.C.  (collectively,
"OraVax") and $2.0 million from Schering Plough (in addition to certain payments
received from Schering Plough pursuant to the Additional  Collaboration  Partner
Agreements). Pursuant to the terms of such collaboration agreements, the Company
expects to receive  license fees and research  payments of $63.5  million in the
aggregate   over  the  next  three  years.   See   "Business  --   Collaborative
Arrangements."

     The Company  expects that its revenue sources for at least the next several
years may be limited to interest  income,  payments under various  collaboration
agreements,  payments  from the sale of rights  and other  payments  from  other
collaborators and licensees under existing or future arrangements, to the extent
that the Company enters into any such further arrangements.  The Company expects
to  continue  to  incur  substantial  expenses  relating  to  its  research  and
development  efforts,  which are  expected  to increase  relative to  historical
levels as the Company  focuses on preclinical  and clinical  trials required for
the development of therapeutic  protein  product  candidates.  As a result,  the
Company expects to incur  continued and increasing  losses over the next several
years unless it is able to realize  additional  revenues  under  existing or new
collaboration  agreements.  The timing and  amounts  of such  revenues,  if any,
cannot be predicted with certainty and will likely fluctuate sharply. Results of
operations  for any period may be unrelated to the results of operations for any
other period. In addition, historical results should not be viewed as indicative
of future operating results.

     On March 2, 1998,  the Company  signed a ten year  agreement with Transgene
S.A.  ("Transgene"),  based in  Strasbourg,  France,  to  develop  gene  therapy
products.  Under the terms and conditions of the agreement,  Transgene will have
the right to exclusively license, and sublicense, up to 10 genes and to develop,
manufacture and commercialize any resulting gene therapy products worldwide. The
two  companies may also choose to co-develop  and co-market the  identified  new
gene therapy products, and, in such case,  commercialization rights will be held
by the Company for North  America and by Transgene for Europe and will be shared
equally  for the rest of the  world's  markets.  Transgene  will pay an  initial
licensing  fee and  research  funding  in an  amount  equal to the  proceeds  to
Transgene from the Company's purchase of a 10% interest in Transgene.  The value
of the 10% interest based on the anticipated close of Transgene's Initial Public
Offering  (currently in process) would be approximately $25 million.  Additional
payments to the Company are dependent  upon the number of genes which  Transgene
licenses  and the  accomplishment  of certain  milestones.  Royalties  on future
product sales and partnering  revenues will be paid by Transgene to the Company.
On  co-marketed  products,   the  Company  and  Transgene  will  pay  reciprocal
royalties.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND 1996

     Revenues.  The Company had revenues of $25.6  million and $36.5 million for
the years ended December 31, 1997 and December 31, 1996, respectively.  The 1997
revenue  consisted of $4.1 million in license  fees and research  payments  from
collaborations  with Pioneer and Roche, $12.0 million in annual license fees and
additional  payments from  collaborations  with Schering  Plough and Synthelabo,
$5.5  million in annual  license  fees and  additional  payments  pursuant  to a
collaboration  agreement  with  Merck,  and $4.0  million in  license  fees from
collaborations with Pharmacia,  MedImmune and OraVax. The 1996 revenue consisted
of $6.9 million for the  achievement of the third  milestone  ("Milestone  III")
under  the SB  Collaboration  Agreements,  $10.0  million  in  license  fees and
research payments from  collaborations  with Pioneer and Roche, $12.0 million in
annual license fees and additional  payments from  collaborations  with Schering
Plough and  Synthelabo,  $5.5  million  in annual  license  fees and  additional
payments  pursuant to a collaboration  agreement with Merck, and $2.1 million in
license fees from collaborations with Pharmacia, MedImmune and OraVax.



                                       22
<PAGE>

     Expenses.  Research and development expenses increased to $46.1 million for
the year ended  December 31, 1997 from $40.5 million for the year ended December
31, 1996. The increase  resulted  primarily from  significant  expansions in the
Company's cell biology,  protein  expression and pharmacology  departments,  the
production of clinical trial  quantities of the Company's  first two therapeutic
product  candidates and the formation of a medical affairs  department to manage
clinical  trials.  Expenses will continue to increase in support of research and
development  of  potential  products  by the  Company  and in support of the new
collaborations.

     General and administrative expenses increased to $11.1 million for the year
ended  December 31, 1997 from $9.6 million for the year ended December 31, 1996.
The  increase  resulted  primarily  from  significantly  higher  legal  expenses
associated  with filing and  prosecuting a larger number of patent  applications
relating to genes and proteins  discovered by the Company.  Patent expenses will
continue to increase  significantly  as  additional  applications  are filed and
existing  applications are prosecuted in the United States and  internationally.
Interest  income was  significantly  higher for the year ended December 31, 1997
compared to the year ended December 31, 1996 due to higher cash balances.

     Net Income (Loss).  The Company  recorded a net loss of $21.4  million,  or
$0.99 per share,  for the year ended December 31, 1997 compared to a net loss of
$7.8  million,  or $0.42 per share,  for the year ended  December 31, 1996.  The
difference in results for the year ended December 31, 1997 and 1996 is primarily
due to the lower  collaboration  partner payments during the year ended December
31, 1997 and higher  expenses,  which were partially  offset by higher  interest
income.

YEARS ENDED DECEMBER 31, 1996 AND 1995

     Revenues.  The Company had  revenues of $36.5  million and $5.0 million for
the years ended December 31, 1996 and December 31, 1995, respectively.  The 1996
revenue consisted of $6.9 million for the achievement of Milestone III under the
SB Collaboration Agreements, $10.0 million in license fees and research payments
from  collaborations with Pioneer and Roche entered into in the first quarter of
1996,  $12.0  million  in  annual  license  fees and  additional  payments  from
collaborations  with Schering  Plough and Synthelabo  entered into in the second
quarter of 1996,  $5.5 million in annual  license fees and  additional  payments
pursuant to a collaboration  agreement entered into with Merck in July 1996, and
$2.1 million in license fees from collaborations  with Pharmacia,  MedImmune and
OraVax entered into in the fourth quarter of 1996. The 1995 revenue consisted of
$5.0  million from Takeda for an option and license  agreement to  commercialize
certain future products of the Company in Japan.

     Expenses.  Research and development expenses increased to $40.5 million for
the year ended  December 31, 1996 from $33.0 million for the year ended December
31, 1995. The increase  resulted  primarily from  significant  expansions in the
Company's cell biology,  protein  expression and  pharmacology  departments  and
reflect  the  Company's   increasing  emphasis  on  determining  the  biological
functions and possible medical  utilities of genes and proteins  discovered as a
result of the Company's gene discovery efforts.

     General and administrative  expenses increased to $9.6 million for the year
ended  December 31, 1996 from $8.7 million for the year ended December 31, 1995.
The  increase  resulted  primarily  from  significantly  higher  legal  expenses
associated  with filing and  prosecuting a larger number of patent  applications
relating to genes and proteins  discovered by the Company.  Interest  income was
significantly  higher for the year ended  December 31, 1996 compared to the year
ended December 31, 1995 due to higher cash balances and interest rates.

     Net Income  (Loss).  The Company  recorded a net loss of $7.8  million,  or
$0.42 per share,  for the year ended December 31, 1996 compared to a net loss of
$31.1  million,  or $1.98 per share,  for the year ended  December 31, 1995. The
difference in results for the year ended December 31, 1996 and 1995 is primarily
due to the receipt of $36.5 million in license fees and research payments during
the year ended December 31, 1996, which was partially offset by higher expenses.

LIQUIDITY AND CAPITAL RESOURCES

     The Company had working  capital of $196.9  million at December 31, 1997 as
compared to $110.8 million at December 31, 1996. The increase  resulted from the
sale in March  1997 of  3,192,750  shares of common  stock at a public  offering
price of $37.00 per share for which the Company  received net proceeds of $112.0
million,  which was partially  offset by the net loss generated during the year,
capital expenditures, and payments on capitalized leases.

     The Company expects to continue to incur  substantial  expenses relating to
its research and  development  efforts,  which expenses are expected to increase
relative to historical levels as the Company focuses on preclinical and clinical
trials required for the development of therapeutic  protein product  candidates.
At December 31, 1997, the Company had outstanding  commitments for  construction
and equipment purchases totaling approximately $353,000.



                                       23
<PAGE>

     The Company expects that its existing funds, interest income, and committed
license fees and research  payments from the Additional  Collaboration  Partners
and under  existing  collaboration  agreements  will be  sufficient  to fund the
Company's  operations for the foreseeable  future.  The Company's future capital
requirements  and the  adequacy  of its  available  funds  will  depend  on many
factors,  including scientific progress in its research and development programs
(including its preclinical and clinical product development activities),  paper,
the  magnitude  of those  programs,  the  ability of the  Company  to  establish
collaborative  and  licensing  arrangements,  the cost  involved  in  preparing,
filing,  prosecuting,  maintaining  and  enforcing  patent  claims and competing
technological and market developments.

     The  Company  entered  into a 20 year lease for a process  development  and
production  facility  being built to the Company's  specifications.  Annual base
rent in the amount of $2.2  million is  expected to begin  January 1, 1999,  the
anticipated completion date of the facility.

     As of December 31, 1997, the Company had net operating  loss  carryforwards
for federal income tax purposes of  approximately  $51 million which expire,  if
unused,  by  the  year  2012.  The  Company  also  has  available  research  and
development tax credit carryforwards of approximately $6.8 million, the majority
of which will expire, if unused, by the year 2012.

     The Company's funds are currently  invested in U.S. Treasury and government
agency obligations and high grade corporate debt securities and commercial paper
investment-grade   commercial  paper  and  interest-bearing   securities.   Such
investments  reflect the Company's  policy  regarding  the  investment of liquid
assets,  which  is to seek a  reasonable  rate of  return  consistent  with  the
emphasis on safety, liquidity and preservation of capital.

     Recently,  national  attention  has focused on the  potential  problems and
costs  resulting  from computer  programs  being written using two digits rather
than four to  define  the  applicable  year.  Any  computer  programs  that have
date-sensitive  software may recognize a date using "00" as the year 1900 rather
than the year 2000.  This could  result in a system  failure or  miscalculations
causing  disruptions of operations,  including,  among other things, a temporary
inability  to  process  transactions,  or  engage  in  similar  normal  business
activities.  While the Company believes that its internal software  applications
are Year 2000 compliant,  there can be no assurance until the year 2000 that all
systems will  function  adequately.  Further,  if the software  applications  of
others on whose services the Company depends are not Year 2000  compliant,  such
noncompliance could have a material adverse effect on the Company.

RECENT PRONOUNCEMENTS

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 130 ("SFAS 130"),  "Comprehensive  Income,"
which is required to be adopted in the year ended December 31, 1998 consolidated
financial statements. SFAS 130 requires that an enterprise (a) classify items of
comprehensive income by their nature in the financial statements and (b) display
the accumulated balance of other  comprehensive  income separately from retained
earnings  and  additional  paid-in  capital in the  Statement  of  Stockholders'
Equity.  The Company  does not expect the adoption of SFAS 130 to be material to
its financial condition and results of operations.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounts  Standards No. 131 ("SFAS 13l"),  "Disclosures about Segments
of an Enterprise  and Related  Information,"  which is required to be adopted in
the year ended December 31, 1998 consolidated financial statements. SFAS changes
the  way  public  companies  report  segment  information  in  annual  financial
statements  and  also  requires  those  companies  to  report  selected  segment
information in interim  financial  reports to stockholders.  The disclosures for
segment information in the consolidated  financial statements is not expected to
be material to its financial condition and results of operations.



                                       24
<PAGE>

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     Certain   statements   contained  in  "Item  1.   Business"  and  "Item  7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations,"  including statements  concerning future collaboration  agreements,
royalties  and  other  payments  under  collaboration  agreements,  and  product
development and sales and other  statements are forward looking  statements,  as
defined in the Private Securities  Litigation Reform Act of 1995. Actual results
may differ materially from those projected in the forward looking  statements as
a  result  of  risks  and  uncertainties,  including  but not  limited  to,  the
following:   the  scientific  progress  of  the  Company  in  its  research  and
development  programs;  the  magnitude  of these  programs;  the  ability of the
Company to establish additional  collaborative and licensing  arrangements;  the
extent to which the Company  engages in clinical  development of any products on
its own; the scope and results of pre-clinical  testing and clinical trials; the
time and costs involved in obtaining regulatory approvals; the costs involved in
preparing,  filing,  prosecuting,   maintaining  and  enforcing  patent  claims;
competing  technological  and market  developments;  and whether  conditions  to
milestone payments are met and the timing of such payments,  and other risks and
uncertainties  detailed  elsewhere  herein  and  from to  time in the  Company's
filings with the Securities and Exchange Commission.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information  required by this item are set forth here in on pages F-1 -
F-20.

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

     None.




                                       25
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The Company  incorporates  herein by reference the  information  concerning
directors and executive officers in its Notice of Annual  Stockholder's  Meeting
and Proxy  Statement to be filed within 120 days after the end of the  Company's
fiscal year (the "1998 Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

     The Company  incorporates  herein by reference the  information  concerning
executive compensation contained in the 1998 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The Company  incorporates  herein by reference the  information  concerning
security ownership of certain beneficial owners and management  contained in the
1998 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company  incorporates  herein by reference the  information  concerning
certain  relationships  and  related  transactions  contained  in the 1998 Proxy
Statement.




                                       26
<PAGE>

                                     PART IV

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

(a)       The following documents are filed as part of this Annual Report:

(1)       Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                            PAGE
                                                                                           NUMBER
                                                                                           ------
<S>            <C>                                                                          <C>
               Report of Ernst & Young LLP, Independent Auditors........................    F-2
               
               Balance Sheets at December 31, 1997 and 1996.............................    F-3

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

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

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

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

</TABLE>

(2)     Financial Statement Schedules

        Financial statement schedules are omitted because they are not required.

(3)     Exhibits
Exhibit No.
-----------

  3.1*   Restated Certificate of Incorporation  (Fifth) of the Registrant (Filed
         as Exhibit 3.1 to the Registrant's  Form 10-K for the fiscal year ended
         December 31, 1993 and incorporated herein by reference).
                                                                                
  3.2*   By-laws of the  Registrant  (Filed as Exhibit  3.2 to the  Registrant's
         Form 10-K for the fiscal year ended December 31, 1993 and  incorporated
         herein by reference).
                                                                                
  3.3    Certificate  of  Amendment  of  the  Certificate  of  Incorporation  of
         Registrant
                                                                                
  4.1*   Form of Common Stock certificate.
                                                                                
 10.1*+  Collaboration Agreement, dated May 19, 1993, between the Registrant and
         SmithKline Beecham Corporation  ("SmithKline  Beecham"),  as amended on
         May 19,  1993  and  August  19,  1993  (Filed  as  Exhibit  10.1 to the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.2*   Second Amendment to HGS-SB Collaboration Agreement, effective September
         1, 1993,  between  the  Registrant  and  SmithKline  Beecham  (Filed as
         exhibit  10.2 to the  Registrant's  Form 10-K for the fiscal year ended
         December 31, 1993 and incorporated herein by reference).
                                                                                
 10.3*   Amendment to HGS-SB Collaboration Agreement,  effective March 17, 1994,
         between the Registrant and SmithKline Beecham (Filed as Exhibit 10.3 to
         the Registrant's  Form 10-K for the fiscal year ended December 31, 1993
         and incorporated herein by reference).
                                                                                
 10.4*+  License  Agreement  between  the  Registrant  and  SmithKline   Beecham
         Corporation  dated  September  15, 1994  (Filed as Exhibit  10.8 to the
         Registrant's Form 10-Q filed November 14, 1994 and incorporated  herein
         by reference).
                                                                                
 10.5*+  Amendment  to  HGS-SB  Collaboration   Agreement  (Therapeutic  Protein
         Amendment),  effective  December 23, 1994,  between the  Registrant and
         SmithKline  Beecham (Filed as Exhibit 10.4 to the Registrant's Form 10-
         K for the fiscal year ended December 31, 1994 and  incorporated  herein
         by reference).

                                       27
<PAGE>
 10.6*+  Amendment to HGS-SB Collaboration  Agreement (Milestone III Amendment),
         effective  December 29, 1994,  between the  Registrant  and  SmithKline
         Beecham  (Filed as Exhibit 10.5 to the  Registrant's  Form 10-K for the
         fiscal  year  ended  December  31,  1994  and  incorporated  herein  by
         reference).
                                                                                
 10.7*   Amendment  to  the  Series  B  Convertible   Preferred  Stock  Purchase
         Agreement  between the Registrant and SmithKline  Beecham  Corporation,
         dated  December 29, 1994.  (Filed as Exhibit 10.96 to the  Registrant's
         form  S-3  Registration  Statement,  as  amended  (Commission  File No.
         33-96206)  originally filed August 25, 1995 and incorporated  herein by
         reference).
                                                                                
 10.8*+  Amendment to HGS-SB Collaboration Agreement,  effective April 24, 1995,
         between the Registrant and SmithKline  Beecham  Corporation.  (Filed as
         Exhibit 10.6 to the Registrant's  form S-3 Registration  Statement,  as
         amended  (Commission  File No.  33-96206),  originally filed August 25,
         1995 and incorporated herein by reference).
                                                                                
 10.9*+  Amendment to HGS-SB  Collaboration  Agreement,  effective May 31, 1995,
         between the Registrant and SmithKline  Beecham.  (Filed as Exhibit 10.1
         to the  Registrant's  Form 10-Q filed August 14, 1995 and  incorporated
         herein by reference).

 10.10*+ Amendment and Restated  License  Agreement  between the  Registrant and
         SmithKline Beecham effective May 31, 1995 (Filed as Exhibit 10.1 to the
         Registrant's Form 10-Q filed August 14, 1995 and incorporated herein by
         reference).

 10.11*+ Amendment  to  SmithKline  Beecham  and  Human  Genome  Sciences,  Inc.
         Collaboration  Agreement and License Agreement and Amended and Restated
         License  Agreement  dated June 28, 1996.  (Filed as Exhibit 10.1 to the
         Registrants  10-Q filed  August  14,  1996 and  incorporated  herein by
         reference).
                                                                                
 10.12*+ SmithKline  Beecham and Human Genome Sciences,  Inc. License  Agreement
         Dated June 28, 1996. ( Filed as Exhibit 10.2 to the  Registrants  10 -Q
         filed August 14, 1996 and incorporated herein by reference).
                                                                                
 10.13*+ Therapeutic  Collaboration  and  License  Agreement  by and among Human
         Genome Sciences, Inc., Schering Corporation,  Schering Plough Ltd., and
         SmithKline  Beecham  Corporation dated June 28, 1996. (Filed as Exhibit
         10.3 to the  Registrants  10-Q filed  August 14, 1996 and  incorporated
         herein by reference).
                                                                                
 10.14*+ Gene  Therapy  Collaboration  and License  Agreement by and among Human
         Genome Sciences, Inc., Schering Corporation,  and Schering Plough Ltd.,
         June 28, 1996. ( Filed as Exhibit  10.4 to the  Registrants  10-Q filed
         August 14, 1996 and incorporated herein reference).
                                                                                
 10.15*+ Collaboration and License Agreement by and among Human Genome Sciences,
         Inc. SmithKline Beecham Corporation and Synthelabo dated June 30, 1996.
         (Filed as Exhibit  10.5 to the  Registrants  10-Q filed August 14, 1996
         and incorporated herein by reference).
                                                                                
 10.16*+ Collaboration  and  License  Agreement   between   SmithKline   Beecham
         Corporation,  Human Genome Sciences, Inc. and Merck KGaA effective July
         10,  1996.  ( Filed  as  Exhibit  10.6 to the  Registrants  10-Q  filed
         November 14, 1996 and incorporated herein by reference).
                                                                                
 10.17*+ Research  Collaboration  Agreement  between the  Registrant and Genetic
         Therapy,  Inc.  dated  September 13, 1994 (Filed as Exhibit 10.7 to the
         Registrant's Form 10-Q filed November 14, 1994 and incorporated  herein
         by reference).
                                                                                
 10.18*+ Option and License  Agreement  between the Company and Takeda  Chemical
         Industries,  Ltd.  dated June 12,  1995  (Filed as Exhibit  10.3 to the
         Registrant's Form 10-Q filed August 14, 1995 and incorporated herein by
         reference).
                                                                                
 10.19*+ Collaboration   and  License   Agreement  between  the  Registrant  and
         MedImmune,  Inc.  dated July 27,  1995  (Filed as  Exhibit  10.5 to the
         Registrant's Form 10-Q filed August 14, 1995 and incorporated herein by
         reference).
                                                                                
 10.20*+ Research  Collaboration  Agreement,  dated  January 19,  1996,  between
         Registrant and Pioneer Hi-Bred International,  Inc. ("Pioneer"). (Filed
         as Exhibit 10.15 to the  Registrants  Form 10-K filed March 31,1996 and
         incorporated herein by reference).

                                       28
<PAGE>
 10.21*+ License  Agreement  between  Registrant and F. Hoffmann-La  Roche, Ltd.
         ("Roche").  (Filed as Exhibit 10.16 to the Registrants  Form 10-K filed
         March 31,1996 and incorporated herein by reference).
                                                                                
 10.22*+ Research  Services  Agreement,  dated  October  1,  1992,  between  the
         Registrant and The Institute for Genomic  Research  ("TIGR")  (Filed as
         Exhibit 10.4 to the Registrant's  Form S-1 Registration  Statement,  as
         amended  (Commission  File No.  33-69850),  originally filed October 1,
         1993 and incorporated herein by reference).
                                                                                
 10.23*+ Intellectual  Property  Agreement,  dated October 2, 1992,  between the
         Registrant and TIGR (Filed as Exhibit 10.5 to the Registrant's Form S-1
         Registration  Statement,  as amended  (Commission  File No.  33-69850),
         originally filed October 1, 1993 and incorporated herein by reference).
                                                                                
 10.24*  Lease Funding  Agreement and Assignment,  dated March 2, 1993,  between
         the Registrant and TIGR (Filed as Exhibit 10.6 to the Registrant's Form
         S-1 Registration  Statement, as amended (Commission File No. 33-69850),
         originally filed October 1, 1993 and incorporated herein by reference).
                                                                                
 10.25*  Letter Agreement, dated March 31, 1993, between the Registrant and TIGR
         (Filed  as  Exhibit  10.7 to the  Registrant's  Form  S-1  Registration
         Statement, as amended (Commission File No. 33-69850),  originally filed
         October 1, 1993 and incorporated herein by reference).
                                                                                
 10.26*+ Letter Agreement, dated April 19, 1993, between the Registrant and TIGR
         (Filed  as  Exhibit  10.8 to the  Registrant's  Form  S-1  Registration
         Statement, as amended (Commission File No. 33-69850),  originally filed
         October 1, 1993 and incorporated herein by reference).
                                                                                
 10.27*  Stock Purchase,  Restriction and Repurchase Agreement,  dated April 26,
         1993,  between the  Registrant  and TIGR (Filed as Exhibit 10.47 to the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.28*  Letter  Agreement,  dated May 7, 1993,  between the Registrant and TIGR
         (Filed  as  Exhibit  10.9 to the  Registrant's  Form  S-1  Registration
         Statement, as amended (Commission File No. 33-69850),  originally filed
         October 1, 1993 and incorporated herein by reference).
                                                                                
 10.29*+ Human cDNA Database Agreement among the Registrant,  SmithKline Beecham
         Corporation,  and The Institute for Genomic Research dated July 7, 1994
         (Filed as Exhibit 10.5 to the Registrant's Form 10-Q filed November 14,
         1994 and incorporated herein by reference).
                                                                                
 10.30*+ Amendment to the Human cDNA Database  Agreement  between the Registrant
         and  SmithKline  Beecham  Corporation  and the  Institute  for  Genomic
         Research  dated  October  26,  1994  (Filed  as  Exhibit  10.6  to  the
         Registrant's Form 10-Q filed November 14, 1994 and incorporated  herein
         by reference).
                                                                                
 10.31*+ Second  Amendment  to the Human cDNA  Database  Agreement  between  the
         Registrant and  SmithKline  Beecham  Corporation  and the Institute for
         Genomic  Research dated as of April 14, 1995 (Filed as Exhibit 10.87 to
         the Registrant's  Form 10-K for the fiscal year ended December 31, 1994
         and incorporated herein by reference).
                                                                                
 10.32*  Common Stock Purchase Warrant,  dated June 8, 1993,  granted to HCV III
         (Filed  as  Exhibit  10.33 to the  Registrant's  Form S-1  Registration
         Statement, as amended (Commission File No. 33-69850),  originally filed
         October 1, 1993 and incorporated herein by reference).
                                                                                
 10.33*  Common Stock Purchase  Warrant,  dated June 8, 1993,  granted to HCV IV
         (Filed  as  Exhibit  10.34 to the  Registrant's  Form S-1  Registration
         Statement, as amended (Commission File No. 33-69850),  originally filed
         October 1, 1993 and incorporated herein by reference).
                                                                                
 10.34*  Common Stock Purchase Warrant,  dated June 8, 1993,  granted to Everest
         (Filed  as  Exhibit  10.36 to the  Registrant's  Form S-1  Registration
         Statement, as amended (Commission File No. 33-69850),  originally filed
         October 1, 1993 and incorporated herein by reference).
                 
                                       29
<PAGE>
 10.35*  Master Lease Agreement,  dated January 31, 1993, between the Registrant
         and  MMC/GATX  Partnership  No.  I  (Filed  as  Exhibit  10.25  to  the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.36*  Warrant  Agreement,  dated January 31, 1993, between the Registrant and
         MMC/GATX  Partnership No. I (Filed as Exhibit 10.26 to the Registrant's
         Form S-1 Registration  Statement,  as amended  (Commission File No. 33-
         69850),  originally  filed October 1, 1993 and  incorporated  herein by
         reference).
                                                                                
 10.37*  Master  Lease  Agreement,  dated as of January  31,  1993,  between the
         Registrant and Dominion  Ventures,  Inc. (Filed as Exhibit 10.27 to the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.38*  Master Lease Agreement,  dated January 31, 1993, between the Registrant
         and Comdisco,  Inc. (Filed as Exhibit 10.29 to the Registrant's Form S-
         1 Registration  Statement,  as amended  (Commission File No. 33-69850),
         originally filed October 1, 1993 and incorporated herein by reference).
                                                                                
 10.39*  Master Lease Agreement (Equipment) between the Registrant and Comdisco,
         Inc.,  dated June 30, 1994 (Filed as Exhibit 10.12 to the  Registrant's
         Form 10-Q filed August 12, 1994 and incorporated herein by reference).
                                                                                
 10.40*  Lease of Premises at 9620 Medical  Center  Drive,  Rockville,  Maryland
         (Filed  as  Exhibit  10.42 to the  Registrant's  Form S-1  Registration
         Statement, as amended (Commission File No. 33-69850),  originally filed
         October 1, 1993 and incorporated herein by reference).
                                                                                
 10.41*  Lease of Premises at 9430 Key West Avenue,  Rockville,  Maryland (Filed
         as Exhibit 10.44 to the Registrant's  Form S-1 Registration  Statement,
         as amended (Commission File No. 33-69850),  originally filed October 1,
         1993 and incorporated herein by reference).
                                                                                
 10.42*  Office  Lease   between  the   Registrant   and  Key  West  IV  Limited
         Partnership,  dated  June  14,  1994  (Filed  as  Exhibit  10.11 to the
         Registrant's Form 10-Q filed August 12, 1994 and incorporated herein by
         reference).
                                                                                
 10.43*  Stock  Purchase and  Restriction  Agreement,  dated  December 31, 1992,
         between  the  Registrant  and  William A.  Haseltine,  Ph.D.  (Filed as
         Exhibit 10.15 to the Registrant's Form S-1 Registration  Statement,  as
         amended  (Commission  File No.  33-69850),  originally filed October 1,
         1993 and incorporated herein by reference).
                                                                                
 10.44*  Employment  Agreement,   dated  February  25,  1997,  with  William  A.
         Haseltine,  Ph.D. (Filed as Exhibit 10.44 to the Registrant's Form 10 K
         for the fiscal year ended December 31, 1996 and incorporated  herein by
         reference).
                                                                                
 10.45*  Restricted Stock Purchase  Agreement,  dated May 18, 1993,  between the
         Registrant and William A. Haseltine,  Ph.D.  (Filed as Exhibit 10.24 to
         the   Registrant's   Form  S-1  Registration   Statement,   as  amended
         (Commission  File No.  33-69850),  originally filed October 1, 1993 and
         incorporated herein by reference).
                                                                                
 10.46*  Promissory  Note,  dated March 4, 1994,  given by William A. Haseltine,
         Ph.D. to the  Registrant  (Filed as Exhibit  10.58 to the  Registrant's
         Form 10-K for the fiscal year ended December 31, 1993 and  incorporated
         herein by reference).
                                                                                
 10.47*  First Allonge to Promissory  Note,  dated  December 16, 1994,  given by
         William A. Haseltine,  Ph.D. to the Registrant  (Filed as Exhibit 10.65
         to the  Registrant's  Form 10-K for the fiscal year ended  December 31,
         1994 and incorporated herein by reference).
                                                                                
 10.48*  Pledge  Agreement,  dated March 4, 1994,  between William A. Haseltine,
         Ph.D. and Registrant  (Filed as Exhibit 10.59 to the Registrant's  Form
         10-K for the  fiscal  year ended  December  31,  1993 and  incorporated
         herein by reference).
                 


                                       30
<PAGE>
 10.49*  First Amendment to Pledge Agreement,  dated December 16, 1994,  between
         William A. Haseltine,  Ph.D. and Registrant  (Filed as Exhibit 10.67 to
         the Registrant's  Form 10-K for the fiscal year ended December 31, 1994
         and incorporated herein by reference).
                                                                                
 10.50*  Employment  Agreement,  dated October 1992, with Craig A. Rosen,  Ph.D.
         (Filed  as  Exhibit  10.17 to the  Registrant's  Form S-1  Registration
         Statement, as amended (Commission File No. 33-69850),  originally filed
         October 1, 1993 and incorporated herein by reference).
                                                                                
 10.51*  Restricted Stock Purchase Agreement,  dated April 21, 1993, between the
         Registrant  and Craig A. Rosen,  Ph.D.  (Filed as Exhibit  10.22 to the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.52*  Employment  Agreement,  dated March 14, 1994,  with Bradley G. Lorimier
         (Filed as Exhibit  10.22 to the  Registrant's  Form 10-K for the Fiscal
         year ended December 31, 1993 and incorporated herein by reference).
                                                                                
 10.53*  Promissory Note dated September 12, 1994,  given by Bradley G. Lorimier
         to the Registrant  (Filed as Exhibit 10.9 to the Registrant's Form 10-Q
         filed November 14, 1994 and incorporated herein by reference).
                                                                                
 10.54*  Employment  Agreement,  dated  January  23,  1995 with Robert H. Benson
         (Filed as Exhibit  10.27 to the  Registrant's  From 10-K for the Fiscal
         year ended December 31, 1994 and incorporated herein by reference).
                                                                                
 10.55*  Employment Agreement between the Company and Melvin D. Booth dated June
         19, 1995  (Filed as Exhibit  10.4 to the  Registrant's  Form 10-Q filed
         August 14, 1995 and incorporated herein by reference).
                                                                                
 10.56*  Restricted Stock Purchase Agreement,  dated April 21, 1993, between the
         Registrant  and  Catherine  G.  Blair  (Filed as  Exhibit  10.19 to the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.57*  Restricted Stock Purchase Agreement,  dated April 21, 1993, between the
         Registrant  and  James  W.  Church  (Filed  as  Exhibit  10.20  to  the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.58*  Restricted Stock Purchase Agreement,  dated April 21, 1993, between the
         Registrant  and  Donald  D.  Johnston  (Filed as  Exhibit  10.21 to the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.59*  1993 Stock Option Plan (Filed as Exhibit 10.45 to the Registrant's Form
         S-1 Registration Statement, as amended (Commission File No. 33- 69850),
         originally filed October 1, 1993 and incorporated herein by reference).
                                                                                
 10.60*  1994  Stock  Option  Plan  (Filed  as  Exhibit  4 to  the  Registrant's
         Registration  Statement on Form S-8, File No.  33-79020,  filed May 17,
         1994 and incorporated herein by reference).
                                                                                
 10.61*  Form  of  Stock  Option  Agreement  (Filed  as  Exhibit  10.46  to  the
         Registrant's Form S-1 Registration  Statement,  as amended  (Commission
         File No.  33-69850),  originally filed October 1, 1993 and incorporated
         herein by reference).
                                                                                
 10.62*+ Agreements  between the Registrant and Perkin-Elmer  Corporation (Filed
         as Exhibit 10.48 to the Registrant's  Form S-1 Registration  Statement,
         as amended (Commission File No. 33-69850),  originally filed October 1,
         1993 and incorporated herein by reference).
                                                                                
 10.63*  $4,000,000 Maryland Industrial  Development Financing Authority Taxable
         Variable Rate Demand Economic  Development Revenue Bonds dated December
         21, 1994 (Filed as Exhibit 10.90 to the Registrant's  Form 10-K for the
         fiscal  year  ended  December  31,  1994  and  incorporated  herein  by
         reference).
                 
                                       31
<PAGE>
 10.64*+ HGS/TIGR  Agreement  dated June 20, 1997 (Filed as Exhibit  10.1 to the
         Registrant's Form 10-Q filed August 14, 1997 and incorporated herein by
         reference).
                                                                                
 10.65*+ Amendment to SmithKline  Beecham  Corporation  and  SmithKline  Beecham
         p.l.c. and Human Genome Sciences,  Inc.  Collaboration  Agreement dated
         July 24, 1997  (Filed as Exhibit  10.2 to the  Registrant's  10-Q filed
         August 14, 1997 and incorporated herein by reference).
                                                                                
 10.66++ Gene Therapy  Collaboration  and License Agreement between Human Genome
         Sciences, Inc. and Transgene S.A., dated February 25, 1998.
                                                                                
 10.67   Lease Agreement between Maryland Economic  Development  Corporation and
         Human Genome Sciences, Inc., dated December 1, 1997.
                                                                                
 23.1    Consents of Ernst & Young LLP, Independent Auditors.
                                                                                
 27      Financial Data Schedule.

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

 *  Incorporated by reference.
                                                                                
 +  Confidentiality treatment has been granted by the Commission. The copy filed
    as an exhibit omits the information subject to the confidentiality request.
                                                                                
 ++ Confidentiality  treatment has been requested.  The copy filed as an exhibit
    omits the information subject to the confidentiality request.
                                                                                
                                       32
<PAGE>

b)       Reports on Form 8-K

         The  Company  did not file any  reports  on Form 8-K  during the fourth
quarter of 1997.

SIGNATURES

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

HUMAN GENOME SCIENCES, INC.

                                    BY:  /S/William A. Haseltine, Ph.D.
                                         ---------------------------------------
                                           William A. Haseltine, Ph.D.
                                           Chairman and Chief Executive Officer

Dated:  March 31, 1998

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

<TABLE>
<CAPTION>

Signature                                                        Title                                 Date
---------                                                        -----                                 ----
<S>                                                    <C>                                       <C> 
/S/William A. Haseltine Ph.D.                          Chairman of the Board and Chief            March 31, 1998
--------------------------------------                 Executive Officer (principal executive
William A. Haseltine, Ph.D.                            officer)


/S/Melvin D. Booth                                     President, Chief Operating Officer         March 31, 1998
-----------------------------------------------        Director
Melvin D. Booth                                 


/S/Craig A. Rosen, Ph.D.                               Senior Vice President, Research and         March 31, 1998
-----------------------------------------------        Development and Director
Craig A. Rosen, Ph.D.                         


/S/Steven C. Mayer                                     Senior Vice President and                  March 31, 1998
-----------------------------------------------        Chief Financial Officer(principal
Steven C. Mayer                                        financial and accounting officer)


/S/Robert A. Armitage                                  Director                                   March 31, 1998
-----------------------------------------------
Robert A. Armitage


/S/James Cavanaugh, Ph.D.                              Director                                   March 31, 1998
-----------------------------------------------
James Cavanaugh, Ph.D.


/S/Jurgen Drews, M.D.                                  Director                                   March 31, 1998
-----------------------------------------------
Jurgen Drews, M.D.


/S/Beverly Sills-Greenough                             Director                                  March 31, 1998
-----------------------------------------------
Beverly Sills-Greenough

</TABLE>

                                       33
<PAGE>

<TABLE>
<CAPTION>

<S>                                                    <C>                                       <C> 
/S/Robert Hormats                                      Director                                  March 31, 1998
-----------------------------------------------
Robert Hormats


/S/Donald D. Johnston                                  Director                                  March 31, 1998
-----------------------------------------------
Donald D. Johnston


/S/Max Link, Ph.D.                                     Director                                  March 31, 1998
-----------------------------------------------
Max Link, Ph.D.


/S/Alan G. Spoon                                       Director                                  March 31, 1998
-----------------------------------------------
Alan G. Spoon


/S/James Barnes Wyngaarden, M.D.                       Director                                  March 31, 1998
-----------------------------------------------
James Barnes Wyngaarden, M.D.

</TABLE>



                                       34
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS


                                                                           Page
                                                                         Number
                                                                         ------
Report of Ernst & Young LLP, Independent Auditors........................ F-2

Balance Sheets at December 31, 1997 and 1996............................. F-3

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

Statements of Stockholders' Equity for the years ended

December 31, 1997, 1996 and 1995......................................... F-5

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

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



                                      F-1

<PAGE>


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
Human Genome Sciences, Inc.
Rockville, Maryland

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

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Human Genome Sciences,  Inc. at
December 31, 1997 and 1996 and the results of its  operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.

                                                           /s/ Ernst & Young LLP

Vienna, Virginia
February 23, 1998


                                      F-2

<PAGE>


                           HUMAN GENOME SCIENCES, INC.

                                 BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                        ---------------------------
                                                                                           1997          1996
                                                                                        ------------ --------------
ASSETS                                                                                  (dollars in thousands, except
------                                                                                 for share and per share amounts)
<S>                                                                                     <C>              <C>      
Current assets:
     Cash and cash equivalents.....................................................     $  44,346        $  27,341
     Short-term investments........................................................       160,866           88,775
     Prepaid expenses and other current assets.....................................         2,120            2,935
                                                                                        ------------ --------------
         Total current assets......................................................       207,332          119,051

Property, plant and equipment (net of accumulated depreciation and amortization)...        20,647           18,031
Restricted investments.............................................................         6,582            1,705
Other assets.......................................................................         1,671            1,330
                                                                                        ------------ --------------
         TOTAL.....................................................................      $236,232         $140,117
                                                                                        ============ ==============

LIABILITIES
-----------

Current liabilities:
     Current portion of long-term debt.............................................     $     444      $      444
     Accounts payable and accrued expenses.........................................         4,656           3,361
     Accrued payroll and related taxes.............................................         2,077           1,120
     Current obligation under capital leases.......................................           223             811
     Deferred revenues.............................................................         3,020           2,537
                                                                                        ------------ --------------
         Total current liabilities.................................................        10,420           8,273
Long-term debt, net of current portion.............................................         2,224           2,668
Obligations under capital leases, net of current portion...........................             0             286
Other liabilities..................................................................           334             369
                                                                                        ------------ --------------
         TOTAL.....................................................................        12,978          11,596

Commitments and other matters......................................................             -               -

STOCKHOLDERS' EQUITY
---------------------

Common stock - $.01 par value; shares authorized - 50,000,000; shares issued -
     22,313,504 and 18,784,382 at December 31, 1997 and 1996, respectively.........           223             188

Additional paid-in capital.........................................................       278,626         162,583

Unearned portion of compensatory stock.............................................          (121)             -
Unrealized gain (loss) on investments available for sale...........................            48            (121)
Retained deficit...................................................................       (55,522)        (34,129)
                                                                                        ------------ --------------
         Total stockholders' equity................................................       223,254         128,521
                                                                                        ------------ --------------
         TOTAL.....................................................................      $236,232        $140,117
                                                                                        ============ ==============

</TABLE>

   The accompanying notes to financial statements are an integral part hereof.

                                      F-3


<PAGE>


                           HUMAN GENOME SCIENCES, INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                 -------------------------------------------------
                                                                      1997           1996              1995
                                                                 --------------- --------------  ------------------
                                                                     (dollars in thousands, except for share
                                                                              and per share amounts)
<S>                                                                    <C>        <C>                   <C>    
Revenue - research and development collaborative contracts.....  $      25,605   $    36,460     $        5,000

Costs and expenses:
     Research and development:
         Direct expenditures...................................         39,893        30,409             22,904
         Payments under research services agreement............          6,247        10,063             10,075
                                                                 --------------- --------------  -----------------
            Total research and development.....................         46,140        40,472             32,979

General and administrative.....................................         11,113         9,639              8,745
                                                                 --------------- --------------  -----------------

         Total costs and expenses..............................         57,253        50,111             41,724
                                                                 --------------- --------------  -----------------
Income (loss) from operations..................................        (31,648)      (13,651)           (36,724)

Interest income................................................         10,889         6,462              4,555

Interest expense...............................................           (389)         (370)              (550)
                                                                 --------------- --------------  -----------------
Income (loss) before taxes.....................................        (21,148)       (7,559)           (32,719)

Provision for (benefit) from income taxes:
     Current...................................................            245           208             (1,651)
                                                                 --------------- --------------  -----------------

Net Income (Loss)..............................................  $    (21,393)   $    (7,767)    $      (31,068)
                                                                 =============== ==============  =================

Basic and diluted net income (loss) per share..................  $      (0.99)   $     (0.42)    $        (1.98)
                                                                 =============== ==============  =================

Weighted average shares outstanding basic and diluted..........    21,525,283     18,630,986         15,723,144
                                                                 =============== ==============  =================
</TABLE>



   The accompanying notes to financial statements are an integral part hereof.

                                      F-4


<PAGE>



                           HUMAN GENOME SCIENCES, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

                    (DOLLARS IN THOUSANDS, EXCEPT FOR SHARES)

<TABLE>
<CAPTION>
                                                                                      Unrealized   
                                       Common Stock                   Unearned      Gain (Loss)   
                                  ----------------------              Portion of         on
                                  Number                  Additional  Compensatory   Investments     Retained
                                    Of                     Paid-In     Stock and      Available      Earnings
                                  Shares      Amount       Capital      Warrants       for Sale     (Deficit)     Total
-------------------------------------------- -----------  ---------- --------------- -------------  ----------- -----------
<S>                              <C>         <C>          <C>         <C>            <C>             <C>        <C>      
Balance - December 31, 1994      14,846,009  $    148     $ 80,729    $  (1,584)     $     (214)     $  4,706   $  83,785
Exercise of options                 113,691         1          932            -               -             -         933
Warrants exercised by lessor        216,330         2           (2)           -               -             -           -
Warrants exercised                    7,499         -            1            -               -             -           1
Issuance of common stock
  pursuant to public offering
  (net of expenses)               3,048,402        31       60,964            -               -             -      60,995

Compensatory stock and warrants
  earned                                  -         -            -          699               -             -         699
Net loss                                  -         -            -            -               -       (31,068)    (31,068)
Unrealized gain on investments            -         -            -            -             261             -         261
                                 ----------- -----------  ---------- --------------- -------------  ----------- -----------
Balance - December 31, 1995      18,231,931       182      142,624         (885)             47       (26,362)    115,606
Exercise of options                 193,752         3        1,897            -               -             -       1,900
Warrants exercised by lessor         17,431         -            -            -               -             -           -
Warrants exercised                    2,203         -            -            -               -             -           -

Issuance of common stock in    
  connection with SB Milestone
  III                               339,065         3       18,062            -               -             -      18,065
Compensatory stock and warrants 
earned                                    -         -            -          885               -             -         885
Net loss                                  -         -            -            -               -        (7,767)     (7,767)
Unrealized (loss) on investments          -         -            -            -            (168)            -        (168)
                                 ----------- -----------  ---------- --------------- -------------  ----------- -----------
Balance - December 31, 1996      18,784,382       188      162,583            -            (121)      (34,129)    128,521
                                   
Exercise of options                 280,340         3        4,173            -               -             -       4,176
Warrants exercised by lessor          5,161         -            -            -               -             -           -
Warrants exercised                   50,871         -           10            -               -             -          10
Issuance of common stock
 pursuant to public
 offering (net of expenses)       3,192,750        32      111,713            -               -             -     111,745
Compensatory stock options
issued                                    -         -          147         (147)              -            -           -
Compensatory stock and warrants 
earned                                    -         -            -           26               -            -          26
Net loss                                  -         -            -            -               -      (21,393)    (21,393)
Unrealized gain on investments            -         -            -            -             169            -         169
                                 ----------- -----------  ---------- --------------- -------------  ----------- -----------
Balance - December 31, 1997      22,313,504  $    223       $278,626 $     (121)     $       48     $(55,522)   $223,254
                                 =========== ===========  ========== =============== =============  =========== ===========
</TABLE>


   The accompanying notes to financial statements are an integral part hereof.

                                      F-5

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                                   1997        1996       1995
                                                                                 ---------------------------------
                                                                                      (dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                              <C>        <C>         <C>      
    Net income (loss)..........................................................  $ (21,393) $  (7,767)  $(31,068)
    Adjustments to reconcile net income (loss) to net cash provided by (used in)
    operating activities:
        Accrued interest on U.S. Treasury bills and commercial paper...........     (1,109)      (857)      (251)
        Depreciation and amortization..........................................      6,359      5,858      4,395
        Loss due to disposal and write-down of property, plant and equipment...         50         66        665
        Compensation expense related to stock options and warrants.............         26        885        699
        Changes in operating assets and liabilities:
           Prepaid expenses and other current assets...........................        738       (718)      (699)
           Funds available - facility fund.....................................          -          -        (52)
           Other assets........................................................       (341)         3         12
           Accounts payable and accrued expenses...............................        988      1,376        305
           Accrued payroll and related taxes...................................        957        428        143
           Deferred income.....................................................        483        537      2,000
           Income taxes payable................................................          -          -     (2,134)
           Other liabilities...................................................        (35)        (5)       (26)
                                                                                 ---------- ----------- ----------
           Net cash provided by (used in) operating activities.................    (13,277)      (194)   (26,011)
                                                                                 ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures - property, plant and equipment.......................     (8,717)     (8,306)   (7,697)
    Purchase of investments and marketable securities..........................   (205,572)   (182,030)  (98,717)
    Proceeds from sale and maturities of investments
      and marketable securities................................................    134,833     159,499    73,552
                                                                                 ---------- ----------- ----------
           Net cash provided by (used in) investing activities.................    (79,456)    (30,837)  (32,862)
                                                                                 ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from long-term debt...............................................          -          -      2,353
    Repayment of long-term debt................................................       (444)       (444)     (444)
    Restricted cash............................................................     (4,877)        295         -
    Payments on capital lease obligations......................................       (874)     (1,297)   (1,139)
    Proceeds from issuance of common stock (net of expenses)...................    115,933      19,965    61,929
                                                                                 ---------- ----------- ----------
           Net cash provided by (used in) financing activities.................    109,738      18,519    62,699
                                                                                 ---------- ----------- ----------
NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..........................     17,005     (12,512)    3,826
Cash and cash equivalents - beginning of year..................................     27,341      39,853    36,027
                                                                                 ---------- ----------- ----------
CASH AND CASH EQUIVALENTS - END OF YEAR........................................  $  44,346   $  27,341  $ 39,853
                                                                                 ==========  ========== ==========

Supplemental  disclosures  of cash flow  information:
   Cash paid during the year for:
        Interest...............................................................  $     240   $     199  $    233
        Income taxes...........................................................        245         208       508

</TABLE>

See Note G for noncash exercise of warrants.


   The accompanying notes to financial statements are an integral part hereof.

                                      F-6

<PAGE>



                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE A) - THE COMPANY

Human Genome  Sciences,  Inc. (the  "Company")  was  incorporated  and commenced
operations  on June 26,  1992.  The  Company  is  engaged  in the  research  and
development of novel,  proprietary  pharmaceutical and diagnostic products based
on the  discovery  and  understanding  of the  medical  utility  of  genes.  The
Company's revenues are currently derived from license fees and research payments
under collaboration  agreements.  The Company does not yet generate any revenues
from product sales.

(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Use of estimates

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

    Cash equivalents and Short-Term Investments

The Company considers all highly liquid investment  instruments purchased with a
maturity of three  months or less to be cash  equivalents.  On December 31, 1997
and 1996, the Company had purchased $15,171,000 and $6,840,054, respectively, of
U.S.  Government  securities  under  agreements to resell on January 1, 1998 and
1997, respectively.  Due to the short-term nature of the agreements, the Company
did not take possession of the securities which were held by the Company's asset
managers. The market value of the securities approximated the carrying amount.

The  Company   classifies  its  short-term   investments  into  the  categories:
"held-to-maturity"  and  "available-for-sale,"  each  of  which  have  different
accounting   treatment.   Investments  in  securities  that  are  classified  as
available-for-sale  and have  readily  determinable  fair values are measured at
fair market value in the balance sheet, and unrealized  holding gains and losses
for these  investments  are reported as a separate  component  of  stockholders'
equity until realized. Debt securities classified as held-to-maturity securities
will be carried at amortized cost.

During 1997,  the Company  instructed  its cash  portfolio  managers to hold all
securities as  available-for-sale  to be available for current  operations.  For
comparative  purposes,  the  Company  has  reclassed  long-term  investments  to
short-term investments.

    Investment Risk

The Company has invested its cash in obligations  of the U.S.  Government and in
high grade  corporate  debt  securities  and  commercial  paper.  The  Company's
investment policy limits  investments to certain types of instruments  issued by
institutions  with investment grade credit ratings,  and places  restrictions on
maturities and concentration by type and issuer.

    Investments

All  investments  in which the Company  has the ability to exercise  significant
influence over the investee,  but less than a controlling  voting interest,  are
accounted for under the equity method of accounting.  Under the equity method of
accounting,  the  Company's  share of the  investee's  earnings  or  losses  are
included in operations,  to the extent the Company has an investment recorded as
an asset plus the amount of any continuing commitment to fund the investee.

                                      F-7

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    Depreciation and amortization

Depreciation and amortization are computed using the  straight-line  method over
the estimated useful lives of the assets as follows:

      Laboratory equipment.................................  3 - 10 years
      Computers and EDP equipment..........................  3 years
      Furniture and office equipment.......................  3 - 5 years
      Leasehold improvements...............................  over the lease term

Equipment acquired under capital lease agreements is amortized over the terms of
the leases ranging from three to four years.

    Impairment of Long-Lived Assets

Periodically,  management  determines  whether any property and equipment or any
other assets have been impaired  based on the criteria  established in Statement
of Financial  Accounting  Standards No. 121,  "Accounting  for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). The
Company  made no  adjustments  to the carrying  values of the assets  during the
years ended December 31, 1997, 1996, and 1995.

    Stock-Based Compensation

During 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based  Compensation" ("SFAS No. 123"). The provisions
of SFAS No. 123 allow  companies to either  expense the estimated  fair value of
stock options or to continue to follow the  intrinsic  value method set forth in
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  ("APB No. 25"),  but  disclose  the pro forma  effects on net income
(loss) had the fair value of the options been expensed.  The Company has elected
to continue to apply APB No. 25 in  accounting  for its stock  option  incentive
plans. See Note L to the financial statements for further information.

    Revenue recognition

Nonrefundable license fees, research payments, additional payments and milestone
payments in connection  with  collaboration  agreements are recognized when they
are earned in accordance with the applicable  performance  requirements and / or
contractual terms.

    Research and development

Research and development costs are charged to expense as incurred.

    Patent costs

Patent application costs are charged to expense as incurred.

    Net income (loss) per share

In 1997,  the Financial  Accounting  Standards  Board issued  Statement No. 128,
"Earnings per Share" ("SFAS No. 128").  SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share.  Unlike primary earnings per share, basic earnings per share excludes any
dilutive  effects of  options,  warrants  and  convertible  securities.  Diluted
earnings  per share is very similar to the  previously  reported  fully  diluted
earnings per share.  All net income  (loss)  earnings per share  amounts for all
periods have been presented,  and where appropriate,  restated to conform to the
SFAS No. 128 requirements.


                                      F-8

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE B) - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    Sources of supply

The  Company  currently  relies  on a single  supplier,  Applied  Biosystems,  a
division of  Perkin-Elmer  Corporation,  to provide  all of its gene  sequencing
machines and certain  reagents  required in connection  with the gene sequencing
process.  The Company has not  experienced  problems  in  obtaining  either gene
sequencing machines or reagents in a timely manner.  While other gene sequencing
machines are  available,  the Company does not believe that such other  machines
are as efficient as the machines currently used by the Company. No assurance can
be given that either the gene  sequencing  machines or the reagents  will remain
available  in  commercial   quantities  at  costs  that  are  not   economically
prohibitive.

    Reclassification

     Certain  reclassifications  have been made to the 1996 financial statements
to conform with the 1997 presentations.

    Recent Pronouncements

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standard No. 130, "Reporting  Comprehensive  Income" ("SFAS
No. 130"),  which is required to be adopted for the Company's  December 31, 1998
financial  statements.  SFAS No. 130 establishes new rules for the reporting and
display  of  comprehensive  income and its  components  in a full set of general
purpose financial statements.  Comprehensive income is the total of net loss and
all  other  nonowner  changes  in  equity.  The  impact  of SFAS No.  130 on the
Company's December 31, 1998 financial condition and results of operations is not
expected to be material.

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standard  No.  131,  "Disclosures  about  Segments  of an
Enterprise and Related  Information"  ("SFAS No. 131"),  which is required to be
adopted for the Company's December 31, 1998 financial  statements.  SFAS No. 131
establishes  annual and interim  reporting  standards for a company's  operating
segments and related disclosures about its products, services,  geographic areas
and major  customers.  The impact of SFAS No. 131 on the Company's  December 31,
1998  financial  condition  and  results of  operations  is not  expected  to be
material.

(NOTE C) - INVESTMENTS

Investments,  including accrued interest,  at December 31, 1997 and 1996 were as
follows:

<TABLE>
<CAPTION>
                                          December 31, 1997
                                          -----------------
                                                       Amortized                          Unrealized
                  Available-for-Sale                     Cost           Fair Value       Gain/(Loss)
                  ------------------                 --------------     ----------       -----------
 <S>                                                    <C>               <C>               <C>
 U.S. Treasury and agencies                          $  16,838,000     $  16,836,000     $     (2,000)
 Corporate debt securities                             143,980,000       144,030,000           50,000
                                                     --------------   ---------------    -------------   
                                                      $160,818,000      $160,866,000     $   48,000    
                                                     ==============   ===============    =============   
                                                                          
                                          December 31, 1996
                                          -----------------
                   Held-to-Maturity
                   ----------------
 Corporate debt securities                             $58,282,000       $58,247,000       $  (35,000)
                                                     ==============   ===============     =============

                  Available-for-Sale
                  ------------------
 U.S. Treasury and agencies                            $15,262,000       $15,194,000       $  (68,000)

 Corporate debt securities                              15,352,000        15,299,000          (53,000)
                                                     --------------   ---------------     -------------
                                                       $30,614,000       $30,493,000        $(121,000)
                                                     ==============   ===============     =============
</TABLE>

                                      F-9

<PAGE>
                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE D) - AGREEMENT WITH THE INSTITUTE FOR GENOMIC RESEARCH ("TIGR")

In June 1997,  the  Company  and TIGR  reached an  agreement  to  terminate  the
Research  Services  Agreement (the "Services  Agreement") dated October 1, 1992,
the  Intellectual  Property  Agreement  dated October 2, 1992, the Lease Funding
Agreement and  Assignment  dated March 2, 1993,  the Agreement of April 19, 1993
related to human cDNA sequencing, and all other agreements entered into any time
prior to the  Termination  Date  between the  Company and TIGR.  Pursuant to the
Termination  Agreement,  the Company  retains  rights in  intellectual  property
arising out of TIGR's research prior to June 2, 1997, but will have no rights to
intellectual  property  resulting  from future  research by TIGR. The Company is
relieved of its  obligation to provide  future  funding  (including all research
funding)  to TIGR,  which  would have  amounted to  approximately  $38  million.
Certain   limitations  on  TIGR's  publication  of  intellectual   property  and
restrictions on TIGR entering into commercial  agreements contained in the prior
agreements were also terminated. However, pursuant to the Termination Agreement,
TIGR has agreed not to enter into commercial  agreements for the next four years
with respect to selected  therapeutic  proteins and associated  diagnostic tests
currently  in  development  by the  Company.  In  addition,  the Company will be
entitled  to be paid a  percentage  of certain  payments  received  by TIGR from
commercial  agreements  relating  to human  therapeutic  proteins  in which TIGR
grants or agrees to grant rights within two years.

(NOTE E) - COLLABORATION AGREEMENTS

Agreements with SmithKline Beecham Corporation

In May 1993, the Company entered into a collaboration agreement, as amended ("SB
Collaboration  Agreements"),  providing  SmithKline Beecham Corporation ("SB") a
first right to develop and market  products in human and animal  healthcare ("SB
Products"),  based upon human genes identified by the Company. In return, SB has
paid $125  million to the  Company  since  1993.  Approximately  $55 million was
allocated  to the purchase  price of  1,351,738  shares of common stock with the
balance of $70 million recognized from license fees, option rights and milestone
payments.  Of the $70 million recognized since 1993, $6.9 million was recognized
during the year ended December 31, 1996.

The 1996  payment  by SB of $25  million  was  made  pursuant  to the  Company's
achievement of Milestone III. Pursuant to the SB Collaboration  Agreements,  the
payment was  allocated as follows.  The Company  sold  339,065  shares of common
stock to SB at $58.28 per share,  which was calculated  pursuant to the contract
as 125% of the average  market price of the Company's  common stock for the five
trading  days  preceding  payment,  for total  proceeds of  approximately  $18.1
million.  The  remainder of the payment was  allocated to the  deliverables  and
other data being transferred to SB and recorded by the Company as revenue.

In  addition,  the Company is entitled to (i)  royalties  on the net sales of SB
Products,  (ii) product  development  progress  payments and (iii) the option to
co-promote up to 20% of any product  development  by SB under the  collaboration
agreement.

In June 1996, the SB Collaboration  Agreements were  substantially  amended (the
"SB Amendment") to allow the Company and SB together to enter into collaboration
agreements with additional pharmaceutical companies  ("Collaboration  Partners")
in the SB Field (other than  diagnostics  and animal  healthcare in which SB has
generally  retained exclusive  rights).  The SB Amendment  restricts the Company
from  entering  into further  collaborations  in the SB Field during the initial
research  term  (through  June 2001).  The  restriction  also applies to certain
products  which are  subject  to  research  plans  submitted  by SB prior to the
expiration of the initial research term and for a period thereafter.  SB has the
right to extend  the  research  term for up to five  additional  years by making
certain payments,  which would extend the time for submitting  research plans as
to therapeutic products.

The SB  Amendment  provides  that SB and the Company  will share  equally in any
license fee  payments  paid by the  Collaboration  Partners and that the Company
will receive all  royalties  and  research  payments  paid by the  Collaboration
Partners. The SB Collaboration Agreements provide for payments to the Company by
SB of royalties on net sales of SB Products  based on the  Company's  patents or
technologies  made  by  SB  and  milestone   payments  in  connection  with  the
development of SB Products.

In July 1997,  the  Collaboration  Agreement with SB was amended with respect to
human  diagnostic  products based on the Company's  human gene  technology.  The
amended  agreement  simplified  procedures  for  outlicense  by SB of diagnostic
products  based on the Company's  human gene  technology.  In addition,  the new
agreement  permits  the  Company to develop  and  market  diagnostic  tests that
correspond  to  therapeutic  products  developed by the Company  pursuant to its
collaboration agreement with SB and to outlicense diagnostic tests corresponding
to therapeutic products outlicensed by the Company. Under the new agreement,  SB
has agreed to pay a royalty to the Company

                                      F-10

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE E) - COLLABORATION AGREEMENTS (Continued)

Agreement with Smithkline & Beecham (Continued)

which is at a rate that is  competitive  in the  diagnostic  field on diagnostic
products based on the Company's human gene technology sold or outlicensed by SB.
Except for the modifications relating to human diagnostic products, this amended
agreement  has no effect on the existing  collaboration  between the Company and
SB, nor does it have any effect on  collaboration  agreements with the Company's
and SB's collaboration partners.

Other Collaboration Agreements in the SB Field

In June 1995,  the Company  entered  into an Option and License  Agreement  with
Takeda Chemical Industries, Ltd. ("Takeda") pursuant to which Takeda was granted
an exclusive option to license rights under the Company's patents and technology
in the  field of human  healthcare  (other  than  gene  therapy,  antisense  and
diagnostics)  to  make  and  sell a  limited  number  (equal  to the  number  of
collaboration  partners  other than SB and Takeda with which the Company  enters
into  collaboration  agreements  in the SB  field)  of  products  in  Japan.  In
consideration  of the grant of the  option,  Takeda paid the Company $5 million,
which was recognized as revenue by the Company in 1995, and agreed to pay to the
Company royalties based on the sale of Takeda products covered by the Option and
License Agreement and certain milestone payments.

In  June  1996,  the  Company  and  SB  entered  into  collaboration  agreements
("Additional  Collaboration  Partner  Agreements") with Schering Corporation and
Schering  Plough  Ltd.  ("Schering  Plough"),  Synthelabo  S.A.,  and Merck KGaA
("Merck"),  (collectively "Additional  Collaboration Partners").  The Additional
Collaboration Partner Agreements provide the Additional  Collaboration  Partners
the rights and licenses to access the Company's Human Gene  Technology,  as well
as biological  information  developed by the Company and SB prior to, and in the
case of the Company,  after the effective date of such  Agreement,  to discover,
develop  and  commercialize  products  based upon or derived  from such  Company
technology in the SB Field (other than diagnostics and animal  healthcare).  The
Additional  Collaboration  Partners are obligated to pay license fees,  research
payments,  milestone  payments and royalties in connection  with the agreements.
The initial  research term expires in June 2001.  The  Additional  Collaboration
Partners  have the right to extend the term for up to five  additional  years by
making certain additional payments. Aggregate license fees and research payments
due under the Additional  Collaborative  Partner Agreements to which the Company
is entitled is $87.5  million,  payable in equal  installments  over a five-year
period. The Company has recognized revenue of $16.5 million and $16.5 million in
license fees and additional payments during 1997 and 1996, respectively, related
to the Additional Collaboration Partner Agreements.

Collaborative Agreements Outside of the SB Field

In January 1996, the Company entered into a comprehensive Research Collaboration
Agreement in the field of corn genomics with Pioneer Hi-Bred International, Inc.
("Pioneer").  Under the terms of the  agreement,  the Company  will  receive $16
million   from  Pioneer   over  three  years  for  work   performed   under  the
collaboration.  The  relationship is exclusive for five years.  Pioneer will own
all sequence information and intellectual property developed as a result of this
collaboration. The Company retains commercial rights to use any gene sequence in
human health and for certain  specialty and industrial enzyme  applications.  In
January 1997,  the Company  received $3 million  pursuant to this agreement that
the  Company  recognized  as  revenue in 1997.  During  1996,  pursuant  to this
agreement,  the Company received and recorded as revenue $8 million from Pioneer
related to license fees and research payments.

In March 1996 the Company entered into a License  Agreement with F.  Hoffmann-La
Roche,  Ltd.  ("Roche") to sequence  and  assemble  the genome of  Streptococcus
pneumoniae,  a major bacterial  pathogen  responsible for severe respiratory and
other  infections.  Roche has  received  a license  to use this  information  to
identify potential new anti-infectives and antibiotics. During 1997, the Company
received and recorded as revenue $1 million from Roche  related to an additional
research payment.  The Company received $2 million from Roche in 1995, which was
recorded  as revenue in 1996.  The  Company  will  receive  additional  research
payments and potential future royalties.

In June 1996, the Company  entered into a  Collaboration  and License  Agreement
with Schering Plough relating to the field of human gene therapy (including gene
therapy  vaccines to a limited  extent).  Under this agreement,  the Company has
granted Schering Plough a non-exclusive  license to use the Company's Human Gene
Technology to conduct research,  and an option to obtain an exclusive license to
specific  genes in the  field  of gene  therapy.  The  agreement  provides  that
Schering Plough will pay the Company a $5 million license fee (payable over five
years) for

                                      F-11

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE E) - COLLABORATION AGREEMENTS (CONTINUED)

Collaborative Agreements Outside of the SB Field (continued)

a  non-exclusive  research  license,  an  option  exercise  fee and  development
milestone  payments for each gene for which it exercises its option to obtain an
exclusive license and royalties on net sales of gene therapy products  resulting
from research under the agreement. The agreement is for an initial term expiring
June 2001,  subject to extension until 2006 on payment of certain  amounts.  The
Company has received $1 million for the license fee each in 1997 and 1996, which
the Company recorded as revenue.

In October 1996, the Company entered into a License and Research  Agreement with
Pharmacia  & Upjohn  Company to  sequence a certain  genome.  Pharmacia & Upjohn
Company has received  license rights to use this information to develop products
for the human  pharmaceutical  and veterinary  fields.  The Company  received $3
million  from  Pharmacia & Upjohn  Company in 1997  related to license  fees and
research  payments of which $2 million has been recorded as revenue  during 1997
with the  remaining  $1 million  recorded  as  deferred  revenues.  The  Company
received  $3  million  from  Pharmacia  & Upjohn  Company  in 1996 of which $1.5
million was recorded as deferred revenue at December 31, 1996, and recognized as
revenue in 1997.

(NOTE F) - PROPERTY, PLANT AND EQUIPMENT

Property,  plant and equipment,  including  equipment under capital leases,  are
stated at cost and are summarized as follows:

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                    ------------
                                                              1997               1996
                                                              ----               ----
<S>                                                         <C>              <C>        
Laboratory equipment....................................    $18,854,000      $16,692,000
Computers and EDP equipment.............................      6,073,000        5,363,000
Furniture and office equipment..........................      1,113,000        1,010,000
Leasehold improvements..................................      8,551,000        7,777,000
Construction in Progress................................      2,787,000                -
                                                         --------------      -----------
                                                             37,378,000       30,842,000
Less accumulated depreciation and amortization..........     16,731,000       12,811,000
                                                          -------------      -----------
                                                            $20,647,000      $18,031,000
                                                          ==============     ===========

</TABLE>

(NOTE G) - EQUIPMENT LEASE OBLIGATIONS

Prior to 1995,  the  Company  entered  into  sale and  leaseback  agreements  in
connection  with certain  computer and  laboratory  equipment  having a net book
value of $2,132,000 and $1,302,000, respectively. The Company sold the equipment
for $2,198,000 and $1,575,000, respectively, and entered into three master lease
agreements  pursuant  to which it leased  back the above  equipment  for initial
terms of 48 months.  All of the equipment leased under these agreements has been
accounted for as capital  leases.  In addition,  the Company  entered into other
capital lease  agreements for certain  equipment for initial terms of 36 months.
The  recording  of capital  leases is  considered  a non-cash  transaction,  and
therefore is excluded from the  Statements of Cash Flows.  Amortization  expense
related to  equipment  under  capital  leases is  included in  depreciation  and
amortization on the statements of cash flows.

The net book value of the equipment  held under  capital  leases was $81,000 and
$719,000 at December 31, 1997 and 1996, respectively.

As of December  31,  1997,  the Company had future  capital  lease  payments for
fiscal 1998 of $223,000.

                                      F-12

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE G) - EQUIPMENT LEASE OBLIGATIONS (CONTINUED)

In conjunction with the master lease agreements, the Company granted warrants to
the lessors to purchase 594,000 shares of the Company's common stock,  which the
Company valued at $.27 per warrant.  The warrants may be exercised at a purchase
price  of $1.33  per  share  or by  receiving  shares  equal  to the  value  (as
determined  by a formula) of the  warrants by  surrender  of the  warrants.  The
warrants  contain   registration  and  certain   antidilution   rights  and  are
exercisable through November 1998.

In 1997,  a lessor  exercised  warrants  for the  purchase  of 5,350  shares  by
electing to receive 5,161 shares.  In 1996, a lessor exercised  warrants for the
purchase of 18,000 shares by electing to receive  17,431  shares.  In 1995,  the
lessors  exercised  warrants for the  purchase of 230,000  shares by electing to
receive 216,330 shares.

(NOTE H) - OTHER ASSETS

Other assets at December 31, 1997 and 1996,  include a note  receivable  from an
officer of $891,000.  The note is due on demand and does not bear interest.  The
note is  collateralized  by shares of the  Company's  common  stock owned by the
officer that have a market value of at least 200% of the outstanding  balance of
the note.

(NOTE I) - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses are comprised of the following:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   ------------
                                                              1997               1996
                                                              ----               ----
<S>                                                        <C>                <C>        
Equipment purchases.....................................   $   868,000        $   561,000
Professional fees.......................................     1,223,000            489,000
Other accrued expenses..................................     2,565,000          2,311,000
                                                          -------------      -------------
                                                            $4,656,000        $ 3,361,000
                                                          =============      =============
</TABLE>

(NOTE J) - LONG-TERM DEBT

In December  1994,  the Company  entered  into a loan  agreement  with  Maryland
Industrial   Development   Financing   Authority   ("MIDFA").   Major  leasehold
improvements  were financed with the proceeds of a $4,000,000  taxable  variable
rate bond issue (the "Bonds") from MIDFA. The Company is required to make annual
payments of $444,000  commencing  December 1995 plus interest at a variable rate
of interest  (6.06% at December 31, 1997 and 5.64% at December 31, 1996), to the
trustee  on  behalf  of the  bondholders  which  is equal  to the  interest  and
principal  requirements  on the bonds.  The  variable  rate is equal to 50 basis
points plus the higher of the yield  equivalent of the average  30-day or 90-day
commercial  paper rate.  Under certain  circumstances,  the rate may be adjusted
either  upward or downward but in no event in excess of 10 basis points above or
below the rate  determined  above.  MIDFA has entered into an indenture with the
Trustee  whereby  the Trustee has  obtained an  irrevocable  letter of credit on
behalf of the bondholders.

The following fund was created under the terms of the trust indenture:

    Bond fund

Required monthly principal  payments of $37,000 plus interest are deposited into
this fund beginning  January 1, 1995.  The interest is disbursed  monthly to the
bondholders.  Principal is to be repaid from this fund to the bondholders at the
rate of $444,000 annually commencing on December 1, 1995 with a final payment of
$448,000 on December 1, 2003.  The Company  deposited  $797,850  and $632,000 of
principal and interest  into this fund during the years ended  December 31, 1997
and 1996, respectively.

In connection with the Loan  Agreement,  the Company entered into an irrevocable
Letter of Credit  Agreement  with a bank for the  account of the  Company and in
favor of the  Trustee  in the  initial  amount of  $4,066,667  which  expires on
December 15, 2003.  Concurrently,  the Company entered into a Collateral  Pledge
Agreement with the bank.

                                      F-13

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE J) - LONG-TERM DEBT (CONTINUED)

The Company is required to maintain 43% of the outstanding  principal  amount of
the  Bonds  (50% is  required  under  certain  circumstances)  with  the bank as
Collateral for the Letter of Credit. Pursuant to the Collateral Pledge Agreement
at December  31,  1997 and 1996,  the Company  had  $1,452,000  and  $1,705,000,
respectively,  on deposit  with the bank that is invested  in a U.S.  Government
agency  security,  which is included in  Restricted  Investments  in the Balance
Sheets.  The pledge collateral will be released upon the payment and performance
in full of the Company's Letter of Credit  obligations.  The agreement  contains
covenants  with respect to tangible  net worth,  cash and cash  equivalents  and
investment  securities,  as well as other covenants and prohibits the payment of
cash  dividends.  During  1994,  the  Company  incurred  costs  of  $136,000  in
connection with this loan which are being amortized over the term of the loan.

(NOTE K) - COMMITMENTS AND OTHER MATTERS

    Operating leases

The Company  leases office and  laboratory  premises and  equipment  pursuant to
operating  leases  expiring at various dates through  2017.  The leases  contain
various renewal options. Minimum annual rentals are as follows:

                       Years Ending December 31,
                       ------------------------------
                       1998............................$..2,304,000
                       1999...............................3,876,000
                       2000...............................3,765,000
                       2001...............................3,762,000
                       2002...............................3,767,000
                       Thereafter........................36,608,000
                                                      --------------
                                                        $54,082,000
                                                      ==============

The  Company  has  entered  into  leases for office and  laboratory  space which
provide for certain rent abatement and rent  escalations on each  anniversary of
the lease commencement date. For financial reporting  purposes,  rent expense is
charged  to  operations  on a  straight-line  basis  over the term of the lease,
resulting in a liability for deferred rent of $300,000 and $262,000  included in
other liabilities at December 31, 1997 and 1996, respectively.

Certain other leases  provide for  escalation for increases in real estate taxes
and certain operating expenses, as well as various renewal terms.

The  Company  entered  into  a 20  year  lease  for a  process  development  and
production  facility  being built to the Company's  specifications.  Annual base
rent of $2.2  million is  expected  to begin  January 1, 1999,  the  anticipated
completion date of the facility.

Rent expense  aggregated  $2,384,000,  $1,988,000,  and $1,866,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

     Capital expenditures

At  December  31,  1997 and  1996,  the  Company  had  commitments  for  capital
expenditures,  consisting  primarily of  laboratory  equipment,  of $353,000 and
$700,000, respectively.

     401(k) Plan

Effective  January 15, 1993, the Company adopted a 401(k) pension plan available
to eligible full-time employees. The Company made discretionary contributions of
$235,000,  $168,000,  and $97,000 to the plan for the years ended  December  31,
1997, 1996, and 1995, respectively.

                                      F-14

<PAGE>
                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE L) - STOCKHOLDERS' EQUITY

     Preferred Stock

In November 1993, the shareholders authorized a new series of preferred stock of
1,000,000  shares,  $.01 par value,  none of which was issued and outstanding at
December 31, 1997 and 1996.

     Common Stock

The Company has the right of first  refusal on the sale of certain  common stock
issued in connection with restricted stock purchase agreements.  The price to be
paid by the  Company  is $1.13  and $.19 per  share  less  than the price of any
proposed sale for 561,160 and 246,052 shares, respectively.

     Stock option plan

The 1993  Employee  Incentive  and  Non-qualified  Stock  Option Plan (the "1993
Plan")  provides for the granting of options to purchase up to 565,827 shares of
the Company's common stock, at a price, for the incentive  options,  of not less
than the fair market value of the common stock on the date of grant. The vesting
period of the options is  determined  by the Board of Directors and is generally
five years. Outstanding options expire after ten years.

Additional  information with respect to 1993 Stock Option activity is summarized
as follows:

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                              --------------------------------------------------------------------------------------------
                                          1997                          1996                           1995
                                               Weighted-                      Weighted-                          Weighted-
                                                Average                        Average                           Average
                                                Exercise                       Exercise                          Exercise
                                 Shares          Price          Shares          Price           Shares            Price
                              -------------   -------------  -------------   -------------   -------------    -------------
<S>                              <C>             <C>            <C>              <C>            <C>              <C>   
Outstanding  at  beginning of 
   year                          293,618         $11.21         399,111          $ 9.16         428,592          $ 4.40

Options granted                        -              -               -               -          78,455           27.50

Options exercised               (105,748)          8.68         (96,128)           2.07         (73,449)           2.98

Options canceled or expired      (20,911)         14.41          (9,365)          17.90         (34,487)           4.89
                              -------------                  -------------                   -------------

Outstanding at end of year       166,959          12.41         293,618           11.21         399,111            9.16
                              =============                  =============                   =============

Options exercisable at end
   of year                       128,979          11.53         148,900            9.25         118,724            3.27
                              =============                  =============                   =============
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                              Options Outstanding                           Options Exercisable
                             ------------------------------------------------------    ------------------------------
                                                    Weighted-           Weighted-                         Weighted-
                                                 Average Remaining      Average                           Average  
                                 Number            Contractual          Exercise          Number          Exercise         
Range of Exercise Price       Outstanding        Life (In Years)          Price        Exercisable          Price          
                             ---------------     -----------------     ------------    -------------     ------------
<S>                               <C>                   <C>              <C>               <C>                <C> 
$.20 to $6.00                      92,806                5.4              $  2.66           78,331             2.23

$9.00 to $27.50                    74,153                7.5                24.60           50,648            25.91
                             ---------------     -----------------     ------------    -------------     ------------
                                  166,959                6.3               $12.41          128,979            11.53
                             ===============     =================     ============    =============     ============
</TABLE>

                                      F-15

<PAGE>
                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE L) - STOCKHOLDERS' EQUITY (CONTINUED)

Stock option plan (continued)

On  March  14,  1994,  the  Company  adopted  a  1994  Employee   Incentive  and
Nonqualified  Stock Option Plan (the "1994 Plan") for the granting of options to
purchase up to 950,000 shares of common stock to officers, employees, directors,
consultants and  non-employee  directors.  The exercise price of options granted
under the plan may not be less than the  market  price on the date of grant.  In
May 1996 an amendment  was  approved to increase the number of shares  available
for issuance from 950,000  options to 2,450,000  options.  In February  1997, an
amendment  was approved to increase the number of shares  available for issuance
from 2,450,000 options to 3,450,000  options.  The vesting period of the options
is determined by the Board of Directors and is generally five years. Outstanding
options expire after ten years.

Additional  information with respect to 1994 Stock Option activity is summarized
as follows:

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                              --------------------------------------------------------------------------------------------
                                          1997                          1996                           1995
                              -----------------------------  -----------------------------   ------------------------------
                                               Weighted-                      Weighted-                         Weighted-
                                                Average                        Average                           Average
                                                Exercise                       Exercise                          Exercise      
                                 Shares          Price          Shares          Price           Shares            Price        
                              -------------   -------------  -------------   -------------   -------------    -------------
<S>                            <C>               <C>            <C>              <C>            <C>              <C>   
Outstanding  at  beginning of  
   year                        1,528,779         $25.29         884,214          $18.01         655,958          $18.01

Options granted                1,644,351          48.57         790,616           32.18         348,263           17.86

Options exercised               (174,592)         18.66         (97,624)          17.42         (40,242)          17.75

Options canceled or expired     (122,588)         28.41         (48,427)          20.58         (79,765)          17.54
                              -------------                  -------------                   -------------
Outstanding at end of year     2,875,950          38.87       1,528,779           25.29         884,214           18.01
                              =============                  =============                   =============
Options  exercisable  at  end
   of year                       597,305          26.00         348,533          $20.05         190,861          $17.52
                              =============                  =============                   =============

</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                              Options Outstanding                           Options Exercisable
                             ------------------------------------------------------    ------------------------------
                                                 
                                                 Weighted-Average       Weighted-                         Weighted- 
                                                    Remaining            Average                           Average  
                                 Number            Contractual           Exercise         Number           Exercise       
Range of Exercise Price       Outstanding        Life (In Years)          Price        Exercisable           Price       
                             ---------------     -----------------     ------------    -------------     ------------
<S>       <C>                     <C>                    <C>               <C>             <C>                <C>  
$12.75 to $22.00                  457,074                6.77              $16.71          267,114            17.11
$23.50 to $34.50                  634,150                8.34               28.62          136,450            25.87
$36.25 to $39.00                  739,375                9.15               37.37          108,925            37.31
$39.25 to $42.56                  695,351                9.63               40.09           84,816            39.66
$70.00 to $100.00                 350,000                9.06               87.14               -0-              -0-
                             ---------------     -----------------     ------------    -------------     ------------
                                2,875,950                8.70              $38.87          597,305            26.00
                             ===============     =================     ============    =============     ============

</TABLE>

The Company applies APB No. 25 in accounting for its stock option incentive plan
and, accordingly, recognizes compensation expense for the difference between the
fair value of the  underlying  common stock and the grant price of the option at
the date of grant.  The effect of applying  SFAS No. 123 on 1997,  1996 and 1995
pro forma net loss and net loss per  share as  stated  above is not  necessarily
representative  of the  effects on  reported  net loss for future  years due to,
among other things, (1) the vesting period of the stock options and the (2) fair
value of additional stock

                                      F-16

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE L) - STOCKHOLDERS' EQUITY (CONTINUED)

     Stock option plan (continued)

options in future years.  Had  compensation  cost for the Company's stock option
plans  been  determined  based  upon the fair value at the grant date for awards
under the plans  consistent with the methodology  prescribed under SFAS No. 123,
the Company's  net loss in 1997,  1996,  and 1995 would have been  approximately
$32.5 million,  $12.9 million,  and $32.8  million,  respectively,  or $1.51 per
share, $0.69 per share, and $2.08 per share, respectively. The fair value of the
options  granted  during  1997 and 1996 are  estimated  as $18.26 and $23.73 per
share, respectively, on the date of grant using the Black-Scholes option-pricing
model with the following  assumptions:  dividend yield 0%,  volatility of 46.03%
for 1997 and  63.61%  for 1996,  risk-free  interest  rate of 5.75% for 1997 and
6.28% for 1996, and expected life of 6 years.

At December 31, 1997,  options for 79,375 and 261,592 were  available for future
grant under the 1993 Plan and 1994 Plan,  respectively.  At December  31,  1996,
options for 58,464 and 783,355  were  available  for future grant under the 1993
Plan and 1994 Plan, respectively.

     Reserved for issuance:

The Company has also reserved  shares of common stock for issuance upon exercise
of warrants and options as follows:

<TABLE>
<CAPTION>
<S>                                                                                            <C>   
          (i) Warrants issued in conjunction with leasing agreements (Note G)...........       75,650
         (ii) Warrants issued to certain  stockholders (a)..............................       14,415
         (iii)Stock option plan - 1993 plan.....,.......................................      246,334
         (iv) Stock option plan - 1994 plan.............................................    3,137,542

</TABLE>
         (a)  These warrants were issued in connection with a commitment made by
              certain  stockholders  in 1993;  they are  exercisable at $.20 per
              share and expire in December 1998.

(NOTE M) - INCOME TAXES

The Company provides for income taxes using the liability method. The difference
between the tax  provision and the amount that would be computed by applying the
statutory  Federal income tax rate to income before taxes is attributable to the
following:

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                      -----------------------
                                                             1997              1996              1995
                                                             ----              ----              ----
<S>                             <C>                         <C>             <C>              <C>           
Federal income tax provision at 34%...................      $(7,181,000)    $(2,570,000)     $ (11,124,000)
State taxes, net of federal effect....................                -               -         (1,511,000)
Expenses for which no tax benefit is available........           31,000         112,000             96,000
Expenses for which no book benefit is available.......       (1,550,000)              -                  -
Utilization of NOL carryforward.......................                -               -                  -
Increase in valuation allowance on deferred tax
       assets.........................................       12,465,000       3,262,000         12,484,000

State taxes and valuation allowance change............       (1,286,000)       (391,000)                 -   
                                                                                                             
Foreign taxes paid....................................          245,000         225,000            500,000   

Tax credits generated and not used....................       (2,436,000)       (403,000)        (2,305,000)  

Other.................................................          (43,000)        (27,000)           209,000   
                                                        ---------------   ----------------  ---------------- 
                                                          $     245,000    $    208,000       $ (1,651,000)  
                                                        ===============   ================  ================ 
</TABLE>

                                      F-17

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE M) - INCOME TAXES (CONTINUED)

Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                CURRENT          LONG-TERM
                                                                            ASSET/(LIABILITY) ASSET/(LIABILITY)
                                                                            ----------------  ----------------
<S>                                                                         <C>                 <C>
December 31, 1997
    Net operating loss carryforward......................................   $            -      $ 19,359,000
    Research and development tax credit carryforward.....................                -         7,186,000
    Depreciation.........................................................                -           744,000 
    Other................................................................          267,000           118,000
                                                                             ----------------  ----------------
                                                                                   267,000        27,407,000
    Less valuation allowance.............................................         (267,000)      (27,407,000)
                                                                            ================  ================
                                                                            $            -    $            -
                                                                            ================  ================
December 31, 1996
    Net operating loss carryforward......................................   $            -      $ 11,808,000
    Research and development tax credit carryforward.....................                -         4,750,000
    Deferred start-up costs..............................................           41,000                 -
    Other................................................................          218,000           262,000
                                                                            ----------------  ----------------
                                                                                   259,000        16,820,000
    Less valuation allowance.............................................         (259,000)      (16,820,000)
                                                                            ================  ================
                                                                            $            -    $            -
                                                                            ================  ================
</TABLE>

The Company recognized a valuation  allowance to the full extent of its deferred
tax  assets  since  the  likelihood  of  realization  of the  benefit  cannot be
determined.

Provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                                     -----------------------
                                                               1997             1996           1995
                                                               ----             ----           ----
<S>                                                        <C>             <C>               <C>         
Current:
    Federal.............................................   $           -   $         -       $(1,643,000)
    State...............................................                       (17,000)         (508,000)
    Foreign taxes.......................................         245,000       225,000           500,000
Deferred................................................               -             -                 -
                                                           -------------   --------------- --------------
                                                                $245,000   $   208,000       $(1,651,000)
                                                           =============   =============== ==============
</TABLE>
<TABLE>
<CAPTION>

The Company has available tax credit carryforwards expiring as follows:
<S>                                                                     <C>        
2000...............................................................     $   500,000
2001...............................................................         225,000
2002...............................................................         245,000
2008...............................................................         745,000
2009...............................................................       1,297,000
2010...............................................................         534,000
2011...............................................................         846,000
2012...............................................................       2,191,000
No expiration......................................................         238,000
                                                                      ==============
                                                                        $ 6,821,000
                                                                      ==============
</TABLE>

                                      F-18

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE M) - INCOME TAXES (CONTINUED)

The Company has net operating loss carryforwards for federal income tax purposes
of  approximately  $51.0  million which  expire,  if unused,  from the year 2010
through the year 2012.  According  to APB 25, the tax  benefit of  approximately
$4.6 million of net operating  losses  related to stock options will be credited
to equity when the benefit is realized through  utilization of the net operating
loss carryforwards.

(NOTE N) - INVESTMENT IN VASCULAR GENETICS INC.

In November 1997, the Company entered into an agreement with three other parties
to  form  a new  privately  held  company,  Vascular  Genetics  Inc.  ("Vascular
Genetics"),  to pursue the  development  and  commercialization  of gene therapy
products for the treatment of vascular  diseases.  The Company will hold a 19.9%
equity interest in Vascular  Genetics'  common stock in exchange for technology.
Under the terms of the  agreement,  the Company  will  receive  warrants for the
purchase of an additional 5.1% equity interest in Vascular Genetics which can be
exercised at any time while  Vascular  Genetics is privately  held.  The Company
also  holds  preemptive  rights  that will  permit  retention  of the  Company's
ownership position in the event of a future financing.  In addition, the Company
has the option to  purchase  100% of  Vascular  Genetics'  common  stock at fair
market value upon  receiving  the approval from one of the other parties and the
board of directors of Vascular Genetics.  The Company will earn royalties on net
sales from products  developed and  commercialized  by Vascular Genetics or by a
party granted a sublicense by Vascular  Genetics.  Royalty rates are competitive
and increase as specified  sales targets are reached.  In addition,  the Company
has the option to manufacture  certain products  developed by Vascular  Genetics
Inc. and receive a manufacturing fee. The Company has committed to lend Vascular
Genetics up to $600,000  at an interest  rate of prime plus 1%. As of  12/31/97,
the Company had lent  $200,000 to Vascular  Genetics.  The Company has appointed
two directors to the Board of Directors of Vascular Genetics.

(NOTE O) - NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss per
share:

<TABLE>
<CAPTION>
                                                                       Years ended December 31,
                                                      -----------------------------------------------------------
                                                            1997                1996                  1995
                                                      -----------------    ---------------      -----------------
<S>                                                      <C>                  <C>                  <C>          
Numerator:
     Net loss                                            $(21,393,000)        $(7,767,000)         $(31,068,000)
                                                      =================    ================     =================
Denominator:
     Denominator for basic earnings per
       share - weighted-average shares                      21,525,283          18,630,986            15,723,144
                                                      =================    ================     =================
     Denominator for diluted earnings per
       share - adjusted weighted average
       shares and assumed conversions                       21,525,283          18,630,986            15,723,144
                                                      =================    ================     =================
Basic loss per share                                      $(0.99)              $(0.42)              $(1.98)
                                                      =================    ================     =================
Diluted loss per share                                    $(0.99)              $(0.42)              $(1.98)
                                                      =================    ================     =================

</TABLE>

                                      F-19

<PAGE>

                           HUMAN GENOME SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE P) - EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT

     On March 2, 1998,  the Company  signed a ten year  agreement with Transgene
S.A.  ("Transgene"),  based in  Strasbourg,  France,  to  develop  gene  therapy
products.  Under the terms and conditions of the agreement,  Transgene will have
the right to exclusively license, and sublicense, up to 10 genes and to develop,
manufacture and commercialize any resulting gene therapy products worldwide. The
two  companies may also choose to co-develop  and co-market the  identified  new
gene therapy products, and, in such case,  commercialization rights will be held
by the Company for North  America and by Transgene for Europe and will be shared
equally  for the rest of the  world's  markets.  Transgene  will pay an  initial
licensing  fee and  research  funding  in an  amount  equal to the  proceeds  to
Transgene from the Company's purchase of a 10% interest in Transgene.  The value
of the 10% interest based on the anticipated close of Transgene's Initial Public
Offering  (currently in process) would be approximately $25 million.  Additional
payments to the Company are dependent  upon the number of genes which  Transgene
licenses  and the  accomplishment  of certain  milestones.  Royalties  on future
product sales and partnering  revenues will be paid by Transgene to the Company.
On  co-marketed  products,   the  Company  and  Transgene  will  pay  reciprocal
royalties.

                                      F-20