<PAGE>   1
                       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, 1995 Commission file no. 0-14587
                          -----------------                     -------
   
                                GENETICS INSTITUTE, INC.
-------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

             Delaware                                04-2718435
 ---------------------------------------        -------------------
(State or Other Jurisdiction                    (I.R.S. Employer
of Incorporation or Organization)               Identification No.)

87 CambridgePark Drive, Cambridge, MA           02140
----------------------------------------        -------------------
(Address of Principal Executive Offices)        (Zip Code)

Registrant's Telephone Number, Including Area Code: (617) 876-1170
                                                    --------------

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

       Depositary Shares, each representing one share of Common Stock $.01
        par value per share, subject to a call option and evidenced by a
                depositary receipt, of Genetics Institute, Inc.*
       -------------------------------------------------------------------
                                 (Title of Class)

                           Common Stock, $.01 par value
                          -----------------------------
                                 (Title of class)

                          Common Stock Purchase Warrants
                          ------------------------------
                                 (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes  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 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. Yes  X  No    .
               ---    ---
     The approximate aggregate market value of voting stock held by
non-affiliates of the registrant was $641,141,926 as of February 23, 1996 (based
on the closing sales price for such stock on that date).**

     The number of shares of Common Stock (including 11,156,975 shares
represented by Depositary Shares) outstanding as of February 23, 1996 was
27,157,716.

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Portions of the following documents are incorporated by reference in this 
Report.

                       Documents Incorporated by Reference
                       -----------------------------------

Document                                          Form 10-K Part

Definitive Proxy Statement with                   Part III
respect to the Annual Meeting of
Stockholders to be held on
May 14, 1996, to be filed with
the Securities and Exchange
Commission

The 1996 Proxy Statement shall be deemed to have been "filed" only to the
extent that portions thereof are expressly incorporated by reference.

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

*The Depositary Shares of Genetics Institute, Inc. (the "Company") represent one
share of Common Stock, $.01 par value, of the Company ("Common Stock"), subject
to a certain stock purchase option (the "Call Option") held by AHP Biotech
Holdings, Inc. ("Holdings"), and are evidenced by a depositary receipt.

**Excludes 16,000,741 shares of Common Stock and 947,000 Depositary Shares held
by Holdings and 458,767 Depositary Shares held by directors and executive
officers of the registrant and held by stockholders of the registrant holding
more than five percent of the Depositary Shares outstanding. Exclusion of
Depositary 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.
------    --------

     Genetics Institute, Inc. ("Genetics Institute" or the "Company") was
organized in December 1980 as a Delaware corporation. The Company is principally
engaged in the discovery, development and commercialization of biopharmaceutical
products, using recombinant DNA and other technologies, for the treatment of a
wide range of diseases and conditions, including anemia, hemophilia, cancer,
tissue damage, infectious disease, cardiovascular disease and autoimmune
diseases.

     Unless otherwise indicated, all references in this Annual Report on Form
10-K to Genetics Institute or the Company include the Company and its wholly
owned subsidiaries, Genetics Institute, Inc. of Japan, Genetics Institute of
Europe, Inc., Genetics Institute of Europe B.V., GI Europe, Inc., GI JJV, Inc.,
GI Japan, Inc., GI Manufacturing, Inc., GI Drug Design, Inc. and, effective
December 6, 1995, SciGenics, Inc.

     Transaction with American Home Products Corporation
     ---------------------------------------------------

     On January 16, 1992, the Company's Common Stock stockholders approved the
Agreement and Plan of Merger, dated as of September 19, 1991 and amended as of
December 9, 1991 (the "Merger Agreement"), among the Company, American Home
Products Corporation ("AHP"), and certain AHP subsidiaries, pursuant to which,
among other things, (i) each share of Common Stock then outstanding was
converted into the right to receive $20.00 in cash and six-tenths of a
depositary share (a "Depositary Share"), each Depositary Share representing one
share of Common Stock subject to an AHP call option (the "Call Option") and
evidenced by a depositary receipt (a "Depositary Receipt"), (ii) AHP acquired
40% of the Company's then outstanding Common Stock and (iii) AHP purchased
9,466,709 shares of newly issued Common Stock (the "Additional Shares") from the
Company for $300 million in cash. As a result of the foregoing transactions,
subsequent open market purchases by AHP, and conversion of the Company's
Convertible Exchangeable Preferred Stock, AHP owned, at February 23, 1996,
approximately 62% of the outstanding shares of Common Stock.

     Under the terms of the Call Option, AHP has the right, but not the
obligation, to purchase the shares of Common Stock represented by the Depositary
Shares and held by The First National Bank of Boston, as depositary, in whole
but not in part at any time on or prior to December 31, 1996, at per share call
prices increasing by approximately $1.84 per share per quarter from $79.47 per
share for the period from January 1, 1996 through March 31, 1996 to $85.00 per
share for the period from October 1, 1996 through December 31, 1996. In the
event that AHP elects to call any shares of Common Stock, AHP must purchase all
of the shares that it does not already own. Accordingly, if the Call Option is
exercised, AHP will own 100% of the outstanding shares of Common Stock of the
Company, and all other stockholders of the Company will cease to have any equity
interest in the Company. During the term of the Call Option, AHP also may
acquire additional shares of Genetics Institute stock, provided that its


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aggregate holdings do not exceed 75% of the Company's stock outstanding, subject
to certain exceptions.

     For information relating to certain governance provisions contained in the
Governance Agreement among the Company, AHP and its subsidiaries, see ITEM 13 in
this Report at page 40.

     Overview
     --------

     Over the past fifteen years, Genetics Institute has financed its business
through collaborative research and development revenues from licensees,
royalties on product sales by certain licensees, product sales (since December
1992), interest income and use of equity capital. This has enabled the Company
to undertake a broad range of research and development programs and to build an
approximately 1000-person organization with over 600,000 square feet of
corporate office, research, development and manufacturing facilities.

     In recent years, the Company has dedicated a larger proportion of its
resources to the discovery and development of self-funded proprietary products.
The Company's discovery research goal is to bring two discovery research leads
forward into development each year. This may take the form of a newly discovered
product candidate or a new indication for an existing product or product
candidate. The Company also has entered into joint ventures, development
collaborations, partnerships and other commercial arrangements for certain of
its proprietary products, which enable the Company to retain significant
development, manufacturing and marketing rights for such products.

     The Company has discovered a number of products and licensed them to
licensees for development and commercialization (collectively, the "Licensed
Products"). Four of these products have been brought to market by the Company's
licensees in various territories: recombinant human antihemophilic factor
("rhAHF"), erythropoietin ("rhEPO"), granulocyte-macrophage colony stimulating
factor ("rhGM-CSF"), and tissue plasminogen activator ("rhtPA") The Company
receives royalties on commercial sales by its licensees of these products and,
in the case of rhAHF, receives substantial additional revenue from its
manufacture of bulk concentrated drug substance. Three of these products are in
clinical development: Recombinant human interleukin-3 ("rhIL-3"), recombinant
human interleukin-6 ("rhIL-6") and recombinant novel plasminogen activater
("rNPA").

     In addition to its Licensed Products, the Company retains substantial
manufacturing and marketing rights for several product candidates which are in
various stages of clinical development, including: a second recombinant
coagulation factor ("rFIX"), recombinant human interleukin eleven ("rhIL-11"),
recombinant human bone morphogenetic protein two ("rhBMP-2"), and an immune
system modulator ("rhIL-12") (collectively, the "Principal Product Candidates").


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     Principal Product Candidates, Discovery Research Areas and Licensed 
     -------------------------------------------------------------------
Products
--------

     The following describes the Company's Principal Product Candidates, its
discovery research areas and Licensed Products.

     Principal Product Candidates
     ----------------------------

          Recombinant Factor IX ("rFIX")
          ------------------------------

     The Company is developing Recombinant Factor IX ("rFIX") as a treatment for
Hemophilia B, or Christmas Disease, which affects approximately 10,000
individuals in North America, Europe and Japan. Similar to Hemophilia A, but
less prevalent, Hemophilia B is a coagulation disorder that can result in
severe, often life threatening, uncontrollable bleeding and crippling joint
destruction.

     Currently, people with Hemophilia B rely on clotting products derived from
human blood to treat or prevent bleeding episodes. The Company believes that the
current market for plasma-derived Factor IX is approximately $150 million
worldwide. The supply of Factor IX from this source is limited by blood and
plasma donations. Patients who rely on these plasma-derived products may also
risk exposure to human blood-borne viruses. A recombinant Factor IX product may
provide a significant improvement over current plasma-derived clotting factor
products by eliminating the risk of human viral contamination associated with
such products and providing a means to manufacture large quantities of clotting
factor without the blood and plasma supply limitations affecting the
plasma-derived products. A recombinant Factor IX product may also have the
potential to lower thrombogenic risk due to the absence of other clotting
factors that remain in some plasma-derived Factor IX products. See "COMPETITION"
at page 24.

     Pivotal clinical trials of rFIX commenced in 1995 and are nearing
completion. These trials are designed to demonstrate the clinical equivalence of
rFIX to existing plasma-derived Factor IX products. If these trials proceed as
planned, and the data are positive, the Company may be able to file for
regulatory approval of rFIX in both the United States and Europe in the second
half of 1996. For information concerning Orphan Drug Issues, see "COMPETITION"
at page 24.

     To date, the Company has retained worldwide development and 
commercialization rights to rFIX. The Company's goal is to market and sell 
rFIX in North America by building its own field force and to utilize 
distributors in markets in which it can gain advantage through specialized 
distributors.

     Neumega[Trademark] Recombinant Human Interleukin Eleven ("rhIL-11")
     -------------------------------------------------------------------

     Recombinant human interleukin eleven ("rhIL-11") is a cytokine which has
been shown in a phase II clinical study to eliminate the need for platelet
transfusions with an acceptable safety profile in a significant number of cancer
patients who had experienced severe platelet


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depletion or thrombocytopenia during a previous chemotherapy cycle ("Established
Thrombocytopenia Study"). Platelets, a critical component of the body's normal
ability to form blood clots and repair damaged tissues, are often severely
depleted during cancer treatments involving chemotherapy alone or with bone
marrow or peripheral blood progenitor cell transplantation, leaving some
patients with bleeding complications. Thrombocytopenia is expected to continue
to grow as a problem in cancer treatment as bone marrow and peripheral blood
progenitor cell transplantation become more common and as other blood cell
growth factors enable oncologists to use higher doses of chemotherapy. rhIL-11
may be useful in accelerating the body's ability to return platelets to a normal
level following chemotherapy alone or with bone marrow or peripheral blood
progenitor cell transplant procedures.

     The only approved therapy currently available to patients suffering from
decreased platelet counts caused by cancer chemotherapy alone or with bone
marrow or peripheral blood progenitor cell transplantation is platelet
transfusion, the infusion of platelets from one or more blood donors. This
therapy is relatively expensive and exposes patients to blood components that
can introduce infectious complications. It also has the potential to decrease in
efficacy over time if the patient develops an immune reaction to the transfused
platelets. By stimulating the body's natural production of platelets, rhIL-11
could potentially provide a safe and effective alternative or supplement to
platelet transfusions.

     The Company commenced a phase III pivotal study of Neumega[Trademark]
rhIL-11 in the fourth quarter of 1995. The study will involve up to 250
patients and 40 medical centers and will evaluate rhIL-11's ability to maintain
platelet levels and to decrease the need for platelet transfusions in patients
who have experienced low platelet counts as a result of their cancer treatment.

     Also in the fourth quarter of 1995, the Company completed enrollment of
patients in a phase II study of breast cancer patients whose chemotherapy
regimens are expected to lead to low platelet counts. In this breast cancer
study, rhIL-11 is being evaluated for its ability to prevent low platelet
counts. This endpoint differs from the endpoint in the Established
Thrombocytopenia Study completed in May 1995, where rhIL-11 eliminated the need
for platelet transfusions in a significant percentage of patients. The results
from the phase II breast cancer study should become available in the second
quarter of 1996. If the breast cancer results are positive and statistically
significant, they, together with the results from the phase II Established
Thrombocytopenia Study, may be sufficient to support an accelerated filing for
FDA approval before completion of the phase III study. No assurance can be given
that an accelerated filing will be warranted.

     Additional phase II clinical trial data regarding rhIL-11's ability to
enhance platelet recovery in patients receiving bone marrow transplants with
peripheral blood progenitor cell support also should become available in 1996.
To date, over 270 men, women and children have received rhIL-11.


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<PAGE>   7

     Apart from Neumega[Trademark] rhIL-11's potential effects on platelets,
rhIL-11 also appears in preclinical research to have useful activity in
preventing and accelerating healing of chemotherapy-induced mucositis. This
effect (i.e., maintaining mucosal integrity) was first observed serendipitously
by a researcher conducting an rhIL-11 platelet restoration experiment. In
addition, rhIL-11 has shown activity in treating inflammatory bowel disease in
animal models. As a result of these findings, the Company initiated phase I
clinical studies of rhIL-11 in Crohn's disease in 1995 and in
chemotherapy-induced mucositis in early 1996 to explore these new potential
uses for rhIL-11.

     The Company has retained development and marketing rights for rhIL-11 in
North America, and worldwide manufacturing rights. In 1991, the Company and 
Essex Chemie A.G., an affiliate of Schering-Plough Corporation ("Schering-
Plough") formed an alliance under which Schering- Plough will register and 
market rhIL-11 in Europe, Africa and Latin America. In 1992, the Company 
granted GI-Yamanouchi, Inc. (the "GYJ"), a 50/50 joint venture with Yamanouchi
Pharmaceutical Co., Ltd. ("Yamanouchi"), rights to develop and market rhIL-11 
in Japan. In 1993, the Company granted Wyeth-Ayerst International Inc., an 
affiliate of AHP, rights to develop and market rhIL-11 in the Pacific Basin 
(excluding Japan), Australia and New Zealand.

     The Company has six United States patents, and has filed additional patent
applications covering rhIL-11 in the United States and in other territories.
Regardless of whether the Company is successful in obtaining patent protection
for rhIL-11, the field of platelet restoration is expected to be highly
competitive. A number of other cytokines are being developed for this use,
including ones previously discovered by the Company and licensed to Sandoz
Pharmaceutical Co., Ltd. (rhIL-3 and rhIL-6). In addition, Immunex Corporation
is in phase III clinical trials with PIXY321, and Amgen Inc. and Genentech, Inc.
have reported that they are engaged in clinical research involving megakaryocyte
growth and development factor ("MGPA") and thrombopoietin ("TPO"), respectively,
each of which is a potential platelet growth factor.

     Recombinant Human BMP-Two ("rhBMP-2")
     -------------------------------------

     In humans and animals, bone normally undergoes constant resorption and
reformation (the natural process of breaking down and rebuilding existing bone).
This process is believed to play an important role during fracture healing. The
Company, in conjunction with certain collaborative partners, is conducting a
program to develop products based on certain protein factors which it believes
regulate these processes. The Company has cloned and produced a number of novel
recombinant human bone morphogenetic proteins. In several preclinical models,
these proteins have been shown to induce formation of new cartilage and bone.

     One of these proteins, recombinant human bone morphogenetic protein-two
("rhBMP-2") is a manufactured version of a human protein naturally present in
very small quantities in the body. Genetics Institute believes it was first to
clone the human gene for the human BMP-2 protein and is currently manufacturing
rhBMP-2 protein for clinical evaluation.


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<PAGE>   8

     Because rhBMP-2 protein causes cells to differentiate and form cartilage
and bone, it has been termed "osteoinductive." The Company is currently
developing this protein for uses in bone repair, such as healing fractures and
bony defects.

     Current methods to stimulate bone growth and healing have disadvantages.
For example, autogenous bone (autograft) is occasionally used to facilitate bone
repair. This material must be harvested from a bony site in the patient and
grafted at the repair site. Such a harvest procedure can cause considerable pain
and morbidity to a patient. rhBMP-2 may have the potential to provide more
reliable and convenient methods to facilitate, accelerate and help assure bony
healing, while avoiding the pain, morbidity and other disadvantages associated
with other approaches.

     In the United States rhBMP-2 is being regulated as a combination product
(device and biologic) under the jurisdiction of the device branch of the U.S.
FDA. rhBMP-2 is expected to be regulated either as a biologic or a drug outside
the U.S.

     The Company and its licensees are designing and implementing a global
clinical trial program to test multiple indications in pilot studies initially
in different geographic territories. Results will be shared among the Company
and its licensees, and if preliminary data are positive, approvals will be
pursued worldwide. To date, the Company's clinical studies have evaluated, or
are evaluating, the safety and clinical feasibility of a surgically-implanted
device that contains the rhBMP-2 protein in several matrix delivery systems in
orthopedic trauma and maxillofacial repair.

     In late 1994 and early 1995, the Company completed patient accrual for two
oral/maxillofacial pilot studies, and two orthopedic pilot studies. These
studies were designed primarily to test the safety of rhBMP-2 in combination
with either an absorbable collagen sponge or autologous blood clot as a carrier.
In 1995, preliminary data from one of the orthopedic studies (a study of
avascular necrosis of the femoral head) were presented at a scientific meeting
in Vienna, Austria, and preliminary data from one oral/maxillofacial study (a
study of alveolar ridge augmentation/preservation) were presented at a
scientific meeting in Toronto, Canada. In each case, the rhBMP-2 and carrier
were shown to be well-tolerated. The alveolar ridge augmentation/preservation
study showed no definitive evidence of biological activity at the concentration
of rhBMP-2 tested. An additional "dose-ranging" study in this indication is
planned for 1996. The avascular necrosis study showed some radiologic and MRI
evidence of biological activity; however, 24 months of post-operative patient
follow-up will be required to determine whether this evidence correlates with
meaningful clinical endpoints. The Company expects data from another
oral/maxillofacial study (sinus floor augmentation) to be presented at several
scientific meetings in the first half of 1996. Although this twelve-patient
study was designed primarily to evaluate the safety of rhBMP-2 and a carrier,
the study design should allow for some evaluation of biological activity with
respect to a meaningful clinical endpoint of generating sufficient bone to
support placement of a dental implant. The Company expects to present data from
its completed orthopedic trauma pilot study at a scientific meeting in the
fourth quarter of 1996. On the basis of all of these trials, the Company plans
to conduct


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<PAGE>   9

additional clinical studies in 1996 with rhBMP-2 in combination with an
absorbable collagen sponge.

     The Company holds several significant U.S. patents for rhBMP-2 and other
members of the BMP family. These patents cover the DNA sequences and recombinant
production of BMP-1, BMP-2, BMP-3, BMP-4, BMP-5, BMP-6 and BMP-7. The Company
believes it has discovered many of the known members of the bone morphogenetic
protein ("BMP") family.

     The Company is aware that a potential competitor has been issued several
patents in the field of bone-inducing proteins. The Company believes that its
commercialization of rhBMP-2 protein will not infringe any valid patent issued
to any third party. However, no assurance can be given that third parties will
not obtain patents containing claims which would materially interfere with the
Company's commercialization of rhBMP-2 or other bone morphogenetic proteins. See
ITEM 3. "LEGAL PROCEEDINGS." at page 27.


     In 1990, the Company formed a United States partnership (the "GPDC") with
Yamanouchi to fund a substantial portion of the development of bone
morphogenetic proteins prior to phase III or pivotal clinical trials worldwide.
Capital contributions, profits and losses of the GPDC generally are divided 25%
and 75% between the Company and Yamanouchi, respectively, prior to the first
commercial sale in specified countries. After the first commercial sale, each
partner's capital contribution and share of profits or losses of the GPDC will
become 50%.

     In 1994, the GPDC decided to focus its resources on the development of
certain then-existing BMPs, and to discontinue funding the research activities
at the Company directed toward discovery of additional members of the BMP
family. The Company, however, has continued its discovery research activities in
this area, alone and in collaboration with third parties, and discoveries of
additional proteins after November 30, 1994 will not be licensed to the GPDC. In
April 1995, the Company and The Johns Hopkins University School of Medicine
formed MetaMorphix, Inc. to continue further discovery research activities in
this field. See "DISCOVERY RESEARCH AREAS - BONE AND CONNECTIVE TISSUE BIOLOGY"
at page 11.

     The GPDC holds exclusive worldwide marketing rights for bone morphogenetic
proteins discovered by the Company prior to December 1, 1994 and has exclusively
sublicensed these rights to the Company in North America, to the GYJ in Japan,
and to the GI-Yamanouchi European Partnership ("GYEP") in Europe, as described
below. Commercialization rights for the rest of the world will be retained by
the GPDC and may be sublicensed in the future to third parties or to the
Company, Yamanouchi or their respective affiliates. The Company has retained
manufacturing rights to BMPs worldwide.

     In 1990, the Company also entered into the GYJ joint venture with
Yamanouchi for the commercialization and marketing in Japan of the Company's
bone morphogenetic proteins and other potential future products. The GYJ is
responsible for clinical development, registration and marketing of
bone-inducing protein products in Japan. In June 1995, the Company and the GYJ


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<PAGE>   10

agreed to restructure their agreement relating to bone morphogenetic proteins,
and assigned to Yamanouchi an exclusive license to develop and commercialize
rhBMP-2 in Japan in return for an increase in the royalty rate and the price for
commercial supply of bulk protein as well as Yamanouchi's agreement to fund
Japanese development and commercialization expenses. The Company retained its
supply rights for bulk rhBMP-2.

     In 1993, the Company and Yamanouchi formed the GYEP for the
commercialization of the GPDC's bone morphogenetic proteins in Europe. The GYEP
contracted with the Company to manage the clinical development, registration and
the core marketing activities of the initial products in the field of localized
bone repair. The GYEP has entered into distribution agreements with Yamanouchi
Europe B.V. (formerly Brocades Pharma B.V.) and Wyeth-Ayerst International Inc.,
affiliates of Yamanouchi and AHP, respectively, in return for distribution fees
and milestone payments. These distributors will assist in obtaining local
country approvals and market the products in their respective territories. The
Company believes these relationships will afford it an opportunity to develop a
European commercialization infrastructure with the cooperation and support of
its partners while retaining manufacturing rights for these proteins.

     In February 1995, the Company and Sofamor Danek Group, Inc. ("SDG")
announced their agreement to develop and commercialize rhBMP-2 products for use
in certain surgical procedures involving the spine in North America. Under the
agreement, SDG will have the exclusive right in North America to develop and
commercialize these products for these spinal applications. SDG paid the Company
$12.5 million in license fees in 1995 and will pay the Company up to $37.5
million over the next three years. The Company retains the exclusive right to
manufacture rhBMP-2 for supply to SDG. The two companies will share revenues
approximately equally.

          Recombinant Human Interleukin-Twelve ("rhIL-12")
          ------------------------------------------------

     IL-12 is an immune system modulating protein whose activity was first
discovered at the Wistar Institute of Anatomy and Biology ("Wistar") and later
cloned at Genetics Institute. It was originally named natural killer cell
stimulatory factor ("NKSF"). The Company believes Hoffmann-La Roche Inc.
("Roche") independently cloned recombinant human interleukin twelve ("rhIL-12")
at about the same time as the Company and Wistar. In October 1995, the Company
received a U.S. patent covering nucleic acids encoding IL-12 and recombinant
technology for expression of rhIL-12. The Company has additional patent
applications relating to IL-12 pending in the United States and foreign
jurisdictions. Roche also has pending patent applications in foreign
jurisdictions based upon its independent development of rhIL-12.

     In 1993, Genetics Institute and Roche collaborated in the preclinical
development of rhIL-12. Following the collaboration, the Company and Roche
decided to pursue commercialization of rhIL-12 independently; however, the
Company and Roche cross-licensed all rights relating to present and future
discoveries relating to rhIL-12, except for future discoveries relating to gene
therapy and vaccine adjuvant applications of rhIL-12.


                                       8

<PAGE>   11

     IL-12 is a complex protein that is believed to link "natural immunity" with
"adaptive" or "acquired" immunity. Natural immunity is mediated by specialized
white blood cells that, in healthy people, perform surveillance and kill
invading bacteria, parasites, and viruses and may eliminate the growth of tumor
cells. IL-12 is believed to activate, and in some cases cause the proliferation
of, certain of these white blood cells, potentially enhancing the immune
system's killing ability. IL-12 also may trigger the production of other immune
system regulatory proteins that not only reinforce this natural immune response
but also may initiate an "adaptive" immune response.

     Whereas natural immunity provides an immediate immune response to invading
pathogens, adaptive immunity involves T and B cell "memory" that can provide a
sustained response against infectious agents and protect the body against future
challenges by these same agents. IL-12 is also believed to stimulate the part of
the immune system that is active in fighting cancer and intra-cellular
pathogens. Examples of diseases caused by intra-cellular pathogens are
tuberculosis, viral hepatitis, and HIV disease.

     Given the biologic activities of IL-12, Genetics Institute launched an
effort to explore rhIL-12 as a therapeutic for certain infectious diseases. In
test tube experiments, rhIL-12 enhanced or augmented normal immune function in
blood cells taken from HIV-infected persons. Also, work has shown that cells
from HIV-infected persons are not able to make IL-12 in the same quantities as
non-infected persons. This suggests that rhIL-12 may have the potential to
correct a deficiency in the immune system of HIV-infected persons. Initial phase
I clinical safety trials for HIV-infected persons were completed in 1995, and
biological activity was observed over a range of well-tolerated doses. A
multi-dosing phase I/II study of rhIL-12 in HIV-infected persons commenced in
late 1995. Other infectious diseases may be explored in the future.

     In preclinical models of a variety of cancers including melanoma, lung
cancer, kidney cancer, lymphoma and colon cancer, rhIL-12 (or its recombinant
murine analog, "rmIL-12") has shown positive effects by either shrinking or
entirely eliminating tumors. In a mouse model of kidney cancer, rmIL-12 appears
to trigger a memory response, since new tumors would not grow in animals that
had been previously administered rmIL-12 to treat their tumors.

     The Company completed a phase I safety study of rhIL-12 in cancer patients
in early 1995. In May 1995, the Company initiated a phase II study of rhIL-12 in
kidney cancer patients. This study was suspended in June 1995 due to serious and
unexpected adverse events experienced by patients in the study. An investigation
into the cause of the adverse events was completed in the autumn of 1995. The
results of the investigation were reviewed with the FDA, and phase I/II studies
of rhIL-12 in cancer patients resumed in late 1995.

     In July 1994, the Company and Wyeth-Ayerst Laboratories ("Wyeth-Ayerst"),
a pharmaceutical division of AHP, agreed to form a 50/50 joint venture ("IL-12
Partners") to develop and commercialize rhIL-12 on a worldwide basis, except for
Japan. IL-12 Partners has a joint project team and steering committee to oversee
current and future clinical trials and other


                                       9

<PAGE>   12

development activities. These activities will be funded equally by the partners.
The arrangement also provides for certain milestone payments to the Company.
Future milestone payments will become due upon achievement of certain clinical
outcomes and submission or approval of specific regulatory filings -- the exact
value of such payments is contingent upon rhIL-12's success in various
therapeutic areas. The Company has the right to supply rhIL-12 to the joint
venture and will receive royalties based on the joint venture's sales of
rhIL-12. The Company will have marketing rights in North America; Wyeth-Ayerst
will have marketing rights outside North America and Japan.

     In July 1994, the Company granted the GYJ rights to develop and market
rhIL-12 in Japan pursuant to a license agreement providing for milestone
payments, the payment of royalties to the Company on product sales and the
purchase of bulk rhIL-12 manufactured by the Company.

          Recombinant Human Macrophage Colony Stimulating Factor ("rhM-CSF")
          ------------------------------------------------------------------

     rhM-CSF is a blood cell growth factor that acts predominantly on monocytes
and macrophages, which constitute a particular class of white blood cell. In
1991, the Company entered into an arrangement with SciGenics, Inc. relating to
the research, development, use, manufacture and sale of rhM-CSF in North
America. In December 1995, the Company completed the acquisition of SciGenics,
Inc. See "SCIGENICS" at page 17. After several years of extensive preclinical
and clinical testing, the Company has decided to cease further development of
rhM-CSF. The Company plans to continue to honor commitments to third parties
(which currently involve insignificant resources) and to make available small
quantities of rhM-CSF from existing inventories to third party researchers, but
has no present plans for self-funded research or development of rhM-CSF.

     Discovery Research Areas
     ------------------------

          Hematopoiesis and Immunology
          ----------------------------

     The Company is devoting a substantial portion of its discovery research
resources to the fields of immunology and hematopoiesis (cytokines, chemokines,
cell surface signalling channels and blood cell growth factors). This area has
historically been a source of important therapeutic candidates and our efforts
are continuing in this field. Attention has been focused specifically on factors
that regulate stem cell and lymphocyte development as well as on factors which
can modulate the immune response including both immune-stimulators and
immunosuppressive agents. Discoveries in this field may lead to promising new
anti-cancer and anti-infective therapies as well as factors potentially useful
for the treatment of autoimmune diseases including rheumatoid arthritis,
systemic lupus erythematosus and multiple sclerosis as well as organ transplant
rejection.

     In September 1995, the Company acquired the rights to the B7/CD28 immune
modulation program from Repligen Corporation. This acquisition included rights
to numerous patents,


                                      10
<PAGE>   13

patent applications, licenses and other agreements in the field and
related genes, monoclonal antibodies, recombinant proteins, cell lines, and
hybridomas. The acquired rights initially included the rights to Repligen's
CTLA4-Ig program, but in January 1996, the Company reassigned these rights to
Repligen.

     The B7/CD28 costimulatory pathway plays a critical role in controlling the
communication between antigen presenting cells and T lymphocytes with the
subsequent activation of the T lymphocytes to mount an immune response. Down
regulation or inhibition of the B7/CD28 signaling pathway is believed to lead to
T lymphocyte tolerance to both foreign antigens, as present with transplanted
organs, and to self-antigens, which have been implicated in autoimmune disease.
Research investigations will focus on the application of B7/CD28 costimulation
inhibition to the prevention of rejection of transplanted organs and to the
treatment of autoimmune disease models. Up modulation or activation of the
B7/CD28 signalling pathway may also lead to heightened T lymphocyte
responsiveness which is believed to be essential for enhancing responses to
antigens supplied as vaccines or to those present on tumors. Research in
enhancing an immune response via the B7/CD28 pathway may lead to improved
anti-cancer and anti-viral therapies. Investigations in this field may also lead
to the discovery of novel ligands and factors important for regulating immune
responses.

          Bone and Connective Tissue Biology
          ----------------------------------

     The Company is continuing its discovery research efforts in the field of
bone and connective tissue biology. Company scientists are continuing to
identify novel factors which may play an important role in the formation, growth
and repair of bone, cartilage and other connective tissues. In 1995, one of
these novel factors, rhBMP-13, was seen to potentially play a role in inducing
the repair of cartilage.

In April 1995, the Company and The Johns Hopkins University School of   
Medicine formed a new company, MetaMorphix, Inc., in which the Company is
currently a majority stockholder. MetaMorphix was established to discover,
develop, and commercialize new members of the Transforming Growth Factor-Beta
("TGF-beta") super-family of genes. MetaMorphix will hold the rights to genes
for BMPs discovered by Genetics Institute after December 1, 1994, and the genes
for growth and differentiation factors which have been or are discovered by
collaborating scientists at Johns Hopkins. Members of the TGF-beta super-family
may play a role in the growth and differentiation of cells from organs as
diverse as the skeletal and nervous systems. Half of the new members discovered
in the collaboration will be licensed to the Company for development and
commercialization and the other half will remain in MetaMorphix for development
and commercialization, subject to a right of first refusal held by the Company
if MetaMorphix decides to seek a third party licensee.

         Soft Tissue Repair and Organ Regeneration
         -----------------------------------------

     Research continues on the effects of growth factors on tissue development
and repair with the aim of developing therapies useful for the treatment of
human tissues damaged by injury or

                                       11

<PAGE>   14

disease. In 1995, the Company also continued its work in the embryonic growth
and regulatory protein ("EGRP") program under its agreement with SciGenics,
studying the effects of specific gene expression and cellular interactions on
the development of insulin-expressing cells in the pancreas. This work has not,
however, led to the discovery of any EGRP factors and remains at an early stage
of discovery research. In December 1995, the Company acquired SciGenics, and is
continuing to evaluate the EGRP program and whether to redeploy resources to
other more promising areas of research. See "SCIGENICS" at page 17.

          Small Molecule Drug Discovery ("SMDD")
          --------------------------------------

     The Company's research efforts have produced expertise in molecular and
structural biology, and in high throughput screening that is relevant to the
identification and utilization of novel human proteins as targets for the
discovery of small molecule based pharmaceuticals.

     In recent years the Company's SMDD research has focused on: (i) cellular
adhesion proteins which play a critical role in the movement of white blood
cells into damaged or diseased tissues; and (ii) cPLA2, an enzyme believed to
play a key role in the production of inflammatory mediators. By identifying the
molecules that block the action of these proteins, the Company hopes to develop
new treatments for asthma, rheumatoid arthritis, organ transplant rejection, and
cancer metastasis. During 1995, the Company continued its program to screen
compounds that could potentially become lead candidates for possible new drugs.
In 1995, the Company also augmented its SMDD technology through the addition of
x-ray crystallography to complement its existing NMR imaging capabilities. This
has increased the ability of the SMDD group to determine protein structures as
an aid to its medicinal chemistry research, in addition to relying on "smart
screening" techniques to discover possible new drug candidates. Several
potential leads have been identified, and preclinical research is in progress.

     During 1992, the Company entered into two agreements with Wyeth-Ayerst
relating to SMDD. The first agreement centers on the discovery of novel target
areas for developing new small molecule based drugs. This agreement provided
Wyeth-Ayerst with the option to enter into a collaboration agreement for each
selected target area. Pursuant to this option agreement, the Company signed a
second agreement with Wyeth-Ayerst to collaborate in the target area of cellular
adhesion. The option agreement expired at the end of fiscal 1993, and
collaborative funding ended as scheduled in mid-1995. Wyeth-Ayerst retains
co-development rights for lead compounds discovered during this collaboration.

          Genomics Initiative
          -------------------

     The Company made progress in 1995 in refining gene-based techniques to
discover novel human genes that code for secreted proteins, receptors and
ligands. These techniques may allow the Company to rapidly discover new genes
and proteins, and facilitate evaluation of their functions and therapeutic
potential.


                                       12

<PAGE>   15

      In November 1994, the Company entered into a collaboration agreement with 
Affymetrix, Inc. to develop new technology to help in understanding the
function of human genes. The technology is based on the use of the Affymetrix
GeneChip[TRADEMARK] to answer questions about where and when large numbers of
genes are expressed in normal and diseased tissues. Prototype chips were
developed and proof-of-concept experiments were performed in 1995. The Company
believes that this technology will accelerate the discovery of gene function,
thereby speeding the move to preclinical evaluation of novel protein-based
therapeutics. In 1995, the Company entered into an expanded supply agreement
with Affymetrix allowing the Company to apply the GeneChip[TRADEMARK]
technology to a substantially larger numbers of genes.

     Licensed Products
     -----------------

          Recombinant Human Antihemophilic Factor ("rhAHF")
          -------------------------------------------------

     Recombinant human antihemophilic factor ("rhAHF", or "recombinant human
Factor VIII") is a manufactured version of a naturally occurring protein that
helps regulate activation of the body's coagulation pathway -- the system that
controls the formation of blood clots and prevents bleeding. Hemophilia A, a
condition affecting approximately one in 10,000 men (or approximately 20,000
persons in the U.S.) is caused by deficient levels of Factor VIII. Symptoms of
hemophilia include uncontrolled bleeding into soft tissues, muscles and weight-
bearing joints.

     Prior to the introduction of rhAHF, people with hemophilia had to rely on
Factor VIII products derived from human blood to treat or prevent bleeding
episodes. The supply of Factor VIII from this source is limited by blood and
plasma donations. Patients who rely on this product may also risk exposure to
blood-borne viruses, such as hepatitis and the AIDS virus.

     Genetics Institute's development of a genetically engineered human Factor
VIII product was one of the most significant technical achievements by the
biotechnology industry. Recombinant Factor VIII is one of the largest proteins
ever produced using genetic engineering technology.

     In 1992, the FDA licensed the Company's concentrated rhAHF product and
its licensee's (Baxter Healthcare Corporation, Hyland Division ("Baxter"))
finished product, Recombinate[TRADEMARK] Antihemophilic Factor (Recombinant),
for the treatment of hemophilia A. Recombinate[TRADEMARK] Antihemophilic Factor
(Recombinant) brand Factor VIII is currently marketed in the U.S. and Europe by
Baxter, under the terms of a worldwide license, and by Centeon L.L.C.
("Centeon"), a Baxter distributor, under a separate brand name. Applications
for regulatory approval have been filed by Baxter in Japan and other countries
throughout the world.

     The production of concentrated rhAHF by recombinant DNA technology rather
than from human blood eliminates the risk of transmitting human viruses
associated with plasma-derived Factor VIII products. In addition, it makes
possible a supply of Factor VIII which is not limited


                                       13

<PAGE>   16

by the blood donor system. These advantages should ultimately enable persons
with hemophilia to use rhAHF to prevent episodes of bleeding, and thereby
improve the quality of their lives.

     Baxter is the Company's worldwide exclusive licensee of concentrated rhAHF.
The Company has retained substantial worldwide manufacturing rights and will
supply product concentrate to Baxter. Baxter further processes the concentrated
rhAHF and sells finished product. Genetics Institute has the right to
manufacture fifty percent of Baxter's requirements until December 2002, and
thirty percent of Baxter's requirements until December 2009. Currently, the
Company manufactures one hundred percent of Baxter's requirements for product
concentrate. Baxter is developing its own capacity to manufacture product
concentrate, and the Company expects Baxter to begin supplying a portion of its
worldwide commercial requirements beginning in 1997 or 1998. The Company earns
manufacturing revenue on the supply of concentrated rhAHF material, and a
royalty on Baxter's sales of finished rhAHF product. While the Company expects
Baxter to continue to purchase most or all of the Company's rhAHF production due
to increasing market demand, the Company cannot provide any assurance that such
demand will increase or that Baxter's own production capacity will not
eventually reduce the Company's rhAHF sales to Baxter.

          Recombinant Human Erythropoietin ("rhEPO")
          ------------------------------------------

     Natural EPO is a protein that stimulates the production of red blood cells.
Inadequate production of EPO by the kidneys results in decreased red blood cell
production and anemia. Pharmaceutical compositions containing EPO are used by
kidney dialysis patients as an alternative to whole blood or red cell
transfusions. Such transfusions are the only other current treatments for this
form of anemia and may expose the patient to various side effects and the risk
of contracting blood-borne diseases.

     Genetics Institute's rhEPO products are being sold in Japan, Europe and
certain other countries outside the United States by its licensees, Chugai
Pharmaceutical Co., Ltd. ("Chugai") and Boehringer Mannheim GmbH ("Boehringer
Mannheim"), respectively. Due to patents and Orphan Drug protection held by
Amgen Inc. ("Amgen") in the United States, the Company and its licensees do not
manufacture or sell rhEPO products in the United States. Chugai has a
royalty-bearing license from the Company to manufacture and market rhEPO in
Japan, Canada and Mexico. The Company has granted Boehringer Mannheim a
royalty-bearing license to manufacture and market rhEPO in Europe, South and
Latin America, Africa, the Middle East, and numerous countries in the
Asia-Pacific region, including, Australia, China, India, Korea, and Taiwan. The
Company receives royalties based on licensee sales of rhEPO in these
territories.

     EPO patent proceedings are pending in Europe on a country-by-country basis
and in the European Patent Office; and, absent settlement, are expected to
continue for a number of years. Injunctive relief sought by Ortho or its
affiliates could at any time result in a loss of royalties in the country or
countries where issued. Royalties in fiscal 1995 totalled approximately $12.9
million for rhEPO sales by Boehringher Mannheim, and, absent an adverse legal
outcome, have the potential to increase in 1996. See ITEM 3. LEGAL PROCEEDINGS
at page 27, and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS at page 33.

                                       14

<PAGE>   17

          Recombinant Novel Plasminogen Activator ("rNPA")
          ------------------------------------------------

     Recombinant novel plasminogen activator ("rNPA") is a form of thrombolytic
(clot- dissolving) agent which may be useful in the treatment of heart attacks
and other conditions which may benefit from the dissolution of blood clots.

     Heart attacks can result from blockage of the coronary arteries which
supply oxygen-rich blood to the cardiac muscle. Frequently, the final blockage
of a diseased (atherosclerotic), partially-obstructed artery results from the
formation of blood clots, or thrombi, which block the supply of blood to the
heart muscle. The degree of permanent damage to the heart depends on the
severity and duration of the blockage of the coronary artery.

     rNPA may have improved qualities over existing thrombolytic therapy.
Preclinical data and early clinical data suggest that rNPA's period of activity
in the body (its "half-life") is approximately ten times that of tPA. As a
result, unlike tPA, an existing thrombolytic agent which is administered by
injection and infusion over more than one hour, rNPA is being developed and
tested for administration as a single bolus injection. If the clinical tests are
successful, rNPA could potentially be administered earlier and more easily than
tPA.

     In 1988, Genetics Institute granted Suntory, Ltd. of Japan a license to
develop and commercialize rNPA in Japan, South Korea, China, and Taiwan. rNPA is
being evaluated in phase III clinical studies in Japan for its utility in
dissolving blood clots.

     In 1994, the United States Court of Appeals for the Federal Circuit held
that rNPA does not infringe any of Genentech, Inc.'s United States patents
covering purified human tPA and recombinant tPA. In May 1995, the Company
entered into an agreement with Bristol-Myers Squibb Company to develop and
commercialize rNPA in all countries outside Suntory's territory. In December
1995, Bristol-Myers Squibb filed an IND to commence phase II studies of rNPA in
the United States, and is preparing to commence phase II studies in Europe.

          rhGM-CSF, rhIL-3, and rhIL-6
          ----------------------------

     GM-CSF is a blood cell growth factor which is produced by cells of the body
as part of the natural defense against infections. GM-CSF stimulates the
intermediate to late stages of development of several different blood cell
lineages, and is particularly effective in stimulating growth of cells in the
granulocyte and macrophage lineages.

     The Company developed rhGM-CSF under a research agreement with Sandoz, Ltd.
("Sandoz") and assigned its rhGM-CSF patent rights to Sandoz in return for
royalties on product sales. Schering-Plough also independently developed a
rhGM-CSF product. In 1988, Sandoz entered into an agreement with Schering-Plough
concerning worldwide co-development and co-promotion of rhGM-CSF. Sandoz and
Schering-Plough sell rhGM-CSF in Europe and certain other countries outside the
United States. As a result of the Sandoz and Schering-Plough agreement, the
Company receives royalties under Sandoz rhGM-CSF patent rights on the


                                       15

<PAGE>   18

combined worldwide sales of rhGM-CSF by Sandoz and Schering-Plough at the same
royalty rate due under the Company's agreement with Sandoz.

     rhIL-3 is a blood cell growth factor that is produced by cells of the
immune system as part of the body's natural defense against infections. The
Company believes that rhIL-3 acts earlier in the pathway of blood cell
production than certain other colony stimulating factors and stimulates a
broader range of cell types, including white blood cells, red blood cells and
platelets.

     rhIL-6 is a blood cell growth factor that also is produced by cells of the
immune system as part of the body's natural defense against infections. The
Company believes that rhIL-6, like rhIL-3, acts early in the pathway of blood
cell production stimulating a broad range of cell types, including white blood
cells, red blood cells and platelets.

     The Company licensed to Sandoz the exclusive worldwide right under the
Company's patents and know-how to develop, manufacture and market rhIL-3 and
rhIL-6 and is entitled to receive royalties on commercial sales of both
products. The Company cannot provide any assurance as to whether such products
will ultimately be developed and approved for sale.

     Development and License Agreements
     ----------------------------------

     The Company has entered into agreements with a number of licensees to
conduct collaborative research and development programs, and to supply bulk drug
substance. While the terms of each agreement differ, the agreements generally
provide that the Company will perform research on specific products or in a
specific field and will use commercially reasonable and diligent efforts to
develop a specified product or group of products. Under most of these
agreements, the Company is reimbursed for a portion of its research and
development costs and/or is paid fixed fees for attaining specified technical or
product development benchmarks by the Company and/or the licensee. In general,
such agreements can be canceled on relatively short notice if certain objectives
are not met or, in some cases, for reasons unrelated to the Company's research
and development progress.

     Generally, upon the completion of the Company's research and development
efforts, the licensee agrees to use its best or commercially reasonable diligent
efforts, subject to certain conditions, to conduct clinical testing and obtain
regulatory approvals, to market and, in some cases, manufacture the developed
product. Under most of the agreements, the licensee acquires the exclusive right
to exploit the developed technology in specified geographic territories for
specified products or within specified fields of use, and the Company retains
the right to use such technology for other products or outside such fields of
use or such territories. The Company is generally entitled to receive royalties
based on sales of products derived from the technology developed by the Company.
Royalty rates for patented products in some cases are higher than those for
unpatented products, and royalty periods for patented products sometimes extend
for longer periods of time. The Company has retained the right, subject to
certain conditions, to manufacture commercial quantities of products for certain
of its licensees,


                                       16

<PAGE>   19

including Baxter (relating to rhAHF), Schering-Plough (relating to rhIL-11), the
GPDC (relating to bone morphogenetic proteins), SDG (relating to rhBMP-2), the
GYJ (relating to rhIL-11 and rhIL-12), Wyeth-Ayerst (relating to rhIL-11), and
IL-12 Partners (relating to rhIL-12).

     The Company's licensees that have contributed 10% or more of the Company's
revenues during one or more of the past three years are Baxter, AHP, Chugai, and
Yamanouchi. Baxter provided approximately 44%, 38% and 55% of the Company's
revenues in fiscal 1993, 1994 and 1995, respectively. Chugai provided
approximately 16%, 17% and 18% of the Company's revenues in fiscal 1993, 1994
and 1995, respectively. AHP provided 12% and 22% of the Company's revenue in
fiscal 1993 and 1994 respectively. Yamanouchi provided approximately 13% and 10%
of the Company's revenues in fiscal 1993 and 1994, respectively. Chugai and AHP
are stockholders of the Company.

     The Company's research and development expenses were $99.0 million, $108.2
million and $122.4 million in fiscal 1993, 1994 and 1995 respectively. Under
collaborative research and development agreements with corporate sponsors and
development partners, the Company recognized $34.3 million, $44.8 million and
$32.8 million of collaborative research and development revenue in fiscal 1993,
1994, and 1995, respectively.

     SciGenics
     ---------

     In October 1995, the Company completed, through a wholly-owned subsidiary,
a $14.00 per share, all cash tender offer (the "Offer") for the outstanding
shares of callable common stock of SciGenics, Inc. ("SciGenics"). Approximately
1.4 million shares were tendered and accepted for payment, which resulted in
total ownership by the Company and its affiliates of approximately 66.7% of the
outstanding callable common stock of SciGenics. The offer was made pursuant to a
previously announced agreement entered into by the Company and SciGenics on
September 7, 1995. Pursuant to the agreement, effective December 6, 1995,
SciGenics was merged with and into a wholly-owned subsidiary of the Company, and
each outstanding share of callable common stock of SciGenics not held by the
Company or its affiliates was converted into the right to receive $14.00 per
share in cash and SciGenics became a wholly-owned subsidiary of the Company.

     SciGenics was incorporated in 1991 to engage in the clinical evaluation and
continued development of rhM-CSF in North America and early stage research and
development of EGRP factors worldwide. See "rhM-CSF" and "Soft Tissue Repair and
Organ Regeneration" above for more information on these two former SciGenics
programs.

     Patents and Proprietary Rights
     ------------------------------

     Patents, trade secrets and other proprietary rights are very important to
the business of the Company. As of February 1, 1996, 99 United States patents
and a total of 226 patents worldwide have been issued to the Company. A number
of other patents and patent applications have been licensed exclusively,
semi-exclusively or nonexclusively to the Company for one or


                                       17

<PAGE>   20

more fields of use. There can be no assurance as to how many patents will issue
to the Company or whether any issued patents will provide the Company and its
licensees with significant protection against competitors.

     United States Patent and Trademark Office interference proceedings have
been declared or are likely with respect to a number of the Company's United
States patents and patent applications, and the costs of such proceedings may be
significant.

     Due to unresolved issues regarding the scope of protection provided by such
patents, as well as the possibility of patents being granted to others, there
can be no assurance that the patents owned or licensed to the Company and its
licensees will provide substantial protection or commercial benefit. The rapid
rate of development and the intense research efforts throughout the world in
biotechnology, the significant time lag between the filing of a patent
application and its review by appropriate authorities and the lack of
significant legal precedent involving biotechnology inventions make it difficult
to predict accurately the breadth or degree of protection that patents will
afford the Company's or its licensees' biotechnology products or their
underlying technology. It is also difficult to predict whether valid patents
will be granted based on biotechnology patent applications or, if such patents
are granted, to predict the nature and scope of the claims of such patents or
the extent to which they may be enforceable.

     Under United States law, although a patent has a statutory presumption of
validity, the issuance of a patent is not conclusive as to validity or as to the
enforceable scope of its claims. Accordingly, there can be no assurance that the
Company's patents will afford legal protection against competitors with similar
inventions, nor can there be any assurance that the patents will not be
infringed or designed around by others or that others will not obtain patents
that the Company would need to license or design around.

     Trade secrets and confidential information are likely to be important to
the Company's commercial success. Although the Company seeks to protect
significant trade secrets and confidential information, there can be no
assurance that others will not either develop independently the same or similar
trade secrets or confidential information or obtain access to such trade secrets
or confidential information. Furthermore, there can be no assurance others have
not obtained or will not obtain patent protection that will preclude the Company
or its licensees from using their trade secrets or confidential information.

     Most countries limit the enforceability of patents against government
agencies or government contractors. Generally, the patent owner may be limited
to monetary relief and may be unable to enjoin infringement. This can be of
particular importance in countries where an infringer is a governmental agency.
The inability to enjoin such infringement and the necessity of relying
exclusively on monetary compensation could materially diminish the value of a
particular patent. Furthermore, many countries (including European countries)
have compulsory licensing laws under which third parties may compel the grant of
non-exclusive licenses under certain circumstances (for example, failure to
"work" the invention in the country, patenting of


                                       18

<PAGE>   21

improvements by a third party or failure to supply a product related to health
and safety). As a result, the Company could be forced to grant a license it
would not have otherwise granted.

     The patent position of biotechnology firms generally is highly uncertain
and involves complex legal and factual questions. Competitors have filed
applications for, or have been issued, patents and may obtain additional patents
relating to products or processes which are similar to or improve upon many of
the products or processes being developed by the Company. The Company is unable
to predict how the United States Patent and Trademark Office, similar foreign
authorities, or the courts will resolve issues relating to the validity and
scope of such patents.

     Companies that have or obtain patents relating to the Company's products or
processes could bring, and, in some cases, have brought, legal actions against
the Company or its licensees claiming damages and seeking to enjoin them from
manufacturing, marketing or clinically testing the affected product. The costs
of such litigation are significant. If any such action were successful, in
addition to any potential liability for damages, in the case of an action
against the Company, or a reduction in royalties, in the case of an action
against a licensee, the Company or its licensees would be required to obtain a
license in order to continue to manufacture or market the affected product. No
assurance can be given that the Company or its licensees would be able to
prevail in any such action or could obtain on acceptable terms any license
required under any such patent. See ITEM 3. "LEGAL PROCEEDINGS" at page 27.

     From time to time the Company becomes aware that others, including various
competitors, educational institutions and governmental organizations have
intellectual property, particularly patents and pending patent applications, in
the United States and other countries potentially useful or necessary to the
Company's and its licensees' businesses. Some of these patents and applications
claim only specific products or methods of making such products, while others
claim more general processes or techniques. There may be similar third-party
intellectual property important to the business of the Company or its licensees
of which the Company is not currently aware. It is likely that in the future
others will obtain patents or develop proprietary rights that might be necessary
or useful for the manufacture, use or sale of some products by the Company or
its licensees. Certain of these patents or rights may be sufficiently broad to
prevent or delay the Company or its licensees from practicing necessary
technology, including the manufacture and/or marketing of products important to
the Company's current and future business. The scope, validity and
enforceability of such patents, if granted, the extent to which the Company or
its licensees may wish or need to obtain licenses thereunder and the cost and
availability of such licenses are not susceptible to accurate prediction and may
be on terms which adversely affect the Company's operating results. If the
Company or its licensees do not obtain such licenses, products may be withdrawn
from the market, or delays could be encountered in market introduction while an
attempt is made to design around such patents. Alternatively, the Company or its
licensees could find that the development, manufacture or sale of such products
is foreclosed. The Company or its licensees could incur substantial costs in
challenging the validity or scope of such patents.


                                       19

<PAGE>   22

     If the Company's licensees are required to pay royalties or make similar
payments to a third party in order to obtain licenses which are required to
market and sell the products licensed by the Company to such licensees, such
licensees are in some cases entitled to deduct a portion of such payments from
royalties otherwise payable to the Company. In a few cases, the Company is
required to contribute to certain costs or liabilities incurred by licensees as
the result of any patent infringement or similar claim asserted by a third party
with respect to technology or products licensed by the Company.

     The Company intends to continue to apply for patent protection in
appropriate cases. The Company also intends to rely on its unpatented
proprietary know-how. There can be no assurance that competitors will not
develop or acquire equivalent proprietary information. All key employees,
consultants and licensees of the Company have agreed to maintain the
confidentiality of the Company's proprietary information. The Company's
licensees may be competitors of the Company with respect to products other than
those covered by their development and license agreements with the Company, and
many of the Company's consultants may be engaged in research projects outside
the scope of their consulting agreements with the Company.

     The Company engages in research collaborations and enters into preclinical
and clinical testing agreements with academic institutions and U.S. government
agencies, such as the National Institutes of Health ("NIH"), in order to benefit
from their technical expertise and staff and to gain access to clinical testing
models, patients and related technology. Consistent with biopharmaceutical
industry and academic standards, and the rules and regulations under the Federal
Technology Transfer Act of 1986, these agreements may provide that results will
be freely published, that information or materials supplied by the Company or
developed under the agreement will not be treated as confidential, and that the
Company will receive either joint ownership in or the right to negotiate a
royalty-bearing license to such results.

     The Company has entered into, and may in the future enter into, agreements
with certain companies and institutions under which the Company obtains
royalty-bearing licenses to use certain products, patent rights and processes in
the manufacture of the Company's products.

     Manufacturing
     -------------

     Proteins produced by recombinant DNA technology are manufactured by growing
large quantities of genetically engineered cells, purifying the desired protein
from the cells or culture medium and characterizing in detail the protein's
chemical and biological properties. Development groups within the Company have
expertise in engineering bacterial (e.g., E. coli) and mammalian cells (e.g.
chinese hamster ovary cells) to produce recombinant proteins and in
characterizing the resulting products. The optimal cell type for the production
of a particular protein product depends on the individual properties of that
protein and the quantities required for commercial use. The achievement and
maintenance of an optimal environment for the production of a protein becomes
more difficult as the scale of production increases and may require extensive
development efforts and expenditures.


                                       20

<PAGE>   23

     The Company owns and operates a 220,000 square foot product development and
manufacturing facility in Andover, Massachusetts. The manufacturing portion of
this facility contains four independent production suites. Two of the four
suites are currently licensed by the FDA for the commercial production of rhAHF.
A fifth suite is currently under construction within the Andover facility. The
Company also has a production suite at its facilities in Cambridge,
Massachusetts. These facilities are designed to be adequate to address clinical
and commercial-scale production requirements of the Company and its licensees,
as applicable, for the next several years.

     The Company presently does not have its own fill and finish capabilities
for producing and labelling final drug products from bulk drug substance or bulk
proteins. The Company has agreements with its licensees, such as Baxter with
respect to rhAHF, to perform such services, and contracts with suppliers to
perform fill and finish services for its own proprietary products currently in
clinical development. In 1995, the Company relied substantially on an
unaffiliated third party and Wyeth-Ayerst for the fill and finish of products
used in clinical testing.

     Currently, 100% of the Company's product sales are dependent upon the
manufacture of rhAHF concentrate. Raw materials used in the manufacture of rhAHF
and other products in development are supplied by vendors qualified by the
Company and conform to specifications set by the Company that meet regulatory
requirements. In the event a qualified vendor cannot provide sufficient raw
materials to meet such requirements, no assurance can be given that an alternate
vendor can be qualified by the Company, and make up any shortfall of raw
materials in a timely fashion.

     Both the Cambridge and Andover production facilities have been inspected by
the FDA and are designed to meet applicable standards for "Good Manufacturing
Practices" or GMPs established by the FDA and other applicable government
standards. The Company anticipates that these facilities will be subject to
ongoing inspections by the FDA and international regulatory authorities in
connection with their reviews of the Company's products. GMPs require that all
manufacturing processes be monitored and controlled, and prohibit the release of
any products which fail to comply with applicable product and process
specifications. Because the manufacture of proteins is complex, the Company
cannot guarantee that in the event of a failure or series of failures in the
production of a protein resulting in GMP non-compliance, that it will have
adequate manufacturing capacity to meet all of the Company's clinical and
commercial manufacturing requirements.

     Government Regulation
     ---------------------

     The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation by numerous
governmental authorities in the United States and other countries.

     FDA Approval. Pharmaceutical products or devices intended for preventative,
therapeutic or diagnostic use in humans are governed by FDA regulations in the
United States. The process


                                       21

<PAGE>   24

of completing clinical testing and obtaining FDA approvals for a new drug,
device or biological product is likely to take a number of years and requires
the expenditure of substantial resources. No product is assured of ultimately
receiving such approvals.

     The steps required before a new human pharmaceutical product or device can
be marketed in the United States typically include preclinical testing, filing
an Investigational New Drug ("IND") application or an Investigational Device
Exemption ("IDE"), conducting clinical trials and filing with and approval by
the FDA of a marketing application, either a New Drug Application for drugs, a
Product License Application for biologics or a Premarket Approval Application
for devices. Preclinical studies are conducted in the laboratory and in animal
model systems to gain preliminary information on the investigational product's
efficacy and to identify significant or potential safety concerns. The results
of these studies are submitted to the FDA for review as part of the IND or IDE
application before a company can commence testing in humans.

     The human clinical testing program is conducted in phases, is designed to
collect data relating to the dosing, safety, side effects and efficacy of a
product candidate, and may include a comparison with any currently accepted
therapy. Phase I clinical trials are usually conducted with a small number of
individuals and are designed to determine the metabolic and pharmacologic
activities of the pharmaceutical product and to assess its safety. Pilot
studies, in the case of devices, are similarly designed to test the general
biocompatibility of the device and its safety in humans. While phase I and pilot
study results have received increasing attention in the biotechnology industry,
it is important to recognize that phase I and pilot study results only represent
the first step in the clinical testing of a product and are important insofar as
they provide the safety data and the initial clinical evidence needed to proceed
to phase II and pivotal trials in which efficacy is ultimately measured.

     Phase II clinical trials generally involve studies in a limited patient
population to provide preliminary evidence of efficacy of the product for
specific targeted indications and to determine optimal dosage. Phase II studies
generally do not involve enough patients to demonstrate efficacy in support of
regulatory approval, and the Company cautions investors that positive phase II
results alone do not assure that a product candidate will ultimately demonstrate
efficacy in larger-scale phase III or pivotal trials, to the extent such studies
are required. Phase III or pivotal clinical trials are generally required to
further evaluate clinical efficacy, to test for safety within an expanded
patient population and to support registration of the product.

     Upon completion of clinical testing demonstrating that the new product is
safe and effective for a specific indication, a marketing application may be
filed with the FDA, and no assurance can be given that an application will be
approved based on the data collected. This marketing application includes
details of the manufacturing and testing processes, preclinical studies and
clinical trials. The FDA must approve the application before the applicant may
market the new product.


                                       22

<PAGE>   25

     Once an FDA license has been obtained or the FDA approves a marketing
application, further studies may be required to provide additional data on
safety or to gain approval for the promotion of a product as a treatment for
clinical indications other than those for which the product was initially
tested. Also, the FDA may require post-approval testing for certain products and
also requires surveillance programs to monitor a product's longer-term effects.
Side effects resulting from the use of pharmaceutical products may prevent or
limit the further marketing of the products.

     In addition to product licensing or product marketing approval, companies
producing biological products have been required to obtain establishment
licenses from the FDA covering the company's manufacturing facilities before a
biological product manufactured by the company can be marketed in the United
States. Prior to granting such a license, the FDA will review the company's
manufacturing procedures and inspect its facilities and equipment for compliance
with applicable rules and regulations. Since any establishment license which may
be granted by the FDA is both site and process specific, any enhancement or
material change by a company in its manufacturing process, equipment or location
may require additional FDA review and approval. In 1992, the Company received an
Establishment License from the FDA for the manufacture of concentrated rhAHF for
sale to Baxter which will further process and resell the rhAHF.

     Changing Health Care Market. The debate regarding health care reform and
the changing health care market has raised the level of risk associated with
biopharmaceutical development. The Company cannot predict with certainty what
impact health care reform, managed care or the continuing competitive pricing
pressures in the pharmaceutical markets, particularly from large buyers, managed
care organizations and government purchasers, might have on the Company's
products.

     Other Regulation. The federal government regulates certain recombinant DNA
research activity through the NIH guidelines for research involving recombinant
DNA molecules (the "NIH Guidelines"). The Company complies with the NIH
Guidelines which, among other things, restrict or prohibit certain recombinant
DNA experiments and establish levels of biological and physical containment of
recombinant DNA molecules that must be met for various types of research.

     Genetics Institute is also subject to regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the
Resource Conservation and Recovery Act, national restrictions on technology
transfer, federal regulations on the protection of human subjects in clinical
studies, the protection of animal welfare in preclinical studies, import, export
and customs regulations and other present or possible future local, state or
federal regulation. From time to time Congressional Committees and federal
agencies have indicated an interest in implementing further regulation of
biotechnology and its applications.

     Orphan Drug Act. The Orphan Drug Act is intended to provide incentives to
manufacturers to develop and market drugs for rare diseases or conditions
affecting fewer than


                                       23

<PAGE>   26

200,000 persons in the United States at the time of application for orphan drug
designation. Historically, both drugs (filed under NDAs) and biologicals (filed
under PLAs) have been eligible for orphan drug designation.

     A product that receives orphan drug designation and is the first product to
receive an FDA license for its product claim is entitled to a seven-year
exclusive marketing period in the United States for that product claim. However,
a product that is considered by the FDA to be different than a particular orphan
drug is not barred from sale in the United States during such seven-year
exclusive marketing period even if it receives marketing approval for the same
product claim.

     Foreign Regulatory Approval. Whether or not FDA approval has been obtained,
approval of a pharmaceutical product and/or its manufacturing process by
comparable governmental regulatory authorities in foreign countries must be
obtained prior to the commencement of clinical trials and subsequent marketing
of such product in such countries. The approval procedure varies from country to
country, and the time required may be longer or shorter than that required for
FDA approval. Although there are now procedures for unified filing in Western
Europe for the fifteen members of the European Union, many member countries
require pricing reviews and approvals prior to marketing.

     At present, pharmaceutical products generally may not be exported from the
United States for other than research purposes until the FDA has approved the
product for marketing in the United States. However, a company may apply to the
FDA for permission to export finished products or partially processed biologics
to a limited number of countries prior to obtaining FDA marketing approval for
the United States.

     Competition
     -----------

     The Company believes that it is likely to encounter significant competition
with respect to its principal products. Companies that are able to complete
clinical trials, obtain required regulatory approvals and commence commercial
sales of their products before their competitors may achieve a significant
competitive advantage. Research in biotechnology is also being carried out in
universities and other nonprofit research organizations. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. Moreover, these institutions continue to compete
with the Company in recruiting skilled scientific personnel.

     Amgen and its licensees are marketing rhEPO throughout the world. Miles
Laboratories, Inc. (a subsidiary of Bayer AG), has developed a recombinant
antihemophilic factor which competes directly with the Company and Baxter's
jointly-developed rhAHF product in the United States and certain other
countries. rhAHF also competes throughout the world with plasma- derived Factor
VIII, which is marketed worldwide by several major healthcare companies,
including, among others, Baxter, Centeon L.L.C., Pharmacia A.B., Alpha
Therapeutics, Inc. and its parent The Green Cross Corporation, Immuno A.G., the
American Red Cross and


                                       24

<PAGE>   27

similar Red Cross organizations. Centeon is a recently-formed joint venture of
Armour Pharmaceutical Company, a subsidiary of Rhone-Poulenc Rorer, Inc., and
the protein plasma division of Behringwerke GmbH. There is also potential for
competition from second generation recombinant Factor VIII molecules. Pharmacia
A.B. is conducting clinical trials with a second generation molecule and the
Company has also discovered a second generation molecule which it may consider
for development. The Company believes that its patent rights in second
generation recombinant Factor VIII molecules will protect against competition
from Pharmacia A.B. However, no assurance can be given as to the strength and
breadth of such patent rights.

     In connection with a settlement of Factor VIII patent litigation in 1993,
Baxter agreed to sell limited annual quantities of rhAHF to Rhone-Poulenc Rorer,
Inc. ("RPR") (now Centeon) as a separately branded distributor. RPR (now
Centeon) has obtained regulatory approvals in the United States and abroad, and
competes with Baxter. The Company may earn additional manufacturing revenue if
Centeon purchases rhAHF from Baxter. However, Centeon's sales of rhAHF may
reduce the manufacturing profit or royalties received from sales of rhAHF by
Baxter.

     Significant potential competition exists with respect to the Company's
Principal Product Candidates: rFIX, rhIL-11, rhBMP-2, and rhIL-12.
Plasma-derived Factor IX is currently marketed and sold worldwide by, among
others, Centeon L.L.C., Pharmacia A.B., Alpha Therapeutics, Inc. and its parent
the Green Cross Corporation, Red Cross organizations, Bayer AG, and Immuno AG,
and is expected to compete with rFIX. Pharmaceutical Proteins Ltd. is developing
a recombinant Factor IX product which it produces in transgenic sheep.

     Centeon (through Armour Pharmaceutical Company) has Orphan Drug exclusivity
under a U.S. Food and Drug Administration ("FDA") orphan drug designation in the
United States for a plasma-derived Factor IX product approved in 1992; that
designation expires in August 1999. Armour obtained FDA approval and Orphan Drug
exclusivity in 1992 as a result of its product's improved safety profile at that
time despite the prior grant of Orphan Drug exclusivity to Alpha Therapeutics
for another plasma-derived Factor IX product in 1990. The Company believes that
FDA approval of its rFIX product will not be affected by Centeon's orphan drug
exclusivity because, among other reasons, rFIX, which is not plasma-derived,
eliminates the theoretical risk of viral contamination associated with
plasma-derived products, and, like Armour's product in 1992, represents a
significant improvement over current plasma-derived Factor IX products. The
Company is unable, however, to provide any assurances that approval of rFIX will
not be delayed as a result of prior Orphan Drug designations.

     Immunex Corporation is developing PIXY321, which is in phase III clinical
trials as an agent to restore platelets. If successful, it could compete with
Neumega[TRADEMARK] rhIL-11. Genentech, Inc. and Amgen Inc. are each testing
forms of TPO in early stage clinical trials to determine if it has potential as
a platelet restoration agent, and Sandoz is testing both rhIL-3 and rhIL-6 in
the clinic in   that indication as well. The Company believes that
Neumega[TRADEMARK] rhIL-11 has the potential to compete favorably with each of
these molecules; however, without final clinical data


                                       25

<PAGE>   28

and regulatory approval, it is not possible to provide any assurances as to the
relative labelling and efficacy of these various product candidates.

     Creative BioMolecules, Inc. and Stryker Corporation are developing a bone
morphogenetic protein which could potentially compete with rhBMP-2. Other
companies are developing bovine-derived bone growth factors, as well as other
growth factors for the repair of bone and cartilage tissue.

     Roche, with whom the Company has a cross-license with respect to rhIL-12,
is actively developing a competing rhIL-12 product.

     Competitors have also commenced clinical trials on, filed for marketing
approval for, or received marketing approval for products that will compete with
rNPA, rhGM-CSF, rhIL-3, and rhIL-6.

     The field of biotechnology is expected to continue to undergo rapid and
significant technological change and to involve significant competition. One
example is the emerging field of gene therapy in which the gene for a protein is
inserted in the patient to enable the patient to manufacture the protein that he
or she lacks. In the future, gene therapy could reduce the demand for rhAHF or
rFIX, and other protein therapeutics. As a result, the Company has entered into
research collaborations with gene therapy companies with respect to the rhAHF
and rFIX genes, and is evaluating the desirability of entering into similar
collaborations with respect to its other proprietary genes.

     Genetics Institute believes that its ability to compete effectively in the
biotechnology industry will be based on a number of factors. These factors
include the Company's ability to create and maintain scientifically advanced
discovery, development and manufacturing technology, develop proprietary
products or processes, attract and retain qualified personnel, raise capital,
obtain patent or other protection for its products or processes, obtain required
government approvals on a timely basis, select and pursue product candidates
with significant market potential, manufacture its products on a cost-effective
basis and successfully commercialize its products. Many of the Company's
competitors have substantially greater financial resources, experience and sales
and marketing organizations than Genetics Institute.

     Sales and Marketing
     -------------------

     The Company has relied on its licensees for sales and marketing of its
Licensed Products. The Company plans to use a direct field force for its
Principal Product Candidates in North America except in markets in which it can
gain advantage through specialized distributors and licensees. Outside North
America, for the foreseeable future, the Company will continue to utilize
distributors, licensees and joint ventures where needed to maximize the
successful development and commercialization of each product.


                                       26

<PAGE>   29

     As the Company's Principal Product Candidates approach market approval,
significant additional expenditures, management time and resources will be
required to put in place an infrastructure for commercialization. While
management believes it has the necessary experience and resources needed to
build or contract for a sales, marketing and product distribution
infrastructure, there can be no assurance that the Company will be successful in
gaining market acceptance for its products.

     Human Resources
     ---------------

     As of December 31, 1995, the Company had 983 full-time regular employees,
of which 795 were engaged in research, product development, manufacturing,
clinical development and regulatory affairs, 108 in operations support and 80 in
general administration. Of the Company's employees, 176 have Ph.D. or M.D.
degrees and another 138 hold other advanced degrees.

     None of the Company's employees is covered by a collective bargaining
agreement. Genetics Institute considers its relations with its employees to be
excellent.

     The Company's ability to maintain its competitive position will depend, in
part, upon its continued ability to attract and retain qualified scientific and
managerial personnel, and certain key employees. Competition for such personnel
is intense, and there can be no assurance that the Company will be able to
attract and retain such personnel.

ITEM 2. Properties.
------  ----------

     The Company's executive, administrative and research offices as well as a
small-scale production facility and research and development laboratories, all
comprising approximately 220,000 square feet, are located in four buildings in
Cambridge, Massachusetts. The Company owns one building, and leases the
remaining three buildings. The lease terms for the Company's two principal
Cambridge facilities extend through 1999 and 2009, respectively. In addition,
the Company leases approximately 6,000 square feet of office space in Tokyo,
Japan, and Paris, France.

     The Company also owns an approximately 220,000 square foot process
development and manufacturing facility in Andover, Massachusetts. This facility
contains four independent production suites. See "Manufacturing." The Company
recently added a 40,000 square foot central utility plant and a new 130,000
square foot preclinical biology and product development facility at its Andover
campus. In addition, the Company leases 18,000 square feet of warehouse space in
an adjacent Andover building.

ITEM 3. Legal Proceedings.
------  -----------------

     The Company is involved in various legal proceedings including patent
litigation of a nature considered normal to its business.


                                       27

<PAGE>   30

     Patent infringement proceedings are pending in Europe between Boehringer
Mannheim, the Company's licensee, and Ortho and certain Ortho affiliates seeking
injunctive relief and damages for infringement of their respective EPO patent
rights.

     The patents which are at issue in these suits have also been the subject of
European Patent Office proceedings. In June 1994, a claim in the Company's
European patent covering homogeneous EPO compositions (the '539 patent) was
upheld by the Opposition Division of the European Patent Office. This decision
has been appealed. In September 1994, an appellate hearing was held before the
Board of Technical Appeals of the European Patent Office relating to oppositions
to Kirin-Amgen's European recombinant EPO patent. The Board ruled that a
modified version of certain of Kirin-Amgen's original claims in the patent
filing was valid. However, it is uncertain whether Kirin-Amgen's claims cover
the making, using or selling of Boehringer Mannheim's recombinant EPO.

     The Company can provide no assurance as to the outcome of these European
proceedings. If as a result of these proceedings Boehringer Mannheim is forced
to withdraw from any or all markets, the Company's future royalty income from
Boehringer Mannheim, which totaled $12.9 million in fiscal 1995, and which,
absent an adverse outcome, is expected to increase in 1996, could be reduced or
eliminated.

     In January 1996, the United States Patent and Trademark Office issued an
order to show cause why it should not rule in a patent interference proceeding
that the patents owned by Stryker Corporation purporting to cover rhBMP-2 do not
interfere with the Company's rhBMP-2 patent estate, and that the Stryker
Corporation patents are not invalid in view of certain prior art publications.
The Company believes the decision is incorrect and plans to respond and appeal,
as appropriate. Because the Company's discovery of rhBMP-2 and its related
rhBMP-2 patent filings substantially pre-date the Stryker Corporation patent
filings, the Company believes that it is unlikely that rhBMP-2 products can be
validly covered by Stryker Corporation patents. However, the Company can provide
no assurance as to the outcome of any future legal proceeding.

     In August 1992 and November 1994, respectively, the Company was issued U.S.
patents covering rhBMP-7 currently in development by Stryker Corporation and
Creative BioMolecules, Inc. under the name OP-1. Stryker Corporation also has
pending patent applications directed to rhBMP-7 which may become the subject of
a future patent interference proceeding with the Company's issued rhBMP-7
patents. The Company can provide no assurance as to the outcome of any future
interference or other legal proceeding with respect to these patents and patent
applications.

     In the opinion of the Company, although the outcome of any litigation
cannot be predicted with certainty, the ultimate liability of the Company in
connection with pending litigation will not have a material adverse effect on
the Company's financial position but could be material to the Company's future
results of operations.


                                       28

<PAGE>   31

ITEM 4.   Submission of Matters to Vote of Security Holders.
          -------------------------------------------------

     Not applicable

     Executive Officers of the Registrant
     ------------------------------------

<TABLE>
     The following table sets forth the names and ages of, and the positions and
offices with the Company as of February 1, 1996 held by, all executive officers
of the Company under Section 16 of the Securities and Exchange Act:


<CAPTION>
        Name                Age               Position
--------------------------------------------------------------------------------
<S>                         <C>         <C>              
Gabriel Schmergel           55          President; Chief Executive  Officer;
                                        Director

Patrick Gage, Ph.D.         53          Chief Operating Officer

Garen G. Bohlin             48          Executive Vice President;
                                        Chief Financial Officer

Tuan Ha-Ngoc                43          Executive Vice President

Steven C. Clark, Ph.D.      46          Senior Vice President-Discovery
                                        Research

Lawrence V. Stein           45          Senior Vice President, General
                                        Counsel and Secretary

Joseph Grimm                44          Vice President-Finance

Jack Morgan                 44          Vice President-Corporate
                                        Development

John Ryan, M.D., Ph.D.      52          Vice President - Clinical Development
</TABLE>

Business Experience
-------------------

     Mr. Schmergel has been President, Chief Executive Officer and a director of
the Company since April 1981.

     Dr. Gage joined the Company in November 1989 as Senior Vice
President-Scientific Affairs, was subsequently promoted to Executive Vice
President in January 1990 and then was promoted to Chief Operating Officer in
November 1993. From 1971 to October 1989, Dr. Gage


                                       29

<PAGE>   32

held various scientific and management positions at Hoffmann-La Roche Inc., most
recently as Vice President, Director of Exploratory Research.

     Mr. Bohlin joined the Company in December 1983 as Director of Finance and
Treasurer and was subsequently promoted to Vice President-Finance and then to
Senior Vice President-Finance and Administration. He has been serving as
Executive Vice President and Chief Financial Officer since January 1990.

     Mr. Ha-Ngoc joined the Company in May 1984 as Marketing Manager and was
subsequently promoted to Director of Marketing, then to Vice President-Marketing
and Business Development and then to Senior Vice President-Pharmaceutical
Business. He has been serving as Executive Vice President since January 1990.

     Dr. Clark joined the Company in March 1981 as one of the founding Senior
Scientists and was subsequently promoted to Director of Hematopoiesis Research
in September 1986. He was promoted to Vice President-Research and Development in
April 1989, and then to Senior Vice President-Discovery Research in November
1993.

     Mr. Stein joined the Company in November 1992 as Senior Vice President and
General Counsel. From 1976 to November 1992, he was an attorney with the law
firm of Arnold & Porter, where he became a partner in 1984.

     Mr. Grimm joined the Company in July 1986 as Director of Finance. He has
been serving as Treasurer since December 1987 and was promoted to Vice
President-Finance in January 1992.

     Mr. Morgan joined the Company as Director, Corporate Development in April
1991 and has been serving as Vice President-Corporate Development since November
1993. Prior to joining the Company, he spent 12 years at Baxter Healthcare
Corporation where, among other responsibilities, he was Vice President of
Corporate Planning.

     Dr. Ryan joined the Company as Vice President, Clinical Development in
February 1995. Prior to joining the Company he spent five years at Merck & Co.
as Executive Director of Infectious Disease, and from 1977 to 1989 he was a
professor in the Department of Internal Medicine at Yale University School of
Medicine.

<TABLE>
     Directors of the Registrant
     ---------------------------
<CAPTION>

     Name                               Title
--------------------------------------------------------------------------------
<S>                              <C>

Benno C. Schmidt                 Chairman of the Board
                                 Genetics Institute, Inc.
                                 Senior Partner
                                 J. H. Whitney Company
</TABLE>

                                       30

<PAGE>   33

<TABLE>
<S>                              <C>

Gabriel Schmergel                President and Chief Executive Officer
                                 Genetics Institute, Inc.

James Andress                    Former President and Chief Executive
                                 Officer of Information Resources Inc.

J. Richard Crout, M.D.           President
                                 Crout Consulting

Anthony B. Evnin                 General Partner
                                 Venrock Associates


Fred Hassan                      Executive Vice President
                                 American Home Products Corporation
  
Robert I. Levy, M.D.             President
                                 Wyeth-Ayerst Research

Thomas P. Maniatis, Ph.D.        Professor of Molecular and Cellular Biology
                                 Harvard University,
                                 scientific founder of Genetics Institute, Inc.

</TABLE>

                                       31

<PAGE>   34

                                     PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
-----------------------------------------------------------------------------

<TABLE>
STOCK PROFILE

Genetics Institute's Common Stock (now represented by Depositary Shares) and
Warrants are traded on the National Market System of NASDAQ under the symbols
GENIZ and GENIW, respectively. At January 31, 1996, shareholders of record of
the Company's Depositary Shares totaled approximately 1,600. The Company has not
paid cash dividends on its Common Stock since its inception. The following table
sets forth the high and low sale prices per share of the Common Stock on the
NASDAQ National Market System since January 1, 1994.

PRICE RANGE OF COMMON STOCK

<CAPTION>
         Fiscal 1995                 High          Low
--------------------------------------------------------------------------------
         <S>                         <C>           <C>

         First Quarter               38            31 1/4

         Second Quarter              37 3/4        33 3/4
                                          
         Third Quarter               39 3/4        33 1/2

         Fourth Quarter              57 1/2        36 1/4
--------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
         Fiscal 1994                 High          Low
--------------------------------------------------------------------------------
         <S>                         <C>           <C>
         First Quarter               49 3/4        42
         
         Second Quarter              46 3/4        39 1/2

         Third Quarter               45 1/2        37 1/4

         Fourth Quarter              45 1/2        34 1/2
--------------------------------------------------------------------------------
</TABLE>

                                       32
<PAGE>   35

<TABLE>
ITEM 6. Selected Financial Data
-------------------------------

<CAPTION>
                                         Years Ended December 31,       Years Ended November 30,
                                         ------------------------   --------------------------------
(In thousands except per share data)         1995        1994         1993        1992        1991
                                           --------    --------     --------    --------    -------- 
                                      
STATEMENT OF OPERATIONS DATA          
<S>                                        <C>         <C>          <C>         <C>         <C>
Revenue                                    $172,055    $130,880     $102,041    $ 87,744    $ 82,551
Investment income                            16,223      14,084       20,852      17,053       5,122
Research and development expense            122,404     108,161       99,002      89,571      69,930
Special items (1)                            24,857        --           --        31,995        --
Net loss (1)                                (22,488)    (18,875)     (16,895)    (36,957)    (10,748)
Net loss per common share (1)                  (.84)       (.71)        (.81)      (1.80)      (1.05)
Dividends per common share                     --          --           --          --          --

<FN>                                  
(1) Special items in 1995 includes a charge of $24,857 relating to the acquisition of SciGenics, Inc. 
Excluding this item, 1995 net income was $2,369, or $.09 per share. Special items in fiscal 1992 
include a charge of $30,000 in AHP Transaction-related expenses and a charge of $1,995 to recognize a 
loss on the sale of a partnership interest.
</TABLE>                              

<TABLE>
BALANCE SHEET DATA
<S>                                        <C>         <C>           <C>         <C>         <C>
Cash and marketable securities             $250,834    $269,763      $291,484    $354,226    $ 71,432
Total assets                                433,811     421,593       440,737     460,549     192,277
Shareholders' equity                        390,115     389,004       413,695     427,285     164,332

-----------------------------------------------------------------------------------------------------
</TABLE> 

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
------  -----------------------------------------------------------------------
        of Operations
        -------------

OVERVIEW

Genetics Institute, Inc. and subsidiaries (the "Company") are principally
engaged in discovering, developing and commercializing biopharmaceutical
products using recombinant DNA and related technologies.

The Company and American Home Products Corporation ("AHP") entered into a
transaction (the "AHP Transaction") through which AHP acquired a majority
interest in the Company effective January 16, 1992 (see Note 2 of Notes to
Consolidated Financial Statements). Under the terms of a call option, AHP has
the right, but not the obligation, to purchase the outstanding Depositary Shares
that it does not own, in whole but not in part, at any time until December 31,
1996, at a call price of $79.47 per share for the period January 1, 1996 to
March 31, 1996 and increasing by approximately $1.84 on a quarterly basis to
$85.00 per share for the quarter ending December 31, 1996 (the "Call Option").

RESULTS OF OPERATIONS

The Company reported a net loss of $22.5 million, or $(0.84) per share for 1995,
which included a special acquisition charge of $24.9 million, or $(0.93) per
share, recorded in the fourth quarter of 1995 relating to the Company's
acquisition of SciGenics, Inc., as discussed


                                       33

<PAGE>   36

below. Excluding this nonrecurring charge, the Company would have reported net
income of $2.4 million, or $0.09 per share, for 1995. The Company reported a net
loss of $18.9 million for fiscal 1994, an increase of $2.0 million from the loss
of $16.9 million in fiscal 1993. Excluding the nonrecurring charge in 1995, the
improvement in financial results for 1995 as compared with 1994 was primarily
due to increases in revenues, gross margin on product sales and other income.
The fiscal 1994 loss reflected the ongoing expansion of product development
activities in the United States, as well as in Japan through a joint venture.
The loss in fiscal 1993 was primarily due to significant expansion of both the
Company's product development activities and discovery research programs.

The Company's revenues include product sales from the supply of recombinant
human antihemophilic factor concentrate ("rhAHF") to Baxter Healthcare
Corporation ("Baxter"), royalties on sales of products by licensees, and
collaborative research and development revenue for activities conducted under
agreements with the Company's joint venture partners and certain licensees.
Revenues increased 31% in 1995 to $172.1 million, while revenues for 1994
increased to $130.9 million, or 28% from fiscal 1993 levels.

In 1995, product sales increased 91% to $83.2 million, due primarily to an
increase in the unit volume of rhAHF shipped to Baxter. Product sales in 1994
increased 5% or $2.2 million from fiscal 1993. Product sales of $41.3 million
for fiscal 1993, the Company's first fiscal year with commercial product sales,
included $5.8 million of one-time manufacturing profit on shipments of rhAHF to
Baxter made prior to the December 1992 commercial approval date.

Royalties increased 31% to $56.0 million in 1995 and increased 61% to $42.6
million in fiscal 1994, primarily due to increases in the unit volume of
licensees' EPO sales. Royalties in 1994 included $2.2 million representing a
payment of EPO royalties earned prior to 1994. Such royalties were initially
withheld in escrow by the Company's licensee, Boehringer Mannheim GmbH
("Boehringer Mannheim"), to fund the Company's share of the cost of EPO patent
suits filed against Ortho Pharmaceutical Co., Ltd. and its affiliates ("Ortho")
in Europe as discussed in "Legal Proceedings" and "Financial Outlook" below. In
addition, significant increases in the volume of Baxter's sales of
Recombinate[TRADEMARK] Antihemophilic Factor (Recombinant) also contributed to
the increases in royalty revenue in 1995 and 1994.

Collaborative research and development revenues decreased 27% to $32.8 million
in 1995 and increased 31% to $44.8 million in 1994, principally due to $20.0
million in initial milestone and signature payments recognized in fiscal 1994 in
connection with a joint venture formed by the Company and AHP to develop and
commercialize recombinant human interleukin-twelve ("rhIL- 12"), an immune
system modulator, worldwide (except Japan). In addition, a collaboration with
AHP in the area of cellular adhesion discovery research ended as scheduled
during the second quarter of 1995. Collaborative research and development
revenues include $9.5 million, $28.9 million and $11.8 million for fiscal years
1995, 1994 and 1993, respectively, relating to collaborations with AHP. The
Company also recorded $12.5 million of collaborative research and development
revenue in 1995 in connection with an agreement with Sofamor Danek Group,


                                       34

<PAGE>   37

Inc. to commercialize recombinant bone morphogenetic protein-two (rhBMP-2) in
North America for use in certain surgical procedures involving the spine.

Cost of sales includes royalties payable to third parties upon the receipt of
certain royalty revenues from licensees. Such third party royalties totaled
$6.5, $3.8 million and $1.6 million in fiscal 1995, 1994 and 1993, respectively.
Cost of sales excluding such third party royalties, as a percentage of product
sales (and also excluding the $5.8 million of one-time manufacturing profit
recognized in fiscal 1993 as discussed above) was 38%, 56% and 58% for fiscal
1995, 1994 and 1993, respectively. The significant percentage decrease in fiscal
1995 and the decrease in 1994 were both primarily due to lower unit
manufacturing costs.

Research and development expense increased 13% to $122.4 million in 1995,
primarily due to increases in facilities and clinical studies costs. Research
and development expense increased 9% to $108.2 million in fiscal 1994. This
increase was primarily attributable to higher staffing levels in the research
and product development areas of the Company and expansion of clinical
development activities and outside research collaborations.

General and administrative expenses increased 8% to $20.3 million in 1995, due,
in part, to an increase in market development activities. General and
administrative expenses decreased 10% in fiscal 1994, primarily due to a
decrease in litigation-related costs from fiscal 1993.

As noted above, in connection with its acquisition of SciGenics, Inc.
("SciGenics"), the Company recorded a nonrecurring charge of $24.9 million in
the fourth quarter of 1995, primarily for the portion of the SciGenics
acquisition price allocated to acquired research and development. The
acquisition was made pursuant to the terms of a cash tender offer in which the
Company acquired approximately 67% of the callable common stock of SciGenics on
October 12, 1995 at $14.00 per share. The remaining equity interest in SciGenics
was acquired by the Company on December 6, 1995, upon the merger of a
wholly-owned subsidiary of the Company into SciGenics, with SciGenics being the
surviving corporation. As a result of the merger, SciGenics has become a
wholly-owned subsidiary of Genetics Institute. In the merger, each outstanding
publicly held share of callable common stock of SciGenics not held by the
Company was converted into the right to receive $14.00 in cash. As of December
31, 1995, SciGenics shareholders holding 543,908 shares indicated their
intention to demand an appraisal of the fair value of their shares under
Delaware law. The Company accrued merger consideration of $14.00 per share, or
$7.6 million, for the shares held for appraisal, for a total purchase price of
$29.3 million for the 2,090,909 shares acquired. Subsequent to December 31,
1995, shareholders holding 255,908 shares have indicated their intention to
withdraw from the appraisal process and to receive payment of merger
consideration of $14.00 per share in cash, or $3.6 million. While the Company
believes the amount of merger consideration to be fair, the Company can provide
no assurance as to the outcome of an appraisal proceeding.

Investment income increased 15% to $16.2 million in 1995 as the impact of higher
interest rates and a lower net realized loss recorded on sales of marketable
securities more than offset a lower average balance of cash and marketable
securities. Investment income decreased 32% in fiscal


                                       35

<PAGE>   38

1994 primarily due to a lower average balance of cash and marketable securities
and a net realized loss recorded on sales of marketable securities in fiscal
1994 as compared with a net realized gain in fiscal 1993.

Losses of affiliates, net, of $0.5 million and $5.3 million were recorded in
1995 and 1994, respectively, and $3.3 million of income of affiliates, net, was
recorded in fiscal 1993. Certain of the Company's product development activities
in Japan are being conducted through GI-Yamanouchi, Inc. (the "GYJ"), a joint
venture with Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"). In the second
quarter of 1995, the GYJ assigned its rights to the development and
commercialization of rhBMP-2 in Japan to Yamanouchi, effective January 1, 1995,
in return for an initial payment and a future benchmark payment, as well as
increases in the bulk product supply price and royalty rate to be paid to the
Company by Yamanouchi upon product commercialization. The Company recognized
income of affiliates of $7.3 million in connection with this transaction.
Excluding this transaction, the increase in loss of affiliates, net, for 1995
was primarily due to expansion of rhIL-11 and rhIL-12 product development
activities in Japan by the GYJ and expansion of rhIL-12 product development
activities that are being conducted through IL-12 Partners, a joint venture with
AHP. In fiscal 1993 the Company recorded $5.0 million of equity income relating
to distribution agreements entered into by the GI-Yamanouchi European
Partnership (the "GYEP"), which was formed by the Company and Yamanouchi for the
commercialization of bone morphogenetic proteins in Europe. The GYEP entered
into distribution agreements with AHP and Yamanouchi in return for distribution
fees and milestone payments. Excluding the $5.0 million of equity income
relating to the GYEP distribution agreements, the increases in loss of
affiliates, net, in fiscal 1994 and 1993 were due primarily to expansion of
product development activities by the GYJ in Japan. Loss of affiliates, net
includes $1.4 million and $0.2 million for fiscal 1995 and 1994, respectively,
relating to the rhIL-12 collaboration with AHP.

LEGAL PROCEEDINGS

The Company is involved in various legal proceedings including patent litigation
of a nature considered normal to its business.

Patent infringement proceedings are pending in Europe between Boehringer
Mannheim, the Company's licensee, and Ortho and certain Ortho affiliates seeking
injunctive relief and damages for infringement of their respective EPO patent
rights.

The patents which are at issue in these suits have also been the subject of
European Patent Office proceedings. In June 1994, a claim in the Company's
European patent covering homogeneous EPO compositions (the '539 patent) was
upheld by the Opposition Division of the European Patent Office. This decision
has been appealed. In September 1994, an appellate hearing was held before the
Board of Technical Appeals of the European Patent Office relating to oppositions
to Kirin-Amgen's European recombinant EPO patent. The Board ruled that a
modified version of certain of Kirin-Amgen's original claims in the patent
filing was valid. However, it is


                                       36

<PAGE>   39

uncertain whether Kirin-Amgen's claims cover the making, using or selling of
Boehringer Mannheim's recombinant EPO.

The Company can provide no assurance as to the outcome of these European
proceedings. If as a result of these proceedings Boehringer Mannheim is forced
to withdraw from any or all markets, the Company's future royalty income from
Boehringer Mannheim, which totaled $12.9 million in fiscal 1995 and which,
absent an adverse outcome, is expected to increase in 1996, could be reduced or
eliminated.

In January 1996, the United States Patent and Trademark Office issued an order
to show cause why it should not rule in a patent interference proceeding that
the patents owned by Stryker Corporation purporting to cover rhBMP-2 do not
interfere with the Company's rhBMP-2 patent estate, and that the Stryker
Corporation patents are not invalid in view of certain prior art publications.
The Company believes the decision is incorrect and plans to respond and appeal,
as appropriate. Because the Company's discovery of rhBMP-2 and its related
rhBMP-2 patent filings substantially pre-date the Stryker Corporation patent
filings, the Company believes that it is unlikely that rhBMP-2 products can be
validly covered by Stryker Corporation patents. However, the Company can provide
no assurance as to the outcome of any future legal proceeding.

In August 1992 and November 1994, respectively, the Company was issued U.S.
patents covering rhBMP-7 currently in development by Stryker Corporation and
Creative BioMolecules, Inc. under the name OP-1. Stryker Corporation also has
pending patent applications directed to rhBMP-7 which may become the subject of
a future patent interference proceeding with the Company's issued rhBMP-7
patents. The Company can provide no assurance as to the outcome of any future
interference or other legal proceeding with respect to these patents and patent
applications.

In the opinion of the Company, although the outcome of any litigation cannot be
predicted with certainty, the ultimate liability of the Company in connection
with pending litigation will not have a material adverse effect on the Company's
financial position but could be material to the Company's future results of
operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash and marketable securities (recorded at fair market value) totaled $250.8
million at December 31, 1995, a decrease of $18.9 million from December 31,
1994. The total usage of cash and marketable securities for 1995 of $33.8
million was offset by a non-cash net unrealized gain on marketable securities of
$14.9 million. For the year ended December 31, 1995, $13.4 million was used (net
of $9.5 million of cash and marketable securities acquired) for the acquisition
of SciGenics discussed above, capital expenditures were $26.6 million, $5.8
million was used for operating activities and $2.0 million was used for other
investing activities. These cash usages in 1995 were offset by $8.0 million of
cash proceeds from stock issuances and $6.0 million of cash proceeds from the
sale and leaseback of equipment. Accounts receivable from


                                       37

<PAGE>   40

Baxter for shipments of rhAHF increased by $21.3 million over the December 31,
1994 balance due to a contractual change in the timing of payment of rhAHF
product revenue to the Company by Baxter.

The Company has 2,090,909 warrants outstanding which are scheduled to expire on
May 31, 1996. These warrants are exercisable for the same consideration received
by shareholders in the AHP Transaction. If the amount of such consideration
continues to exceed the exercise price of the warrants, their exercise would
provide approximately $75 million of cash proceeds to the Company. In addition,
in connection with the Company's acquisition of SciGenics discussed above, as of
December 31, 1995, the Company accrued $7.6 million of merger consideration for
shares held by shareholders who have exercised appraisal rights.

The Company expects that its available cash and marketable securities, together
with operating revenues, investment income and lease and debt financing
arrangements, will be sufficient to finance its working capital and capital
requirements for the foreseeable future. Over the next several years, the
Company's working capital and capital requirements will be subject to change
depending upon numerous factors including the level of capital expenditures,
changes in the amount of expenditures committed to self-funded research and
development programs, results of research and development activities,
competitive and technological developments, the levels of resources which the
Company devotes to the expansion of its clinical testing, manufacturing and
marketing activities and the timing and cost of obtaining required regulatory
approvals for new products.

FINANCIAL OUTLOOK

The Company expects to be profitable in 1996. However, the level of the
Company's profitability in 1996 and thereafter depends upon a number of factors
including: the volume and cost of bulk rhAHF concentrate manufactured by the
Company and sold to Baxter; the Company's ability to manufacture sufficient
quantities of bulk rhAHF concentrate to meet Baxter's requirements; the volume
and price of Baxter's sales of Recombinate[TRADEMARK] Antihemophilic Factor
(Recombinant); licensees' sales of EPO and the impact of infringement
litigation on EPO royalty income (as discussed in "Legal Proceedings" above and
as discussed further    below); the success of the Company's development
collaborations with others (including AHP) and the achievement of development
benchmarks under existing collaborative arrangements; and the ability of the
Company to consummate new collaborative agreements. For years after 1996,
profitability will also depend on the successful completion of clinical trials,
subsequent regulatory approvals for commercialization of biopharmaceuticals
under development, including rFIX and Nuemega[TRADEMARK]  rhIL-11, and the
timing of any such regulatory approvals.

Future sales increases for Baxter's Recombinate[TRADEMARK] and licensees' EPO
are primarily dependent on further penetration of existing markets, the effects
of competitive products and changes in reimbursement rates or the basis of
reimbursement by governmental agencies. Future sales increases for Baxter's
Recombinate[TRADEMARK] may also be dependent on obtaining regulatory approvals
for changes in and improvements to the Company's rhAHF manufacturing processes.
Increases


                                       38
<PAGE>   41

in licensees' sales of EPO are also dependent on product approvals in and
penetration of new markets and the timing and nature of additional indications
for which the product may be approved. In addition, international sales of      
Baxter's Recombinate[TRADEMARK] and licensees' sales of EPO will continue to be
subject to changes in foreign currency exchange rates.

Adverse developments with respect to these matters could have a material adverse
effect on the Company's results of operations. In addition, the Company's
consolidated results of operations have fluctuated from period to period and may
continue to fluctuate as a result of these factors.

In January 1996 the Company expanded and restructured its EPO license agreement
with Boehringer Mannheim. Under the new agreement, Boehringer Mannheim has
agreed to pay the Company license fees and benchmark payments for certain
expanded territories, portions of which will be realized when Boehringer
Mannheim receives approval to market EPO in the newly licensed territories. The
restructuring provides Boehringer Mannheim with greater financial responsibility
for and control over the prosecution and settlement of patent suits against
third party infringers. In addition, Boehringer Mannheim has agreed to release
from escrow approximately $8 million in royalties it previously withheld from
the Company to finance such litigation expenses, and to cease to withhold any
additional royalties for such purpose. The restructuring establishes a new
royalty rate applicable to Boehringer Mannheim's original territories that
cannot be decreased by any future EPO patent settlement or for any other reason.
The transaction is expected to contribute approximately $22 million of revenue
to the first quarter of 1996, relating to a combination of license fees,
benchmark payments, and termination of the escrow arrangement.

Significant volatility of market valuations has been associated with the
business and operations of biopharmaceutical companies. Developments involving
the Company or its competitors concerning technological innovations, new
commercial products, results of clinical trials, patents, proprietary rights and
related infringement disputes, results of litigation, and the expense and time
associated with obtaining requisite government approvals may have a significant
impact on the Company's business and on its market valuation. As of December 31,
1995, four of the Company's proprietary product candidates were in human
clinical trials. Phase I and phase II data are preliminary measurements of a
product's safety and efficacy and do not necessarily assure positive phase III
data or ultimate regulatory approval for commercial sale. The Company's market
valuation could be subject to volatility based upon the outcome of clinical
trials and as investors interpret the results of the Company's current and
future clinical trials. In addition, the Call Option held by AHP, which expires
on December 31, 1996, may have an impact on the volatility of the Company's
market valuation.


                                       39

<PAGE>   42

ITEM 8. Financial Statements and Supplementary Data.
------  -------------------------------------------

     All financial statements and schedules required to be filed hereunder are
filed as exhibits hereto, are listed under Item 14(a) and are incorporated
herein by reference.

                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant.
-------  --------------------------------------------------

     (a) Directors. The information with respect to directors required under
this item is incorporated herein by reference to Part I of this Report, and by
reference to the section captioned "Election of Directors" in the Company's
Proxy Statement with respect to the Annual Meeting of Stockholders to be held on
May 14, 1996.

     (b) Executive Officers. The information with respect to executive officers
required under this item is incorporated herein by reference to Part I of this
Report.

ITEM 11. Executive Compensation.
-------  ----------------------

     The information required under this item is incorporated herein by
reference to the sections entitled "Election of Directors -- Compensation for
Directors," "-- Compensation of Executive Officers," "-- Compensation
Arrangements and Employment Agreements," "-- Report of the Compensation
Committee" and "-- Stock Performance Chart," in the Company's Proxy Statement
with respect to the Annual Meeting of Stockholders to be held on May 14, 1996.


ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
-------  --------------------------------------------------------------

     The information required under this item is incorporated herein by
reference to the section entitled "Principal Stockholders" in the Company's
Proxy Statement with respect to the Annual Meeting of Stockholders to be held on
May 14, 1996.


ITEM 13. Certain Relationships and Related Transactions.
-------  ----------------------------------------------

     The information required under this item is incorporated herein by
reference to the sections entitled "Election of Directors -- Compensation
Arrangements and Employment Agreements" and "-- Certain Transactions" in the
Company's Proxy Statement with respect to the Annual Meeting of Stockholders to
be held on May 14, 1996.

     The Company, AHP and its affiliate, AHP Biotech Holdings, Inc. ("Holdings")
have entered into a Governance Agreement (the "Governance Agreement") providing,
among other things, for (i) the inclusion of nominees designated by Holdings on,
and the change in composition on January 1, 1997 of, an expanded Board of
Directors of the Company, (ii) the establishment of committees of the Board of
Directors addressing compensation, scientific affairs and intellectual property
rights and the membership of the directors designated by Holdings on such new as
well as existing committees, (iii) approval rights on the part of the directors
designated by Holdings with respect to material acquisitions by the Company,


                                       40

<PAGE>   43

dispositions of all or any substantial portion of its business or assets,
issuances and repurchases of equity securities, amendments to the Certificate of
Incorporation or By-Laws of the Company and any action otherwise within the
purview of the Intellectual Property Committee, Scientific Affairs Committee or
Compensation Committee of the Board of Directors established pursuant to the
Governance Agreement which is presented to the full Board for action, (iv)
certain rights of first refusal granted to AHP with respect to material
licensing and marketing arrangements with third parties, including an obligation
to first offer to AHP marketing rights to products before offering them to third
parties, (v) certain restrictions on acquisitions and dispositions of New Shares
by AHP and its affiliates and (vi) certain agreements as to Holdings' voting of
its Common Stock with respect to elections of directors and amendments to the
terms of the Depositary Shares.


                                       41

<PAGE>   44

                                      PART IV


ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
-------  -----------------------------------------------------------------

(a)(1) Index to Financial Statements.

     Report of Independent Public Accountants.............F-1

     Consolidated Balance Sheets as of
     December 31, 1995 and 1994...........................F-2

     Consolidated Statements of Operations
     for the years ended December 31, 1995 and 1994
     and the year ended November 30, 1993.................F-3

     Consolidated Statements of Cash Flows
     for the years ended December 31, 1995 and 1994
     and the year ended November 30, 1993.................F-4

     Consolidated Statements of Changes in
     Shareholders' Equity for the years ended
     December 31, 1995 and 1994, the month ended
     December 31, 1993  and the year
     ended November 30, 1993..............................F-5

     Notes to Consolidated Financial Statements...........F-6


                                       42

<PAGE>   45

(a)(2)  Index to Financial Statement Schedules.

The following Financial Statement Schedule is filed 
as part of this Report:

Schedule II- Valuation, Qualifying and Reserve
             Accounts -- for the years ended
             December 31, 1995 and 1994, the month
             ended December 31, 1993 and the year
             ended November 30, 1993......................S-1

     All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.

(a)(3)  Index to Exhibits.

     The Exhibits filed as part of this Form 10-K are listed on the Exhibit
Index immediately preceding such Exhibits, which Exhibit Index is incorporated
herein by reference.

(b)  Reports on Form 8-K.

     During the quarter ended December 31, 1995, the Company filed a report on
Form 8-K on October 26, 1995 and a report on Form 8-K/A on December 22, 1995,
both relating to the Company's Offer to Purchase and subsequent Merger with
SciGenics, Inc.


                                       43

<PAGE>   46

                                   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.

                                   GENETICS INSTITUTE, INC.



March 1, 1996                 By:/s/Gabriel Schmergel
                                 ---------------------------
                                  Chief Executive Officer



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

<CAPTION>
Signature                    Title                              Date
<S>                          <C>                                <C>



/s/Gabriel Schmergel         President;                         March 1, 1996
-------------------------    Chief Executive Officer
Gabriel Schmergel            (Principal Executive Officer);
                             Director


/s/Garen G. Bohlin           Executive Vice                     March 1, 1996
-------------------------    President
Garen G. Bohlin              (Principal Financial
                             and Accounting Officer)



/s/Benno C. Schmidt          Chairman of the                    March 1, 1996
-------------------------    Board; Director
Benno C. Schmidt


/s/James G. Andress          Director                           March 1, 1996
-------------------------
James G. Andress
</TABLE>

                                       44
<PAGE>   47

<TABLE>
<S>                          <C>                                <C>

/s/J. Richard Crout, M.D.    Director                           March 1, 1996
-------------------------
J. Richard Crout, M.D.



/s/Anthony B. Evnin          Director                           March 1, 1996
-------------------------
Anthony B. Evnin



/s/Fred Hassan               Director                           March 1, 1996
-------------------------
Fred Hassan


/s/ Thomas P. Maniatis       Director                           March 1, 1996
-------------------------
Thomas P. Maniatis, Ph.D.



/s/Robert I. Levy            Director                           March 1, 1996
-------------------------
Robert I. Levy, M.D.

</TABLE>


                                       45
<PAGE>   48

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and the Shareholders of Genetics Institute, Inc.:

We have audited the accompanying consolidated balance sheets of Genetics
Institute, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations and cash flows for the years ended
December 31, 1995 and 1994 and November 30, 1993, and the consolidated
statements of shareholders' equity for the years ended December 31, 1995 and
1994, the one month period ended December 31, 1993 and the year ended November
30, 1993. 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 Genetics Institute, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years ended December 31, 1995 and 1994
and November 30, 1993, in conformity with generally accepted accounting
principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of the
financial statements is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.



                                                          Arthur Andersen LLP




Boston, Massachusetts 
January 22, 1996


                                      F-1
<PAGE>   49
<TABLE>
--------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS 
GENETICS INSTITUTE, INC. AND SUBSIDIARIES

--------------------------------------------------------------------------------
<CAPTION>

December 31,                                  1995            1994
(In thousands except share data)

ASSETS
--------------------------------------------------------------------------------
<S>                                         <C>             <C>

Cash and cash equivalents                   $ 33,164        $ 21,793
Marketable securities                        217,670         247,970
Accounts receivable                           40,876          16,127
Inventories                                   21,009          18,673
Other current assets                           5,844           5,275
                                            --------        --------

          TOTAL CURRENT ASSETS               318,563         309,838
                                            --------        --------

Property, plant and equipment, net           109,116         105,315
Other assets                                   6,132           6,440
                                            --------        --------

                                            $433,811        $421,593
                                            ========        ========


LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

Accounts payable                            $  8,936        $ 11,544
Accrued clinical and other studies             4,913           4,018
Accrued royalties                              2,715           1,258
Accrued merger consideration                   7,615               -
Other accrued expenses                        19,517          15,769
                                            --------        --------

          TOTAL CURRENT LIABILITIES           43,696          32,589
                                            --------        --------

Shareholders' equity:
     Common stock, par value $.01;
          authorized 50,000,000 shares           268             266
     Additional paid-in capital              604,013         595,360
     Accumulated deficit                    (214,166)       (206,622)
                                            --------        --------

          TOTAL SHAREHOLDERS' EQUITY         390,115         389,004
                                            --------        --------

                                            $433,811        $421,593
                                            ========        ========

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

</TABLE>

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


                                      F-2
<PAGE>   50
<TABLE>
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS 
GENETICS INSTITUTE, INC. AND SUBSIDIARIES

--------------------------------------------------------------------------------
<CAPTION>

Year Ended                            December 31,   December 31,   November 30,
                                          1995           1994           1993
(In thousands except per share data)
<S>                                     <C>            <C>            <C>

REVENUE
    Product sales                       $ 83,220       $ 43,482       $ 41,313
    Royalties                             55,993         42,603         26,474
    Collaborative research                                        
       and development                    32,842         44,795         34,254
                                        --------       --------       --------
    Total revenue                        172,055        130,880        102,041
                                        --------       --------       --------
                                                                  
OPERATING EXPENSES                                                
    Cost of sales                         38,436         28,369         22,035
    Research and development             122,404        108,161         99,002
    General and administrative            20,289         18,719         20,784
    Special acquisition charge            24,857              -              -
                                        --------       --------       --------
    Total operating expenses             205,986        155,249        141,821
                                        --------       --------       --------
LOSS FROM OPERATIONS                     (33,931)       (24,369)       (39,780)
                                        --------       --------       --------
                                                                  
OTHER INCOME, NET                                                 
    Investment income                     16,223         14,084         20,852
    (Loss) income of affiliates, net        (535)        (5,308)         3,275
    Other, net                            (4,245)        (3,282)        (1,242)
                                        --------       --------       --------
    Total other income, net               11,443          5,494         22,885
                                        --------       --------       --------
                                                                  
NET LOSS                                 (22,488)       (18,875)       (16,895)

Dividends on preferred stock                   -              -         (3,436)
                                        --------       --------       --------
                                                                  
Net loss applicable to common shares    $(22,488)      $(18,875)      $(20,331)
                                        ========       ========       ========
                                                                  
Weighted average common shares                                    
  outstanding                             26,724         26,440         25,103
                                        ========       ========       ========
                                                                  
                                                                  
NET LOSS PER COMMON SHARE               $  (.84)       $  (.71)       $  (.81)
                                        ========       ========       ========
--------------------------------------------------------------------------------
                                                                  
</TABLE>
                                                                
                   The accompanying notes are an integral part
                   of the consolidated financial statements.

                                      F-3
<PAGE>   51
<TABLE>
-------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS 
GENETICS INSTITUTE, INC. AND SUBSIDIARIES

-------------------------------------------------------------------------------------------------
<CAPTION>

Year Ended                                              November 30,  December 31,   December 31,
(In thousands)                                              1995          1994           1993
OPERATING ACTIVITIES
-------------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>            <C>

Net loss                                                 $(22,488)     $ (18,875)     $ (16,895)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities-
    Depreciation and amortization                           17,345        13,192         11,649
    Compensation related to incentive plans                    701           691          1,146
    Equity in net loss (income) of affiliates                  535         5,308         (3,275)
    Special acquisition charge                              24,857             -              -
    Changes in assets and liabilities -
       Accounts receivable                                (24,749)           642           (950)
       Inventories and other current assets                (2,809)        (2,745)         2,930
       Accounts payable                                    (2,608)        (2,331)         1,889
       Accrued expenses                                      3,376         5,360          2,889
       Reserve for patent-related damages                        -             -        (11,000)
                                                         ---------     ---------      ---------
       Net cash (used in) provided by  operating
         activities                                         (5,840)        1,242        (11,617)
                                                         ---------     ---------      ---------

INVESTING ACTIVITIES
----------------------------------------------------------------------------------------------------

Purchases of marketable securities                        (240,588)     (165,014)      (343,114)
Proceeds from sale/maturity of marketable
    securities                                             290,162       189,321        347,092
Acquisition, net of cash acquired                          (17,724)            -              -
Additions to property, plant and equipment                 (26,622)      (44,323)       (46,886)
Investments in affiliates                                     (535)       (5,308)        (2,725)
Other investing activities                                  (1,454)          564         (3,673)
                                                         ---------     ---------      ---------
       Net cash provided by (used in) investing
        activities                                           3,239       (24,760)       (49,306)
                                                         ---------     ---------      ---------

FINANCING ACTIVITIES
----------------------------------------------------------------------------------------------------

Stock issuances                                              7,954         7,728          6,040
Preferred stock dividends                                        -             -         (3,436)
Redemption of preferred stock                                    -             -           (445)
Proceeds from sale-leaseback transactions                    6,018        16,714              -
                                                         ---------     ---------      ---------

    Net cash provided by financing activities               13,972        24,442          2,159
                                                         ---------     ---------      ---------

Net increase (decrease) in cash and cash equivalents        11,371           924        (58,764)

Cash and cash equivalents, beginning of period              21,793        20,869         64,623
                                                         ---------     ---------      ---------

Cash and cash equivalents, end of period                 $  33,164     $  21,793      $   5,859
                                                         =========     =========      =========
----------------------------------------------------------------------------------------------------

</TABLE>

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

                                      F-4
<PAGE>   52
<TABLE>

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

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
GENETICS INSTITUTE, INC. AND SUBSIDIARIES

--------------------------------------------------------------------------------------------------------------
<CAPTION>


                                            Convertible
                                            Exchangeable              Additional                    Total
                                             Preferred      Common     Paid-in     Accumulated   Shareholders'
(Dollars in thousands)                         Stock        Stock      Capital       Deficit       Equity
--------------------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>       <C>          <C>            <C>

BALANCE AT NOVEMBER 30, 1992                 $ 1,146         $244      $577,767     $(151,872)     $427,285

Issuance of 231,804 shares of common
  stock under incentive plans                      -            2         6,849             -         6,851
Issuance of 1,625,370 shares of common
  stock upon conversion of 1,137,815
  shares of preferred stock                   (1,138)          16         1,012             -          (110)
Redemption of 8,490 shares of
  preferred stock                                 (8)           -          (437)            -          (445)
Issuance of 14,864 shares of
  common stock to AHP                              -            -           445             -           445
Preferred stock dividends                          -            -             -        (3,436)       (3,436)
Net loss                                           -            -             -       (16,895)      (16,895)
--------------------------------------------------------------------------------------------------------------

BALANCE AT NOVEMBER 30, 1993                       -          262       585,636      (172,203)      413,695

Issuance of 48,183 shares of common
  stock under incentive plans                      -            1         1,311             -         1,312
Net loss                                           -            -             -        (4,372)       (4,372)
--------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1993                       -          263       586,947      (176,575)      410,635

Issuance of 288,260 shares of common
  stock under incentive plans                      -            3         8,413             -         8,416
Unrealized loss on marketable securities           -            -             -       (11,172)      (11,172)
Net loss                                           -            -             -       (18,875)      (18,875)
--------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1994                       -          266       595,360      (206,622)      389,004

Issuance of 291,690 shares of common
  stock under incentive plans                      -            2         8,653             -         8,655
Unrealized gain on marketable securities           -            -             -        14,944        14,944
Net loss                                           -            -             -       (22,488)      (22,488)
--------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1995                   $   -         $268      $604,013     $(214,166)     $390,115
==============================================================================================================
</TABLE>


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

                                      F-5
<PAGE>   53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
GENETICS INSTITUTE, INC. AND SUBSIDIARIES



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business: Genetics Institute, Inc. and subsidiaries (the "Company") are
principally engaged in discovering, developing and commercializing
biopharmaceutical products using recombinant DNA and related technologies. The
Company's major licensees and markets are discussed in Note 12.

Basis of Presentation: The consolidated financial statements include all
accounts of Genetics Institute, Inc. and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in the prior years financial statements have been
reclassified to conform to the current year's presentation.

The preparation of consolidated 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.

Change in Fiscal Year: The Company changed its fiscal year-end from November 30
to December 31, effective January 1, 1994. Financial information for the fiscal
year ended November 30, 1993 has not been restated because the information is
reasonably comparable with the fiscal years ended December 31, 1995 and 1994.
Summarized financial information for the month ended December 31, 1993 is as
follows: revenue $7.2 million, net loss $4.4 million, net loss per common share
$(0.17), cash provided by operating activities $1.8 million, cash provided by
investing activities $2.1 million and cash provided by financing activities
$11.2 million. Comparative unaudited financial information for the month ended
December 31, 1992 is as follows: revenue $9.5 million, net income $1.9 million,
net income per common share $0.06, cash used by operating activities $5.3
million, cash provided by investing activities $4.3 million and cash provided by
financing activities $0.9 million.

Revenue Recognition: Product sales revenue is recognized upon shipment of
commercial product and represents sales of recombinant human antihemophilic
factor concentrate ("rhAHF") under a supply contract with Baxter Healthcare
Corporation ("Baxter") for Baxter's final product manufacturing and
distribution. Under the supply contract, the Company receives cost plus a
manufacturing profit for shipments of rhAHF to Baxter. Product sales revenue
recognized upon shipment of rhAHF is estimated and is subject to adjustment
based on actual manufacturing costs and yields and on Baxter's actual selling
price. Shipments of rhAHF and other products at cost for periods prior to
commercial approval are included in collaborative research and development
revenue.

The Company has entered into agreements with a number of collaborative partners
and licensees to conduct collaborative research and development programs. In
some cases, these programs are conducted through development partnerships.
Revenue under these arrangements is included in collaborative research and
development revenue and is generally recognized as the related costs are
incurred by the Company, as benchmarks are achieved or as precommercial product
is shipped, as applicable. Collaborative research and development revenue from
development partnerships is recorded net of amounts funded to the partnerships
by the Company.


                                      F-6
<PAGE>   54

Royalty revenue is recognized in the period that commercial product is sold by
the licensee and primarily represents royalties earned on sales of recombinant
human erythropoietin ("rhEPO") by Chugai Pharmaceutical Co., Ltd. ("Chugai") in
Japan and by Boehringer Mannheim GmbH ("Boehringer Mannheim") in Europe and
other countries outside the United States.

Research and Development costs, including those incurred in relation to the
Company's collaborative research and development programs, are expensed in the
period incurred.

(Loss) Income of Affiliates, Net, consists of the Company's share of benchmark
payments or license fees received by affiliated joint ventures, net of the
Company's share of research and development expenses incurred by affiliated
joint ventures (excluding any research and development or other services
provided by the Company to the joint ventures). The Company's share of the joint
ventures' revenues, which ranges from 50% to 62.5%, is generally distributed
when received by the joint venture. The Company's share of the joint ventures'
expenses, which ranges from 25% to 50%, is generally funded as incurred.
Investments in such affiliates are accounted for on the equity method and
amounted to $1.6 million and $0.8 million at December 31, 1995 and 1994,
respectively.

The more significant of these affiliates are GI-Yamanouchi, Inc. (the "GYJ"),
the GI-Yamanouchi European Partnership (the "GYEP") and IL-12 Partners. The GYJ
and the GYEP are joint ventures with Yamanouchi Pharmaceutical Co., Ltd.
("Yamanouchi") formed to develop and commercialize certain of the Company's
product candidates in Japan and Europe, respectively. IL-12 Partners is a joint
venture with American Home Products Corporation formed to develop and
commercialize rhIL-12 worldwide except Japan.

Cash Equivalents, for purposes of reporting cash flows, include highly liquid
instruments purchased with a maturity of three months or less. The Company's
cash equivalents are classified as held-to-maturity and are recorded at
amortized cost.

Marketable Securities consist of debt securities which are classified as
available-for-sale and are recorded at fair value. Net unrealized gains or
losses are recorded in shareholders' equity. For periods prior to fiscal 1994,
marketable securities are recorded at cost which approximates market. In
computing realized gains or losses, the cost of securities sold is based on
average cost. The estimated fair value of marketable securities is based
primarily on market quotations.

Inventories are valued at the lower of cost or market. Cost is determined on the
first-in, first-out method.

Property, Plant and Equipment are recorded at cost. Depreciation is provided,
using the straight-line method, over the assets' estimated useful lives, or for
leasehold improvements and leased equipment, over the lesser of the lease term
or the useful life, as follows (in years): buildings and building improvements,
10-30; machinery and equipment, 3-10; and leasehold improvements, 2-10.

Foreign Currency Transactions: The Company enters into foreign exchange forward
and option contracts to hedge royalties on sales in foreign currencies by
licensees. The purpose of this hedging activity is to protect the Company from  
the risk that dollar cash flows from such royalties will be adversely affected
by changes in exchange rates. Gains and losses on forward and option contracts
that are hedges of firm commitments are deferred and recognized in revenue in
the same period as the hedged transactions. Contracts that hedge anticipated
royalty transactions are marked to market and unrealized gains and losses are
recorded in income for the period. The net unrealized loss on such contracts
was $30,000 in fiscal 1995 and $0.6 million in fiscal 1994. At December 31,
1995, the 

                                      F-7
<PAGE>   55

Company had forward exchange contracts, all having maturities of less than one
year, to sell Japanese yen in the amount of $5.5 million and German deutsch
marks in the amount of $2.3 million.

Financial Instruments consist of cash equivalents, marketable securities,
accounts receivable and foreign currency contracts. The estimated fair value of
these financial instruments approximates their carrying value and, except for
accounts receivable, is based primarily on market quotes. The Company's cash
equivalents and marketable securities are generally obligations of the federal
government or investment grade corporate or municipal issuers. The Company, by
policy, limits the amount of credit exposure to any one financial institution.
The counterparties to foreign currency contracts are major financial
institutions. The Company does not anticipate any losses from nonperformance on
such contracts.

Net Loss per Common Share is computed based on the weighted average number of
common shares outstanding during the period. Common share equivalents have not
been included in the calculations because their effect would be antidilutive.
For periods prior to July 1993, the net loss applicable to common shares
consists of the reported net loss plus dividends declared on the Company's then
outstanding Convertible Exchangeable Preferred Stock (the "Preferred Stock").

2.  TRANSACTIONS WITH AMERICAN HOME PRODUCTS CORPORATION

The Company and American Home Products Corporation ("AHP") entered into a
transaction (the "AHP Transaction") through which AHP acquired a majority
interest in the Company effective January 16, 1992. In connection with the AHP
Transaction, the Company issued 9,466,709 new shares of Genetics Institute, Inc.
Common Stock (the "Common Stock") to AHP for an aggregate purchase price of
$300.0 million and, for shares of Common Stock owned, the Company's shareholders
received from AHP a combination of cash and Depositary Shares subject to a call
option (the "Depositary Shares"). Under the terms of the call option, AHP has
the right, but not the obligation, to purchase the outstanding Depositary Shares
that it does not own, in whole but not in part, at any time until December 31,
1996, at a call price of $79.47 per share for the period January 1, 1996 to
March 31, 1996 and increasing by approximately $1.84 on a quarterly basis to
$85.00 per share for the quarter ending December 31, 1996.

Independent of its right to call the Depositary Shares, AHP is permitted by the
terms of the agreements with the Company to acquire additional Depositary Shares
through open market purchases or privately negotiated purchases, provided that,
prior to December 31, 1996, its aggregate holdings do not exceed 75% of the
Company's outstanding equity, subject to certain exceptions. As of December 31,
1995, AHP had purchased 947,000 additional Depositary Shares through such
purchases. In addition, in connection with the call for redemption of the
Company's Preferred Stock in July 1993, holders of Preferred Stock elected to
convert 1,136,815 shares, or approximately 99% of the outstanding shares of such
stock, into 1,624,021 shares of Common Stock which, pursuant to the AHP
Transaction, were exchanged for the same combination of cash and Depositary
Shares received by shareholders in the AHP Transaction. Pursuant to agreements
with AHP, the Company issued to AHP 14,864 shares of Common Stock, the proceeds
of which funded the cash required for the redemption of the 8,490 shares of
Preferred Stock not converted. As of December 31, 1995, such transactions have
brought AHP's total ownership position in the Company to approximately 63%.


                                      F-8
<PAGE>   56

The Company is engaged in collaborations with AHP in the development and
commercialization of recombinant human interleukin-twelve (rhIL-12), an immune
system modulatory protein, and the commercialization of recombinant human
interleukin-eleven (rhIL-11), a blood cell growth factor. A collaboration with
AHP in the area of cellular adhesion discovery research ended as scheduled
during the second quarter of 1995. Collaborative research and development
revenue includes $9.5 million, $28.9 million and $11.8 million for fiscal 1995,
1994 and 1993, respectively, relating to these collaborations with AHP. In July
1994, the Company and AHP entered into an agreement to form a joint venture to
develop and commercialize rhIL-12 on a worldwide basis except for Japan. In
connection with this agreement, the Company recognized $23.1 million, including
$20.0 million of initial milestone and signature payments, in fiscal 1994.
Losses of affiliates includes $1.6 million and $0.2 million for fiscal 1995 and
1994, respectively, relating to the rhIL-12 collaboration with AHP.

3.  INVESTMENTS IN DEBT SECURITIES

<TABLE>
The Company's investment portfolio of debt securities consists of cash
equivalents classified as held-to-maturity and marketable securities classified
as available-for-sale. The fair value of cash equivalents approximated the
amortized cost of $32.1 million at December 31, 1995. Aggregate fair value,
amortized cost and average maturity for marketable securities held at December
31, 1995 and 1994 are presented below. The average maturities presented below
include estimates of the effective life for certain securities whose actual
maturities will differ from contractual maturities because the borrowers have
the right to call or prepay the obligations without call or prepayment
penalties.

December 31, 1995
(In thousands)
<CAPTION>

                                           Amortized       Gross Unrealized        Fair
                                             Cost       Holding Gains (Losses)     Value
                                           ---------    ----------------------   --------
<S>                                        <C>          <C>          <C>         <C>

U.S Government and Agency securities
     (average maturity of 3.5 years)       $138,498     $2,823       $   (266)   $141,055
Corporate and other debt securities                                 
     (average maturity of 2.6 years)         75,400      1,292            (77)     76,615
                                           --------     ------       ---------   --------
                                           $213,898     $4,115       $   (343)   $217,670
                                           ========     ======       =========   ========
                                                                    
December 31, 1994                                                   
(In thousands)                                                      
                                                                    
U.S Government and Agency securities                                
     (average maturity of 3.1 years)       $143,917     $  143       $ (6,369)   $137,691
Corporate and other debt securities                                 
     (average maturity of 2.7 years)        115,225         43         (4,989)    110,279
                                           --------     ------       ---------   --------
                                           $259,142     $  186       $(11,358)   $247,970
                                           ========     ======       =========   ========
</TABLE>

Gross realized gains and gross realized losses on sales of marketable securities
in fiscal 1995 were $1.7 million and $2.3 million, respectively. Approximately
$5.5 million in debt securities at December 31, 1995 has been pledged as
collateral pursuant to obligations under operating leases (Note 7). Gross
realized gains and gross realized losses on sales of marketable securities in
fiscal 1994 were $0.8 million and $2.4 million, respectively.


                                      F-9
<PAGE>   57

4. INVENTORIES

<TABLE>
Inventories include $15.2 million and $14.3 million of rhAHF at December 31,
1995 and 1994, respectively, and at December 31 consisted of:

<CAPTION>
(In thousands)                                     1995          1994
                                                 --------      --------
<S>                                              <C>           <C>

Raw materials                                    $  5,769      $  4,354
Work in process                                       915           776
Finished goods                                     14,325        13,543
                                                 --------      --------
                                                 $ 21,009      $ 18,673
                                                 ========      ========
</TABLE>


5.  PROPERTY, PLANT AND EQUIPMENT, NET

<TABLE>
Property, plant and equipment at December 31 consisted of:

<CAPTION>

(In thousands)                                     1995          1994
                                                 --------      --------
<S>                                              <C>           <C>

Land and land improvements                       $ 10,421      $  9,988
Construction in progress                            4,644        10,891
Buildings and building improvements                90,175        76,323
Machinery and equipment                            55,362        47,067
Leasehold improvements                             14,224        14,443
Accumulated depreciation and amortization         (65,710)      (53,397)
                                                 --------      --------
                                                 $109,116      $105,315
                                                 ========      ========
</TABLE>

Machinery and equipment with an aggregate cost of $6.0 million, $16.7 million
and $9.9 million were sold and leased back in fiscal 1995 and 1994 and the month
ended December 31, 1993, respectively, as discussed in Note 7.

6. ACQUISITION OF SCIGENICS, INC.

In the fourth quarter of 1995, the Company acquired 100% of the callable common
stock of SciGenics, Inc. ("SciGenics"). The acquisition was made pursuant to the
terms of a cash tender offer in which the Company acquired approximately 67% of
the callable common stock of SciGenics on October 12, 1995 at $14.00 per share.
The remaining equity interest in SciGenics was acquired by the Company on
December 6, 1995, upon the merger of a wholly owned subsidiary of the Company
into SciGenics, with SciGenics being the surviving corporation. As a result of
the merger, SciGenics has become a wholly owned subsidiary of Genetics
Institute. In the merger, each share of callable common stock of SciGenics not
held by the Company was converted into the right to receive $14.00 in cash. As
of December 31, 1995, SciGenics shareholders holding 543,908 shares indicated
their intention to demand an appraisal of the fair value of their shares under
Delaware law. The Company has accrued merger consideration of $14.00 per share,
or $7.6 million, for the shares held for appraisal, for a total purchase price
of $29.3 million for the 2,090,909 shares acquired. Subsequent to December 31,
1995, shareholders holding 255,908 shares have indicated their intention to
withdraw from the appraisal process and to receive payment of merger
consideration of $14.00 per share in cash, or $3.6 million. While the Company
believes the amount of merger consideration to be fair, the Company can provide
no assurance as to the outcome of an appraisal proceeding.


                                      F-10
<PAGE>   58

The acquisition, which was financed with available cash, has been accounted for
as a purchase, and the results of operations of SciGenics have been included in
the consolidated operating results since the date of acquisition. The excess of
the purchase price and acquisition costs over the fair value of the net assets
acquired, which totaled $23.4 million, was allocated to acquired research and
development. The amount allocated to acquired research and development was
charged to operations in the fourth quarter of 1995 because the acquired
research and development programs have no alternative use. This charge and the
write-off of warrant value of $1.5 million discussed below are included in the
accompanying consolidated financial statements as a special acquisition charge
of $24.9 million. Unaudited pro forma results of operations to reflect the
SciGenics acquisition as if it had taken place on January 1 of 1995 and 1994
are as follows: for 1995, revenue $170.0 million, net loss $(25.4) million and
net loss per common share $(0.88); for 1994 (excluding the special acquisition 
charge discussed above), revenue $128.3 million, net loss $(22.1) million and 
net loss per common share $(0.84).

In May 1991, SciGenics and the Company completed an initial public offering of
2,090,909 units, each unit consisting of one share of callable common stock of
SciGenics, and one warrant to purchase one share of the Company's Common Stock
at an exercise price of $35.92 per share, exercisable at any time from December
1, 1992 through May 31, 1996 ("the Warrants"). The value of the Warrants ($8.3
million), representing an incentive to enter into a development contract, has
been included in other assets and amortized on the basis of revenues received by
the Company from SciGenics each period to projected total revenues to be
received. The unamortized warrant value at December 6, 1995 of $1.5 million was
written off by the Company in connection with its acquisition of SciGenics, and
this expense is included in the special acquisition charge discussed above. For
periods prior to December 6, 1995, amortization expense, included in general and
administrative expenses, was $0.4 million, $0.5 million and $1.1 million in
fiscal 1995, 1994 and 1993, respectively. Accumulated amortization was $6.4
million and $5.9 million at December 31, 1994 and November 30, 1993,
respectively.

7. COMMITMENTS AND CONTINGENCIES

Litigation: The Company is involved in various legal proceedings including
patent litigation of a nature considered normal to its business.

Patent infringement proceedings are pending in Europe between Boehringer
Mannheim, the Company's licensee, and Ortho and certain Ortho affiliates seeking
injunctive relief and damages for infringement of their respective EPO patent
rights.

The patents that are at issue in these suits have also been the subject of
European Patent Office proceedings. In June 1994, a claim in the Company's
European patent covering homogeneous EPO compositions (the '539 patent) was
upheld by the Opposition Division of the European Patent Office. This decision
has been appealed. In September 1994, an appellate hearing was held before the
Board of Technical Appeals of the European Patent Office relating to oppositions
to Kirin-Amgen's European recombinant EPO patent. The Board ruled that a
modified version of certain of Kirin-Amgen's original claims in the patent
filing was valid. However, it is uncertain whether Kirin-Amgen's claims cover
the making, using or selling of Boehringer Mannheim's recombinant EPO.

The Company can provide no assurance as to the outcome of these European
proceedings. If as a result of these proceedings Boehringer Mannheim is forced
to withdraw from any or all markets, the Company's future royalty income from
Boehringer Mannheim, which totaled $12.9 million in fiscal 1995, and which,
absent an adverse outcome, is expected to increase in 1996, could be reduced or
eliminated.


                                      F-11
<PAGE>   59

In January 1996, the United States Patent and Trademark Office issued an order
to show cause why it should not rule in a patent interference proceeding that
the patents owned by Stryker Corporation purporting to cover rhBMP-2 do not
interfere with the Company's rhBMP-2 patent estate, and that the Stryker
Corporation patents are not invalid in view of certain prior art publications.
The Company believes the decision is incorrect and plans to respond and appeal,
as appropriate. Because the Company's discovery of rhBMP-2 and its related
rhBMP-2 patent filings substantially predate the Stryker Corporation patent
filings, the Company believes that it is unlikely that rhBMP-2 products can be
validly covered by Stryker Corporation patents. However, the Company can provide
no assurance as to the outcome of any future legal proceeding.

In August 1992 and November 1994, respectively, the Company was issued U.S.
patents covering rhBMP-7 currently in development by Stryker Corporation and
Creative BioMolecules, Inc. under the name OP-1. Stryker Corporation also has
pending patent applications directed to rhBMP-7 which may become the subject of
a future patent interference proceeding with the Company's issued rhBMP-7
patents. The Company can provide no assurance as to the outcome of any future
interference or other legal proceeding with respect to these patents and patent
applications.

In the opinion of the Company, although the outcome of any litigation cannot be
predicted with certainty, the ultimate liability of the Company in connection
with pending litigation will not have a material adverse effect on the Company's
financial position but could be material to the Company's future results of
operations.

Leases: The Company has entered into operating leases for various facilities and
equipment. The most significant of these arrangements relates to the Company's
headquarters facility which was sold at cost in 1984 and then leased back. The
terms of this 20-year lease provide for rental adjustments and purchase options
at the end of every fifth year of the lease. In addition, the Company has
pledged certain of its marketable securities as collateral pursuant to
obligations under the lease (Note 3) and the lease agreement requires that the
Company maintain certain levels of net worth and working capital, as defined,
throughout the term of the lease. In fiscal 1995 and 1994 and the month ended
December 31, 1993, the Company entered into several operating leases involving
the sale-leaseback of certain machinery and equipment (Note 5). The Company is
responsible for taxes, insurance and maintenance under all of its facility and
equipment leasing arrangements.

<TABLE>
Future minimum rental payments under operating leases as of December 31, 1995
are as follows (in thousands):

          <S>                                                  <C>       
          1996..............................................   $10,276
          1997..............................................    10,280
          1998..............................................    10,213
          1999..............................................     7,971
          2000..............................................     6,499
          Thereafter........................................    17,903
                                                               -------
                                                               $63,142
                                                               =======
</TABLE>

Rent expense under operating leases was $11.0 million, $11.2 million and $9.1
million in fiscal 1995, 1994 and 1993, respectively.


                                      F-12
<PAGE>   60

8. INCOME TAXES

As of December 31, 1995, the Company had operating loss and research and
development credit carryforwards for federal income tax purposes of
approximately $79.3 million and $14.0 million, respectively, available to reduce
future taxable income and income taxes payable, respectively. These
carryforwards expire at various dates from 1996 through 2010. The Company
utilized approximately $40.0 million of net operating loss carryforwards in 1995
primarily due to revenue recognized for tax purposes in connection with a
collaboration with Sofamor Danek Group, Inc. and approximately $17.0 million of
net operating loss carryfowards in 1994 primarily due to revenue recognized for
tax purposes in connection with the rhIL-12 joint venture discussed in Note 2.
Based on the Internal Revenue Code and the change in ownership of the Company
resulting from the AHP Transaction discussed in Note 2, utilization of the net
operating loss carryforwards is subject to an annual limitation.

The Company cannot recognize a net deferred tax asset for the future benefit of
its net operating loss and tax credit carryforwards unless it concludes that it
is "more likely than not" that the deferred tax asset will be realized. Due to
its history of operating losses, the Company has recorded a valuation allowance
equal to 100% of its deferred tax asset for the potential future tax benefit of
its net operating loss and tax credit carryforwards.

<TABLE>
The components of the deferred tax amounts, carryforwards and the valuation
allowance is approximately as follows at December 31 (in thousands):

<CAPTION>
                                      1995                1994
                                    --------            --------
<S>                                  <C>                 <C>

Temporary differences                $37,534             $20,833
Operating loss carryforwards          26,968              40,558
Tax credit carryforwards              13,995              12,431
                                     -------             -------
                                      78,497              73,822
Valuation allowance                   78,497              73,822
                                     -------             -------
                                     $   -               $   -
                                     =======             =======
</TABLE>

9. OTHER INCOME, NET

<TABLE>
The Company's (loss) income of affiliates, net, included in Other Income, Net,
for the three years ended December 31, 1995 and 1994 and November 30, 1993 was
as follows (in thousands):

<CAPTION>

                                                                  1995         1994         1993
                                                                --------     --------     --------
<S>                                                             <C>          <C>          <C> 

Combined net loss of affiliated joint ventures                  $(18,373)    $(38,946)    $(12,803)
                                                                ========     ========     ========
Company share of joint ventures' net loss based on
ownership percentage share of revenues and expenses             $ (8,015)    $(15,721)    $ (1,560)

Elimination of Company share of joint 
    venture expenses attributable to:
    - Benchmarks paid to the Company                                   -        4,500            -
    - Services provided by the Company                             7,480        5,913        4,835
                                                                --------     --------     --------

Equity (loss) income of affiliates reported in the Company's
Consolidated Statements of Operations                           $   (535)    $ (5,308)    $  3,275
                                                                ========     ========     ========
</TABLE>


                                      F-13
<PAGE>   61

<TABLE>
Summarized financial information for the Company's significant affiliated joint
ventures for the years ended December 31, 1995 and 1994 and November 30, 1993 is
presented below (in thousands):

FOR THE YEAR ENDED DECEMBER 31, 1995
<CAPTION>

                                           GYJ          GYEP         IL-12        Other         Total
                                        ---------     --------     --------    -----------    --------
<S>                                     <C>           <C>          <C>          <C>           <C>

Revenues                                $  11,738     $      -     $   -         $      -     $ 11,738
Research and Development Expenses:
       GI R&D                                   -        2,010       10,572         4,757       17,339
       Partner R&D and other costs          9,554          526        2,764           (72)      12,772
                                        ---------     --------     --------      --------     --------

                                            9,554        2,536       13,336         4,685       30,111
                                        ---------     --------     --------      --------     --------

Net Income (Loss)                       $   2,184     $ (2,536)    $(13,336)     $ (4,685)    $(18,373)
                                        =========     ========     ========      ========     ========
</TABLE>


<TABLE>

FOR THE YEAR ENDED DECEMBER 31, 1994
<CAPTION>

                                           GYJ          YEP          Other     Eliminations     Total
                                        ---------     --------     --------    ------------   --------
<S>                                     <C>           <C>          <C>          <C>           <C>

Revenues                                $       -     $      -     $  6,000      $ (6,000)    $      -
Research and Development Expenses:
       Benchmark payments                   9,000        6,000            -        (6,000)       9,000
       GI R&D                                   -        2,614       15,208             -       17,822
       Partner R&D and other costs         11,004          820          300             -       12,124
                                        ---------     --------     --------      --------     --------

                                           20,004        9,434       15,508        (6,000)      38,946
                                        ---------     --------     --------      --------     --------

Net Loss                                 $(20,004)    $ (9,434)    $ (9,508)     $      -     $(38,946)
                                        =========     ========     ========      ========     ========
</TABLE>

<TABLE>

FOR THE YEAR ENDED NOVEMBER 30, 1993
<CAPTION>
                                     
                                           GYJ          GYEP         Other     Elminations     Total
                                        ---------     ---------    --------    -----------    --------
<S>                                     <C>           <C>          <C>          <C>           <C>

Revenues                                $       -     $  10,000    $  6,000      $ (6,000)    $ 10,000
Research and Development Expenses:
       Benchmark payments                       -         6,000           -        (6,000)           -
       GI R&D                                 222         1,228      16,475             -       17,925
       Partner R&D and other costs          4,878             -           -             -        4,878
                                        ---------     ---------    --------      --------     --------

                                            5,100         7,228      16,475        (6,000)      22.803
                                        ---------     ---------    --------      --------     --------

Net Income (Loss)                        $ (5,100)    $   2,772    $(10,475)     $      -     $(12,803)
                                        =========     =========    ========      ========     ========
</TABLE>


                                      F-14
<PAGE>   62

Collaborative research and development revenue from joint venture affiliates,
which represents research and development costs and benchmark payments billed to
the joint ventures, net of amounts funded by the Company, totaled $10.7 million,
$15.8 million (including $4.5 million in benchmark payments from the GYJ) and
$13.3 million for fiscal 1995, 1994 and 1993, respectively. In addition, in
fiscal 1994, the Company recorded $20.0 million in initial milestone and
signature payments from AHP in connection with the formation of a joint venture
with the Company, as discussed in Note 2.

<TABLE>
Other items included in Other Income, Net, for the years ended December 31, 1995
and 1994 and November 30, 1993, are as follows:

<CAPTION>

(In thousands)                                         1995        1994        1993
                                                     -------     -------     -------
<S>                                                  <C>         <C>         <C>

Foreign withholding taxes                            $(3,030)    $(2,235)    $(1,650)
Federal alternative minimum taxes                     (1,147)       (300)          -
Net (loss) gain on foreign currency transactions         (30)       (642)         92
Interest expense                                         (76)       (146)        (45)
Other, net                                                38          41         361
                                                     -------     -------     -------
                                                     $(4,245)    $(3,282)    $(1,242)
                                                     =======     =======     =======
</TABLE>

10. CAPITAL STOCK AND WARRANTS

There were 26,881,638 and 26,589,948 shares of Common Stock issued and
outstanding at December 31, 1995 and 1994, respectively. In July 1993, the
Company elected to call for redemption all of the outstanding shares of its
Preferred Stock at a redemption price of $52.40 per share, as discussed in Note
2.

In addition, 2,090,909 Warrants (Note 6) to purchase one share of the Company's
Common Stock at an exercise price of $35.92 per share, exercisable at any time
from December 1, 1992 through May 31, 1996, were outstanding at December 31,
1995. The expiration date of the Warrants was unaffected by the AHP Transaction
and remains May 31, 1996. From and after the AHP Transaction, the Warrants are
exercisable for the same consideration received by shareholders in the AHP
Transaction.

11. INCENTIVE AND BENEFIT PLANS

Stock Option Plans: The Company has reserved 3,800,000 shares of Common Stock
under the 1982 incentive and nonqualified stock option plans and 4,400,000
shares under the 1991 incentive and nonqualified stock option plan. These plans
were implemented to enable the Company to attract and retain key employees and
consultants. In addition, the Company reserved 100,000 shares of Common Stock in
both fiscal 1990 and 1993 to establish nonqualified stock option plans for
nonemployee directors of the Company. Shares under option, which are granted at
fair market value, generally vest ratably over a five-year period. The Company
reserves the right to cancel those options not vested at termination of the
related stock option agreements.


                                      F-15
<PAGE>   63
<TABLE>

Activity under these plans for the fiscal year ended November 30, 1993, the
month ended December 31, 1993 and the years ended December 31, 1994 and 1995 is
summarized as follows:

<CAPTION>

                                            Number of       Price Range
                                              Shares         per Share
                                            ---------     --------------
<S>                                         <C>           <C> 

Outstanding, November 30, 1992              3,030,580     $ 2.50 - 42.50
     Granted                                1,086,200      27.75 - 43.25
     Exercised                               (174,025)      2.50 - 30.88
     Canceled                                 (74,150)     17.25 - 32.00
                                            ---------

Outstanding, November 30, 1993              3,868,605      10.00 - 43.25
     Exercised                                (18,184)     15.25 - 32.00
     Canceled                                 (11,200)     28.50 - 43.25
                                            ---------

Outstanding, December 31, 1993              3,839,221      10.00 - 43.25
     Granted                                1,002,200      40.25 - 48.75
     Exercised                               (222,539)     10.00 - 40.00
     Canceled                                (136,900)     26.25 - 48.75
                                            ---------

Outstanding, December 31, 1994              4,481,982      10.00 - 48.75
     Granted                                  936,300      33.63 - 52.00
     Exercised                               (207,325)     10.00 - 48.75
     Canceled                                (121,825)     10.00 - 48.75
                                            ---------

Outstanding, December 31, 1995              5,089,132     $10.00 - 52.00
                                            =========

Options exercisable at December 31, 1995    2,641,172     $10.00 - 48.75
                                            =========
</TABLE>

Pursuant to the AHP Transaction, if AHP exercises the call option discussed in
Note 2, all outstanding options granted under the 1982 and the 1991 option plans
will automatically accelerate and become fully vested and exercisable.

Restricted Stock Plan: Under the Company's 1991 restricted stock plan, the
Company is authorized to award up to 300,000 restricted Depositary Shares to a
limited number of key employees for nominal consideration. Awards totaling
150,000 shares were granted under the plan in fiscal 1992, and awards of 148,000
shares were granted in February, 1996. At December 31, 1995, 75,000 shares had
vested under the plan. The remaining shares vest 10 years after the date of
award, subject however, to acceleration of vesting for achievement of certain
performance targets.

Stock Purchase Plans: In 1992, the Company established an employee stock
purchase plan, which allows substantially all employees to purchase Depositary
Shares upon exercise of options granted. The options are exercisable at the
lower of 85% of the fair market value of the Depositary Shares at either the
date of grant or of exercise. Purchases under this plan are subject to certain
limitations and may not exceed 480,000 shares during the term of the plan, which
expires in May 1997. During fiscal 1995, 1994 and 1993, 79,365, 70,721 and
57,779 shares, respectively, were issued under this plan at prices ranging from
$25.39 to $36.97.

Savings Plan: The Company has a voluntary 401(k) savings plan for all employees
and matches 100% of employee contributions of up to 3% of base salary and 50% of
employee contributions from 3% to 6% of base salary. Company contributions to
the savings plan in fiscal 1995, 1994 and 1993 were $2.1 million, $1.9 million
and $1.5 million respectively.


                                      F-16
<PAGE>   64

12. MAJOR LICENSEES AND RELATED PARTY TRANSACTIONS

<TABLE>
The percentage of total revenue for licensees who contributed 10% or more of
total revenue, and revenue from foreign licensees for the three years ending
December 31, 1995 and 1994 and November 30, 1993 are as follows:

<CAPTION>

(Dollars in thousands)                         1995        1994         1993
                                             -------     -------      -------
<S>                                          <C>         <C>          <C>

Major licensees -
    Baxter Healthcare Corporation                55%         38%          44%
    Chugai Pharmaceutical Co., Ltd.               18          17           16
    American Home Products Corporation             -          22           12
    Yamanouchi Pharmaceutical Co., Ltd.            -          10           13

Foreign revenues -
    Western Europe                           $17,506     $13,474      $ 9,729
    Asia                                      35,649      35,632       29,516
</TABLE>

Related party transactions with AHP are discussed in Note 2. Joint ventures with
AHP and Yamanouchi are discussed in Notes 1 and 9. Accounts receivable in the
accompanying consolidated balance sheets include $36.4 million and $13.3 million
at December 31, 1995 and 1994, respectively, from major licensees. At December
31, 1995, Chugai Pharmaceutical Co., Ltd. was a shareholder of the Company's
Common Stock.

<TABLE>
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED - IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)

<CAPTION>

                                         First        Second      Third        Fourth
Year Ended December 31, 1995            Quarter      Quarter     Quarter      Quarter
--------------------------------------------------------------------------------------
<S>                                    <C>          <C>          <C>         <C>

Revenue                                $ 51,771     $ 45,910     $32,494     $ 41,880
Special acquisition charge (Note 6)           -            -           -      (24,857)
Income (loss) from operations             6,983       (4,195)     (8,987)     (27,732)
Net income (loss)                         5,699        5,170      (7,183)     (26,174)
Net income (loss) per common share          .21          .19        (.27)        (.98)
--------------------------------------------------------------------------------------


                                          First        Second      Third        Fourth
Year Ended December 31, 1994             Quarter      Quarter     Quarter      Quarter
--------------------------------------------------------------------------------------

Revenue                                $ 26,950     $ 24,787     $51,190     $ 27,953
Income (loss) from operations           (11,991)     (11,978)     11,825      (12,225)
Net income (loss)                       (10,051)      (9,543)     12,643      (11,924)
Net income (loss) per common share         (.38)        (.36)        .46         (.45)
-------------------------------------------------------------------------------------
</TABLE>


                                      F-17
<PAGE>   65
<TABLE>

             SCHEDULE II-VALUATION, QUALIFYING AND RESERVE ACCOUNTS
                    GENETICS INSTITUTE, INC. AND SUBSIDIARIES


<CAPTION>

                               Balance at                                            Balance at
                               Beginning                                               End of
                               of Period        Additions         Deductions           Period
                              -----------      ------------      -------------       ------------
RESERVE FOR PATENT-RELATED
     DAMAGES
<S>                           <C>              <C>               <C>                 <C>

Year ended
November 30, 1993             $11,000,000      $     -           $(11,000,000)       $          -
                              ===========      ============      =============       ============

Month ended
December 31, 1993             $         -      $     -           $          -        $          -
                              ===========      ============      ============        ============

Year ended
December 31, 1994             $         -      $     -           $          -        $          -
                              ===========      ============      ============        ============

Year ended
December 31, 1995             $         -      $     -           $          -        $          -
                              ===========      ============      ============        ============
</TABLE>


                                      S-1
<PAGE>   66






                                    EXHIBIT INDEX



          EXHIBIT NO.               DESCRIPTION                 
          -----------               -----------

             3.1         Restated Certificate of Incorporation,
                         as amended, of Genetics Institute,
                         Inc. (the "Company").(11)

             3.2         Restated By-Laws of the Company.(2)

             4.1         Depositary Agreement among Genetics
                         Institute, Inc., American  Home
                         Products Corporation ("AHP"), AHP
                         Biotech Holdings, Inc. ("Holdings")
                         and The First National Bank of Boston,
                         as Depositary.(11)

            10.1         1982 Incentive Stock Option Plan, as amended.(3)
                
            10.2         1982 Non-Qualified Stock Option Plan, as amended.(3)

            10.3         Amendment to 1982 Incentive Stock Option Plan
                         dated December 16, 1986.(4)

            10.4         Amendment to 1982 Incentive Stock Option Plan
                         dated September 19, 1991. (11)

            10.5         Amendment to 1982 Non-Qualified Stock Option
                         Plan dated September 19, 1991.(11)

            10.6         1991 Stock Option Plan.(11)

            10.7         Amendment to 1991 Stock Option Plan dated March
                         24, 1995.(1)

            10.8         1987 Employee Stock Purchase Plan.(5)

            10.9         Amendment to 1987 Employee Stock Purchase Plan.(7)

            10.10        1991 Employee Stock Purchase Plan, as amended.(11)

            10.11        Amendment to 1991 Employee Stock Purchase Plan dated  
                         January 18, 1994.(1)

<PAGE>   67


            10.12        1990 Outside Director Stock Option
                         Plan.(8)
                      
            10.13        Amendment to 1990 Outside Director
                         Stock Option Plan.(11)
                      
            10.14        1991 Restricted Stock Plan, as amended.(11)
                      
            10.15        Research Agreement between the Company
                         and Sandoz Ltd., dated as of June 9,
                         1982, as amended.(3)(21)
                      
            10.16        Agreement between the Company and
                         Chugai Pharmaceutical Co., Ltd., as
                         amended.(3)(21)
                      
            10.17        Agreement between the Company and
                         Chugai Pharmaceutical Co., Ltd. dated
                         as of November 27, 1985.(3)(21)
                      
            10.18        Development and License Agreement
                         between the Company and Boehringer
                         Mannheim GmbH dated as of October 8,
                         1985.(3)(21)
                      
            10.19        Lease between the Company and Fleet
                         Real Estate, Inc. dated as of November
                         29, 1984.(3)
                      
            10.20        Lease between the Company and Cambridge  
                         I Associates dated as of December 1, 1983, 
                         as amended.(3)
                      
            10.21        Indenture of Lease between the Company
                         and Judith Ann Spinelli dated as of
                         August 27, 1984.(3)
                      
            10.22        Extension and Fourth Amendment of
                         Lease dated as of November 20, 1992
                         between the Company and Cambridge I
                         Associates.(13)(21)
                      
            10.23        Amendment dated as of October 9, 1986
                         to Research Agreement between the
                         Company and Sandoz Ltd. dated as of
                         June 9, 1982.(4)(21)
                      
            10.24        Agreement between the Company and
                         Boehringer Mannheim GmbH dated as of
                         May 5, 1988.(6)(21)
                      
            10.25        License Agreement between the Company
                         and Suntory Limited dated as of
                         November 24, 1988.(6)(21)

            10.26        Agreement between the Company and
                         Boehringer Mannheim GmbH dated as of
                         January 11, 1989.(7)(21)
                 
            10.27        Supply Agreement between the Company
                         and Baxter Healthcare Corporation
                         dated as of July 31, 1989.(7)(21)
                 
<PAGE>   68
            10.28        Partnership Agreement of GPDC Partnership  
                         dated as of May 30, 1990 by and between GI  
                         Japan, Inc., and Yamanouchi Pharmaceutical  
                         Co., Ltd. (9)(21)
                 
            10.29        Organizational Agreement of GI-Yamanouchi,   
                         Inc., dated as of June 30, 1990 among
                         Genetics Institute, Inc., GI JJV, Inc. and
                         Yamanouchi Pharmaceutical Co., Ltd.(9)(21)
                 
            10.30        Research and Development Agreement
                         dated as of May 30, 1990, between the
                         Company and GPDC Partnership.(9)(21)
                 
            10.31        License Agreement dated as of May 30,
                         1990 between Genetics Institute, Inc.
                         and GI Japan, Inc.(9)(21)
                 
            10.32        GI Sublicense Agreement dated as of
                         May 30, 1990 between GPDC Partnership
                         and Genetics Institute, Inc.(9)(21)
                 
            10.33        JJV Sublicense Agreement dated as of
                         September 20, 1990 between GPDC
                         Partnership and GI-Yamanouchi, Inc.(9)(21)
                 
            10.34        Strategic Alliance Agreement between
                         the Company and Essex Chemie A.G.
                         dated June 26, 1991.(11)(21)
                 
            10.35        Option Agreement dated as of February
                         28, 1992 between the Company and
                         AHP.(12)(21)
                 
            10.36        Cellular Adhesion Strategic Alliance
                         Agreement dated as of May 15, 1992
                         between the Company and AHP.(12)(21)
                 
            10.37        Agreement and Plan of Merger dated as
                         of September 19, 1991 and amended as
                         of December 9, 1991 among the Company,
                         AHP, Holdings and AHP Merger Subsidiary 
                         Corporation.(10)

            10.38        Governance Agreement among the Company, 
                         AHP and Holdings.(11)
                   
            10.39        Employment Agreement entered into between 
                         the Company and Patrick Gage dated January 14, 
                         1992.(11)
                   
            10.40        Employment Agreement entered into between the  
                         Company and Lawrence V. Stein dated November 
                         9, 1992.(12)
                   
            10.41        Letter dated April 11, 1991 from the Company to 
                         Dr. Thomas Maniatis regarding certain consulting
                         arrangements and a related memorandum dated 
                         July 1, 1991.(12)
                   
            10.42        Partnership Agreement of GI-Yamanouchi European 
                         Partnership dated
<PAGE>   69
                         as of May 19, 1993 between GI Europe, Inc. and 
                         Yamanouchi B.V. (13)(21)
                   
            10.43        European Partnership Sublicense Agreement dated  
                         as of May 19, 1993 between GPDC Partnership and  
                         GI-Yamanouchi European Partnership. (13)(21)
                   
            10.44        Participation Agreement Number 1 dated as of May   
                         19, 1993 between GI Netherlands  B.V. and Yamanouchi 
                         B.V. (13)(21)
                   
            10.45        Product Management Agreement Number 1 dated as of  
                         May 19, 1993 between GI Netherlands B.V. and  
                         GI-Yamanouchi European Partnership (13)(21)
                   
            10.46        Parent Company Agreement dated as of May 19, 1993   
                         between Genetics Institute, Inc. and Yamanouchi
                         Pharmaceutical Co., Ltd. (13)
                   
            10.47        License Agreement dated as of August 11, 1993   
                         between Genetics Institute, Inc. and American  
                         Home Products Corporation. (14)(21)
                   
            10.48        Sales and Distribution Agreement between 
                         GI-Yamanouchi European Partnership and
                         Wyeth-Ayerst International Inc. (15)(21)
                   
            10.49        Sales and Distribution Agreement between 
                         GI-Yamanouchi Partnership and Brocades 
                         Pharma B.V. (15)(21)
                   
            10.50        Master Lease Agreement, dated as of
                         December 22, 1993, between the Company
                         and BancBoston Leasing, Inc. (15)
                   
            10.51        Amendment to Master Lease Agreement,
                         dated as of December 22, 1993, between
                         the Company and BancBoston Leasing,
                         Inc.(1)
                   
            10.52        Master Equipment Lease Agreement, dated 
                         as of December 27, 1993, between the Company 
                         and Fleet Credit Corporation. (15)
                   
            10.53        Amended and Restated Addendum to Master 
                         Equipment Lease Agreement between the Company  
                         and Fleet Credit Corporation dated December 20, 
                         1994. (l7)
                   
            10.54        Equipment Lease Agreement, dated as of
                         December 28, 1987, between Maryland
                         Nationalease Corporation and the Company.  (17)
                   
            10.55        Amendment to Equipment Lease Agreement, dated  
                         as of December 23, 1993, by and between the 
                         Company and General Electric Capital
                         Corporation.(15)
                   
<PAGE>   70
            10.56        Amendment to Equipment Lease Agreement, dated 
                         as of December 23, 1993, by and between the 
                         Company and General Electric Capital Corporation.(1)
                   
            10.57        Agreement among the Company, Hoffmann-LaRoche 
                         Inc. and F. Hoffmann-LaRoche Ltd. dated July 7, 
                         1994.(16)(21)
                   
            10.58        IL-12 Joint Development Agreement and License 
                         Agreement between the Company and GI-Yamanouchi, 
                         Inc. dated August 4, 1994.(16)(21)
                   
            10.59        License Agreement between British Technology   
                         Group Limited and the Company dated December     
                         23, 1992.(17)(21)
                   
            10.60        Partnership Agreement of IL-12 Partners between 
                         AHP IL-12 Corporation and GI Drug Design, Inc.  
                         effective July 1, 1994.(l7)(21)
                   
            10.61        License Agreement between the Company and GI Drug   
                         Design, Inc. effective July 1, 1994.(17)(21)
                   
            10.62        Assignment and Assumption Agreement among GI Drug  
                         Design, Inc., IL-12 Partners and the Company 
                         effective July 1, 1994.(17)(21)
                   
            10.63        Sale, Assignment and Assumption Agreement between    
                         AHP IL-12 Corporation and GI Drug Design, Inc.
                         effective July 1, 1994.(17)(21)
                   
            10.64        Parent Company Agreement among the Company, American 
                         Home Products Corporation and  AHP Biotech Holdings,
                         Inc. effective July 1, 1994.(17)
                   
            10.65        GI Research and Development Agreement between IL-12 
                         Partners and the Company effective July 1, 
                         1994.(17)(21)
                   
            10.66        Wyeth Research and Development Agreement between 
                         IL-12 Partners and American Home Products 
                         Corporation effective July 1, 1994.(17)
                   
            10.67        Amended and Restated License Agreement between the 
                         Company and Sofamor Danek Properties, Inc. dated as  
                         of February 15, 1995.(18)(21)
                   
            10.68        Yamanouchi Assignment, Assumption and Master 
                         Agreement among GPDC Partnership, Yamanouchi 
                         Pharmaceutical Co., Ltd., GI-Yamanouchi, Inc., the
                         Company and GI JJV, Inc. dated as of June 1, 
                         1995.(19)(21)
                   
            10.69        Option/License Agreement between Bristol-Myers  
                         Squibb Company and the Company dated as of 
                         May 24, 1995 and related letter Agreements of 
                         September 21, 1995 and October 5, 1995.(20)(21)
                   
<PAGE>   71
            10.70        Amendment, dated as of December 22, 1995, to the 
                         Agreements by and between the Company and Chugai 
                         Pharmaceutical Co., Ltd. dated as of June 29, 1984
                         and November 27, 1985.(1)(22)
                   
            10.71        Amendment, dated January 19, 1996, to the Development  
                         and License Agreement between the Company and 
                         Boehringer Mannheim GmbH dated as of October 8,
                         1985.(1)(22)

            21           Subsidiaries of the Company.(1)

            23.1         Consent of Arthur Andersen LLP(1)
          _____________

               (1)  Filed as an exhibit to this Annual Report on Form 10-K.

               (2)  Filed as an exhibit to the Company's Quarterly Report
                    on Form 10-Q (File No. 0-14587) on May 20, 1995 and
                    incorporated herein by reference.

               (3)  Filed as an exhibit to the Company's Registration
                    Statement on Form S-1 (Registration No. 33-4746) on
                    April 11, 1986 and incorporated herein by reference.

               (4)  Filed as an exhibit to the Company's Annual Report on
                    Form 10-K for the year ended November 30, 1986 (File
                    No. 0-14587) on February 27, 1987  and incorporated
                    herein by reference.

               (5)  Filed as an exhibit to the Company's Registration
                    Statement on Form S-8 (Registration No. 33-13528) on
                    April 16, 1987 and incorporated herein by reference.

               (6)  Filed as an exhibit to the Company's Annual Report on
                    Form 10-K for the year ended November 30, 1988  (File
                    No. 0-14587) on February 27, 1989 and incorporated
                    herein by reference.

               (7)  Filed as an  exhibit to the Company's Annual Report on
                    Form 10-K for the year ended November 30, 1989 (File
                    No. 0-14587) on February  27, 1990 and incorporated
                    herein by reference.

               (8)  Filed as an exhibit to the Company's Registration
                    Statement on Form S-8 (Registration No. 33-34629) on
                    April 30, 1990 and incorporated herein by reference.

               (9)  Filed as an exhibit to the Company's Annual Report on
                    Form 10-K for the year ended November 30, 1990 (File  
                    No. 0-14587) on February 28, 1991 and incorporated 
                    herein by reference.

<PAGE>   72


               (10) Filed as an exhibit to the Company's Registration
                    Statement on Form S-4 (Registration No. 33-44418) on
                    December 9, 1991 and incorporated herein by reference.

               (11) Filed as an exhibit to the Company's Annual Report on
                    Form 10-K  for the year ended November 30, 1991 (File
                    No. 0-14587) on February 28, 1992 and incorporated
                    herein by reference.

               (12) Filed as an exhibit to the Company's Annual Report on
                    Form 10-K for the year ended November 30, 1992 (File
                    No. 0-14587) on February  28, 1993  and incorporated
                    herein by reference.

               (13) Filed as an exhibit to the Company's Quarterly Report
                    on Form 10-Q for the quarter ended May 31, 1993 (File
                    No. 0-14587) on July 1, 1993 and incorporated herein by
                    reference.

               (14) Filed as  an exhibit to the Company's Quarterly Report
                    on Form 10-Q for the quarter ended August 31, 1993
                    (File No. 0-14587) on  September 29, 1993 and
                    incorporated herein by reference.

               (15) Filed as an exhibit to the Company's Annual Report on
                    Form 10-K for the year ended November 30, 1993  (File
                    No. 0-14587) on February 28, 1994 and incorporated
                    herein by reference.

               (16) Filed as an exhibit to the Company's Quarterly Report
                    on Form 10-Q for the quarter ended September 30,  1994
                    (File No. 0-14587) on November 10, 1994 and incorporated 
                    herein by reference.

               (17) Filed as an exhibit to the Company's Annual Report on
                    Form 10-K  for the year  ended December 31, 1994 (File
                    No. 0-14587) on March 15, 1995 and incorporated herein
                    by reference.

               (18) Filed as  an exhibit to the  Company's Quarterly Report
                    on Form 10-Q for the quarter ended March 31, 1995 (File
                    No. 0-14587) on May 12, 1995 and incorporated herein by
                    reference.

               (19) Filed as  an exhibit to the  Company's Quarterly Report
                    on Form 10-Q for the quarter ended June 30, 1995 (File
                    No. 0-14587) on August 14, 1995 and incorporated herein
                    by reference.

               (20) Filed as an exhibit to the Company's Quarterly Report
                    on Form 10-Q for the quarter ended September 30, 1995
                    (File No. 0-14587) on November 8, 1995 and incorporated
                    herein by reference.

               (21) Confidential treatment granted as to certain portions.

               (22) Confidential treatment requested as to certain portions
                    which are indicated by an asterisk and filed separately
                    with the Securities and Exchange Commission with an
                    Application for Confidential Treatment pursuant to
                    Rule 24b-2 promulgated under the Securities Exchange
                    Act of 1934, as amended.