<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                    FORM 10-K

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

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 1998

                                               OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the transition period from ___________  to ______________

                          Commission file No.: 0-28494

                        Millennium Pharmaceuticals, Inc.

             (Exact Name of registrant as Specified in its Charter)

           Delaware                                       04-3177038
(State or Other Jurisdiction of                       (I.R.S. Employer
 Incorporation or Organization)                      Identification No.)

               640 Memorial Drive, Cambridge, Massachusetts 02139

               (Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (617) 679-7000


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

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

                          Common Stock, $.001 par value

                                 Title of 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. [ ]

The aggregate market value of voting Common Stock held by non-affiliates of the
registrant was $983,696,553 based on the last reported sale price of the Common
Stock on the NASDAQ Stock Market on March 15, 1999.

Number of shares outstanding of the registrant's class of Common Stock as of
March 15, 1999:  35,406,467.

Documents incorporated by reference:
Annual Report to Stockholders for fiscal year ended December 31, 1998 - Part II
Proxy Statement for the 1999 Annual Meeting of Stockholders - Part III


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                                     PART I

ITEM 1. BUSINESS

GENERAL

Millennium Pharmaceuticals, Inc. has a mission -- to build the biopharmaceutical
company of the future. Founded in 1993 as a Delaware corporation, Millennium
incorporates large-scale genetics, genomics, high throughput screening, and
informatics in an integrated life science and technology platform. We apply this
technology platform primarily in discovering and developing proprietary
therapeutic and diagnostic human healthcare products and services. The terms
"Millennium" or the "Company," as used in this document, generally include our
subsidiaries. The term "MPI," as used in this document, refers to the parent
company exclusively.

Millennium's technology platform includes advanced capabilities in genetics,
genomics, molecular biology, cell biology, biochemistry, chemistry and
analytical instrumentation. Using these capabilities and advanced robotics and
informatics technologies, we have created a series of high-throughput processes
that we believe have the potential to transform the discovery and development of
life-science-based products and services. Our goal is to improve the speed of
the discovery and development process and the value of its output, and to lead a
change in medical practice through new uses of information across the spectrum
of healthcare, from gene discovery to patient care.

Millennium pursues multiple business opportunities through groups within MPI and
through subsidiaries that specialize in particular areas. The MPI
pharmaceuticals division focuses on the development of small-molecule drugs. The
MPI technology division focuses on continuing development and integration of the
technology platform, on high-throughput processes and services, and on
information and informatics technologies that support our strategic alliances
and discovery efforts across the entire organization.

The Company has two subsidiaries, Millennium BioTherapeutics, Inc. ("MBio") and
Millennium Predictive Medicine, Inc. ("MPMx"), both formed in 1997. MBio focuses
on developing therapeutic proteins and antibodies, vaccines and gene therapy,
and antisense products. MPMx focuses on Diagnomics(TM) (genomics-based
diagnostics) and pharmacogenomics (correlation of patient genotypes to drug
responses), and on generating and integrating diverse biomedical data to provide
products and services to the healthcare industry. Millennium believes that
dedicated business units allow us to pursue opportunities with appropriate
focus, maintain an entrepreneurial environment, and attract and retain
high-caliber employees. We have established formal and informal relationships
between the various units to provide for cooperation and collaboration among
them and to allow each business unit access to Millennium information, assets
and capabilities relevant to that unit's focus area.


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Millennium's commercialization strategy has been to form strategic alliances
with major companies in the pharmaceutical and/or life science marketplaces.
Through December 31, 1998, we had formed ten alliances, nine within MPI, and one
within MBio. The MPI alliances include two separate alliances with the
Wyeth-Ayerst division of American Home Products Corporation ("AHP"), an alliance
with Astra AB ("Astra"), an alliance with Bayer A.G. ("Bayer"), two separate
alliances with Eli Lilly and Company, ("Lilly"), an alliance with Hoffmann-La
Roche Inc. ("Roche"), an alliance with Monsanto Company ("Monsanto"), and an
alliance with Pfizer, Inc. ("Pfizer"). MBio is engaged in an alliance with
Lilly.

In September 1998, Millennium announced the formation of a broad alliance with
Bayer. Under the terms of this agreement, Bayer will receive access to key
technologies in gene research as well as a flow of genomics-based drug
development targets that Millennium discovers through our research efforts. This
collaboration contributes to our ability to expand the scope of our drug
discovery efforts because it gives Millennium residual rights to develop, on our
own behalf, certain products derived from research conducted under the alliance.
As part of the agreement, in November 1998 Bayer made an equity investment of
$96.6 million in exchange for approximately 4.96 million shares of MPI Common
Stock.

In February 1999, MPMx formed an alliance with Becton, Dickinson and Company
("Becton Dickinson"). MPMx has agreed to undertake a research program to
identify genetic markers and related assays that may be used to develop
diagnostic products for several types of cancer. Becton Dickinson has agreed to
manufacture and market any products that result, and MPMx will receive a royalty
based upon gross profits from related product sales. The agreement is subject to
clearance under the Hart Scott Rodino Antitrust Improvements Act. Upon
clearance, Becton Dickinson has agreed to make a $15 million equity investment
in MPMx in exchange for approximately 11% of MPMx voting stock, as well as an
up-front license payment of $3 million.

From its inception in 1993 until 1996, Millennium's main focus was on developing
our technology platform and on applying this platform to the early stages of
drug discovery for important human diseases. Beginning in 1997, we expanded the
scope and scale of our operations through the acquisition of ChemGenics
Pharmaceuticals Inc. ("ChemGenics") and through establishing MBio and MPMx. Our
key objectives in this expansion were to increase our capabilities and
involvement in the later stages of drug discovery and to establish new focused
business units to pursue additional commercial opportunities. During 1998, we
expanded efforts in our subsidiaries as well as in MPI. We hired additional
staff in drug discovery, informatics, biotherapeutics, and
diagnostics/prognostics as well as in other support areas.

Millennium also formed Millennium Information, Inc. ("MInfo") in 1997. MInfo was
established to generate and integrate biomedical data and develop information
products and services for use by the healthcare industry. During 1998 we
reevaluated the market opportunities and business plans


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for MInfo and MPMx, and determined that the two companies had major areas of
common focus. We combined their operations and, in January 1999, merged MInfo
with MPMx. MPMx was the surviving corporation of the merger.

Collaborations with medical, research, and academic institutions are also
critical to our research and technology development success. During 1998, we
formed several new collaborations including agreements with the University of
Pittsburgh and the University of Texas M.D. Anderson Cancer Center to gain
access to clinical samples and tissue collections as well as additional clinical
expertise. In addition, MBio established an umbrella material transfer agreement
with Harvard Medical School to facilitate collaboration and sharing of novel
genes and other biological materials. MPMx also formed a collaboration with the
Mayo Clinic that allows us access to clinical samples and tissue collections. In
1997, we established a corporate consortium with Bristol-Myers Squibb Company
("BMS") and Affymetrix, Inc. ("Affymetrix") to fund a five-year research program
in functional genomics at the Whitehead Institute/Massachusetts Institute of
Technology Center for Genome Research.

During 1999, we expect to continue to pursue additional alliances, and will
consider joint development, merger, or acquisition opportunities that may
provide Millennium with access to products on the market or in later stages of
commercial development than those represented within our current programs.


BACKGROUND

DISCOVERY AND DEVELOPMENT PROCESSES FOR LIFE-SCIENCE-BASED PRODUCTS AND SERVICES

SMALL MOLECULE DRUGS

TRADITIONAL APPROACH. The great majority of drugs in use today consist of
relatively small chemical compounds. Such drugs are often referred to as
"small-molecule drugs," to distinguish them from proteins and other
biotherapeutic drugs which are significantly larger molecules. Typically,
pharmaceuticals can be formulated into pills for oral consumption.
Biotherapeutics, on the other hand, typically are only available in injectable
form. As used in this document, the term "pharmaceuticals" refers only to pills,
or "small-molecule drugs," and the term "biotherapeutics" is used to describe
proteins and other biotherapeutic drugs.

The discovery of new small-molecule drugs for a particular disease typically
involves several steps. The first step is the identification of a drug "target"
for therapeutic intervention -- a molecule or structure somewhere in the body,
inside or on the surface of cells, which is either directly involved in the
disease or lies in a biochemical pathway leading to the disease. The next step
is to identify compounds which interact with this drug target and modulate the
drug target's activity in a manner that might help reverse, inhibit or prevent
the disease process. This step is


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normally accomplished by screening large collections (or "libraries") of
synthetic chemicals and natural products in a trial-and-error process designed
to identify those compounds that can interact with the drug target. The most
promising compounds to emerge from this process are advanced to the next stage,
in which synthetic derivatives of these compounds are generated and tested to
arrive at one or a few "lead compounds." The interactions of these lead
compounds with the drug target and their activity in animal and/or cellular
models of the disease suggest that they could be developed successfully into new
drugs. The best of these lead compounds are then subjected to rigorous testing,
first in animals and then in humans, to establish their safety and efficacy as
drugs.

Because of the absence of any suitable technology for the systematic
identification and characterization of molecules and structures involved in
disease mechanisms, the selection of new targets for drug discovery historically
has been a haphazard process. Drug targets have often been selected based on
speculation that they might be involved in disease processes, rather than
because of any clear, well-documented association with specific diseases. As a
result, many drug candidates fail during clinical trials because they turn out
to be ineffective and/or unsafe, and many drugs that do reach the market treat
only the symptoms of diseases rather than their underlying causes.

GENOMICS AND RELATED TECHNOLOGIES. Diseases ultimately have an underlying
genetic basis. The initiation, continuation and progression of a disease
reflects some aspect of the structure or expression of the patient's genes
and/or the genes of a pathogen. Systematic study of human genes in the context
of disease should therefore lead to the identification of those genes that play
a role in important diseases. These genes, their protein products and/or the
biochemical pathways in which they lie should be important drug targets for
therapeutic intervention.

In the past, however, systematic study of genes in the context of disease has
been extremely difficult. Each person carries a very large number of genes on
his or her chromosomes - according to current estimates, more than 100,000
different genes (known collectively as the "human genome"). Because of the large
numbers of genes, the identification of individual genes or sets of genes
correlated with specific diseases has posed major technological challenges.

In recent years, this situation has changed dramatically. Fueled by broad
interest in determining the entire DNA sequence of the human genome, major
improvements have been made in the technologies available for identifying and
cataloguing genes in complex organisms. These technologies include
high-throughput methods for sequencing genes, for monitoring and comparing their
expression in different situations and for following their inheritance in
families prone to particular diseases. These technologies depend crucially on
the integration of molecular biology with robotics, informatics and analytical
instrumentation. The integration of these disciplines provides powerful
capabilities for generating, capturing and analyzing large volumes of data
concerning genes and their expression, making it possible for the first time to
mount a systematic search to discover and characterize the genes and biochemical
pathways which


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underlie human diseases. At Millennium, this search is providing new drug
targets with well-validated roles in various diseases. We believe that compounds
active against these targets may be highly effective and specific in treating
the underlying causes of these diseases.

Major advances have also been made in the technologies available for screening
synthetic chemical and natural-product libraries to identify compounds active
against specific drug targets and for the subsequent generation of lead
compounds optimized for their activity against these drug targets. Intelligent
integration of robotics, informatics and analytical instrumentation, coupled
with novel combinatorial approaches to the synthesis of chemical libraries, has
played an enabling role in these advances. We believe that the combined effect
of these developments will permit Millennium and others to more rapidly identify
higher-quality lead compounds

Taken together, these new technologies for selecting drug targets and developing
lead compounds may deliver whole new classes of drugs which are safe and
effective for treating a broad range of important diseases in diverse
individuals.

APPLICATIONS FOR BIOTHERAPEUTICS AND PREDICTIVE MEDICINE

Genomics and related technologies have major applications in human healthcare
beyond the discovery of small-molecule drugs. Key additional applications
include the identification of important new biotherapeutic products and the
development of novel approaches to the prediction, diagnosis and management of
diseases.

Biotherapeutics are proteins or nucleic acids administered to patients for
therapeutic benefit. Protein biotherapeutics in current use include: secreted
proteins, such as interferons, erythropoietin, insulin and human growth hormone;
therapeutic antibodies, such as OKT3 and ReoPro(R); and vaccines, such as the
vaccine for hepatitis B. In 1998, biotherapeutic products generated over $12
billion in annual worldwide sales. Nucleic acid biotherapeutics fall into two
general classes: gene therapy products and antisense products. Although no
product in either nucleic acid class has yet reached the marketplace, a number
are currently in development.

There are multiple ways in which genomics technologies can contribute to the
development of novel biotherapeutics. High-throughput gene-discovery programs
can lead to the rapid identification of novel genes. Through the use of
informatics and functional genomics strategies, these genes and/or their protein
products can be identified as potential candidates for therapeutic protein or
gene therapy applications or as potential targets for development of therapeutic
antibodies, antisense or vaccine-based drugs.

In the realm of predictive medicine, genomics technologies can be used to
identify genes that predispose individuals to disease, participate in the
initiation, progression and resolution of disease and determine individual
responses to different treatments that may be available. As a


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result, the identification of such genes can form the basis for novel strategies
and products for the prediction, diagnosis and management of diseases.

Millennium believes that improved methods for the discovery of drug targets and
the development of lead compounds will lead to safer and more effective new
drugs. Efficacy and safety may be enhanced even further by another important
application of genomics technologies, referred to as "pharmacogenomics." The
goal of pharmacogenomics is to understand why a particular drug may be more
effective in some people than in others and/or have more pronounced side effects
in certain people. Differences in the way people respond to a drug are believed
to reflect genetic differences between them: different people may have slightly
different versions of the genes involved in the beneficial and/or the adverse
effects of the drug. Millennium believes that genomics technologies will permit
the identification of the genetic differences that underlie variability in
responses to drugs and that, as a result, it will be possible to individualize
the selection of drugs for patients so that each patient receives only those
drugs likely to be effective and safe for him or her.

OTHER APPLICATIONS

The fundamental power of genomics technologies is their ability to identify, in
a rapid and comprehensive manner, genes that underlie complex biological traits.
In human healthcare, the traits of interest are diseases. Genomics technologies
can be successfully applied outside of human healthcare as well. In plant
agriculture, for example, these include the yields, nutritional content,
disease-resistance and drought-tolerance of crop plants and the susceptibility
of pests, pathogens and weeds to agrochemicals. Millennium's alliance with
Monsanto employs genomics technologies in the field of plant agriculture.

THE MILLENNIUM STRATEGY

Millennium's business strategy is to develop a comprehensive, integrated
platform of genomics and related technologies and to use this platform to pursue
multiple opportunities in life-science-based industries. Our primary focus is on
opportunities relating to the discovery and development of new products and
services in the healthcare industry. To pursue multiple business opportunities
simultaneously, Millennium has established focused units (divisions or
subsidiaries) specializing in particular areas, believing that each unit can
then address its designated area with the energy and drive of a start-up
enterprise. At the same time, we recognize the importance of enabling each unit
to take advantage of the combined capabilities of the overall organization.

MPI and its two subsidiaries have formed agreements under which each party has
assigned or licensed to the other parties' technology and rights in the other
parties' core areas of interest. See "-- Millennium BioTherapeutics, Inc. --
Overview" and "-- Millennium Predictive Medicine, Inc. -- Overview."


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In general, Millennium's strategy for pursuing business opportunities has been
to form alliances with major participants in the relevant markets. We focus in
these alliances on the discovery of innovative new products, relying on our
partners for product development and marketing. Revenues from these alliances
come in the form of fixed up-front payments and research funding, with the right
to milestone payments and royalties (or a share of profits) based on the success
of any products that result from the alliance. Millennium has also formed
alliances based on the transfer of aspects of our technology platform to
partners. Revenues in such alliances may include up-front payments and fees
associated with the successful transfer of technology. In some instances, we
have also obtained access to our partners' technologies (such as libraries of
chemical compounds) to enhance our operations outside of the alliance.

During 1999, we plan to examine opportunities, through acquisition, merger, or
new forms of strategic alliances, to allow us to extend our capabilities in
clinical development and the commercialization of therapeutic products. We
intend to pursue one or more new relationships, consistent with our vision for
Millennium's future and our commitment to current alliance partners. We believe
that Millennium is well positioned to capture value from a broad array of
opportunities in diverse life-science-based industries.

TECHNOLOGY PLATFORM

Millennium's broad technology platform reflects our strong belief that success
in genomics-based product discovery and development requires the use of multiple
parallel approaches, accelerated and integrated through the latest advances in
informatics and "process technologies" (i.e., automation, miniaturization, and
analytical instrumentation).

Millennium has established a number of dedicated technology groups responsible
for developing and maintaining our technology platform and for supporting the
use of this platform by all of the Millennium companies and our strategic
partners.

GENE IDENTIFICATION

GENETIC APPROACHES TO GENE IDENTIFICATION
HUMAN GENETICS. Genetic studies of families and populations prone to particular
diseases can identify genes involved in these diseases. "Markers" spaced at
regular intervals along the human chromosomes are studied in affected and
unaffected individuals, a process known as genotyping. If specific markers are
co-inherited more frequently in affected than in unaffected individuals, these
markers define a chromosomal region (or a "map position") containing a gene or
genes involved in the disease. The genes in question may then be identified by
some combination of three approaches: higher-resolution mapping (repeating the
co-inheritance studies with additional markers known to fall in the region of
interest but located more closely to one another than those used for the initial
"genome scan"); "positional cloning" (isolation of microbial clones of human


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DNA corresponding to the map position which has been identified); and
high-throughput sequencing (to identify protein-encoding regions (i.e. genes) in
the region of interest, and to compare them in normal and affected individuals).

To gain access to suitable families and populations around the world, Millennium
has formed a number of collaborations with academic centers. Our capabilities in
human genetics include the design and proper clinical management of appropriate
studies, technology for automated high-throughput genotyping and sequencing,
custom-developed software for data capture and analysis, and positional cloning.
With these capabilities, Millennium has made significant progress in the mapping
and positional cloning of genes implicated in a number of important human
diseases.

These capabilities in human genetics can be readily adapted and applied to the
identification of genes underlying traits of interest in other species - such as
diseases in mice, as described below, or economically important traits in plants
and animals.

MOUSE GENETICS. Genetic studies in mice can often provide faster identification
of human disease genes than corresponding studies in humans. This is because
genes and diseases in mice are often closely similar to their human
counterparts, but the association between them can be studied more rapidly since
mice (unlike humans) can be bred rapidly and selectively. To capitalize on the
advantages of working with mice, we have built substantial expertise in mouse
genetics. This includes the development of proprietary markers, genetic maps,
advanced breeding strategies and a significant animal facility. In combination
with technologies adapted from our activities in human genetics, this expertise
has allowed us relatively rapidly to identify murine (mouse) genes whose human
counterparts may play significant roles in important diseases. Examples of such
genes and their human counterparts that we have identified include the tub and
db/OB-R genes, believed to be important in obesity.

MICROBIAL GENETICS. Genetic and genomic studies of microbes, such as bacteria
and yeast, are important for two reasons. First, these studies may result in the
identification of genes essential for microbial growth, which should provide
attractive drug targets for new antibiotics for the treatment of infectious
diseases caused by such microbes. Second, such studies can help determine the
functions of human genes, many of which have counterparts in microbial systems.
In fact, the study of these microbial counterparts is particularly useful
because microbial genes are significantly easier to understand and manipulate
than human genes.

Millennium has developed considerable expertise in genetic investigation and
manipulation of a broad range of bacterial and fungal species, including
pathogens important for humans, animals and plants. Millennium has employed this
expertise to identify a significant number of drug targets in our antifungal and
antibacterial research programs. During 1998, the U.S. Patent and Trademark
Office issued Millennium two patents relating to a process for the discovery of
antimicrobial drug targets.


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NON-GENETIC APPROACHES TO GENE IDENTIFICATION
TRANSCRIPTIONAL PROFILING. Genes contain encoded information instructing cells
how to make proteins. Each gene encodes one protein. When the protein is
produced, the gene is said to be "expressed." For a protein to be made, the gene
must first be transcribed into a copy known as messenger RNA (mRNA). This copy,
also called a transcript, then directs synthesis of the encoded protein in a
process known as translation. Cells differ from one another because each cell
type makes a different spectrum of proteins, and, along the way, a different
population of mRNA transcripts. Similarly, diseased cells differ from normal
cells by virtue of the spectrum of proteins, and the population of transcripts,
which they produce. Comparison of transcript populations in normal and diseased
cells and tissues can therefore identify the transcripts, and thus the genes,
associated with a particular disease.

For this reason, Millennium has developed or accessed a number of powerful
approaches for examining and comparing transcript populations in different cells
and tissues representing normal and diseased conditions. Many of these
approaches involve conversion of mRNA transcripts into DNA copies known as
complementary DNA (cDNA), which is easier to handle than mRNA and can be
amplified by the polymerase chain reaction (PCR). Increasingly, these approaches
involve the use of cDNA "microarrays" (multiple different cDNAs placed in
high-density arrays on various surface types) to determine whether samples of
interest contain corresponding mRNAs. Crucial to the success of these approaches
are customized software tools developed by Millennium for tracking experiments,
generating microarrays and capturing and analyzing data.

Millennium has applied its transcriptional profiling technologies to identify a
number of genes with potentially significant roles in various diseases. For
example, we applied transcriptional profiling to identify the gene that encodes
melastatin, a protein that appears to suppress metastasis (spreading to other
tissue) in malignant melanomas.

HIGH-THROUGHPUT SEQUENCING. The information carried within genes to direct the
synthesis of proteins resides within the DNA sequences of those genes. Each gene
is part of a polymeric chain built from four nucleotide monomers (represented by
the letters A, C, G and T). The sequence of these monomers in the chain
specifies what protein should be made. Accordingly, to identify and assign
function to the large number of genes in the human and other genomes, it is
essential to have very high-capacity methods for determining, storing and
analyzing DNA sequence information.

Millennium has developed comprehensively automated processes for high-throughput
DNA sequencing as well as a proprietary suite of software tools for the capture,
storage and analysis of large volumes of DNA sequence data (including
Millennium's proprietary Sequence Explorer(TM) software package). Millennium
uses these capabilities to support multiple approaches to gene discovery,
including positional cloning projects in human and mouse genetics programs;
sequencing of genomic regions surrounding known genes to identify unknown
relatives derived


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by gene-duplication events; and sequencing of cDNA copies made from mRNAs
extracted from various cells and tissues.

EXPRESSION CLONING. Among the most interesting proteins in any organism are
those that are secreted or that reside on cell surfaces. Secreted proteins often
carry signals from one cell/tissue to another. Cell-surface proteins often serve
as the receptors for such signals. Most currently approved biotherapeutics are
secreted proteins; many current small-molecule drugs and most current antibody
therapeutics exert their effects through cell-surface receptors.

Millennium has developed high-throughput methodologies specifically to clone
genes that encode secreted and cell-surface proteins and is applying these
methodologies to identify such genes and proteins in significant numbers. For
example, Millennium has used these methodologies in its discovery of the gene
that encodes ob-r, the receptor for the hormone leptin, which is a fundamental
regulator of weight and appetite.

FUNCTIONAL GENOMICS/DRUG TARGET VALIDATION
Genes discovered by genetic and non-genetic approaches may already be implicated
in a disease or some other biological trait of interest. However, significant
additional study is often required in order to establish more precisely the
specific functions of these genes and the roles they play in the disease or
trait of interest. The process of ascribing function to genes is known as
functional genomics.

In a pharmaceutical project, the main purpose of functional genomics is to
confirm that specific genes or their products may be appropriate targets for new
drugs. Such drug "target validation" requires a demonstration that modulating
the function of the possible drug target gene (or its product) is likely to have
a beneficial therapeutic effect. For non-pharmaceutical applications such as
agriculture, the specifics of what is meant by "validation" is different, but
the general principle (demonstrating the usefulness of modifying gene function)
is the same.

Conversion of newly identified genes into validated drug targets or product
candidates is a key step in the overall process of genomics-based product
discovery. Efficiency and greater productivity at this stage can provide a
significant competitive advantage. Accordingly, we have dedicated a substantial
portion of our research and development activities to functional genomics and
drug target validation, and to methods to increase the throughput and efficiency
of these activities.

One of the major challenges in functional genomics is quickly to reduce the
relatively large numbers of potential drug targets (or product candidates) that
typically emerge from a high-throughput gene-discovery program to a relatively
small number of high-priority candidates for further investigation. Millennium
addresses this challenge with a staged approach, starting with high-throughput
techniques that require relatively little effort per gene, then gradually
increasing our effort on each potential drug target as the total number of drug
targets decreases.


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The high-throughput techniques used for initial prioritization include
computational biology and microarray-based transcriptional profiling. Candidates
which appear promising in these initial studies are then evaluated further by
approaches, such as histology-based expression profiling, pathway profiling and
cellular and animal models, until sufficient information has been gathered to
nominate one or more of these candidates as targets for drug discovery or, in
the case of non-pharmaceutical projects, as being suitable for further
development into products. These techniques are described in greater detail
below.

COMPUTATIONAL BIOLOGY
Using appropriate software tools, it is possible to infer substantial
information about a gene's function from its DNA sequence. Information about
previously known genes gathered over many years by scientists from around the
world can be accessed and analyzed rapidly. Similarities ("homologies")
identified between the previously known genes and newly discovered genes provide
insight into what functions the new genes may have. Of particular interest are
homologies suggesting that a newly discovered gene falls into the same class as
genes with known medical or commercial usefulness, such as those encoding the
receptors, ion channels and enzymes that are the targets of many current
small-molecule drugs.

Millennium's Sequence Explorer software provides powerful tools for accessing
and interpreting both public and private Millennium databases of DNA sequence
information. We are continually developing enhanced computational capabilities
for "mining" DNA sequence data in order to extract the function of the gene (and
its protein product) encoded by such DNA sequence.

BENCH BIOLOGY
EXPRESSION PROFILING. Information about where and when a gene is transcribed and
translated, and in which cells and tissues and under what circumstances,
provides vital clues to the function of that gene. These expression patterns can
be determined using a variety of approaches directed towards either the
transcription or the translation stage of expression. Ideally, both stages
should be monitored, for two reasons. First, not all mRNAs are translated, and
it may be important to know which ones are and which ones are not. Secondly,
many proteins undergo significant "post-translational" modifications after being
synthesized. These modifications cannot be detected by monitoring transcripts
and often have crucial effects on the activities of the proteins under
investigation.

At the mRNA level, expression can be monitored in cells or tissue samples using
cDNA microarrays and other transcriptional profiling technologies, as described
above. Alternatively, transcripts can be localized more precisely to specific
cells and sub-cellular organelles by a technique known as in situ hybridization,
which involves the microscopic examination of tissue slices that have been
treated to highlight the presence and location of specific transcripts.


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Similar options are available for monitoring expression at the protein level.
The locations of proteins within tissue slices can be determined using specially
stained antibodies (a technique known as immunocytochemistry). In addition, the
population of proteins present in a cell or tissue extract can be examined using
"proteomics," technologies designed to identify all of the different protein
species within a cell or tissue sample and/or those protein species which are
present in one sample but not in another.

Millennium's platform includes an integrated set of technologies for
investigating expression patterns at both the mRNA and the protein level,
including cDNA microarrays, in situ hybridization and immunocytochemistry.
Millennium has also invested significant resources in building an extensive
collection of normal and diseased tissue samples in which the expression
patterns of genes of interest can be studied. These technologies and tissue
samples have contributed significantly to our validation of a number of
genes/gene products as targets for drug discovery. We are also actively
developing new proteomics technologies to ascertain differences in expression at
the level of translated proteins and/or post-translational modification status.

PATHWAY PROFILING. Any given property of an organism usually reflects the
coordinated activity of a set of genes (proteins) acting in concert, rather than
the isolated activity of an individual gene (protein). Stated another way, most
processes within an organism take place via pathways in which signals or
metabolites are processed in a defined sequence by different proteins acting in
succession. Accordingly, each gene emerging from a discovery effort has a
two-fold significance. First, it may prove useful as a drug target (or product
candidate) in its own right. Secondly, it represents an entry point into a
pathway composed of additional, possibly superior, potential drug targets. To
take advantage of this latter possibility, appropriate technologies are required
for the identification of other proteins in the pathway, a process known as
"pathway profiling."

Millennium has developed various pathway profiling capabilities, including the
use of yeast two- and three-hybrid systems and BIAcore biosensors (technologies
which can detect and monitor interactions between different proteins lying in a
biochemical pathway) and the application of transcriptional profiling to
identify sets of genes transcribed in a coordinated manner, which indicates that
they may participate in a common biochemical pathway.

CELLULAR AND ANIMAL MODELS. Important information about the function of a gene
can be derived by arranging for expression of the gene to be blocked, or for
that gene to be expressed in specific cells or tissues, or in the organism as a
whole, at levels higher or lower than usual. For experiments of this type,
Millennium has developed significant expertise in the construction and
utilization of specialized gene-delivery systems, and in the generation of
transgenic and knockout microbes and mice. A "transgenic" organism is one
carrying a gene from another species. A "knockout" organism is one in which a
particular gene has been disabled. Millennium also has broad experience in a
variety of the biochemical and cell-biology assays required to interpret such
experiments.

INFORMATICS AND ADVANCED PROCESS TECHNOLOGIES


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Successful application of genomics to the discovery of new drugs and other
products requires the simultaneous deployment of multiple different technologies
across a broad array of experimental procedures. This multi-disciplinary
approach presents numerous challenges, ranging from the diversity and complexity
of the overall process to the sheer volume of data to capture and interpret.

To address these challenges, Millennium places a heavy emphasis on the use of
advanced informatics and process technologies to integrate and accelerate the
many diverse activities of its genomics programs. Accordingly, our technology
platform includes a number of custom-developed informatics tools, including
Sequence Explorer(TM), Expression Explorer(TM), and Sample Manager(TM) that
enable users to capture, track and interpret large volumes of data from various
activities, such as genotyping, DNA sequencing and expression profiling, and to
incorporate data from both Millennium's own programs and published sources into
their analyses. Our technology platform also incorporates a high degree of
automation, controlled in many cases by proprietary software, and advanced
capabilities in analytical instrumentation such as fluorimetry and mass
spectrometry.

APPLICABILITY OF TECHNOLOGY PLATFORM
The technologies and processes from gene identification through target
validation, and the use of informatics and advanced process technologies, are
similar for the development of pharmaceuticals, biotherapeutics, or diagnostic
or pharmacogenomic tests. From this point forward in product discovery and
development, the processes and methods begin to differ in the different areas.
Further discussion of biotherapeutic and diagnostic/pharmacogenomic discovery is
in the sections describing MBio and MPMx, respectively.

PHARMACEUTICAL DISCOVERY APPROACHES AND DISEASE PROGRAMS

OVERVIEW
Through the application of our integrated platform of genomics and related
technologies, our pharmaceuticals division is engaged in discovering novel drug
targets and lead compounds which may be developed into new small-molecule drugs
for major human diseases. Such drugs are the mainstay of the traditional
pharmaceutical industry. Generally taken orally, they are particularly
appropriate for treating chronic diseases that often require the daily
administration of medications over many years.

PHARMACEUTICAL DISCOVERY APPROACHES

HIGH-THROUGHPUT SCREENING
In the discovery process for small-molecule drugs, gene products (that is,
proteins) which have been validated as suitable targets for therapeutic
intervention are configured into screening systems for testing large libraries
of compounds to identify those capable of interacting with these drug targets in
a useful manner. Various skills are required for success in this process. Each
screen must be configured so that it has an easily detectable readout, can be
performed economically, is capable of high throughput, is robust enough to
process samples of widely


                                      -15-
<PAGE>   16
differing purity and quality and has appropriate sensitivity and specificity.
Implementing the screen then requires diverse skills in sample tracking,
automation, data capture and analysis.

Millennium's technology platform incorporates a broad range of skills in the
configuration of assays and their implementation as high-throughput screens. We
are developing technologies, alone and through collaborations, to configure
validated targets into screens in a rapid manner. We believe that these
technologies will allow us to eliminate a key bottleneck in the discovery
process. During 1998, we formed a number of collaborations and entered into
various agreements to allow us access to technology we believe will be useful in
screening genomic targets. We currently develop assays and perform all
high-throughput screening for the antifungal and antibacterial programs, which
are the subjects of our collaborations with Pfizer and AHP, as well as for
Millennium drug targets.

In connection with our alliance with Bayer and with our proprietary drug
development programs, in 1999 we expect to expand our capabilities in assay
development and configuration. We intend to license technologies others have
developed and expand our staffing and other internal efforts in this area.

CHEMICAL DIVERSITY
Also key to success in drug discovery is the availability of large, diverse
libraries of chemical compounds. Ideally, these libraries encompass both
synthetic and natural compounds, since both classes are well represented in the
population of drugs currently on the market.

For its drug-discovery programs, Millennium has secured access to a broad range
of chemical compounds and natural products. Our sources of synthetic chemicals
include libraries made available by Lilly and AHP under the terms of
Millennium's collaborations with these companies (see "-- Strategic Alliances"),
novel combinatorial libraries synthesized at Millennium and compounds purchased
from various sources.

Millennium is currently expanding its efforts to generate additional proprietary
synthetic chemistry libraries. We believe that such libraries will be
particularly useful sources of pharmacologically active compounds.

Millennium's sources of natural products include a proprietary collection of
over 50,000 fungal species collected from numerous sites around the world as
well as proprietary transgenic fungi. These transgenic fungi are readily
culturable fungi, which we have engineered to synthesize compounds, which are
normally made only in fungi that are difficult or impossible to culture. These
transgenic fungi provide Millennium with access to a rich diversity of naturally
occurring compounds which has not previously been accessible to the
pharmaceutical industry.

During 1997, Millennium was issued a United States patent on an approach for
generating novel sources of natural compounds involving crossing two
incompatible strains of the fungus Aspergillus, resulting in synthesis of
compounds not found in either of the parent strains.

DISEASE PROGRAMS


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<PAGE>   17
BACTERIAL INFECTIONS
In the field of bacterial infections, we are engaged in identifying and
validating new targets for antibacterial drugs and in high-throughput screening
to identify potential lead compounds. MPI has formed a collaboration with AHP in
this field. See "-- Strategic Alliances --American Home Products Corporation."

Infectious diseases are the third leading cause of death in the United States,
and account for 25% of all physician visits. Antibiotics are the second most
frequently prescribed class of drugs. Bacterial resistance to antibiotics is a
serious problem. For example, drug-resistant pneumococci cause 15,000 cases of
meningitis each year in the United States, 7,000 cases of sepsis/bacteremia
(blood infections), 150,000 cases of pneumonia and over one million cases of
otitis media (ear infections). Between three and 35% of pneumococcal illness is
due to drug-resistant strains, depending on geographical location and season of
the year. Mortality and hospital length of stay are at least doubled for
resistant strains of bacterial organisms compared with strains responsive to
treatment. Only one antibiotic, vancomycin, remains effective against
hospital-acquired staphylococcal infections.

We are applying our expertise in bacterial genetics and genomics to identify
significant numbers of genes that are essential for the growth of pathogenic
bacteria, to prioritize these genes on the basis of their likely suitability as
targets for novel antibacterial drugs and to pinpoint the molecular targets of
compounds identified by other means as having antibacterial activity. In each of
1997 and 1998, AHP accepted three novel targets for antibacterial drug
discovery. Targets from this program are now at various stages within the drug
discovery process ranging from assay configuration, through screening, to
optimization of chemical compounds that interact with the target.

CARDIOVASCULAR DISEASE
Millennium's research program in cardiovascular disease includes projects in
atherosclerosis and congestive heart failure. We have formed a strategic
alliance with Eli Lilly concerning these projects. See "-- Strategic Alliances--
Eli Lilly and Company."

Heart disease has a prevalence in the United States of approximately 18 million
individuals. Its major cause is atherosclerosis. Risk factors for
atherosclerosis include gender, elevated cholesterol levels, smoking, high blood
pressure, diabetes mellitus and severe obesity. Studies indicate that a person's
genetic make-up, as indicated by a family history of heart disease, is the
single most significant risk factor for early onset of the disease. However, the
genetic basis of atherosclerosis remains largely unclear. Approximately five
million Americans suffer from heart failure and an additional 500,000 cases are
diagnosed annually. The mortality rate from heart disease is extremely high. Few
effective therapies are available.

More than two million people in the United States suffer from the effects of
congestive heart failure (CHF) and approximately 400,000 new cases are diagnosed
each year. CHF results from altered cardiac muscle mechanics and function in
response to various conditions including: hypertension, valvular heart disease,
and heart attacks due to atherosclerosis. The response of the


                                      -17-
<PAGE>   18
cardiac muscle to these conditions is felt to be largely under the genetic
control of several, complex signaling pathways. Therefore, it is thought that by
modulating novel molecular targets in heart muscle, CHF may be more effectively
treated.

MPI's programs in atherosclerosis and CHF use three different approaches to
novel gene discovery: human genetics, mouse genetics and expression profiling.
The human genetics program is being conducted through collaborations with
academic investigators and aims to identify genes responsible for, respectively,
early-onset vascular disease and inherited lipid defects in children that
promote atherosclerosis in adulthood. Mouse genetic models of both
atherosclerosis and congestive heart failure are being used with the goal of
identifying genes that modify or protect against developing the disease.
Expression profiling approaches are a major gene/target discovery engine in the
atherosclerosis and congestive heart failure programs. These studies include an
investigation of how biomechanical forces affect gene expression in cells from
the walls of blood vessels (atherosclerosis) and how different mechanical or
growth factor stimuli affect gene expression in cardiac myocytes (congestive
heart failure).

Millennium's efforts in atherosclerosis and CHF have led to the discovery of
several genes which appear to play a role in protecting blood vessels from the
formation of atherosclerotic lesions or in key signaling pathways involved in
regulating cell growth, differentiation and migration - processes that are
fundamental to the initiation and progression of cardiovascular disease. Five of
these genes have been delivered to Lilly for screening against small molecule
compound libraries, including four targets in 1998. In 1998, the US Patent and
Trademark Office issued Millennium a number of patents relating to genes
discovered in our cardiovascular research programs.

CENTRAL NERVOUS SYSTEM DISEASES
In the field of central nervous system diseases, Millennium is principally using
human genetics to identify the genes responsible for affective disorders and
schizophrenia and has formed a strategic alliance with AHP. In addition, we are
using cDNA approaches to identify genes potentially implicated in the initiation
and/or progression of generalized depression, epilepsy and neurodegeneration.
See "-- Strategic Alliances -- American Home Products Corporation."

Bipolar affective disorder, also known as manic depression, affects at least two
million people in the United States, while the related disorder, common
depression, may affect up to 13 million persons. Siblings of people affected
with bipolar affective disorder appear tenfold more likely to develop the
disease than siblings in the general population, suggesting an underlying
genetic basis. Schizophrenia is a debilitating disease of the central nervous
system that is characterized by severe cognitive impairment, and that affects
approximately 2.5 million people in the United States.

For its studies on the genetics of bipolar affective disorder, Millennium is
collaborating with academic investigators who have access to appropriate
populations. Genetic linkages have been identified in these populations, and
positional cloning efforts are in progress to identify the disease genes, which
these linkages represent.


                                      -18-
<PAGE>   19
In the area of schizophrenia and schizoaffective disorders, we are collaborating
with a consortium of academic clinicians who have access to populations of
schizophrenia-prone families that have undergone extensive clinical
characterization. Genotyping of individuals in these populations is in progress.

FUNGAL INFECTIONS
In the field of fungal infections, MPI is engaged in the identification and
validation of new targets for antifungal drugs and in high-throughput screening
to identify potential lead compounds. We are conducting these activities in a
collaboration with Pfizer. See "--Strategic Alliances -- Pfizer."

Approximately two million systemic fungal infections (infections involving the
bloodstream and/or internal organs) occur annually worldwide. The proportion of
hospital-acquired infections in the United States due to fungi (as opposed to
other pathogens) nearly doubled from 1980 to 1990, from 6% to over 10% of all
such infections. The increasing incidence of systemic fungal infections is due
in part to the growing number of patients whose immune systems are compromised
due to HIV infection, chemotherapy treatments, increased use of
immunosuppressive drugs or aging. Despite current approaches to treatment, the
mortality rate in patients with systemic fungal infections is extremely high,
ranging from 30% to 80%, depending on the specific fungal infection.

Only two major classes of antifungal drugs are in use today, both of which have
significant inadequacies. One class of antifungal drugs, which includes
Amphotericin-B, while generally effective against Candida, Aspergillus, and
Cryptococcus, must be administered intravenously and has serious side effects in
many patients. The other major class of antifungal drugs is the azoles. Azoles
are well-tolerated and available in orally active forms. However, they are
ineffective against important pathogenic species such as Aspergillus. Moreover,
strains of fungal infections that are resistant to the azoles have emerged,
particularly in patients with AIDS.

Using our expertise in fungal genetics and genomics and in lead-discovery
technologies, Millennium scientists have identified significant numbers of genes
that are essential for the growth of pathogenic fungi. Our scientists have
prioritized these genes on the basis of their likely suitability as targets for
novel antifungal drugs, configured screens to identify compounds active against
the most promising antifungal drug targets and conducted several high-throughput
screens of large chemical libraries. These activities have led to the discovery
of several series of lead compounds that are the subject of ongoing medicinal
chemistry optimization.

During 1998, the US Patent and Trademark Office issued Millennium two patents
relating to a process for identifying genes essential for a pathogen's survival.
We believe that identifying pathogenic survival genes could be an important step
in developing novel drugs that can actually kill the pathogen (fungi or
bacteria) in question. In contrast, many existing therapeutics merely ameliorate
symptoms of the pathogenic disease or slow the growth of the disease-causing
organism.

INFLAMMATORY RESPIRATORY DISEASES


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<PAGE>   20
In the field of inflammatory respiratory diseases, Millennium is conducting gene
identification and drug target validation activities and has formed a strategic
alliance with Astra. See "--Strategic Alliances --Astra AB."

Asthma affects approximately 12 million individuals in the United States.
Current treatments for moderate to severe asthma, while effective in managing
symptoms of the disease, are known to have significant side effects over the
long term. Although asthma has both genetic and environmental factors, a number
of studies have indicated that asthma is substantially attributable to a genetic
component.

Millennium currently is undertaking several projects in the field of
inflammatory respiratory diseases through human genetics and cDNA approaches.
The human genetics program is being conducted in appropriate populations in both
China and Europe. The cDNA - based programs are focused on identifying key genes
that control immunological conditions important in inflammatory respiratory
diseases, including asthma. In this program, high throughput gene-expression
analysis and rapid validation methods are being used to identify critical
regulatory genes in inflammatory pathways. Millennium scientists have also
established several animal disease models expressing physiologic and
inflammatory disease markers for use in both gene discovery and gene validation.
These programs are generating knowledge and information useful in understanding
both respiratory and non-respiratory inflammatory diseases.

OBESITY
In the field of obesity, Millennium is conducting gene identification and drug
target validation activities and has formed a strategic alliance with Roche. See
"-- Strategic Alliances --Hoffmann-La Roche Inc."

Approximately 34 million individuals in the United States may be classified as
obese (greater than 30% above ideal body weight). This serious medical condition
has limited therapeutic alternatives and can increase the risk of additional
serious medical conditions, such as coronary heart disease, certain cancers and
type 2 diabetes. Although obesity is believed to have multiple contributing
causes, studies of identical twins suggest that genetic factors are a principal
cause of the disease.

We are currently undertaking several projects in the field of obesity, employing
animal models, mouse genetics, human genetics and other components of
Millennium's technology platform. These have led to the identification of a
number of genes responsible for obesity in animal models or strongly implicated
in the disease, including: the gene encoding ob-r, the receptor for the hormone
leptin, a fundamental regulator of weight and appetite; the gene encoding tub,
which we believe is associated with adult onset diabetes; uncoupling protein
homologue (UCPH), which regulates metabolism and energy expenditure; and the
gene encoding the melanocortin 4-receptor (MC4-R), a G-protein coupled receptor
which is an important regulator of body weight. MPI and Roche have conducted
drug target identification, validation and development programs with respect to
these and other genes. In addition, through collaborations with academic
investigators, we are conducting human genetics studies in appropriate
populations in the American Midwest and the rural Anhui province of China.


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<PAGE>   21
During 1998, Millennium announced that Roche had accepted into its
small-molecule screening program two drug targets identified by Millennium,
achievements for which Millennium received milestone fees under our strategic
alliance agreement with Roche. In addition, the US Patent Office issued
Millennium two patents in 1998 related to UCPH. The first relates to the gene
encoding UCPH, and the second to a drug screening method. Millennium previously
received a U.S. patent relating to diagnostic methods involving UCPH.

ONCOLOGY
In the field of oncology, Millennium is conducting gene identification and
small-molecule drug discovery activities related to mechanisms of drug
resistance and angiogenesis (formation of blood vessels within and around
tumors) in a variety of cancers, including prostate, breast, lung, colorectal
cancer and melanoma. Millennium has a strategic alliance with Lilly in select
areas within oncology, including prostate cancer and mechanisms of drug
resistance, and has granted rights to discoveries and targets in other areas of
oncology to Bayer. See "--Strategic Alliances -- Eli Lilly and Company" and 
"--Strategic Alliances --Bayer AG."

Over one million new cancer cases are reported in the United States annually.
Cancers of all types result in over 500,000 deaths in the United States each
year, making cancer the second leading cause of death in the United States. In
addition to surgery and radiotherapy, there are nearly 50 FDA-approved drug
therapies for the treatment of a variety of cancers. Many of these therapies
have severe adverse side effects.

We are currently undertaking several projects focusing on the areas of
hormone-refractory prostate cancer, mechanisms of drug resistance, apoptosis
(cell death), early-stage breast, lung and colon cancers, and mechanisms of
angiogenesis using both data base mining and cDNA approaches. We are also using
expression profiling technologies to identify genes that function in the
progression of a variety of different types of cancer. We have collaborations
with major medical centers to gain access to tumor samples. Millennium has
identified drug target candidates in multi-drug resistant tumors,
hormone-refractory prostate cancer and genes implicated in the initiation and
progression of melanomas. We have begun drug target validation studies on these
genes, including gene transfer into animal models of cancer progression. During
1998, Millennium was issued a U.S. patent relating to two novel caspase genes,
which may be involved in the regulation of apopotosis.

TYPE 2 DIABETES
In its type 2 diabetes research program, Millennium is principally using a gene
identification strategy based on human genetics and has formed a strategic
alliance with Roche. See "-- Strategic Alliances -- Hoffmann-La Roche Inc."

Approximately 14 million persons in the United States are affected by type 2
diabetes, also known as adult-onset or non-insulin dependent diabetes mellitus
(NIDDM). The disease is the seventh leading cause of death in the United States.
Studies of identical twins indicate that type 2 diabetes is primarily due to
genetic factors. This condition is a complex disorder involving a


                                      -21-
<PAGE>   22
combination of factors, including the inability of certain tissues to respond to
insulin and an inability of the pancreas to produce appropriate levels of
insulin.

Millennium's human genetics studies in type 2 diabetes are designed to identify
disease genes involved in both of these disease processes. These studies have
led to the mapping of a gene, NIDDM2, which may be associated with the
development of a form of adult-onset diabetes linked to low insulin secretion.

In November 1996, Millennium and Roche announced the achievement of a research
milestone associated with the identification of a gene implicated in the
development of type 2 diabetes, and in 1998 Millennium and Roche announced two
research milestones associated with genes identified under the collaboration
that would move forward into high throughput screening.

In 1998 the US Patent and Trademark Office granted Millennium a patent covering
a method for identify candidate drugs for the treatment of type 2 diabetes, as
well as a patent covering a test to determine whether an individual has, or is
at risk for developing, certain forms of type 2 diabetes.

OTHER PROGRAMS
In addition to the foregoing disease research programs, the Millennium is
conducting additional research efforts in the fields of osteoporosis,
non-respiratory inflammation and autoimmune diseases, and intends, in connection
with the alliance with Bayer, to begin additional efforts in pain, liver
fibrosis, hematology, and viral infections during 1999.

STRATEGIC ALLIANCES - MPI

OVERVIEW
In accordance with its overall commercialization strategy, Millennium has formed
a number of alliances focused on drug discovery with pharmaceutical partners
that have substantial resources and expertise in research, preclinical and
clinical development, regulatory issues and marketing. We intend to pursue
additional such alliances, as well as other commercialization opportunities
through product acquisition, as appropriate.

MPI has formed a total of nine strategic alliances. These agreements include
alliances based on the transfer of our technology platform, alliances which
combine technology transfer with a focus on a specific disease or therapeutic
approach, and disease-focused programs under which Millennium conducts research
funded by its partners. In each of these alliances, Millennium generally has
agreed that, while the alliance is in place, we will not conduct certain
research, independently or with any commercial third party, that is in the same
field covered by the alliance agreement. Millennium has retained
commercialization rights to certain therapeutic and diagnostic applications of
the discoveries resulting from these funded research programs. See "-- Retained
Commercialization Rights."

Each of the agreements governing the strategic alliances is subject to certain
contingencies including, in certain instances, early termination rights. In the
event that specified additional research, product development and associated
regulatory milestones are achieved, our strategic


                                      -22-
<PAGE>   23
partners will be obligated to make milestone payments to Millennium. Generally,
each of these agreements also entitles Millennium to royalties and/or a share of
the profits on product sales, which are payable for the longer of the life of
the applicable patent or a period of time specified in each agreement.

To realize value from its investment in technology development, and to access
additional resources for such development, Millennium has agreed to transfer
components of its technology platform to its partners as part of certain of its
strategic alliances. These alliances are with companies operating primarily in
the pharmaceutical and plant agriculture industries.

Millennium's alliances with Monsanto, Lilly, Astra, Bayer and AHP, as described
below, include significant technology transfer components. In each case,
Millennium has granted rights to use, and has undertaken to transfer, certain
genomics technologies to its partner, primarily technologies for high-throughput
sequencing, informatics and transcriptional profiling. Millennium also made
certain commitments to provide continuing support for technology it has
transferred. Under certain circumstances, Millennium may receive royalties on
certain products in whose discovery or development Millennium technologies have
played a role.

STRATEGIC ALLIANCES

AMERICAN HOME PRODUCTS CORPORATION
CENTRAL NERVOUS SYSTEM DISORDERS. In July 1996, the Company formed a strategic
alliance with the Wyeth-Ayerst division of American Home Products Corporation to
discover and develop targets and assays to identify small molecule drugs and
vaccines for treatment and prevention of disorders of the central nervous
system. The strategic alliance with AHP consists of three major components:
central nervous system ("CNS") disease drug-discovery research, informatics
technology and support and technology exchange.

In June 1998, Millennium and AHP announced the discovery of a novel gene that
regulates the activity of a key ion channel in the brain, that is likely to be
involved in CNS disorders. Millennium received a milestone payment in connection
with this discovery.

Millennium has focused the CNS drug discovery research program with Wyeth-Ayerst
on psychiatric disorders including anxiety, depression, schizophrenia, and
bipolar disease. The Wyeth-Ayerst division of AHP has been granted exclusive,
worldwide, royalty-bearing rights for the development and marketing of any small
molecule drugs and vaccines arising from the collaboration for the prevention
and treatment of CNS diseases and disorders. Millennium generally retains rights
relating to the worldwide development and marketing of antisense drugs and
diagnostic products and services arising from the collaboration. Millennium has
granted a right of first refusal to AHP with respect to further opportunities
for the joint development of non-vaccine therapeutic proteins and gene therapy
products in the CNS field identified in the research program.

The CNS alliance may continue for up to seven years, through August 2003. AHP
has the option to terminate the agreement in September 1999 if Millennium has
not met certain research


                                      -23-
<PAGE>   24
objectives, in September 2000 if Millennium has not met certain objectives with
respect to technology transfer, or in September 2001 if Millennium has not met
additional research objectives.

ANTIBACTERIALS. Through its acquisition of ChemGenics in February 1997,
Millennium became engaged in a strategic alliance with AHP to discover novel
drug leads for treating bacterial infections in humans.

During 1998, AHP accepted three antibacterial drug targets from Millennium for
drug candidate screening. As a result, AHP made a milestone payment to
Millennium for each drug target and a bonus payment for delivering six drug
targets within the first two years of the agreement.

The alliance agreement provides AHP with exclusive worldwide royalty-bearing
rights to develop and commercialize small-molecule drugs arising from the
collaboration for human bacterial diseases other than H. pylori infections.
Commencing one year after the end of the research term, Millennium will have
certain rights to develop and commercialize Millennium or AHP products arising
from the collaboration if AHP is not developing a product from the collaboration
with the same activity profile.

Under the terms of the alliance, AHP is funding and collaborating with
Millennium on a five-year program that is due to conclude in December 2001. AHP
has the right to terminate in November 1999 if certain research objectives have
not been met by that date.

OTHER. Millennium has obtained certain rights to screen its own drug targets
against small molecule compound libraries owned by AHP as part of a technology
exchange program with AHP.

ASTRA AB
In December 1995, Millennium and Astra formed a strategic alliance in the field
of inflammatory respiratory diseases. The agreement also includes a component of
informatics technology and support and technology exchange. In December 1998,
Astra and Millennium amended the agreement and extended the alliance until
December 2003. Astra has the right to terminate the program in December 2001,
and would be obligated to make an early termination payment in that case.

The agreement gives Astra exclusive worldwide royalty-bearing rights to develop
and commercialize small-molecule drugs in the inflammatory respiratory diseases
field based on Millennium's target discoveries arising from the collaboration.
Millennium and Astra have agreed to explore opportunities to jointly develop and
commercialize therapeutic proteins identified in the research program in the
field of inflammatory respiratory diseases. In the absence of an agreement on
joint development, Astra has exclusive worldwide rights for therapeutic proteins
in the field of inflammatory respiratory diseases delivered by oral inhalation
or nasal administration. Millennium and Astra also have agreed to explore
opportunities to jointly develop and commercialize antisense drugs identified in
the research program. In the absence of an agreement on joint development, Astra
has exclusive worldwide rights in the field


                                      -24-
<PAGE>   25
of inflammatory respiratory diseases for antisense drugs delivered by oral
inhalation or nasal administration, as well as co-exclusive worldwide rights in
such field for antisense drugs not delivered by oral inhalation or nasal
administration. We also have granted Astra a non-exclusive right to use certain
genomics technologies. Millennium has retained exclusive rights to all
diagnostic and gene therapy applications arising from the strategic alliance
research program.


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<PAGE>   26
BAYER AG
In September 1998, Millennium and Bayer formed a strategic alliance in the field
of pharmaceutical drug discovery. Together, Millennium and Bayer will pursue a
new production-oriented approach to rapidly move compounds toward clinical
trials based on genomics research. In November 1998, Bayer made an equity
investment of $96.6 million in exchange for approximately 4.96 million shares of
Millennium common stock, and Bayer paid Millennium $33.4 million as an up-front
licensing fee. Future payments which may be made over the full alliance term
include $219 million of ongoing license and research program funding, as well as
a potential of up to $116 million of performance payments for delivery of
targets. Bayer has the right to cancel the agreement after two and three years
if certain minimum target delivery objectives are not met.

The primary goal of the alliance is for Millennium to supply 225 drug targets to
Bayer over a period of five years. These targets will be relevant for
cardiovascular disease, areas of oncology not covered by Millennium's alliance
with Lilly, osteoporosis, pain, liver fibrosis, hematology and viral infections.
From those identified by the alliance, Bayer will select drug targets for its
exclusive use; the remainder will be available to Millennium to use in its own
proprietary drug development efforts. In addition, both Millennium and Bayer in
certain circumstances have rights to royalty payments on the sale of marketed
products.

ELI LILLY AND COMPANY
In October 1995, Millennium and Lilly formed a strategic alliance in the field
of atherosclerosis and in March 1996, Millennium and Lilly formed a strategic
alliance in select areas within oncology. The atherosclerosis agreement also
includes a component of informatics technology and support and technology
exchange. Under the terms of the atherosclerosis agreement, Lilly made an $8.0
million equity investment in Millennium. Lilly also agreed to fund five-year
programs of atherosclerosis and cancer research by Millennium starting in,
respectively, October 1995 and March 1996. In September 1997, Lilly and
Millennium expanded the scope of the atherosclerosis research program to include
congestive heart failure.

In December 1998, Millennium announced that Lilly had accepted two novel targets
for drug candidate screening under the cardiovascular program. This achievement
triggered a milestone payment to Millennium.

Each of the agreements provides Lilly with exclusive worldwide royalty-bearing
rights to develop and commercialize small-molecule drugs and therapeutic
proteins and co-exclusive rights to develop and commercialize gene therapy
products for atherosclerosis, congestive heart failure or cancer based on our
gene discoveries in the alliance research programs. Millennium has retained
exclusive rights to all diagnostic and antisense drug applications arising from
the strategic alliance research programs. In addition, Millennium has granted
Lilly a right of first negotiation with respect to research programs in the
cardiovascular area falling outside of the field of atherosclerosis.

Lilly has granted Millennium non-exclusive rights to use select combinatorial
chemistry libraries and high-throughput screening technologies controlled by
Lilly to conduct a limited number of


                                      -26-
<PAGE>   27
screens with our drug targets to identify product candidates for medical
indications other than specific medical indications designated by Lilly as being
of strategic importance to Lilly. We have exclusive worldwide rights to develop
and commercialize such product candidates. Millennium will be required to pay
Lilly royalties on the sale of any products that we may identify using Lilly's
combinatorial chemistry libraries. Millennium has also granted Lilly a
non-exclusive right to use certain genomics technologies (see "-- Strategic
Alliances").

Lilly originally had the right to terminate the atherosclerosis agreement at any
time after October 1998. In September 1997, based on achievements in several key
areas of the program during its first two years, Lilly waived this right and
accelerated its commitment to fund the program for a full five years. In
December 1998, Millennium and Lilly agreed to extend the oncology alliance to
its full term, through March 2001. Lilly retains the right to terminate its
research funding obligations under each agreement under various circumstances.

HOFFMANN-LA ROCHE INC.
In March 1994, Millennium and Roche formed a strategic alliance in the fields of
obesity and type 2 diabetes. Under the terms of a related stock purchase
agreement, Hoffmann-La Roche Ltd. (Basel, Switzerland), a Roche affiliate, made
a $6.0 million equity investment in Millennium, and agreed to fund a five-year
program of obesity and type 2 diabetes research. In 1998, Millennium and Roche
announced two research milestones associated with genes identified under the
collaboration that would move forward into high throughput screening. The
research phase of the collaboration with Roche will conclude in March 1999.

The agreement provides Roche with exclusive worldwide royalty-bearing rights to
develop and commercialize small molecule therapeutics for obesity and type 2
diabetes based on Millennium's target discoveries arising from the
collaboration. Roche has an exclusive royalty-bearing right to develop and
commercialize therapeutic proteins, antisense drugs, oligonucleotides and gene
therapy for obesity and type 2 diabetes outside of North America. Within North
America, Millennium has retained the right to develop and commercialize
therapeutic proteins, antisense drugs, oligonucleotides and gene therapy for
obesity and type 2 diabetes, subject to Roche's right to co-promote such
products.

MONSANTO COMPANY
In October 1997, Millennium formed a broad five-year collaboration agreement
with Monsanto relating to the application of genomics technologies in Monsanto's
life-science-based businesses. Efforts under this alliance are under way
primarily in MPI's technology division. In connection with this agreement,
Monsanto has established a wholly owned subsidiary, Cereon Genomics LLC
("Cereon"), based in Cambridge, Massachusetts. Millennium granted Cereon and
Monsanto an exclusive license to use Millennium's genomics technologies in plant
agriculture and certain aspects of dairy agriculture and agreed to collaborate
exclusively with Cereon and Monsanto in these fields. Millennium agreed not to
compete or grant licenses to others in these fields for a period of ten years
after the five-year term of the collaboration. Millennium also granted a
non-exclusive license to Monsanto to apply Millennium's genomics technologies
outside of these fields.


                                      -27-
<PAGE>   28
Monsanto agreed to pay Millennium $118 million in up-front, licensing and
technology transfer fees over the five-year term of the agreement. Monsanto also
agreed to pay Millennium up to $100 million over five years for achieving
mutually determined research objectives and for the payment of royalties to
Millennium on the sale of certain products originating from research conducted
by Cereon. Millennium was also granted non-exclusive rights outside the field of
agriculture to use certain discoveries and technologies developed within Cereon
and Monsanto. Millennium realized $38.2 million in revenues associated with
technology transfer and license fees, achievement of mutually agreed-upon
research objectives, and facilities services under this agreement in 1998, and
$38 million in revenues as an up-front payment in 1997.

Monsanto has the right to terminate the agreement in the event that a company
with sales exceeding $1 billion in plant agriculture and certain aspects of
dairy agriculture acquires more than a specified percentage of the combined
voting power of Millennium's outstanding securities or acquires all or
substantially all of Millennium's assets.

PFIZER
Through its acquisition of ChemGenics, Millennium also became engaged in a
strategic alliance with Pfizer to discover novel drug leads for treating fungal
infections in human. Under the terms of this alliance, Pfizer is funding and
collaborating with Millennium on a program of antifungal research. This
agreement, scheduled to conclude in December 1998, was amended in December 1998
and extended through December 2000.

The agreement provides Pfizer the option to acquire exclusive royalty-bearing
worldwide rights to develop and commercialize products to treat human fungal
infections discovered as part of the collaboration. If the option is not
exercised for a particular candidate product and Pfizer is not developing
another product with a similar profile of activity arising from the
collaboration, Millennium will be permitted under certain circumstances to
develop and commercialize that candidate itself or with third parties. If
Millennium or a Millennium licensee sells any such product, we may be required
to make a royalty payment to Pfizer.

RETAINED COMMERCIALIZATION RIGHTS

Millennium has retained a broad range of rights to commercialize certain
therapeutic and diagnostic applications of discoveries resulting from the
disease-focused research programs funded by its strategic partners. These
retained rights fall broadly into three categories: small-molecule drugs, 
biotherapeutics and diagnostics.

In each of its strategic alliances, Millennium has retained the co-exclusive
right to use the molecular drug targets that result from the funded research
programs to identify and develop small-molecule drugs to treat medical
indications that fall outside of the field(s) covered by the alliance from which
the target originated. We are using a number of these drug targets and retained
rights as the basis for additional drug-discovery programs either on our own
behalf or in alliances with other current or future partners.


                                      -28-
<PAGE>   29
Millennium has also retained certain exclusive or co-exclusive rights to develop
and market therapeutic proteins and antibodies, vaccines and gene therapy and
antisense products stemming from discoveries made in MPI's disease-focused
drug-discovery alliances. These rights have been transferred to, and are being
used by, our MBio subsidiary.

Millennium has retained rights to develop and market diagnostic products and
services resulting from the research programs conducted by MPI under the
strategic alliances with AHP, Astra, Bayer, Lilly, Roche, and Pfizer. These
rights have been transferred to, and are being used by MPMx.



MILLENNIUM BIOTHERAPEUTICS, INC.

Millennium BioTherapeutics, Inc. (MBio) was founded in May 1997 to leverage the
MPI genomics and informatics technology platform toward the discovery of new
biotherapeutic drugs. As of March 1, 1999, MBio had approximately 80 full-time
employees and was contracting with other units within MPI for the services of
approximately 40 additional full-time equivalent employees. MBio's core field is
biotherapeutic drugs including therapeutic proteins, therapeutic antibodies,
gene therapy, antisense therapy, and vaccine products. MPI owns approximately
82% of MBio's voting stock, and Lilly, which made a $20 million equity
investment in MBio in 1997, owns 18% of MBio's voting stock.

MBio's initial focus is protein and antibody product discovery efforts. MBio's
protein discovery efforts include a genomics-based program that is funded in
part by Lilly, working toward identification of therapeutic protein drugs, as
well as programs for identification of therapeutic protein opportunities that
are exclusive of MBio's relationship with Lilly. MBio's antibody discovery
effort is focused on novel antibody drugs in the fields of inflammation and
oncology. Potential product opportunities in gene therapy, antisense, and
vaccine products may emerge indirectly from our protein and antibody discovery
efforts. We intend to attempt to exploit these opportunities by selling rights
to assist in funding MBio's efforts in discovery and development of protein and
antibody drugs.

MPI has generally agreed to transfer to MBio all product development
opportunities and technology rights (including opportunities and rights arising
under our collaboration agreements) in MBio's core area of interest which
focuses on biotherapeutic proteins and antibodies, vaccines, and gene therapy
and antisense products. Reciprocally, MBio has generally agreed to transfer to
MPI all product development opportunities and technology rights outside MBio's
core area of interest. MPI has also granted to MBio a royalty-free,
non-exclusive license to MPI's process technologies and a royalty-free,
exclusive license to certain product-related technology, in each case within
MBio's core area of interest. Similarly, MBio has granted to MPI a royalty-free,
non-exclusive license to MBio's process technologies and a royalty-free,
exclusive license to certain product-related technology, in each case outside
MBio's core area of interest. In addition, there are agreements providing for
contracting of research and administrative services. MBio intends


                                      -29-
<PAGE>   30
to continue to contract with MPI for certain research services (e.g., DNA
sequencing) and certain administrative services.

BIOTHERAPEUTICS
Biotherapeutics fall into five main product classes: therapeutic proteins,
therapeutic antibodies, gene therapy products, antisense products and vaccines.

Most therapeutic proteins now available are produced from cloned genes. These
proteins may represent biotechnology's biggest contribution to date to human
healthcare. Examples of therapeutic protein products include: Humulin(R) (human
insulin); Humatropin(R) (human growth hormone); Neupogen(R) (granulocyte
colony-stimulating factor, G-CSF); Epogen(R) (erythropoietin); Intron-A(R)
(interferon alpha); Betaseron(R) and Avonex(R) (interferon beta); Kogenate(R)
(factor VIII); Activase(R) (tissue plasminogen activator, TPA); and Ceredase(R)
(glucocerebrosidase).

Therapeutic proteins are often divided into two main categories. The first
category, which may be termed "replacement therapies," consists of proteins
which supplement or replace proteins whose absence or deficiency is an
underlying cause of the disease in question. Examples include glucocerebrosidase
in Gaucher's disease and factor VIII in hemophilia. The second category, which
may be termed "pharmacologic therapies," consists of proteins which stimulate
natural processes within the body for therapeutic effect, but whose absence is
not an underlying cause of the disease. Examples of pharmacologic therapies
include G-CSF, which stimulates the regeneration of neutrophils following cancer
chemotherapy, thereby protecting patients against infection, and TPA, which
stimulates the breakdown of dangerous blood clots in heart-attack and stroke
patients. MBio believes that genomics technologies will enable the
identification of many new potential products in both of these categories.

Therapeutic uses of antibodies are based on the unique ability of antibodies to
recognize and bind potently to specific molecular shapes. In some cases, the
antibody targets a protein or process in the body, which will otherwise have
adverse effects. For example, by blocking the aggregation of platelets,
ReoPro(R) inhibits potentially dangerous blood clotting after angioplasty. In
other cases, the antibody binds specifically to the surface of unwanted cells,
such as tumor cells, and initiates the destruction of these cells by the body's
immune system. In an alternative but similar approach, a toxin or radioactive
label is coupled with the antibody and used to destroy the unwanted cells. MBio
believes that genomics technologies will enable the identification of a new
generation of targets whose neutralization or recognition by antibodies could
have a beneficial therapeutic effect.

Gene therapy consists of the administration to a patient of a gene that encodes
a protein having a therapeutic benefit. Gene therapy may have potential
advantages in situations in which there is a need for prolonged administration
of therapeutic proteins or for their delivery only to defined sites within the
body. For example, a protein that is chronically deficient in a particular
disease might be provided by relatively infrequent administration of the gene
encoding that protein, rather than by frequent intravenous or subcutaneous
administration of the purified protein. Alternatively, a disease might most
appropriately be treated by localized administration of a


                                      -30-
<PAGE>   31
specific protein to a particular organ system, which is difficult to achieve
with injectable proteins but expected to be achievable by gene therapy. MBio
believes that genomics technologies will be successful in enabling the
identification of many genes that will be good candidates for use in gene
therapy products.

Antisense therapy can be viewed as the opposite of gene therapy. Instead of
providing a gene that encodes a protein whose effect is beneficial, the goal of
antisense therapy is to block the activity of a gene that encodes a protein
whose effect is harmful. The gene's activity is blocked using a synthetic DNA-
or RNA-like molecule which by virtue of its sequence is capable of binding to
mRNA transcripts copied from the gene. This binding prevents translation of the
mRNA, and thereby inhibits synthesis of the harmful protein. Genomics
technologies have the capability to identify genes and transcripts whose
activities it would be beneficial to block. Such genes and transcripts represent
potential targets for antisense therapies.

A vaccine is a preparation that resembles a pathogen in a way that is sufficient
to provoke an immune response, but without causing disease. Vaccination primes
the immune system to mount a vigorous response upon subsequent exposure to the
pathogen in question, preventing development or progression of the disease that
the pathogen causes. Historically, the main targets of vaccines have been
infectious diseases. Accordingly, the target pathogens have been viruses and
bacteria, such as poliovirus and the bacteria, which cause diphtheria, pertussis
and tetanus. More recently, there has been a strong interest in developing both
preventive and therapeutic cancer vaccines, for which the target "pathogens" are
cancer cells. Whatever the nature of the pathogen, proteins that are present on
its exterior surface and unique to the pathogen have the potential to provoke
pathogen-specific immune responses. Such proteins therefore represent potential
constituents of vaccines. MBio believes that genomics technologies will be
useful in identifying such proteins.

TECHNOLOGY PLATFORM
As applied at MBio, the key components of the technology platform include
high-throughput DNA sequencing, advanced informatics technologies including
Sequence Explorer(TM) and Expression Explorer(TM), genetic mapping,
transcriptional profiling, high-throughput expression cloning, modified
retroviral vector technology for gene expression and in vivo functional
validation, and generation of transgenic and knock-out mice. In addition, MBio
has external agreements to provide transgenic and knockout mice.

In addition to technologies obtained through MPI, MBio has expanded its platform
to include high-throughput mammalian cell- and yeast-based signal sequence
expression cloning technologies, development of a proprietary naive antibody
phage display library, and "PLATO", an automated cell panning-based antibody
phage display technology for high-throughput generation of antibodies and
biological validation of genes through functional knock-out strategies.

DISCOVERY PROGRAMS
Discovery research efforts at MBio are currently focused on two major product
categories, therapeutic proteins and therapeutic antibodies. In the field of
therapeutic proteins, MBio has


                                      -31-
<PAGE>   32
formed a strategic alliance with Lilly. See "-- Strategic Alliances -- Eli Lilly
and Company." MBio is not currently engaged in efforts directed specifically to
the discovery of gene therapy, antisense or vaccine products, although it
anticipates that it may have programs in these areas in the future.

MBio's therapeutic protein discovery program includes the Lilly collaboration,
which is using cDNA-based sequencing, transcription profiling, and genomic
sequencing approaches for gene discovery. At present, MBio has discovered and is
engaged in research on approximately 100 priority therapeutic protein candidates
in various stages of pre-clinical development.

In addition, potential antibody targets have been identified as an outcome of
the therapeutic protein discovery effort. The therapeutic focus for MBio's
therapeutic antibody efforts is inflammation and oncology. MBio has developed
"PLATO", a high-throughput antibody generation platform using phage display
technology. "PLATO" allows rapid generation of single-chain antibodies for use
as immunohistochemistry reagents as part of antibody target validation.

STRATEGIC ALLIANCES
ELI LILLY AND COMPANY. In May 1997, MBio and Lilly formed a strategic alliance
in the field of therapeutic proteins. Under the terms of this alliance, Lilly
and MBio each provides half of the funding for a research program at MBio to
discover candidate therapeutic proteins, and each receives exclusive rights to
half of the therapeutic proteins discovered. Therapeutic antibodies and certain
other proteins are excluded from the alliance. In conjunction with the formation
of this alliance, Lilly made an equity investment of $20 million in MBio, for
which it received approximately 18% of MBio's voting stock. In the event that
Lilly achieves specified research, product development and associated regulatory
milestones in its development of proteins resulting from the alliance, Lilly
will be obligated to make milestone payments to MBio. Lilly also will be
obligated to pay royalties to MBio on the sale of certain therapeutic products
that may result from the alliance.

Candidate therapeutic proteins identified in the jointly funded research program
which meet certain specified criteria become available for selection by either
Lilly or MBio for further development. Each company is entitled to select an
equal number of the proteins from the pool of qualified candidates, with the
companies taking alternating turns to select candidates for further development.
Each company is under obligations of diligence to develop each protein it has
selected. Any protein that is not diligently developed may be returned to the
selection pool, or be transferred to the other partner. Each company has
exclusive worldwide rights, sub- licensable under certain conditions, and
royalty bearing in the case of Lilly, to develop and commercialize therapeutic
proteins it has selected. MBio and Lilly each has royalty-bearing worldwide
rights to use proteins from the jointly funded program as drug targets to
discover small-molecule drugs. MBio has transferred these rights to Millennium
for use by MPI.

Lilly has the right to terminate the research program on its third and its
fourth anniversary upon at least 120 days' written notice. Either party may
terminate the agreement at any time upon 30


                                      -32-
<PAGE>   33
days' written notice if any pharmaceutical or other health care company acquires
majority control of the other party.

OTHER AGREEMENTS

MBio and Abgenix, Inc., an antibody technology company, have entered into a
development and commercialization agreement that provides MBio access to
Xenomouse(TM) technology for two therapeutic antibody targets. Xenomouse(TM)
technology involves a genetically engineered mouse that, when exposed to an
antigen, produces human antibodies in response. The genes encoding these human
antibodies can be deciphered and used to produce candidate therapeutic
antibodies for human use. Under the agreement, MBio maintains all commercial
rights to human antibodies generated from the Xenomouse(TM) and will pay Abgenix
certain development milestones as well as royalties upon product
commercialization.

MBio has entered into an agreement with Harvard Medical School that provides
MBio with access to various research capabilities. MBio is also participating in
academic collaborations established by MPI, and is engaged in a number of
consulting, materials transfer, and collaboration agreements with academic
investigators and institutions, primarily to allow us access to expertise in
validating genes. MBio has also formed several technology acquisition and
research collaboration agreements for generation of transgenic and knockout
mice, use of phage display technology and use of certain cell lines.

MILLENNIUM PREDICTIVE MEDICINE, INC.

Millennium Predictive Medicine, Inc. ("MPMx") was founded in September 1997 as a
wholly owned MPI subsidiary. The MPMx vision is to change the practice of
medicine by developing products and services that place information in the hands
of clinicians and pharmaceutical researchers, allowing them to improve decisions
about drug treatment and other aspects of patient management. MPMx is applying
the Millennium technology platform to discover novel molecular markers of
disease and drug effects. As of March 1, 1999, MPMx had approximately 40
full-time employees. MPMx initially is focusing its efforts in diagnostics and
in pharmacogenomic services.

MPMx's initial commercialization strategy is to seek partners that will provide
funding for product research and development and that will have the capability
to manufacture and market these products.

MPI has generally agreed to transfer to MPMx all product development
opportunities and technology rights (including opportunities and rights arising
under our collaboration agreements) in MPMx's core area of interest which
focuses on Diagnomics(TM), pharmacogenomics and on generating and integrating
diverse biomedical data to provide patient management services to the healthcare
industry. Reciprocally, MPMx has generally agreed to transfer to MPI all product
development opportunities and technology rights outside MPMx's core area of
interest. MPI has also granted to MPMx a royalty-free, non-exclusive license to
MPI's process technologies and a royalty-free, exclusive license to certain
product-related technology, in each case within MPMx's


                                      -33-
<PAGE>   34
core area of interest. Similarly, MPMx has granted to MPI a royalty-free,
non-exclusive license to MPMx's process technologies and a royalty-free,
exclusive license to certain product-related technology, in each case outside
MPMx's core area of interest. In addition, there are agreements providing for
contracting of research and administrative services. MPMx intends to continue to
contract with MPI for certain research services and certain administrative
services.

In February 1999, MPMx announced the formation of an alliance with Becton,
Dickinson Company ("Becton Dickinson"). Overall, the alliance will aim to
develop tests designed to provide individualized diagnostic and prognostic
information, assist in treatment selection for patients with cancer, and improve
the prediction of patient healthcare outcomes. MPMx will supply markers which
are clinically validated to Becton Dickinson for the following cancers:
melanoma, cervical, breast, ovarian, uterine, prostate and colon. MPMx and
Becton Dickinson will jointly determine which tests, from among diagnostics and
pharmacogenomics, will be developed for each type of cancer included in the
alliance.

Becton Dickinson will receive exclusive rights to all diagnostic products (with
the exception of colon cancer diagnostic products for which it will have
co-exclusive rights), and co-exclusive rights to all pharmacogenomic products,
developed in the collaboration. The rights to all therapeutic discoveries and to
all products outside of the specific cancers included in the alliance will be
retained by MPMx. The agreement also provides Becton Dickinson with certain
rights of first refusal to commercialize pharmacogenomic products developed by
MPMx in connection with drugs to treat these cancers.

The agreement is subject to clearance under the Hart Scott Rodino Antitrust
Improvements Act. Upon clearance, Becton Dickinson will make a $15 million
equity investment in exchange for approximately 11% of the voting stock of MPMx,
as well as an up-front license payment of $3 million. Becton Dickinson has
agreed to pay MPMx up to $51.5 million in research funding and additional annual
license fees over the five-year term of the agreement. Becton Dickinson has also
agreed to pay milestones and royalties to MPMx in connection with the
commercialization and sale of any products developed through the alliance.
Becton Dickinson has the right to terminate the alliance after three years if
MPMx fails to meet certain performance objectives.

BACKGROUND
Despite tremendous advances during the twentieth century, Millennium believes
that much medical care is still suboptimal. Many diseases are diagnosed using
tests that provide only a snapshot of current symptoms, rather than a predictive
assessment of underlying causes. In addition, many diseases are treated with
drugs that, while safe and effective in some patients, may be ineffective and
even dangerous in others. We believe that genomics and related technologies can
make a fundamental contribution to the optimization of medical care by providing
tests that report informatively on the underlying causes and likely outcomes of
diseases and predict accurately the responses of individual patients to drugs.
We also believe that MPMx can gain a competitive advantage in developing such
tests and related services through the application of Millennium's integrated
platform of genomics and related technologies.


                                      -34-
<PAGE>   35
Diagnostic products and services generally have shorter product development and
regulatory approval time than therapeutic products. Therefore, Millennium
believes that products and services developed by MPMx may be among the first
arising from our genomics programs to generate sales revenues.

DIAGNOMICS(TM)
Many current diagnostic tests are directed towards the symptoms, rather than the
causes, of the diseases that they are used to diagnose or monitor. As a result,
these tests generally provide information only about a patient's current
condition. In contrast, Millennium has coined the term "Diagnomics(TM)" to
describe genomics-derived molecular diagnostics that assess the underlying
causes of diseases rather than just their symptoms. We believe that
Diagnomics(TM) products and services will provide information with inherent
prognostic, therapeutic and economic implications, enabling a shift in medical
care towards planned and cost-effective treatment of the underlying causes of
disease. The initial focus for MPMx's Diagnomics(TM) program is in cancer.

PHARMACOGENOMICS
Different people often respond in different ways to the same drug. A drug that
is safe and effective in one patient may be toxic and ineffective in another.
MPMx believes that such differences in response reflect genetic differences
between the individuals concerned. Pharmacogenomic studies seek to establish
correlations between specific genetic variations and specific responses to
drugs. By establishing such correlations, pharmacogenomics may permit both new
and existing drugs to be targeted to those patients in whom they are most likely
to be both effective and safe. MPMx therefore expects that the pharmacogenomics
products and services it is developing will enable pharmaceutical companies to
accelerate clinical trials, improve the success rate of such trials and realize
significant extra value from existing drugs and failed clinical development
candidates. MPMx further expects that these products and services will allow
healthcare organizations to provide improved patient care at the same or lower
cost.

MPMx is currently focusing its pharmacogenomics efforts in clinical areas for
which there is a strong need for more informed pharmaceutical care. These areas
include therapeutic classes for which drug choice has a strong impact on patient
outcome, and areas in which a drug that may be very effective and safe for some
patients shows potentially life-threatening toxicities for other patients.
Examples of the former category include oncology, arrhythmia, and depression;
examples of the latter category include hematological toxicity and
hepatotoxicity.

For the application of pharmacogenomics to drugs in clinical development, MPMx
will pursue strategic alliances with pharmaceutical companies as its initial
business model. The objective of these alliances will be to discover molecular
markers - at the DNA, RNA, or protein level - of either efficacy or toxicity
associated with specific drugs. Such markers may be used for assessing
predisposition to efficacy or toxicity or improved assessment of drug response
post-administration. Resulting pharmacogenomic tests are expected to improve
clinicians' ability to use those drugs in patient management (i.e. the right
drug for the right patient). In addition, a pharmacogenomic approach to drug
development may improve efficiency by allowing pre-selection of positive
responders.


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<PAGE>   36
RESEARCH AND DEVELOPMENT
DIAGNOMICS(TM)
The two main phases of the Diagnomics(TM)research program are marker discovery
and marker validation. Markers are genes or gene products that are identified
with and can be used, in an assay, to diagnose or monitor a particular disease
or disease condition. In general, marker discovery involves acquiring and
preparing samples, preparing representative cDNA libraries, constructing
subtracted libraries, and array profiling. Marker validation involves selection
of a subset of candidate markers that are over- or under-expressed in test tumor
samples; assay formatting as appropriate; and clinical validation using patient
samples.

In addition to the research funded by the oncology Diagnomics(TM) alliance with
Becton Dickinson, MPMx may conduct internally funded research to position
ourselves for further diagnostics collaborations.

Millennium owns two issued U.S. patents relating to the gene that encodes
melastatin, a protein that appears to suppress metastasis in malignant
melanomas. MPMx has a license under these patents for the development of
Diagnomics(TM) products and services.

PHARMACOGENOMICS
MPMx has preliminary plans to develop a pharmacogenomics research program in
oncology. The program would involve laboratory-based discovery (including
bioinformatics analyses), bioinformatics-based discovery, and clinical
validation.

RESEARCH AND DEVELOPMENT

Millennium's total research and development expenses were $114.2 million, $74.8
million, and $34.8 million for 1998, 1997 and 1996, respectively. Revenues under
collaborative research and development agreements totaled $133.7 million, $89.9
million, and $31.8 million in 1998, 1997, and 1996, respectively.

SIGNIFICANT CUSTOMERS

Substantially all of Millennium's revenues are derived from our strategic
alliances. In 1998, revenues from our strategic alliances with Bayer, Monsanto,
Lilly, and AHP accounted for approximately 25%, 29%, 15% and 15%, respectively,
of the Company's total revenues. Millennium has three alliances with Lilly and
two alliances with AHP. A loss of any of these strategic alliance partners could
have a material adverse effect on the Millennium's business, financial condition
and results of operations. See "-- Strategic Alliances " and "-- Factors That
May Affect Results -- Reliance on Strategic Partners."

PATENTS AND PROPRIETARY RIGHTS

As of March 1, 1999, Millennium and its subsidiaries own, or are the exclusive
licensee under, more than 500 pending U.S. and international patent applications
and 25 issued U.S. patents. Millennium seeks United States and international
patent protection for the genes, proteins and


                                      -36-
<PAGE>   37
small molecule drug leads that it discovers, as well as therapeutic, diagnostic
and pharmacogenomic products and processes, drug screening methodologies,
transgenic animals and other inventions based on such genes, proteins and small
molecules. Our commercial success will depend in part on obtaining such patent
protection. We also intend to seek patent protection or rely upon trade secret
rights to protect certain other technologies which may be used to discover and
characterize genes, proteins and small molecules and which may be used to
develop novel therapeutic, diagnostic and pharmacogenomic products and
processes.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including Millennium, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of Millennium's
pending patent applications will result in issued patents. We cannot assure that
Millennium will develop additional proprietary technologies that are patentable,
or that any patents issued to either Millennium or our strategic partners will
provide a basis for commercially viable products. We cannot assure that any
issued patents will provide us with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not adversely
affect our ability to do business. In addition, patent law relating to the scope
of claims in the technology fields in which Millennium operates is still
evolving, and the extent of protection for our proprietary discoveries is
therefore uncertain. We cannot assure that others will not independently develop
similar or alternative technologies, duplicate any of our technologies, or
design around the patented technologies that we develop. In addition, others may
discover uses for genes, proteins and small molecules other than those uses
covered in our patents and patent applications, and these other uses may be
separately patentable. It is possible, therefore, that we could be excluded from
selling a product for which we have a composition of matter claim if another
party were to hold a patent covering the use of a product of that same
composition.

Millennium has applied for patent protection for novel, full-length genes,
partial gene sequences of novel genes and novel uses for known genes identified
through its research programs. There has been and continues to be uncertainty
regarding the patentability of partial gene sequences and full-length genes
absent functional data and the scope of patent protection available for
full-length genes and partial gene sequences. Based on recent technological
advances in gene sequencing technology, a number of groups other than Millennium
are attempting to rapidly identify gene sequences, whose functions have not been
characterized. Washington University (in conjunction with Merck & Co., Inc.) and
The Institute for Genomic Research (in collaboration with the National Center
for Biological Information) have made certain gene sequences available in
publicly accessible databases. It is possible that these and other similar
disclosures could adversely affect our ability to obtain patent protection for
full-length genes claimed in subsequent patent applications. We routinely
conduct searches of publicly available databases to determine whether other
parties have previously identified gene sequences corresponding to the various
partial gene sequences and full-length genes that Millennium has discovered. To
the extent any patents issue to other parties on such gene sequences, the risk
increases that Millennium's or Millennium's partners' potential products and
processes may give rise to claims of patent infringement.


                                      -37-
<PAGE>   38
Others may have filed and in the future are likely to file patent applications
covering inventions that are similar or identical to those we have filed. We
cannot assure that any such patent application will not have priority over
patent applications we have filed. We believe that certain of our patent
applications cover genes that may also be claimed in patent applications filed
by other parties. Interference proceedings before the USPTO may be necessary to
establish which party was the first to invent a particular gene.

Our potential products and services may conflict with patents that have been or
may be granted to competitors, universities or others. As the biotechnology and
biopharmaceutical industries expand and more patents are issued, the risk
increases that our potential products and services may give rise to claims that
they infringe the patents of others. Other parties could bring legal actions
against Millennium or our strategic partner claiming damages and seeking to
enjoin clinical testing, manufacturing and marketing of the affected products
and services. If any such actions are successful, in addition to any potential
liability for damages, Millennium or our strategic partner could be required to
obtain a license in order to continue to manufacture or market the affected
products and processes. We cannot assure that we or our strategic partners would
prevail in any such action or that any license required under any such patent
would be made available on commercially acceptable terms, if at all. We believe
that there will continue to be significant litigation in the industry regarding
patent and other intellectual property rights. If Millennium becomes involved in
such litigation, it could consume a substantial portion of the our managerial
and financial resources.

There is substantial uncertainty concerning whether human clinical data will be
required for issuance of patents for human therapeutics. If such data is
required, our ability to obtain patent protection could be delayed or otherwise
adversely affected. Although the USPTO issued new utility guidelines in July
1995 that address the requirements for demonstrating utility for biotechnology
inventions, particularly for inventions relating to human therapeutics, utility
will be determined on a case-by-case basis. Moreover, we cannot assure that the
USPTO's position will not change with respect to what is required to establish
utility for biotechnology inventions.

Millennium relies upon trade secret protection for its confidential and
proprietary information. We believe that we have developed proprietary
technology for use in gene discovery and characterization, including proprietary
genetic marker sets, proprietary software (including proprietary software for
the capture, storage and analysis of DNA and protein sequence data) and an
integrated informatics system. We have not sought patent protection for many of
these technologies. In addition, Millennium has developed databases of
proprietary gene sequences and biological information, which are updated on an
ongoing basis. We have taken security measures to protect our data and we
continue to explore ways to further enhance data security. We cannot assure,
however, that such measures will provide adequate protection for our trade
secrets or other proprietary information. While we require employees, academic
collaborators and consultants to enter into confidentiality agreements, we
cannot assure that proprietary information will not be disclosed, that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets or disclose such
technology, or that we can meaningfully protect our trade secrets.


                                      -38-
<PAGE>   39
Millennium's academic collaborators have certain rights to publish data and
information in which we have rights. While we believe that the limitations on
publication of data developed by its collaborators pursuant to its collaboration
agreements will be sufficient to permit Millennium to apply for patent
protection, there is considerable pressure on academic institutions to publish
discoveries. We cannot assure that such publication would not affect our ability
to obtain patent protection for some inventions in which we may have an
interest.

Millennium is a party to various license agreements that give us rights to use
certain technologies in our research and development processes. We cannot assure
that we will be able to continue to license such technology on commercially
reasonable terms, if at all. Our failure to maintain rights to such technology
could have a material adverse effect on our business, financial condition and
results of operations.


GOVERNMENT REGULATION
Millennium is applying its technologies to the discovery and development of
therapeutic and diagnostic products including: small-molecule drugs,
biotherapeutic proteins and antibodies, vaccines, gene therapy and antisense
products and genomic-based and proteomic-based diagnostic and pharmacogenomic
products. The FDA in the United States, comparable authorities in other
countries, will regulate Millennium and our proposed products in a variety of
ways. These regulatory authorities and other federal, state, and local entities
apply to, among other things, the preclinical and clinical testing, safety,
effectiveness, approval, clearance, manufacture, labeling, marketing, export,
storage, record keeping, advertising, and promotion of our proposed products.

FDA approval or clearance of our proposed products, including a review of the
manufacturing processes and facilities used to produce such products, will be
required before such products may be marketed in the United States. The process
of obtaining approvals or clearance from the FDA can be costly, time consuming,
and subject to unanticipated delays. There can be no assurance that approvals or
clearances of our proposed products, processes, or facilities will be granted on
a timely basis, or at all. Moreover, if Millennium fails to obtain approval or
clearance, we would be unable to market the proposed products. If approvals are
delayed, our ability to market proposed products would be adversely affected.
Approval or clearance may include significant limitations on indicated uses for
which a product could be marketed. In addition, the product approval or
clearance could be subject to suspension or withdrawal under certain
circumstances.

Any diagnostic testing products that Millennium may develop will be regulated in
the United States as medical devices. Prior to introduction into interstate
commerce, medical devices must be found "substantially equivalent" to a legally
marketed Class I or Class II device or to a Class III device for which the FDA
has not required premarket approval. In order to demonstrate substantial
equivalence, a manufacturer must submit a premarket notification (510(k)) under
section 510(k) of the Food Drug and Cosmetic Act (the Act). FDA may require
additional data to support a substantial equivalence determination, and there is
no assurance FDA will find a device substantially equivalent. If FDA finds that
a device is not substantially equivalent, the manufacturer may ask the FDA to
make a risk-based classification to place the device in Class I


                                      -39-
<PAGE>   40
or Class II. However, if a timely request for risk-based classification is not
made, or if FDA determines that a Class III designation is appropriate, an
approved premarket approval application (PMA) will be required before the device
may be marketed.

The PMA approval process is lengthy, expensive, and typically requires, among
other things, extensive data from pre-clinical testing and a well-controlled
clinical trial or trials that demonstrates a reasonable assurance of safety and
effectiveness. There is no assurance that review will result in timely or any
PMA approval, and there may be significant conditions of approval, including
limitations on labeling and advertising claims and the imposition of post-market
testing, tracking, or surveillance requirements. In addition, although
diagnostic devices are exempt from investigation device exemption (IDE) approval
requirements for clinical trials under certain specified circumstances, FDA may
notify a sponsor that an approved IDE is required before clinical trials may
commence. If FDA requires an approved IDE, there is no guarantee that the agency
will approve the IDE, and an IDE approval process could result in significant
delay.

Certain devices may be exempt from premarket notification, but other regulatory
requirements will apply, including the Food, Drug and Cosmetic Act's general
controls, for example, the Quality System Regulations governing current good
manufacturing practices (cGMP) and enforced with periodic inspections, the
Medical Device Reporting (MDR) requirements, and the adulteration and
misbranding provisions of the Act.. Permission to market may be suspended or
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.

The MDR regulations require that reports be submitted to FDA to report
device-related deaths, serious injuries, and malfunctions the recurrence of
which would likely cause serious injury or death. MDRs can result in agency
action such as inspection, recalls, and patient/physician notifications, and are
often the basis for agency enforcement actions. Because MDRs are publicly
available, they can also become the basis for private tort suits, including
class actions. Depending on their significance, MDRs could have a material
adverse effect on Millennium's business, financial condition, results of
operations, and ability to market its products.

If a manufacturer makes a change to a device cleared for marketing under section
510(k) that is a major change in intended use, or is a change to design,
material, composition, energy source, or manufacture that could significantly
affect the safety and effectiveness of the marketed device, a new 510(k) will be
required before the modified device may be marketed. Changes to approved PMA
devices that affect safety and effectiveness require supplemental PMA approvals
before the modified PMA device may be marketed. Failure to obtain timely or any
approval for changes to marketed devices could have a material adverse effect on
Millennium's business, financial condition, and results of operations.

The process required by the FDA before drug or biological products may be
approved for marketing in the United States generally involves (i) preclinical
laboratory and animal tests, (ii) submission to the FDA of an IND, which must
become effective before clinical trials may begin, (iii) adequate and well-
controlled human clinical trials to establish the safety and efficacy of the


                                      -40-
<PAGE>   41
product for its intended indication, (iv) submission to the FDA of a marketing
application and (v) FDA review of the marketing application in order to
determine, among other things, whether for a new drug, the product is safe and
effective for its intended uses or whether, for a biological product, the
product is safe, pure and potent, and the facility in which it is manufactured,
processed, packed or need meets standards designed to assume the products
continued safety, priority, and potency. There is no assurance that the FDA
review process will result in product approval on a timely basis, or at all.

An IND is a submission which the sponsor of a clinical trial of an
investigational new drug or biological product (such as a vaccine) must make to
the FDA, and which the agency must allow to become effective before clinical
trials may commence. The IND submission must include, among other things
preclinical testing; a description of the sponsor's investigational plan;
protocols for each planned study; chemistry, manufacturing, and control
information; pharmacology and toxicology information; and a summary of previous
human experience with the investigational drug or biological product.

A New Drug Application ("NDA") is an application to the FDA to market a new
drug. A Biologics License Application ("BLA") is an application to the FDA to
market a biological product. An NDA or BLA, depending on the submission, must
contain, among other things, information on chemistry, manufacturing controls
and potency and purity; nonclinical pharmacology and toxicology; human
pharmacokinetics and bioavailability; and clinical data. The new drug or
biologic may not be marketed in the United States until the FDA has approved the
NDA or BLA, as the case may be. In addition, for both NDAs and BLAs, the
application will not be approved until the FDA conducts a manufacturing
inspection and approves the applicable manufacturing process for the drug or
biologic.

Preclinical tests include laboratory evaluation of product chemistry and animal
studies to gain preliminary information about a product's pharmacology and
toxicology and to identify any safety problems that would preclude testing in
humans. Products must generally be manufactured according to cGMP and
preclinical safety tests must be conducted by laboratories that comply with FDA
regulations regarding good laboratory practices. The results of the preclinical
tests are submitted to the FDA as part of an IND and are reviewed by the FDA
prior to the commencement of human clinical trials. Unless the FDA objects to,
or makes comments or raises questions concerning, an IND, the IND will become
effective 30 days following its receipt by the FDA and initial clinical studies
may begin, although companies often obtain affirmative FDA approval before
beginning such studies. There can be no assurance that submission of an IND will
result in the ability to commence clinical trials.

Clinical trials can involve the administration of the investigational new drug
or biologic to healthy volunteers and to patients under the supervision of a
qualified principal investigator. Clinical trials must be conducted in
accordance with the FDA's Good Clinical Practice requirements under protocols
that detail, among other things, the objectives of the study, the parameters to
be used to monitor safety, the effectiveness criteria to be evaluated and a
statistical plan to evaluate the study results. Each protocol must be submitted
to the FDA as part of the IND. Further, each clinical study must be conducted
under the authority of an Institutional


                                      -41-
<PAGE>   42
Review Board ("IRB"). The IRB will consider, among other things, ethical
factors, the safety of human subjects, the possible liability of the institution
and the informed consent disclosure which must be made to participants in the
clinical trial.

Clinical trials are typically conducted in three sequential phases, although the
phases may overlap. During Phase I, when the drug or biologic is initially
administered, often to healthy human subjects, the product is tested for safety,
dosage tolerance, absorption, metabolism, distribution, and excretion. Phase II
involves studies in a limited patient population to (i) evaluate preliminarily
the efficacy of the product for specific, targeted indications, (ii) determine
dosage tolerance and optimal dosage, and (iii) identify possible adverse effects
and safety risks. When a new product is found to have an effect and to have an
acceptable safety profile in Phase II evaluation, Phase III trials are
undertaken in order to further evaluate clinical efficacy and to further test
for safety within an expanded patient population. The FDA may place clinical
trials on hold at any point in this process, among other reasons, if it
concludes that clinical subjects are being exposed to an unacceptable health
risk.

The results of the preclinical studies and clinical studies, the chemistry and
manufacturing data, and the proposed labeling, among other things, are submitted
to the FDA in the form of an NDA or BLA, approval of which must be obtained
prior to commencement of commercial sales. The FDA may refuse to accept the NDA
or BLA for filing and substantive review if certain administrative and content
criteria are not satisfied, and even after accepting the NDA or BLA for review,
the FDA may require additional testing or information before approval of the NDA
or BLA. In any event, the FDA must deny an NDA or BLA if applicable regulatory
requirements are not ultimately satisfied. Moreover, if regulatory approval of a
product is granted, such approval may be made subject to various conditions,
including post-marketing testing and surveillance to monitor the safety of the
product, or may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.

In November 1997, Congress amended the Food and Drug Modernization Act of 1997
and eliminated certain previously required filings including Product License
Applications (PLAs), which were previously required to market biologic products,
and Establishment License Applications (ELAs), which were previously required to
obtain biologic manufacturing establishment licenses. All biologic products are
now subject only to the BLA process. The FDA has proposed regulations to
implement BLAs. Although the FDA's intent in promulgating new regulations for
biologics has been, in part, to lessen the burdens of the regulatory approval
process, there can be no assurance that any new regulations, will have the
effect of reducing review times.

Changes to approved drug and biological products that affect safety or
effectiveness require approved supplemental applications, as do changes in
manufacturing that have a substantial potential to adversely affect product
safety or effectiveness. Such supplemental applications must be approved before
the product may be marketed as modified.


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<PAGE>   43
Both before and after approval or clearance is obtained, a product, its
manufacturer, and the sponsor of the marketing application for the product are
subject to comprehensive regulatory oversight. Violations of regulatory
requirements at any stage, including the preclinical and clinical testing
process, the approval or clearance process, or thereafter (including after
approval or clearance) may result in various adverse consequences, including FDA
delay in approving, clearing or refusal to approve or clear a product, or
suspension, revocation or withdrawal of an approval or clearance. Violations of
regulatory requirements may also result agency enforcement actions including
voluntary or mandatory recall, seizure of products, fines, injunctions and/or
civil or criminal penalties.

In addition, the nature of marketing claims that Millennium will be permitted to
make in the labeling and advertising of its products will be limited to those
specified in an FDA clearance or approval, and claims exceeding those that are
cleared or approved will constitute violation of the Act. Millennium's
advertising of its products will also be subject to regulation by the Federal
Trade Commission (FTC) under the FTC Act. The FTC Act prohibits unfair methods
of competition and unfair or deceptive acts in or affecting commerce. Violations
of the FTC Act, such as failure to have substantiation for product claims, would
subject Millennium to a variety of enforcement actions, including compulsory
process, cease and desist orders, and injunctions. FTC enforcement can result in
orders requiring, among other things, limits on advertising, corrective
advertising, consumer redress, and recision of contracts. Violations of FTC
enforcement orders could result in substantial fines or other penalties.

Whether or not FDA approval has been obtained, approval of a therapeutic product
by comparable government regulatory authorities in foreign countries must be
obtained prior to marketing such product in such countries. Further, applicable
FDA export requirements must be met. 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 some procedures for unified filing for
certain European countries, in general, each country has its own procedures and
requirements.

In addition to regulations enforced by the FDA, Millennium also is subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. Millennium's research and development involves the controlled use
of hazardous materials, chemicals and various radio active compounds. Although
we believe that our safety procedures for storing, handling, using an disposing
of such materials comply with the standards prescribed by applicable
regulations, the risk of accidental contaminations or injury form these
materials cannot be completely eliminated. In the event of such an accident,
Millennium could be held liable for any damages that result and any such
liability could have a material adverse effect.

COMPETITION

Millennium faces, and will continue to face, intense competition from
organizations such as large pharmaceutical, biotechnology, and diagnostic
companies, as well as academic and research


                                      -43-
<PAGE>   44
institutions and government agencies. We are subject to significant competition
from organizations that are pursuing the same or similar technologies as those
which constitute our technology platform and from organizations that are
pursuing pharmaceutical or diagnostic products that are competitive with our
potential products. Most of the organizations competing with us have greater
capital resources, research and development staffs and facilities, and greater
experience in drug discovery and development, obtaining regulatory approval and
pharmaceutical product manufacturing and marketing capabilities than Millennium.

Research in the field of genomics is highly competitive. Our competitors in the
genomics area include, among others, public companies such as Genome
Therapeutics Corporation, Human Genome Sciences, Inc., Incyte Pharmaceuticals,
Inc., Myriad Genetics, Inc. and Axys Therapeutics, Inc., as well as private
companies and major pharmaceutical companies. Universities and other research
institutions, including those receiving funding from the federally funded Human
Genome Project, also compete with Millennium. A number of entities are
attempting to rapidly identify and patent randomly sequenced genes and gene
fragments, typically without specific knowledge of the function of such genes or
gene fragments. In addition, certain other entities are pursuing a gene
identification, characterization and product development strategy based on
positional cloning. Millennium's competitors may discover, characterize or
develop important genes in advance of Millennium. We also face competition from
these and other entities in gaining access to DNA samples used in research and
development projects. We expect competition to intensify in genomics research as
technical advances in the field are made and become more widely known.

In the field of small-molecule drug discovery and development we compete with
other companies using using advanced technologies for assay configuration,
high-throughput screening and combinatorial chemistry as well as with companies
using conventional methods of discovering and developing drugs for the treatment
of disease. In the future we may also have to compete with new non-gene therapy
treatments which may be developed by our competitors. A number of commercial
entities, including major established biotechnology and pharmaceutical
companies, as well as development stage entities, currently are involved in the
discovery and development of small-molecule drugs. The number and diversity of
Millennium's drug discovery programs are comparable to those of major
pharmaceutical companies. However, such pharamaceuticals companies have
significantly larger organizations and financial resources than Millennium. In
most or all of the disease areas for which it is trying to discover drugs,
Millennium also faces competition from biotechnology companies focused on
particular therapeutic areas or classes of drug targets.

Our primary competition in the development of biotherapeutics is from major
pharmaceutical and biotechnology companies including Human Genome Science,
Lilly, American Home Products, Schering Plough, Novo Nordisk, Amgen, Genentech,
Immunes, and Biogen. Several pharmaceutical and biotechnology companies have an
established presence in the field of biotherapeutic development and therapeutic
protein production.

In the diagnostics and pharmacogenomics fields, we compete primarily with other
genomic companies such as Genset and Axys Pharmaceuticals as well as certain
collaborative ventures


                                      -44-
<PAGE>   45
involving pharmaceutical and biotechnology companies such as diaDexus (joint
venture of Smith Kline Beecham and Incyte Pharmaceuticals).

We rely on our strategic partners for support in our disease research programs
and we intend to rely on our strategic partners for preclinical evaluation and
clinical development of potential products and manufacturing and marketing of
products. Each of Millennium's strategic partners is conducting multiple product
development efforts within each disease area that is the subject of its
strategic alliance with us. Generally, our strategic alliance agreements do not
restrict the strategic partner from pursuing competing development efforts. It
is therefore possible that any Millennium product candidate could be subject to
competition with a potential product under development by a strategic partner.

EMPLOYEES

As of March 1, 1999, Millennium, including its subsidiaries, had approximately
730 full-time employees, of whom approximately 180 hold Ph.D. or M.D. degrees
and approximately 270 hold other advanced degrees, approximately 580 are engaged
in research and development activities and approximately 150 are engaged in
business development, finance, operations support and administration. Millennium
currently has plans to hire up to approximately 200 additional employees by the
end of 2000.


FACTORS THAT MAY AFFECT RESULTS

This Annual Report on Form 10-K contains forward-looking statements. For this
purpose, any statements contained in this Annual Report that are not statements
of historical fact may be considered to be forward-looking statements. Although
this is not a complete list, we use the words "believes," "anticipates,"
"plans," "expects," "intends," and similar expressions to identify
forward-looking statements. There are a number of important factors that could
cause our actual results to differ materially from those that are indicated by
forward-looking statements. Those factors include, without limitation, those
listed below and elsewhere in this Annual Report on Form 10-K.

UNCERTAINTIES RELATING TO TECHNOLOGICAL APPROACHES; RISKS RELATED TO PRODUCT
DEVELOPMENT. To date, we have not developed or commercialized any products or
services based on our genomics and related technologies. Millennium's lead
programs and development focus have been primarily directed to disease that may
be linked to several or many genes, working in combination. The scientific and
medical communities have a limited understanding relating to the role of genes
in these diseases. Relatively few products and services based on gene
discoveries have been developed and commercialized. Our technological approach
to gene identification and target validation may not consistently enable
Millennium to successfully identify and characterize genes that predispose
individuals to diseases.

Any therapeutic, diagnostic or pharmacogenomic products and services based on
gene discoveries that Millennium or any of our current and future strategic
partners may develop in


                                      -45-
<PAGE>   46
the future will require significant research, development, testing and
regulatory approvals prior to commercialization. Development of these products
and services will be subject to the risks of failure that accompany the
development of products and services based on new technologies. These risks
include the possibilities that any products or services based on these
technologies will be found to be ineffective, unreliable or unsafe, or otherwise
fail to receive necessary regulatory approvals; that products or services, if
safe and effective, will be difficult to manufacture on a large scale or will be
uneconomical to market; that proprietary rights of third parties will preclude
us or our strategic partners from marketing products or services; and that third
parties will market superior or equivalent products or services.

Accordingly, even if Millennium is successful in identifying genes associated
with specific diseases, there can be no assurance that our gene discoveries will
lead to the development of therapeutic and diagnostic products capable of
addressing these diseases. The failure to successfully commercialize products
based on Millennium-discovered genes would have a material adverse effect on our
business, financial condition and operating results.

HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES; UNCERTAINTY OF
ADDITIONAL FUNDING. To date, substantially all of our revenues have resulted
from payments from strategic partners. We have not yet generated any therapeutic
or diagnostic products or services that have entered preclinical studies. We
have not generated any revenue from therapeutic or diagnostic product sales. We
anticipate that it will be a number of years, if ever, before we will recognize
revenue from therapeutic or diagnostic product sales or royalties.

As of December 31, 1998, Millennium had an accumulated deficit of approximately
$89 million including a non-recurring charge of $83.8 million in 1997 for
acquired in-process research and development related to the acquisition of
ChemGenics. We may incur losses for at least the next several years, or may show
periods of profitability and periods of losses. Losses may increase as we
expand our infrastructure, research and development, and commercialization
activities. To achieve sustained profitability, Millennium, alone or with
others, must successfully develop therapeutic, diagnostic and pharmacogenomic
products or services, conduct clinical trials, obtain required regulatory
approvals and successfully manufacture, market and sell such therapeutic or
diagnostic products or services. The time required to reach commercial revenue
and profitability is highly uncertain. Millennium may not be able to achieve any
such revenue and profitability on a sustained basis, if at all.

Our approach of applying a comprehensive platform of genomics and related
technologies in the discovery of life-science based products and services has
required that Millennium establish a substantial scientific infrastructure.
Millennium has consumed substantial amounts of cash to date and expects capital
and operating expenditures to increase over the next several years as we expand
our infrastructure, research and development, and commercialization activities.

We believe that existing cash and investment securities and anticipated cash
flow from existing strategic alliances will be sufficient to support our
operations for the foreseeable future. Our actual future capital requirements,
however, will depend on many factors, including progress of our development and
discovery programs, the number and breadth of these programs, costs


                                      -46-
<PAGE>   47
associated with acquisition of products and other opportunities, achievement of
milestones under strategic alliance arrangements, our ability to establish and
maintain additional strategic alliance and licensing arrangements, and the
progress of the development efforts of our strategic partners. Other factors
that may affect our future capital requirements include the level of our
activities relating to commercialization rights it has retained in its strategic
alliance arrangements, competing technological and market developments, costs
associated with acquiring rights to technologies developed outside Millennium,
costs associated with facility expansion, costs associated with collection of
patient information and DNA samples, costs involved in enforcing patent claims
and other intellectual property rights and the costs and timing of regulatory
approvals.

We expect that Millennium will require significant additional financing in the
future, which we may seek to raise through public or private equity offerings,
debt financings or additional strategic alliance and licensing arrangements.
Such additional financing may not be available when needed, or may not be
available on terms that are favorable to Millennium or our stockholders. To the
extent we raise additional capital by issuing equity securities, ownership
dilution to stockholders will result. To the extent that we raise additional
funds through strategic alliance and licensing arrangements, we may be required
to relinquish rights to certain of our technologies or product candidates, or to
grant licenses on terms that are unfavorable, either of which could have a
material adverse effect on our business, financial condition and results of
operations. In the event that adequate funds are not available, our business
would be adversely affected.

RELIANCE ON STRATEGIC PARTNERS. Millennium's strategy for development and
commercialization of therapeutic, diagnostic and pharmacogenomic products and
services based upon our gene discoveries depends upon the formation of various
strategic alliances. We may not be able to establish additional strategic
alliance or licensing arrangements necessary to develop and commercialize
products and services based upon our discovery and development programs. Any
such arrangements or licenses may not be on terms favorable to us. Moreover, any
current or future strategic alliances or licensing arrangements ultimately may
not be successful.

In certain of our strategic alliances, we are dependent on our partners for the
development, regulatory approval, and commercialization of therapeutic,
diagnostic and pharmacogenomic products and services based on the results of
these collaborative programs. The agreements with these strategic partners allow
them significant discretion in electing whether to pursue any of these
activities. We cannot control the amount and timing of resources our strategic
partners devote to our discovery and development programs or to the potential
products or services which may result from these programs.

If any of our strategic partners were to breach or terminate its agreement with
us or otherwise fail to conduct its collaborative activities successfully in a
timely manner, our discovery and development programs, including the preclinical
or clinical development or commercialization of products or services, would be
delayed or terminated. Any such delay or termination could have a material
adverse effect on our business, financial condition and results of operations.


                                      -47-
<PAGE>   48
We rely on our strategic partners for strategic alliances in support of our
discovery and development programs. We could be required to devote additional
internal resources to our product and service development, or scale back or
terminate certain development programs or seek alternative collaborative
partners, if funding from one or more of our collaborative programs were reduced
or terminated.

Disputes may arise in the future with respect to the ownership of rights to any
technology developed with strategic partners. These and other possible
disagreements between strategic partners and Millennium could lead to delays in
the collaborative research, development or commercialization of certain products
and services, or could require or result in litigation or arbitration, which
could be time consuming and expensive. Such disagreements could have a material
adverse effect on our business, financial condition and results of operations.

Recently there have been a significant number of consolidations among
pharmaceutical companies. Any such consolidation involving a company with which
Millennium is collaborating could result in the diminution or termination of, or
delays in, the development or commercialization of products or research programs
under one or more of our strategic alliances.

In each of our strategic alliances, we generally agree not to conduct certain
research and development, independently or with any commercial third party, that
is in the same field as the research and development conducted under the
alliance agreement. Consequently, these arrangements may have the effect of
limiting the areas of research and development we may pursue, either alone or
with others. Our strategic partners, however, may develop, either alone or with
others, products and services that are similar to or competitive with the
products and services that are the subject of our collaborations with such
partners. Competing products and services, either developed by a strategic
partner or to which the strategic partner has rights, may result in the partner
withdrawing financial and related support for our product and service
candidates, which could have a material adverse effect on Millennium's business,
financial condition and results of operations.

All of our strategic alliance agreements are subject to termination under
various circumstances. Each strategic partner has the right to terminate its
agreement with Millennium (while maintaining rights and licenses to certain
Company discoveries) should we fail to meet certain performance criteria
specified in the relevant strategic alliance agreement. Certain of our strategic
alliance agreements provide that, upon expiration of a specified period after
commencement of the agreement, our strategic partner has the right to terminate
the agreement on short notice without cause. We may not be able to successfully
negotiate a continuation of such agreements, if we seek to do so. The
termination or non-renewal of any strategic alliance could have a material
adverse effect on our financial condition and results of operations.

RISKS ASSOCIATED WITH ESTABLISHMENT OF SUBSIDIARIES. Millennium has adopted a
strategy of establishing business divisions and subsidiaries in order to pursue
multiple business opportunities and increase our capabilities and involvement in
the later stages of drug discovery and development. In 1997, we organized three
subsidiaries, MBio, MPMx and MInfo. During 1998, we combined MPMx and MInfo. We
do not hold all of the equity in MBio and, if the


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<PAGE>   49
alliance between MPMx and Becton Dickinson receives clearance under the
Hart-Scott-Rodino Antitrust Improvements Act, we will not hold all of the equity
of MPMx. We anticipate that there could be additional minority stockholders in
both subsidiaries in the future.

Millennium has sought to develop both informal and formal relationships between
and among subsidiaries and divisions to provide each unit within the overall
group with access to the assets and capabilities of the overall group that are
relevant to the business of the particular unit. However, conflicts could arise
in the future between or among Millennium and its divisions and subsidiaries
with respect to, among other things, future business opportunities and the
sharing of rights, technologies, facilities, administrative services or other
resources.

Certain officers and directors of Millennium, including Mark Levin, Chief
Executive Officer and Chairman of the Board of Directors, and Steven Holtzman,
Chief Business Officer, currently serve as directors of each of the
subsidiaries. Mr. Levin also serves as the President of MBio. Our present
executive officers and managers may assume other positions within Millennium's
current or future subsidiaries, causing them to be unavailable to serve the
parent company or to reduce the amount of time they devote to its affairs.
Furthermore, members of the Board of Directors of Millennium and the officers of
Millennium who are also affiliated with one or more of the subsidiaries will be
required to consider not only the short-term and long-term impact of operating
decisions on the parent company, but also the impact of such decisions on the
subsidiaries. In some cases, the impact of such decisions could be
disadvantageous to Millennium or to any or all of the subsidiaries. Conflicts
may arise among the parent company and its subsidiaries and/or the minority
stockholders of such subsidiaries, which could have a material adverse effect on
our business, financial condition or results of operations.

RISKS ASSOCIATED WITH ACQUISITIONS. As part of our business strategy, we may
acquire assets and businesses relating or complementary to our operations and
business. Such acquisitions could include companies, specific technology, or
in-licensed products that are in later stages of development than those in our
current programs. Any acquisitions we may make will be accompanied by the risks
commonly encountered in acquisitions of companies or products. Such risks
include, among other things, potential exposure to unknown liabilities of
acquired companies or to acquisition costs and expenses exceeding amounts
anticipated for such purposes, the difficulty and expense of assimilating the
operations, acquired technology and personnel of the acquired businesses, the
potential disruption of our ongoing business, diversion of management time and
attention, and the potential failure to achieve anticipated financial, operating
and strategic benefits from such acquisitions.

In order to finance any such acquisition, it may be necessary for Millennium to
raise additional funds through public or private financing. Such financing, if
available at all, may be on terms which are not favorable to us, and, in the
case of equity financings, may result in dilution to Millennium stockholders.

There can be no assurance that we would be successful in overcoming these risks
or any other problems encountered in connection with any such acquisitions. If
Millennium is unsuccessful


                                      -49-
<PAGE>   50
in doing so, our business, financial condition and results of operations could
be materially and adversely affected.

EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH. We have significantly increased
the scale of our operations to support the expansion of our disease research
programs and our strategic alliances, including expansion due to the acquisition
of ChemGenics in 1997, the organization during 1997 of subsidiaries, the
initiation of a major strategic alliance with Monsanto in October 1997 and the
initiation of an alliance with Bayer in November 1998. This expansion has
included the hiring of a significant number of additional personnel. As of March
1, 1999, Millennium and its subsidiaries had approximately 730 full-time
employees, an increase of 210 employees since March 1, 1998. We plan to hire up
to approximately 200 new employees by the end of 1999. In addition to hiring new
employees, our growth has required and will continue to require the acquisition
of significant amounts of additional equipment, including software and
informatics resources, and the leasing of additional facilities.

Our growth has resulted in an increase in responsibilities placed upon
management and has placed added pressures on our operational and financial
systems. Our ability to manage such growth effectively will depend upon our
ability to broaden our management team and to attract, hire and retain skilled
employees. Our success will also depend on the ability of our officers and key
employees to continue to implement and improve our operational, management
information and financial control systems and to expand, train and manage our
employee base. If we are unable to manage growth effectively, such inability
could have a material adverse effect on our business, financial condition and
operating results.

INTENSE SCIENTIFIC AND COMMERCIAL COMPETITION. The fields of genomics and
pharmaceuticals are highly competitive. Millennium's competitors in the genomics
area include, among others, public companies such as Genome Therapeutics
Corporation, Human Genome Sciences, Inc., Incyte Pharmaceuticals, Inc., Myriad
Genetics, Inc. and Sequana Therapeutics, Inc., as well as private companies and
major pharmaceutical companies. Universities and other research institutions,
including those receiving funding from the federally funded Human Genome
Project, also compete with Millennium. A number of entities are attempting to
rapidly identify and patent randomly sequenced genes and gene fragments,
typically without specific knowledge of the function of such genes or gene
fragments. In addition, certain other entities are pursing a gene
identification, characterization and product development strategy based on
positional cloning and other genomics technologies.

Many of the organizations competing against Millennium have greater capital
resources, research and development staffs and facilities, and greater
experience in drug discovery and development, obtaining regulatory approvals and
product manufacturing and greater marketing capabilities than us. Our
competitors may discover, characterize or develop therapeutic or diagnostic
products or services for important genes in advance of Millennium or may make
discoveries which render non-competitive or obsolete the products or services
that Millennium or our strategic alliance partners may seek to develop, any of
which could have a material adverse effect on any related Millennium disease
research program. We expect competition to intensify in genomics research as
technical advances in the field are made and become more widely known.


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<PAGE>   51
Generally, our strategic alliance agreements do not restrict the strategic
partner from pursuing competing development efforts. Any product candidate of
Millennium, therefore, may be subject to competition with a potential product
under development by a strategic partner.

PATENTS AND PROPRIETARY RIGHTS; THIRD PARTY RIGHTS. Millennium's commercial
success will depend in part on obtaining patent protection on gene discoveries
and on products, methods and services based on such discoveries. As of March 1,
1999, Millennium and its subsidiaries own, or are the exclusive licensee under,
more than 500 pending U.S. and international patent applications and 25 issued
U.S. patents.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including Millennium, are generally uncertain and involve complex
legal and factual questions. Patent law relating to the scope of claims in the
technology fields in which Millennium operates is still evolving, and the extent
of protection for our discoveries is therefore uncertain. We may not be issued
patents in respect of the patent applications that we file relating to our
technology pending patent applications will result in issued patents. Millennium
may not develop additional proprietary technologies that are patentable, and any
patents issued to either Millennium or our strategic partners may not provide a
basis for commercially viable products. Any issued patents may not provide us
with any competitive advantages or may not be challenged by third parties.

The patents of others may adversely affect our ability to do business. For
example, others may independently develop similar or alternative technologies,
duplicate any of our technologies, or design around the patented technologies we
develop. In addition, others may discover uses for genes, proteins and small
molecules other than those uses covered in our patents and patent applications,
and these other uses may be separately patentable. It is possible, therefore,
that we could be excluded from selling a product for which we have a composition
of matter claim if another party were to hold a patent covering the use of a
product of that same composition. It is also possible that Millennium could
incur substantial costs in litigation if we are required to defend ourselves in
patent suits brought by third parties, or if we initiate litigation against
others.

Millennium has applied for patent protection for novel, full-length genes,
partial gene sequences of novel genes and novel uses for known genes identified
through its research programs. There has been and continues to be uncertainty
regarding the patentability of partial gene sequences and full-length genes
absent functional data and the scope of patent protection available for
full-length genes and partial gene sequences. Based on recent technological
advances in gene sequencing technology, a number of groups other than Millennium
are attempting to rapidly identify gene sequences, whose functions have not been
characterized. Washington University (in conjunction with Merck & Co., Inc.) and
The Institute for Genomic Research (in collaboration with the National Center
for Biological Information) have made certain gene sequences available in
publicly accessible databases. It is possible that these and other similar
disclosures could adversely affect our ability to obtain patent protection for
full-length genes claimed in subsequent patent applications. We routinely
conducts searches of publicly available databases to determine whether other
parties have previously identified gene sequences corresponding to the various
partial gene sequences and full-length genes that Millennium has


                                      -51-
<PAGE>   52
discovered. To the extent any patents issue to other parties on such gene
sequences, the risk increases that Millennium's or Millennium's partners'
potential products and processes may give rise to claims of patent infringement.

Others may have filed and in the future are likely to file patent applications
covering inventions that are similar or identical to inventions that we have
made. Any such patent applications covered have priority over patent
applications filed by Millennium. We believe that certain of our patent
applications cover genes that may also be claimed in patent applications filed
by other parties. Interference proceedings before the United States Patent and
Trademark Office may be necessary to establish which party was the first to
discover a particular gene.

Our potential products and services may conflict with patents that have been or
may be granted to competitors, universities or others. As the biotechnology and
biopharmaceutical industries expand and more patents are issued, the risk
increases that our potential products and services may give rise to claims that
they infringe the patents of others. Other parties could bring legal actions
against Millennium or our strategic partner claiming damages and seeking to
enjoin clinical testing, manufacturing and marketing of the affected products
and services. If any such actions are successful, in addition to any potential
liability for damages, We or our strategic partner could be required to obtain a
license in order to continue to manufacture or market the affected products and
processes. We cannot assure that we or our strategic partners would prevail in
any such action or that any license required under any such patent would be made
available on commercially acceptable terms, if at all. We believe that there
will continue to be significant litigation in the industry regarding patent and
other intellectual property rights. If Millennium becomes involved in such
litigation, it could consume a substantial portion of the our managerial and
financial resources.

There is substantial uncertainty concerning whether human clinical data will be
required for issuance of patents for human therapeutics. If such data is
required, our ability to obtain patent protection could be delayed or otherwise
adversely affected. Although the USPTO issued new utility guidelines in July
1995 that address the requirements for demonstrating utility for biotechnology
inventions, particularly for inventions relating to human therapeutics, utility
will be determined on a case-by-case basis. Moreover, we cannot assure that the
USPTO's position will not change with respect to what is required to establish
utility for biotechnology inventions.

Millennium relies upon trade secret protection for its confidential and
proprietary information. We believe that we have developed proprietary
technology for use in gene discovery and characterization, including proprietary
genetic marker sets, proprietary software (including proprietary software for
the capture, storage and analysis of DNA and protein sequence data) and an
integrated informatics system. We have not sought patent protection for many of
these technologies. In addition, Millennium has developed databases of
proprietary gene sequences and biological information, which are updated on an
ongoing basis. We have taken security measures to protect our data and we
continue to explore ways to further enhance data security. We cannot assure,
however, that such measures will provide adequate protection for our trade
secrets or other proprietary information. While we require employees, academic
collaborators and consultants to enter into confidentiality agreements, we
cannot assure that proprietary


                                      -52-
<PAGE>   53
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets or disclose such technology, or that we can
meaningfully protect our trade secrets.

Millennium's academic collaborators have certain rights to publish data and
information in which we have rights. While we believe that the limitations on
publication of data developed by its collaborators pursuant to its collaboration
agreements will be sufficient to permit Millennium to apply for patent
protection, there is considerable pressure on academic institutions to publish
discoveries. We cannot assure that such publication would not affect our ability
to obtain patent protection for some inventions in which we may have an
interest.

Millennium is a party to various license agreements that give us rights to use
certain technologies in our research and development processes. We cannot assure
that we will be able to continue to license such technology on commercially
reasonable terms, if at all. Our failure to maintain rights to such technology
could have a material adverse effect on our business, financial condition and
results of operations.

IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs that were written using
two digits rather than four to define the applicable year. Any computer program
that has date-sensitive software may recognize a date using "00" as the year
1900 rather than the Year 2000. It is possible that this incorrect recognition
of dates could cause system failures or miscalculations of data. If these errors
were to occur in Millennium systems, they could cause us to be unable to process
data and engage in normal business activities.

Millennium has determined that we have Year 2000 exposure in the following
areas: (i) software and hardware embedded in our laboratory equipment and used
in our research and development programs, (ii) computer software and hardware
used in our business and facilities operations and (iii) computer systems used
by vendors and suppliers with whom we do business. In addition, we have Year
2000 exposure with respect to internally developed informatics application
software that is used by Millennium and certain alliance partners who have
access to our technology platform.

Millennium has a Year 2000 task force that is evaluating our internal computer
programs, systems and equipment and overseeing our Year 2000 efforts. We are
using both internal and external resources to identify potential issues, costs
and solutions to address Year 2000 concerns. For this effort, we are using
procedures outlined in the Government Accounting Office's Y2K Guide. We have
completed a preliminary inventory of our informatics applications, and we are
conducting an in-depth assessment of this inventory. In addition, we have
inventoried a substantial amount of software and hardware embedded in our
laboratory and facilities equipment as part of our effort to determine Year 2000
compliance. We are also making inquiries of our important suppliers and vendors
to assess their Year 2000 readiness. We have inventoried software used in our
business operations as well. We intend to identify critical systems and
equipment on which to focus our inquiries and testing.


                                      -53-
<PAGE>   54
To date, we have identified aspects of our computer hardware, network
infrastructure and business systems that are not Year 2000 compliant. We have
obtained and begun to implement vendor recommendations for correcting these
deficiencies. We have also identified aspects of internally developed software
applications that are not Year 2000 compliant and have begun testing and
corrective programs in this area. In addition, we expect to complete an
inventory and assessment of critical laboratory and facilities equipment and
systems by the end of the first quarter of 1999. We expect to complete testing
and remediation for critical computer hardware, network infrastructure, business
systems and internally developed software applications by the end of the third
quarter of 1999. We expect to complete testing and any remediation of critical
laboratory and facilities equipment by the end of the year. We are not
experiencing and do not anticipate any forward-looking problems.

At the current time, we expect to be able to correct the problems of which we
are aware in a reasonable and timely manner. As we have not completed our
evaluation of all of our critical systems, software or equipment, there can be
no assurance that we will not find problems that will require us to incur
substantial costs to correct or will disrupt our business. Should such problems
occur, they could have a material adverse effect on our business, financial
position or results of operations.

We do not currently have contingency plans for all critical aspects of our
systems and operations in the event that we or any of our important suppliers or
vendors are not able to become Year 2000 compliant. We expect to develop
contingency plans for critical areas if we determine that we or any important
vendors or suppliers are not likely to become Year 2000 compliant.

We have not incurred material remediation costs to date and we do not currently
expect that the aggregate cost of our efforts will be material to our operations
or financial position taken as a whole. However, it is possible that remediation
costs will be greater than we anticipate and that such costs could have a
material adverse effect on our financial position or results of operations. Our
alliance partners or collaborators may also experience disruption as a result of
the Year 2000 issue. If our alliance partners and collaborators experience
disruption, it is possible that our alliances with these partners could be
adversely affected, which could have a material adverse effect on our financial
position and results of operations.

There can be no assurance that we will identify all Year 2000 compliance
problems as a result of our efforts or that we will be able to correct
compliance problems that are identified in a timely manner. If we are unable, in
a timely manner, to identify and correct compliance problems in critical systems
and equipment, our business, financial position and results of operations could
be adversely affected.

UNCERTAINTY OF GOVERNMENT REGULATORY APPROVALS. The FDA, FTC and comparable
agencies in foreign countries impose substantial requirements upon the
manufacturing and marketing of human therapeutic, diagnostic and vaccine
products and services such as those proposed to be developed by Millennium or
its strategic alliance partners. Failure to comply with applicable regulations
or to obtain the necessary marketing clearances or approvals will significantly
impair Millennium's ability to market its products and services. The process of
obtaining FDA and


                                      -54-
<PAGE>   55
other required regulatory approvals is lengthy and expensive. The time required
for FDA and other clearances or approvals is uncertain and typically takes a
number of years, depending on the complexity and novelty of the product. We
and/or our strategic alliance partners may encounter significant delays or
excessive costs in our efforts to secure necessary clearances, approvals or
licenses.

Because certain of the products likely to result from the our research and
development programs involve the application of new technologies and may be
based on a new therapeutic approach, such products may be subject to substantial
additional review by various governmental regulatory authorities. As a result,
regulatory approvals may be obtained more slowly than for products using more
conventional technologies. For example, proposals to conduct clinical research
involving gene therapy at institutions supported by the National Institutes of
Health ("NIH") must be approved by the Recombinant DNA Advisory Committee
("RAC") and the NIH. In addition, the U.S. Government has recently established a
working group to assess whether additional regulations in the area of genetic
testing may be appropriate, which could result in further regulation.

There can be no assurance that FDA or other clearances or approvals will be
obtained in a timely manner, if at all. Any delay in obtaining, or the failure
to obtain, such clearances or approvals could materially adversely affect our
ability to generate product or service or royalty revenues. Furthermore, such
clearances or approvals may include significant limitations on indications for
use for which the product or service may be marketed. Even if FDA or other
clearances or approvals are obtained, the marketing and manufacturing of
diagnostic and therapeutic products are subject to continuing FDA and other
regulatory review. Later discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on the product or
manufacturer, including, suspension, revocation, or withdrawal of product
approvals or clearances and/or withdrawal of the product from the market.
Violations of the Act or regulatory requirements at any time during the product
development process, approval process, or after approval may result agency
enforcement actions, including voluntary or mandatory recall, seizure of
products, fines, injunctions and/or civil or criminal penalties. Any such agency
action could have a material adverse effect on Millennium.

Millennium cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business in the future. Any such requirements could delay or
prevent regulatory approval or clearance of products under development. Any such
requirements could have a material adverse effect on Millennium's business,
financial condition, results of operations, and ability to market its products.

Our research and development activities involve the controlled use of hazardous
materials, chemicals and various radioactive materials. Millennium is subject to
federal, state and local laws and regulations governing the use, storage,
handling and disposal of such materials and certain waste products. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be


                                      -55-
<PAGE>   56
completely eliminated. In the event of such an accident, Millennium could be
held liable for any damages that result and any liability could exceed our
resources.

UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING. The grant of
regulatory approval for the commercial sale of any of our potential products
will depend in part on us and/or our strategic alliance partner successfully
conducting extensive preclinical and clinical testing to demonstrate the
product's safety and efficacy in humans. We have limited experience in
conducting preclinical and clinical development activities. Neither Millennium
nor any strategic alliance partner has submitted an IND to the FDA for any
product candidate based upon our discoveries.

The results of preclinical studies by Millennium and/or our strategic alliance
partners may be inconclusive and may not be indicative of results that will be
obtained in human clinical trials. In addition, results attained in early human
clinical trials relating to the products under development may not be indicative
of results that will be obtained in later clinical trials. As results of
particular preclinical studies and clinical trials are received, we and/or our
strategic alliance partners may abandon projects which we might otherwise have
believed to be promising.

We may not be permitted to undertake and complete human clinical trials of any
of our potential products, either in the U.S. or elsewhere. If such trials are
permitted. The products under development covered have undesirable side effect
or other characteristics that may prevent them from being approved or limit
their commercial use if approved. Clinical testing is very expensive, and we
and/or our strategic alliance partners will have to devote substantial resources
for the payment of clinical trial expenses.

In certain circumstances we may rely, in part, on our strategic alliance
partners, academic institutions and on clinical research organizations to
conduct and monitor certain clinical trials. Such entities may not conduct the
clinical trials successfully. Furthermore, we will have less control over such
trials than if Millennium were the sole sponsor. As a result, these trials may
not begin or be completed as planned. Failure to begin or complete any of our
planned clinical trials could have a material adverse effect on our business,
financial condition or results of operations.

ABSENCE OF SALES AND MARKETING EXPERIENCE; LIMITED MANUFACTURING CAPABILITY.
Although Millennium plans to rely significantly on strategic alliance partners
for the marketing and distribution of its products and services once developed,
we may market and sell certain of our products and services directly and may
engage in certain other marketing activities in collaboration with our strategic
alliance partners. During 1999, we intend to consider joint development, merger,
or acquisition opportunities that could provide Millennium with access to
products on the market or in later stages of commercial development than those
represented within our current programs. We have no experience in sales,
marketing or distribution. We do not expect to establish a direct sales
capability until such time as we have one or more products or services in
development which are approaching marketing approval.

To the extent Millennium enters into marketing or distribution arrangements with
strategic alliance partners, any revenues we receive will depend upon the
efforts of third parties. Any


                                      -56-
<PAGE>   57
third party may not market our products and services successfully any
third-party collaboration may not be on terms favorable to us. If any marketing
partner did not market a product or service successfully, our business and
financial results would suffer. If our plan to rely on strategic alliance
partners for significant aspects of marketing and selling our products were
unsuccessful for any reason, Millennium would need to recruit and train a
marketing and sales force which would require us to incur significant additional
costs.

Millennium may not be able to attract and build a sufficient marketing staff or
sales force, the cost of establishing such a marketing staff or sales force may
not be justifiable in light of any product or service revenues, and our direct
sales and marketing efforts would be successful. In addition, if Millennium
succeeds in bringing one or more products or services to market, we may compete
with other companies that currently have extensive and well-funded marketing and
sales operations. Our marketing and sales efforts may not enable us to compete
successfully against such other companies.

Millennium does not have commercial-scale facilities to manufacture any products
under development in accordance with current Good Manufacturing Practices
("GMP") requirements prescribed by the FDA. We expect to be dependent on third
party manufacturers or collaborative partners for our clinical trials and
commercial production of products. In the event that we were unable to obtain
contract manufacturing, we may not be able to commercialize our products. Where
third-party arrangements are established, we expect to depend upon these third
parties to manage our clinical trials and meet our production needs in a timely
manner. Any such third parties we depend on may not perform. Any failures by
third parties could delay clinical trial development or the submission of
products for regulatory approval, impair our ability to commercialize products
as planned and deliver products on a timely basis, or otherwise harm our
competitive position, all of which could have a material adverse effect on our
business, financial condition or result or operation.

If we determined to develop our own manufacturing capabilities, we would need to
recruit qualified personnel and build or lease the requisite facilities and
equipment. We do not have any experience in manufacturing on a commercial scale
and do not have manufacturing facilities or equipment. We may not be able to
successfully develop our own manufacturing capabilities in a cost-effective or
timely manner. In addition, the manufacture of any potential Millennium products
regulated by the FDA and comparable agencies in foreign countries. Our delay in
complying, or our failure to comply with these agencies' manufacturing
requirements could materially adversely affect the marketing of our products and
our business, financial condition and results of operations.

AVAILABILITY OF, AND COMPETITION FOR, FAMILY RESOURCES. Our gene identification
strategy includes genetic studies of families and populations prone to
particular diseases. These studies are based upon statistical analyses of
disease inheritance patterns and require the collection of large numbers of DNA
samples from affected individuals, their families and other suitable
populations. We are dependent upon collaborations with a number of academic
centers for the identification of donor populations and the collection and
supply of the DNA samples used in its human disease gene research programs. The
availability of DNA samples from large, family-


                                      -57-
<PAGE>   58
based or other suitable populations is therefore critical to our ability to
discover the genes responsible for human diseases through human genetic
approaches. The competition for these resources is intense and certain of our
competitors have obtained rights to significantly more family resources than we
have obtained. We may not be able to obtain access to DNA samples necessary to
support our human gene discovery programs and any material lack of availability
of such DNA samples would have an adverse effect on our business.

ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS. We are highly
dependent on the principal members of our management and scientific staff, none
of whom is bound by a long-term employment agreement. The loss of services of
any of these personnel could impede significantly the achievement of our
development objectives and could have a material adverse effect on our business,
financial condition and operating results. Furthermore, recruiting and retaining
qualified scientific personnel to perform research and development work in the
future will also be critical to our success. There is intense competition among
pharmaceutical and health care companies, universities and nonprofit research
institutions for experienced scientists, and there can be no assurance that we
will be able to attract and retain personnel on acceptable terms.

In addition, we rely on our scientific advisors to assist us in formulating our
discovery and developing strategy. All of the scientific advisors are employed
by employers other than Millennium and have commitments to other entities that
may limit their availability to us. Some of our scientific advisors also consult
for companies that may be competitors of Millennium.

DEPENDENCE ON RESEARCH COLLABORATORS AND SCIENTIFIC ADVISORS. We have
relationships with collaborators at academic and other institutions who conduct
research at our request. Such collaborators are not Millennium employees. All of
Millennium's consultants are employed by employers other than us and may have
commitments to, or consulting or advisory contracts with, other entities that
may limit their availability to Millennium. As a result, we have limited control
over their activities and, except as otherwise required by our collaboration and
consulting agreements, can expect only limited amounts of their time to be
dedicated to our activities. Our ability to discover genes involved in human
disease and commercialize products based on those discoveries may depend in part
on continued collaborations with researchers at academic and other institutions.
We may not be able to negotiate additional acceptable collaborations with
collaborators at academic and other institutions and our existing collaborations
may not be successful.

Our research collaborators and scientific advisors sign agreements which provide
for confidentiality of Millennium's proprietary information and results of
studies. There can be no assurance, however, that we will be able to maintain
the confidentiality of our technology and other confidential information in
connection with every collaboration, and any unauthorized dissemination of our
confidential information could have an adverse effect on our business.

UNCERTAINTY OF THERAPEUTIC AND DIAGNOSTIC PRICING, REIMBURSEMENT AND RELATED
MATTERS. Millennium's business, financial condition and results of operations
may be materially adversely affected by the continuing efforts of government and
third party payors to contain or reduce the


                                      -58-
<PAGE>   59
costs of health care through various means. For example, in certain foreign
markets pricing and profitability of prescription pharmaceuticals are subject to
government control. In the United States, we expect that there will continue to
be a number of federal and state proposals to implement similar government
control. In addition, increasing emphasis on managed care in the United States
will continue to put pressure on the pricing of therapeutic, diagnostic and
pharmacogenomic products and services. Cost control initiatives could decrease
the price that we or any of our strategic partners receives for any therapeutic,
diagnostic and pharmacogenomic products or services in the future and have a
material adverse effect on our business, financial condition and results of
operations. Further, to the extent that cost control initiatives have a material
adverse effect on our strategic partners, Millennium's ability to commercialize
our products and to realize royalties may be adversely affected.

The ability of Millennium and any strategic partner to commercialize
therapeutic, diagnostic and pharmacogenomic products and services may depend in
part on the extent to which reimbursement for the products and services will be
available from government and health administration authorities, private health
insurers and other third party payors. Significant uncertainty exists as to the
reimbursement status of newly approved health care products and services. Third
party payors, including Medicare, increasingly are challenging the prices
charged for medical products and services. Government and other third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic and diagnostic
products and services and by refusing in some cases to provide coverage for uses
of approved products for disease indications for which the FDA has not granted
labeling approval. Any third party insurance coverage may not be available to
patients for any products and services discovered and developed by Millennium or
our strategic partners. If adequate coverage and reimbursement levels are not
provided by government and other third party payors for our products and
services, the market acceptance of these products and services may be reduced,
which may have a material adverse effect on our business, financial condition
and results of operations.

PRODUCT LIABILITY EXPOSURE. Clinical trials, manufacturing, marketing and sale
of any of Millennium's or our strategic partners' potential therapeutic products
may expose Millennium to liability claims from the use of such therapeutic
products. We currently do not carry product liability insurance. There can be no
assurance that we or our strategic partners will be able to obtain such
insurance or, if obtained, that sufficient coverage can be acquired at a
reasonable cost. An inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of therapeutic products
developed by Millennium or our strategic partners. A product liability claim or
recall could have a material adverse effect on the business or financial
condition of Millennium. While under certain circumstances we are entitled to be
indemnified against losses by its strategic partners, there can be no assurance
that this indemnification would be available or adequate should any such claim
arise.

ITEM 2. PROPERTIES


                                      -59-
<PAGE>   60
The Company's facilities currently consist of an aggregate of approximately
560,000 square feet of office, research and laboratory space in several
locations in Cambridge, Massachusetts, pursuant to leases and subleases that
expire from 1999 to 2014.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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

No matters were submitted to a vote of security holders of the Company, through
solicitation of proxies or otherwise, during the last quarter of the year ended
December 31, 1998.

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the names, ages and positions of the executive
officers of the Company.

<TABLE>
<CAPTION>
     Name                Age                     Position
     ----                ---                     --------
<S>                      <C>     <C>
Mark J. Levin            48      Chairman of the Board, Chief Executive Officer
                                 and Director
Steven H. Holtzman       45      Chief Business Officer
Frank D. Lee, Ph.D.      47      Chief Research Technology Officer
Michael Pavia, Ph.D.     43      Chief Technology Development Officer
Kevin Starr              36      Chief Financial Officer
</TABLE>


Mark J. Levin has served as Chairman of the Board of Directors since March 1996,
Chief Executive Officer of the Company since November 1994, and as a director of
the Company since inception. From 1987 to 1994, Mr. Levin was a partner at
Mayfield Fund ("Mayfield") a venture capital firm, and co-director of its Life
Science Group. While employed with Mayfield, Mr. Levin was the founding Chief
Executive Officer of several biotechnology and biomedical companies, including
Cell Genesys Inc., CytoTherapeutics Inc., Tularik Inc. and Focal, Inc. Mr. Levin
holds an M.S. in Chemical and Biomedical Engineering from Washington University.
Mr. Levin also serves on the Board of Directors of CytoTherapeutics Inc and
Focal, Inc.

Steven H. Holtzman has served as Chief Business Officer of the Company since May
1994. From 1986 to 1993, Mr. Holtzman was with DNX Corporation ("DNX"), a
biomedical company, and its subsidiaries. He was a founder and the first
employee of DNX, served as a member of the Board of Directors, and held several
senior management positions including, from 1992 to 1993, President of DNX
Biotherapeutics Inc., a subsidiary of DNX, and from 1990 to 1993, Executive Vice
President of DNX. Mr. Holtzman received his graduate B.Phil. degree in
Philosophy from Oxford University, which he attended as a Rhodes Scholar. Mr.
Holtzman currently serves as


                                      -60-
<PAGE>   61
co-chairperson of the Biotechnology Industry Organization's Bioethics Committee
and is a member of the National Bioethics Advisory Commission.

Frank D. Lee, Ph.D. joined the Company in July 1994 as Vice President, Research,
became Chief Scientific Officer in January 1996 and became Chief Research
Technology Officer in November 1997. From 1989 to 1994, Dr. Lee served as
Director of Molecular Biology at DNAX Research Institute of Molecular and
Cellular Biology, Inc., a subsidiary of Schering-Plough Corporation, a
pharmaceutical company ("DNAX"), and from 1981 to 1989 he served as a Senior
Staff Scientist at DNAX. Dr. Lee received his Ph.D. from Stanford University and
did his postdoctoral research at Stanford University School of Medicine in the
Department of Pharmacology and was a Senior Fellow of the American Cancer
Society. Dr. Lee also did postdoctoral research at the Massachusetts Institute
of Technology's Center for Cancer Research as a fellow of the Helen Hay Whitney
Foundation.

Michael Pavia, Ph.D. has served as Chief Technology Development Officer of the
Company since September 1997. From 1993 to 1997, he was employed by Sphinx
Pharmaceuticals, a division of Eli Lilly & Company, where he was most recently
Vice President-Cambridge Research. From 1992 to 1993, Dr. Pavia was Vice
President of Chemistry at Genesis Pharmaceuticals, Inc., a drug development
company. Dr. Pavia also worked in senior scientific positions in the Department
of Chemistry at the Parke-Davis Pharmaceutical Research Division of
Warner-Lambert Co., a pharmaceutical company. He holds a B.S. in Chemistry from
Lehigh University and a Ph.D. in Organic Chemistry from the University of
Pennsylvania.

Kevin Starr joined Millennium in February 1997 as Vice President of Finance,
Millennium BioTherapeutics and became Chief Financial Officer of Millennium
Pharmaceuticals in January 1999. Mr. Starr was Corporate Controller of Biogen,
Inc. from 1994 to 1997 and Manager of Financial Analysis from 1991 to 1994. Mr.
Starr also worked in various financial positions at Digital Equipment
Corporation from 1984 to 1991. He earned a Master of Science in Finance from
Boston College and a Bachelor of Arts from Colby College. Mr. Starr also serves
on the Board of Trustees of Cambridge Savings Bank.

                                     PART II

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

(a)       MARKET PRICE OF AND DIVIDENDS ON MILLENNIUM'S COMMON STOCK AND RELATED
          STOCKHOLDER MATTERS

The Common Stock of Millennium has been traded on the NASDAQ National Market
under the symbol MLNM since May 6, 1996. Prior to May 6, 1996, Millennium's
Common Stock was not publicly traded. On March 15, 1999, the closing price for
the sale of a share of Millennium's Common Stock on the NASDAQ Stock Market was
$34.375. The following table sets forth for the periods indicated the high and
low closing prices per share of our Common Stock as reported by the NASDAQ
National Market.


                                      -61-
<PAGE>   62
<TABLE>
<CAPTION>
                                             1997
                                             ----
<S>                            <C>                       <C>
                                 High                      Low
                                 ----                      ---
        First Quarter          $ 21.50                   $13.625
       Second Quarter          $ 17.50                   $ 13.00
        Third Quarter          $21.125                   $ 12.50
       Fourth Quarter          $ 21.25                   $ 16.75
                                             1998
                                             ----

                                 High                      Low
                                 ----                      ---
        First Quarter           $22.38                   $17.75
       Second Quarter           $19.00                   $14.13
        Third Quarter           $18.69                   $10.57
       Fourth Quarter           $25.88                   $14.75
</TABLE>

(b)       RECENT SALES OF UNREGISTERED SECURITIES

On November 10, 1998, Millennium sold 4,957,660 shares of Common Stock, $.001
par value per share, of Millennium to Bayer AG, a corporation organized and
existing under the laws of Germany, in exchange for an aggregate of $96,600,000.

No person acted as an underwriter with respect to the above transaction.
Millennium relied on Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), for the exemption from the registration requirements of the
Securities Act, since no public offering was involved.

On March 15, 1999, Millennium had approximately 394 stockholders of record.
Millennium has never declared or paid any cash dividends on its Common Stock. We
currently intend to reinvest earnings, if any, to support the development of our
business and do not expect to pay cash dividends for the foreseeable future.

ITEM 6.   SELECTED FINANCIAL DATA

Incorporated by reference from Millennium's 1998 Annual Report to Stockholders
under the heading "Selected Financial Data", which appears in Exhibit 13 to this
Annual Report on Form 10-K.

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

Incorporated by reference from Millennium's 1998 Annual Report to Stockholders
under the heading "Management's Discussions and Analysis of Financial Condition
and Results of Operations", which appears in Exhibit 13 to this Annual Report on
Form 10-K.


                                      -62-
<PAGE>   63
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company maintains an investment portfolio in accordance with its Investment
Policy. The primary objectives of the Company's Investment Policy are to
preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment.

The Company does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments which would require
disclosure under this item.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements filed as part of this Annual Report on Form 10-K are
listed under Item 14 below and are incorporated by reference from the Company's
1998 Annual Report to Stockholders under the heading "Financial Statements and
Notes Thereto", which appears in Exhibit 13 to this Annual Report on Form 10-K.

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

During the Company's two most recent fiscal years there have been no
disagreements with our independent accountants on accounting and financial
disclosure matters.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

The information required by this item (with respect to Directors) is
incorporated by reference from the information under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in our Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Company's 1999
Annual Meeting of Stockholders to be held on June 2, 1999 (the "Proxy
Statement").

The required information about Executive Officers of the Company is contained in
Part I of this Annual Report on Form 10-K under the heading "Executive Officers
of the Company."

ITEM 11.  EXECUTIVE COMPENSATION

The information required regarding executive compensation is incorporated by
reference from the information under the captions "Election of Directors --
Compensation for Directors," "Executive Compensation," "Report of the
Compensation Committee" and "Compensation Committee Interlocks and Insider
Participation" contained in the Proxy Statement.


                                      -63-
<PAGE>   64
ITEM 12.  STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in this
Proxy Statement.

                                     PART IV

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

(a)      The following documents are included as part of this Annual Report on
         Form 10-K or are incorporated by reference from the Company's 1998
         Annual Report to Stockholders.

1. The following financial statements (and related notes) of Millennium are
incorporated by reference from the 1998 Annual Report to Stockholders.

<TABLE>
<S>                                                                          <C>
Report of Independent Auditors on Financial Statements                       20

Consolidated Balance Sheets at December 31, 1998 and 1997                    21

Consolidated Statements of Operations
  for the years ended December 31, 1998, 1997, and 1996                      22

Consolidated Statements of Cash Flows
  for the years ended December 31, 1998, 1997, and 1996                      23

Statements of Stockholders' Equity
   for the years ended December 31, 1998, 1997 and 1996                      24

Notes to Financial Statements                                                26
</TABLE>

  *Refers to page number of 1998 Annual Report to Stockholders

2. All schedules are omitted as the information required is inapplicable or the
information is presented in the consolidated financial statements or the related
notes.

3. The Exhibits listed in the Exhibit Index immediately preceding the Exhibits
are filed as a part of this Annual Report on Form 10-K.




                                      -64-
<PAGE>   65
(b) The following Current Reports on Form 8-K were filed by the Company during
the last quarter of the period covered by this report:

                  1. Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 1, 1998.




         The following trademarks of the Company are mentioned in this Annual
Report on Form 10-K: Millennium, Millennium Pharmaceuticals, Millennium
Predictive Medicine, Millennium Information, Millennium BioTherapeutics, MBio,
MPMx, MInfo, Diagnomics(TM), Sequence Explorer, Expression Explorer, and Sample
Manager . Other trademarks used in this Annual Report on Form 10-K are the 
property of their respective owners.


                                      -65-
<PAGE>   66
                                   SIGNATURES

In accordance with the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the undersigned, duly authorized officers of Millennium
have signed this report on Millennium's behalf.


                                        MILLENNIUM PHARMACEUTICALS, INC.


                                            By:      /s/ Mark J. Levin
                                                     ---------------------------
                                                     Mark J. Levin
                                                     Chief Executive Officer

In accordance with the requirements of the Securities Exchange Act of 1934, the
following persons have signed this report below, on behalf of the Company, in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                         Title                                        Date
---------                         -----                                        ----
<S>                               <C>                                          <C>
/s/ Mark J. Levin                 Chief Executive Officer and Director         March 18, 1999
Mark J. Levin                     (Principal Executive Officer)

/s/ Steven H. Holtzman            Chief Business Officer                       March 18, 1999
Steven H. Holtzman

/s/ Kevin Starr                   Chief Financial Officer (Principal           March 18, 1999
Kevin Starr                       Financial and Accounting Officer)

/s/ Joshua Boger                  Director                                     March 18, 1999
Joshua Boger, Ph.D.

/s/ Eugene Cordes                 Director                                     March 18, 1999
Eugene Cordes, Ph.D.

/s/ A. Grant Heidrich             Director                                     March 18, 1999
A. Grant Heidrich, III

/s/ William W. Helman             Director                                     March 18, 1999
William W. Helman

/s/ Raju Kucherlapati             Director                                     March 18, 1999
Raju Kucherlapati

/s/ Eric S. Lander                Director                                     March 18, 1999
Eric S. Lander, Ph.D.
</TABLE>


                                      -66-
<PAGE>   67
                                  Exhibit Index


         The following exhibits are filed as part of this Annual Report on Form
10-K.

<TABLE>
<CAPTION>
Exhibit No.       Description
-----------       -----------
<S>               <C>
(2)       3.1     Amended and Restated Certificate of Incorporation of the Company

(2)       3.2     Amended and Restated Bylaws of the Company

(1)       4.1     Specimen Certificate for shares of Common Stock, $.001 par value, of the
                  Company

(8)(1)   10.1     1996 Director Option Plan

(1)      10.2     Third Amended and Restated Investors' Rights Agreement, as amended, dated
                  February 1, 1996 by and among the Company and the persons named on the
                  signature pages thereto.

(1)      10.3     Agreement dated as of August 10, 1995 by and between the Company and Joshua
                  Boger.

(1)      10.4     Agreement dated as of August 10, 1995 by and between the Company and Eugene
                  Cordes.

(1)      10.5     Agreement dated as of April 21, 1993, by and between the Company and Raju
                  Kucherlapati.

(1)      10.6     Letter Agreement dated November 30, 1994 by and between the Company and Mark
                  J. Levin.

(1)      10.7     Letter Agreement dated April 14, 1994 by and between the Company and Steven H.
                  Holtzman.

(1)      10.8     Promissory Note dated March 15, 1996 made in favor of the Company by Steven H.
                  Holtzman.

(1)      10.9     Master Lease Agreement dated March 22, 1993 by and between the Company and
                  Comdisco, Inc.

(1)      10.10    Loan and Security Agreement dated October 28, 1994 by and between the Company
                  and MMC/GATX Partnership No. 1
</TABLE>


                                      -67-
<PAGE>   68
<TABLE>
<S>               <C>
(1)      10.11    Master Equipment Lease Agreement dated July 14, 1995 by and between the
                  Company and Lighthouse Capital Partners, L.P.

(1)      10.12    Loan Agreement dated February 15, 1996 by and between the Company and
                  Lighthouse Capital Partners, L.P.

(4)      10.13    Form of Master Equipment Lease Financing Agreement, as
                  amended, dated September 19, 1996 by and between the Company
                  and GE Capital Corporation.

(7)      10.14    Amendment to Master Equipment Lease Agreement dated June 16, 1997 by and
                  between the Company and GE Capital Corporation.

(1)      10.15    Lease Agreement dated August 25, 1993, as amended, by and between the Company
                  and the Massachusetts Institute of Technology.

(4)      10.16    Lease Agreement dated October 26, 1996 by and between the Company and Fort
                  Washington Limited Partnership

(5)      10.17    Lease Agreement between the Company and Old Cambridge Realty Trust, Inc.

(5)      10.18    Form of Sub-Lease Agreement, dated June 28, 1996, by and
                  between the Company (as successor to ChemGenics) and
                  PerSeptive Biosystems, Inc.

(6)      10.19    Lease dated March 28, 1997 by and between the Company and Old Cambridge
                  Property LLC

(6)      10.20    Subordination Non-Disturbance and Attornment Agreement dated March 28, 1997 by
                  and among LaSalle National Bank, as Trustee for Asset Securitization
                  Corporation Commercial Mortgage Pass-Through Certificates, Series D-4, Old
                  Cambridge Property LLC and the Company.

(7)      10.21    Lease dated May 15, 1997 by and between the Company and Massachusetts
                  Institute of Technology.

(11)     10.22    Lease dated November 17, 1997 by and between the Company and FC 45/75 Sidney,
                  Inc.

(12)     10.23    Lease dated June 12, 1998 by and between the Company and 270 Albany Street
                  Realty Trust.

(12)     10.24    Lease dated June 17, 1998 by and between the Company and TransAmerica Business
                  Credit Corporation.
</TABLE>


                                      -68-
<PAGE>   69
<TABLE>
<S>               <C>
+(1)     10.25    Sponsored Research Agreement dated March 25, 1994 by and between the Company
                  and F. Hoffman-La Roche Ltd.

+(1)     10.26    Research and License Agreement dated October 3, 1995 by and between the
                  Company and Eli Lilly and Company.

+(1)     10.27    Research and License Agreement dated December 9, 1995 by and between the
                  Company and Astra AB.

+        10.28    Amended and Restated Research and License Agreement dated December 22, 1998 by
                  and between MPI and Eli Lilly and Company .

+(3)     10.29    CNS Research, Collaboration and License Agreement
                  effective as of August 1, 1996 by and between American Home
                  Products Corporation and the Company.

+(3)     10.30    Bioinformatics Access and License Agreement effective as
                  of August 1, 1996 by and between American Home Products
                  Corporation and the Company.

+(3)     10.31    Transcription Profiling Technology Access and License
                  Agreement effective as of August 1, 1996 by and between
                  American Home Products Corporation and the Company.

+(5)     10.32    Collaborative Research Agreement, dated as of January 1,
                  1995, by and between the Company (as successor to ChemGenics)
                  and Pfizer, Inc.

+(5)     10.33    License Option, License and Royalty Agreement, dated as
                  of January 1, 1995, by and between the Company (as successor
                  to ChemGenics) and Pfizer, Inc.

+(5)     10.34    Collaborative Research and License Agreement, dated as
                  of November 1, 1996, by and between the Company (as successor
                  to ChemGenics) and American Home Products Corporation,
                  represented by its Wyeth-Ayerst Laboratories division.

+(5)     10.35    License Agreement, dated as of June 28, 1996, by and
                  between the Company (as successor to ChemGenics) and
                  PerSeptive Biosystems, Inc.

(5)      10.36    Master Agreement, dated as of May 7, 1996, by and
                  between the Company (as successor to ChemGenics) and
                  PerSeptive Biosystems, Inc.

(5)      10.37    Amendment, dated November 22, 1996, to the Master Agreement dated May 7, 1996
                  between the Company (as successor to ChemGenics) and PerSeptive Biosystems,
                  Inc.

(5)      10.38    Omnibus Amendment Agreement dated December 18, 1996
                  between the Company (as successor to ChemGenics) and
                  PerSeptive Biosystems, Inc.
</TABLE>


                                      -69-
<PAGE>   70
<TABLE>
<S>               <C>
(5)      10.39    Consulting and Interim Services Agreement dated as of June 28, 1996, by and
                  between the Company (as successor to ChemGenics) and PerSeptive Biosystems,
                  Inc.

(5)      10.40    Confidentiality and Non-Competition Agreement dated as of June 28, 1996, by
                  and between the Company (as successor to ChemGenics) and PerSeptive
                  Biosystems, Inc.

(5)      10.41    Amendment, Consent and Waiver dated January 18, 1997 by and among the Company,
                  ChemGenics and American Home Products Corporation acting through its
                  Wyeth-Ayerst Division ("Wyeth-Ayerst").

(5)      10.42    Letter Agreement dated January 18, 1997 by and among the Company, ChemGenics
                  and Pfizer, Inc.

(5)      10.43    Letter Agreement dated January 18, 1997 by and among the Company, ChemGenics
                  and PerSeptive Biosystems, Inc.

(5)      10.44    Amendment to Collaborative Research and License Agreement dated March 20, 1997
                  by and among the Company, ChemGenics and Wyeth-Ayerst.

+(7)     10.45    Sponsored Research Agreement by and among Whitehead Institute for Biomedical
                  Research, Affymetrix, Inc., Bristol-Myers Squibb Company and the Company dated
                  April 28, 1997.

+(7)     10.46    Consortium Member Agreement by and among Affymetrix,
                  Inc., Bristol-Myers Squibb Company and the Company dated April
                  28, 1997.

+(7)     10.47    Collaboration Agreement by and among the Company, Millennium BioTherapeutics,
                  Inc. ("MBio") and Eli Lilly and Company dated as of May 28, 1997.

+(7)     10.48    Technology Transfer and License Agreement by and between
                  the Company and MBio dated as of May 28, 1997.

+(7)     10.49    Rights Exchange Agreement by and between the Company and MBio dated as of May
                  28, 1997.

+(9)     10.50    Agreement dated October 27, 1997 by and among the Company, Monsanto Company
                  and Cereon Genomics Inc. (formerly Monsanto Agricultural Genomics II LLC).
</TABLE>


                                      -70-
<PAGE>   71
<TABLE>
<S>               <C>
  (10)   10.51    Agreement and Plan of Merger dated January 20, 1997 by and
                  among the Company, CPI Acquisition Corp. and ChemGenics
                  Pharmaceuticals, Inc.

+ (13)   10.52    Agreement dated September 22, 1998 by and between the Company
                  and Bayer AG.

+ (13)   10.53    Investment Agreement dated September 22, 1998 by and between
                  Bayer AG and the Company.

+ (13)   10.54    Registration Rights Agreement dated November 10, 1998 by and
                  between Bayer AG and the Company.

+        10.55    Amendment No. 1 dated December 1998 to Collaborative Research
                  Agreement and License Option, License and Royalty Agreement
                  Each Dated As of January 1, 1995.

+        10.56    Amended and Restated Research and License Agreement dated
                  December 1998 by and between Astra AB and Millennium
                  Pharmaceuticals, Inc.

         10.57    Sixth Amendment dated January 29, 1999 to Lease Agreement
                  dated August 25, 1993 by and between the Company and
                  Massachusetts Institute of Technology.

         13       1998 Annual Report to Stockholders (which shall be deemed
                  filed only with respect to those portions specifically
                  incorporated by reference herein).

         21       Subsidiaries of the Company.

         23.1     Consent of Ernst & Young LLP, Independent Auditors.

         27       Financial Data Schedule.
</TABLE>

(1)      Incorporated herein by reference to the Company's Registration
         Statement on Form S-1, as amended (File No. 333-2490).

(2)      Incorporated herein by reference to the Company's 10-Q for the quarter
         ending March 31, 1996.

(3)      Incorporated herein by reference to the Company's 10-Q for the quarter
         ending June 30, 1996.

(4)      Incorporated herein by reference to the Company's 10-Q for the quarter
         ending September 30, 1996.





                                      -71-
<PAGE>   72
(5)      Incorporated herein by reference to the Company's 10-K for the fiscal
         year ending December 31, 1996.

(6)      Incorporated herein by reference to the Company's 10-Q for the quarter
         ending March 31, 1997.

(7)      Incorporated herein by reference to the Company's 10-Q for the quarter
         ending June 30, 1997.

(8)      Management contract or compensatory plan or arrangement filed as an
         exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.

(9)      Incorporated hereby by reference to the Company's Amendment No. 1 to
         Current Report on Form 8-K, filed with the SEC on January 30, 1998.

(10)     Incorporated herein by reference to the Company's Current Report on
         Form 8-K, filed with the SEC on February 20, 1997.

(11)     Incorporated herein by reference to the Company's 10-K for the fiscal
         year ending December 31, 1997.

(12)     Incorporated herein by reference to the Company's 10-Q for the quarter
         ending June 30, 1998.

(13)     Incorporated herein by reference to the Company's 10-Q for the quarter
         ending September 30, 1998.


+        Confidential treatment requested as to certain portions.


                                      -72-