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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

              Annual Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

For the fiscal year ended December 31, 1998          Commission File No. 0-19659

                       CHRYSALIS INTERNATIONAL CORPORATION
             (Exact name of registrant as specified in its charter)

                Delaware                                     22-2877973
    (State or other jurisdiction of                      (I.R.S. employer
     incorporation or organization)                     identification no.)

   575 Route 28, Raritan, New Jersey                           08869
(Address of principal executive offices)                     (Zip code)

       Registrant's telephone number, including area code: (908) 722-7900

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

                                      None

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

                     Common stock, Par Value $0.01 Per Share

      Indicate by check mark whether the registrant (1) has filed all reports 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
requirement 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 Common stock held by non-affiliates as of
March 20, 1999 at a closing price of $0.563 per share as reported by the Nasdaq
National Market was approximately $5,492,908.

      The number of shares of Common stock outstanding as of March 20, 1999 was
11,666,480.

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Except as otherwise noted, all references to Chrysalis include all subsidiaries
of Chrysalis International Corporation. Unless otherwise indicated, financial
information is presented in U.S. dollars.

                                     PART I

Item 1. Business

General

      Chrysalis, incorporated in 1988, is an international contract research
organization. Chrysalis provides drug development services primarily to the
pharmaceutical and biotechnology industries. Chrysalis' services include:

      o     transgenic discovery research;

      o     preclinical development; and

      o     clinical capabilities.

      In addition, Chrysalis uses its proprietary transgenic and licensed gene
targeting technology to provide services for its clients that require transgenic
animal models. Chrysalis' clients use these models to:

      o     determine the function of human genes and identify therapeutic
            targets implicated in disease; and

      o     to evaluate therapeutic lead compounds for further development.

Merger Agreement

      On November 18, 1998, Chrysalis announced that it had executed a
definitive Agreement and Plan of Merger with Phoenix International Life Sciences
Inc., a corporation constituted under the laws of Canada. In accordance with the
terms of the merger agreement, Phoenix will acquire Chrysalis pursuant to a
merger of one of Phoenix's wholly owned subsidiaries with and into Chrysalis.
Pursuant to the merger, Chrysalis stockholders will receive, for each share of
Common stock, par value $.01 per share, of Chrysalis, approximately 0.08527 of a
Phoenix common share, based on shares of Chrysalis common stock and options to
purchase shares of Common stock outstanding on January 31, 1999. The actual
fraction of a Phoenix common share will be calculated by dividing $8.29 million
by the number of outstanding shares of common stock on the date immediately
prior to the merger and the number of shares of common stock subject to options
having an exercise price less than $0.71 divided by $8.28. Consummation of the
merger agreement is subject to receipt of necessary regulatory approvals,
receipt of the approval of Chrysalis' stockholders and satisfaction of certain
other closing conditions, some of which are beyond the parties' control.
Chrysalis anticipates that the merger agreement will be submitted to Chrysalis'
stockholders for their approval during April 1999.


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      The merger agreement contains a number of covenants restricting Chrysalis'
ability to conduct its operations. These covenants include restrictions on
Chrysalis' ability, without Phoenix's consent to:

      o     increase compensation to employees;

      o     make capital and other expenditures; and

      o     enter into or amend real property leases.

      Although the merger agreement does not permit Phoenix to unreasonably
withhold or delay its consent, the restrictive covenants, or the refusal or
delay of Phoenix to give any required consent, may adversely affect Chrysalis'
ability to conduct its operations prior to the merger. In addition, it is
possible that the restrictive covenants will hamper Chrysalis' operations to
such an extent that Chrysalis will be unable to satisfy one or more of the
conditions to the merger. If this occurred, Phoenix may be able to choose not to
consummate the merger.

Forbearance Agreement

      At September 30, 1998 and December 31, 1998, Chrysalis was in default
under its loan agreement with its senior secured lender (the "Bank"). The
defaults arose from the failure by Chrysalis to meet required financial ratios
contained in the loan agreement. The Bank refused to waive the defaults.
Instead, Chrysalis, the Bank and Phoenix entered into the forbearance agreement
concurrently with the merger agreement. Under the forbearance agreement, the
Bank agreed not to exercise its rights and remedies with respect to existing
defaults under the loan agreement until January 31, 1999. The forbearance
agreement required Chrysalis to place $3.0 million in U.S. Treasury Securities
in a pledge account as cash collateral for the benefit of the Bank. A portion of
the pledged amount would have been used to pay the $312,500 principal
installment due on December 31, 998. The forbearance agreement also provides
that if Phoenix guaranteed repayment of the outstanding loan amount and secured
the guaranty with a cash collateral pledge, then the Bank would:

      o     extend the forbearance period until March 31, 1999;

      o     release the $3.0 million pledge of Chrysalis; and

      o     waive the December 1998 principal payment.

      In connection with the merger agreement and the forbearance agreement,
Phoenix entered into an unconditional guaranty in favor of the Bank. Under the
guaranty, Phoenix guaranteed payment of Chrysalis' outstanding indebtedness to
the Bank under the loan agreement. As of January 31, 1999, the outstanding
principal balance under the loan agreement was $4,687,500.

      To secure its obligations under the guaranty, Phoenix delivered $4,724,975
to a pledged collateral account for the benefit of the Bank. That amount was
equal to the outstanding principal amount and accrued interest owed to the Bank
by Chrysalis. In the event of a default under the guaranty, the Bank can
foreclose on the pledged collateral.


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      In consideration of the delivery by Phoenix to the Bank of the guaranty
and the pledged cash collateral, the Bank granted Phoenix the option to acquire
from the Bank all of its right, title and interest under the loan agreement and
related documents, and all liens, mortgages and security interests that secure
any obligations under the loan agreement and related documents. If Phoenix
exercises its option, Phoenix will pay to the Bank the payment of the
outstanding principal indebtedness under the loan agreement plus all accrued
interest.

As a result of the delivery of the guaranty and the pledged cash collateral:

      o     the forbearance period was extended until March 31, 1999;

      o     the Bank released Chrysalis' $3.0 million pledge; and

      o     the December 31, 1998 principal payment owed by Chrysalis to the
            Bank was waived.

      In March 1999, Chrysalis, the Bank and Phoenix executed an amendment to
the forbearance agreement under which:

      o     the forbearance period was extended until April 30, 1999; and

      o     the scope of the forbearance agreement was broadened to cover any
            defaults as of March 31, 1999.

Restructuring of Clinical Operations

      The merger agreement requires Chrysalis to shut down and discontinue
providing clinical services in the United States and at several of its clinical
operations in Europe. Chrysalis has begun to shut down its clinical operations
in Austin, Texas, Dusseldorf, Germany and Cham, Switzerland. As a result of
these shut downs, Chrysalis will no longer provide services for Phase I clinical
studies. It will focus on providing services for Phase II or Phase III clinical
studies in Germany, Eastern Europe and Israel. These shut downs in Dusseldorf,
Germany and Austin, Texas and a significant downsizing of Chrysalis' European
clinical operations will occur even if the merger is not completed. If the
merger is not completed, Chrysalis expects to continue to provide Phase II and
Phase III clinical services in Eastern Europe and Israel, as well as in Western
Europe on a significantly downsized basis. Chrysalis will perform fully or
transfer existing clinical studies at shut down and downsized locations to other
Chrysalis locations. After the merger, existing clinical studies may be
transferred to Phoenix locations.

      The shut down and downsizing have materially adversely affected:

      o     Chrysalis' ability to provide clinical data management and
            biostatistical services;

      o     its ability to coordinate its marketing efforts and cross-sell its
            services; and

      o     its ability to compete with international full service contract
            research organizations for clinical contracts.


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If the merger is not completed, these factors are expected to continue to
materially adversely affect Chrysalis' operations, results of operations and
financial condition for the long term.

Other Matters

      On March 16, 1998, Chrysalis issued a $5.0 million subordinated note to a
wholly owned subsidiary of MDS Inc., a Canadian corporation. As part of this
transaction, Chrysalis also issued to MDS's subsidiary a warrant to purchase
2,000,000 shares of Common stock for $2.50 per share. In addition, Chrysalis and
MDS entered into a standstill agreement which governs the ownership and
acquisition of securities of Chrysalis by MDS and its affiliates.

      On December 18, 1996, Chrysalis issued 2,632,600 shares of Common stock in
connection with the acquisition by Chrysalis of all of the outstanding equity
interests in BioClin, Inc., a Delaware corporation, BioClin Europe AG, a Swiss
corporation, BioClin GmbH, a German corporation, Kilmer N.V., a Netherlands
Antilles corporation, and BioClin Institute of Clinical Pharmacology GmbH, a
German corporation (the "BioClin Group"). Chrysalis recorded the BioClin Group
acquisition using the "pooling-of-interests" method of accounting.

      Chrysalis is also the exclusive commercial licensee of a U.S. patent
covering DNA microinjection. DNA microinjection is the process widely used in
the pharmaceutical and biotechnology industries to develop transgenic animal
models. Chrysalis uses this process for its transgenic research and drug
discovery services. Chrysalis also grants several types of sublicenses for the
use of this technology by commercial firms and academia. Chrysalis receives
revenues from these sublicenses consisting of fees and, in some cases,
royalties.

New Drug Development Process Overview

      Drug development is an expensive and lengthy process. Before a new drug
can be marketed, it must undergo extensive testing and regulatory review to
determine its safety and efficacy. Two of the most critical stages of this
process are preclinical and clinical testing. In preclinical testing, the
sponsor of the new drug conducts laboratory analyses and animal tests to
determine the basic biological activity and safety of the drug. After
successfully completing the preclinical phase, the drug undergoes a series of
clinical tests in humans. These tests typically progress from dosing studies in
healthy volunteers to testing in patients with the targeted disease. The
information generated during these trials is critical for gaining marketing
approval from the FDA or other regulatory agencies. In the United States,
preclinical and clinical testing must comply with the requirements of good
laboratory practices and good clinical practices and other standards established
by the FDA and other federal and state governmental authorities.

      The FDA pioneered the use of clinical trials for new drug development. The
agency's approval process has shaped much of drug regulation worldwide. In
recent years, the FDA and corresponding regulatory agencies of the major
industrial countries, including Canada, Japan and the European Union, commenced
discussions to develop common standards for the conduct of preclinical and
clinical studies. In addition, these regulatory agencies had discussions on the
format and content of applications for new drug approvals. Data from
multinational studies adhering to good clinical practices are now generally
acceptable to the FDA and the governments within the European Union.

      In the United States, a drug sponsor must file an investigational new drug
application with the FDA before the commencement of human testing of a drug. The
investigational new drug application includes preclinical testing results. It
also describes the sponsor's plans for conducting human clinical trials. The
design


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of these plans, known as the study protocol, is critical to the success of the
drug development effort because the protocol must correctly anticipate the data
and results that the FDA will require before approving the drug.

      Extensive preclinical testing, involving pharmacology and toxicology
studies, is required before a drug developer may conduct safety and efficacy
testing in humans. In efficacy studies, drug candidates are evaluated in animal
models that simulate human disease conditions. These screens are used primarily
by pharmaceutical and biotechnology companies. In toxicology studies, drug
candidates are tested in normal, healthy animals to determine their potential
harmful effects to humans. In addition, new industrial and agricultural
chemicals often require extensive toxicology testing before they may be sold.
Therefore, toxicology tests are used not only by developers of new drugs, but
also by developers of other chemical products.

      Human trials usually start on a small scale to assess safety and then
expand to test efficacy. Trials are usually grouped into four phases, with
multiple trials generally conducted within each phase. Clinical trials often
represent the most expensive and time-consuming part of the overall drug
development process.

Phase I. Phase I trials are conducted on healthy volunteers, typically 20 to 80
persons, to develop basic safety data relating to toxicity, metabolism,
absorption, elimination and other pharmacological actions.

Phase II. Phase II trials are conducted on a small number of subjects, typically
100 to 200 patients, who suffer from the drug's targeted disease or condition.
Phase II trials offer the first evidence of clinical efficacy, as well as
additional safety data.

Phase III. Phase III trials are conducted on a significantly larger population
of several hundred to several thousand patients who suffer from the targeted
disease or condition. Phase III trials are designed to measure long-term side
effects and efficacy on a larger scale.

Phase IV. As a condition of granting marketing approval, the FDA may require a
sponsor to continue to conduct additional clinical trials, known as Phase IV
trials. Phase IV trials are designed to (1) monitor long-term risks and
benefits, (2) study different dosage levels, or (3) evaluate different safety
and efficacy parameters in target patient populations. The increasing importance
of Phase IV trials results in increased numbers of patients tested and increased
numbers of sites at which testing is performed.

      After the successful completion of Phase III trials, the sponsor of a new
drug may submit a new drug application to the FDA. The new drug application is a
comprehensive filing that includes the results of all preclinical and clinical
studies and information about the drug's composition. The application also
contains the sponsor's plans for producing, packaging and labeling the drug.
Most of the clinical data contained in a new drug application is generated
during the Phase II and III trials. Drugs that successfully complete FDA review
may be marketed in the United States, subject to any conditions imposed by the
FDA.

Industry Overview

      The contract research organization industry provides independent product
development services primarily for the pharmaceutical and biotechnology
industries. Companies in these industries outsource product development services
to contract research organizations that manage the drug development process.
Contract research organizations derive substantially all of their revenue from
the research and development expenditures of pharmaceutical and biotechnology
companies. See "--Competition."


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Services

The major categories of drug development services offered by Chrysalis are:

Transgenic Services

      Chrysalis has observed an acceptance by the pharmaceutical and
biotechnology industries in the use of transgenic laboratory animal model
technology as a tool to improve drug discovery programs. As a result of this
acceptance, Chrysalis is able to use its proprietary DNA microinjection
technology to offer its specialty transgenic-based contract research services.
These services are used by companies electing to outsource all or a portion of
their transgenic animal model needs. These transgenic-based specialty contract
research services include gene function assessment, custom model development
programs, molecular biology services and other related services.

      In the area of genomics research, Chrysalis' transgenic animal technology
is being used to determine the functions of human genes and to identify human
gene targets implicated in disease. Transgenic animal technology provides for
the genetic manipulation of animals, allowing for the production of animals that
more accurately reflect human biochemistry, physiology and pathology. Worldwide
efforts to map and sequence the human genome have resulted in the identification
of new genes. These newly-identified genes and transgenic animal technology
allow for the generation of new laboratory animals with specifically engineered
genetic traits. These new animals will facilitate the understanding of the
molecular basis of disease progression.

Preclinical Services

      Chrysalis believes it offers clients, on an international basis, a broad
range of preclinical drug development services. Chrysalis also believes it can
provide a majority of the preclinical testing requirements necessary to secure
approval to initiate human clinical trials from the FDA and regulators in the
European community and Japan. Chrysalis provides the following preclinical drug
development services:

Toxicology. Toxicology studies are designed to identify and evaluate any harmful
effects that pharmaceuticals or chemicals might cause to humans. These studies
are required in connection with the FDA approval process. Chrysalis provides the
toxicology testing services in the areas of mutagenesis/genetic toxicology,
teratology, reproduction/fertility, immunotoxicology, continuous infusion,
carcinogenesis, and acute, subacute and chronic evaluations. Chrysalis believes
it has a recognized specialty expertise in continuous infusion administration
techniques and immunotoxicology.

Pharmacology. Pharmacology studies are designed to quantify the properties and
reactions of drugs primarily in relation to their therapeutic value. Chrysalis
provides testing in therapeutic areas involving the central nervous system,
cardiovascular, pulmonary, anti-inflammatory, gastrointestinal, cardiopulmonary
and analgesia. In addition, Chrysalis provides safety pharmacology studies.
These studies include the evaluation of possible effects on the central nervous
system, cardiovascular, gastrointestinal, pulmonary and renal function and
adverse interaction with drugs likely to be co-administered with the development
candidate.

Pharmacokinetics. Pharmacokinetic studies are designed to characterize the time
course of drug absorption, distribution, metabolism and excretion and relate
these processes to the intensity and time course of pharmacological and
toxicological effects of drugs.


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Immunology. Immunology studies are designed to evaluate and test the substance's
ability to affect the immune system of humans.

Clinical Services

      Chrysalis' clinical services include clinical trial management services
and product registration and regulatory services. These services can be provided
separately or as an integrated package. Services from each of these categories
can be used for the development and execution of a new drug application.
However, Chrysalis has begun to shut-down and discontinue providing clinical
services in the United States and several of its clinical operations in Europe.
Even if the merger is not consummated, the clinical services offered by
Chrysalis will be reduced significantly. Therefore, Chrysalis no longer provides
Phase I clinical services. In addition, its ability to provide some of the other
services described below has been severely restricted and will be severely
restricted if the merger is not consummated. See "nGeneralnRestructuring of
Clinical Operations."

      Clinical Trial Management Services. Chrysalis offers complete services for
the design, placement, performance and management of clinical trial programs.
These programs are critical elements in obtaining regulatory approval for drugs.
Chrysalis has performed services in connection with trials in many therapeutic
areas. Chrysalis' multidisciplinary clinical trials group has the ability to
examine a product's existing preclinical and clinical data for the purposes of
designing protocols for clinical trials to ascertain evidence of the product's
safety and efficacy.

      Chrysalis' services include management of Phase II through IV trials and,
until recently, included management of Phase I trials. Management services
include:

      o     design of operations manuals;

      o     identification and recruitment of trial investigators;

      o     initiation of sites;

      o     monitoring for strict adherence to good clinical practices;

      o     site visits to ensure compliance with protocol procedures and proper
            collection of data;

      o     interpretation of trial results; and

      o     report preparation.

      If the merger is not consummated, Chrysalis expects to continue to provide
Phase II and Phase III clinical services in Eastern Europe and Israel, and in
Western Europe on a significantly downsized basis. See " -General-Restructuring
of Clinical Operations" above.


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Phase I Services. Before the shut-downs that Chrysalis is currently conducting,
Chrysalis provided a number of Phase I services. They included:

      o     computerized volunteer databases;

      o     a clinical pharmacology unit;

      o     access to special populations;

      o     vital signs;

      o     telemetry; and

      o     statistical evaluation.

Phase II--Phase IV Services. Chrysalis provides Phase II through Phase IV
services. These services include:

      o     efficacy testing;

      o     additional safety data; and

      o     long-term risks and side effects.

      Chrysalis maintains a network of physicians who serve as investigators at
hospitals and university centers for in- and outpatient studies. Chrysalis also
maintains a network of established research sites performing special
investigations and a selection of centralized laboratories. Until the
shut-downs, these sites were located in each country across Europe, Israel and
North America. However, Chrysalis has begun the process of shutting down its
clinical operations in North America and significantly downsizing its European
clinical operations. See "n General n Restructuring of Clinical Operations"
above. In connection with Phase II through Phase IV services, Chrysalis provides
project management, monitoring and data management. Monitoring is handled under
traditional methods or by fax or remote/direct data entry.

Monitoring for Strict Adherence to Good Clinical Practices. Efficient data
collection, form design, detailed operations manuals and site visits by
Chrysalis' contract research assistants are used to determine whether clinical
investigators and their staff follow established protocols and accurately record
the findings of the trials. In addition, Chrysalis has quality assurance
auditors that provide additional internal and external auditing.

      In connection with its services, Chrysalis assists clients with one or
more of the following:

      (1)   Study Protocol. The protocol defines the medical issues the study
            seeks to examine and the statistical tests to be conducted. Examples
            include:

            o     the frequency and type of laboratory and clinical measures
                  that are to be tracked and analyzed;


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            o     the number of patients required to produce a statistically
                  valid result;

            o     the period of time over which they must be tracked; and

            o     the frequency and dosage of drug administration.

      (2)   Case Report Forms. Once the study protocol has been finalized,
            special forms for recording the required information must be
            developed. These forms are called case report forms.

      (3)   Site and Investigator Recruitment. The drug is administered to
            patients under the supervision of physicians who serve as
            investigators, at hospitals, clinics or other locations, referred to
            as sites. Potential investigators may be identified by the drug
            sponsor or Chrysalis. Generally, the investigators contract directly
            with Chrysalis. The trial's success depends on the successful
            identification and recruitment of investigators with proper
            expertise and an adequate base of patients who satisfy the
            requirements of the study protocol.

      (4)   Patient Recruitment and Enrollment. Prior to the shut downs,
            Chrysalis recruited Phase I volunteers and maintained a database of
            those volunteers. The investigators, however, find and enroll
            patients suitable for the Phase II through IV trials according to
            the study protocol. Prospective patients are required to review
            information about the drug and its possible side effects.
            Prospective patients are also required to sign an informed consent
            to record their knowledge and acceptance of potential side effects.
            Patients also undergo a medical examination to determine whether
            they meet the requirements of the study protocol. Patients then
            receive the drug and are examined by the investigator as specified
            by the study protocol.

      (5)   Study Monitoring and Data Collection. As patients are examined and
            tests are conducted in accordance with the study protocol, data are
            recorded on case report forms and laboratory reports. The data are
            collected from study sites by contract research assistants. Contract
            research assistants visit sites regularly to ensure that the case
            report forms are completed correctly and that all data specified in
            the protocol are collected. Case report forms are reviewed for
            consistency and accuracy before their data are entered into an
            electronic database.

      (6)   Medical Affairs. Throughout the course of a clinical trial,
            Chrysalis may provide various medical research and services. These
            services include:

            o     medical monitoring of clinical trials;

            o     interpretation of clinical trial results; and

            o     preparation of clinical study reports.

      (7)   Report Writing. The results of statistical analysis of data
            collected during the trial, together with other clinical data, are
            included in a final report to be included in a regulatory document.


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      (8)   Information Technology. Prior to the shut downs, Chrysalis
            maintained a fully networked information system to facilitate
            complete computerized data management of Phase II through Phase IV
            trials. Laboratory data was on-line for review by physicians and
            project managers. Chrysalis' ability to provide information
            technology services has been materially adversely impacted by the
            restructuring of its clinical operations. If the merger is not
            completed, Chrysalis will have only a small operation in Eastern
            Europe to perform these services. Chrysalis would have to expand its
            facilities significantly to continue to provide these services.

Clinical Data Management and Biostatistical Services. Prior to the shut downs,
Chrysalis had experience in creating scientific databases for all phases of the
drug development process. These databases provided clients with data
abstraction, data review and coding, data verification and editing and problem
data resolution capabilities. Chrysalis used an imaging technology process which
eliminates time and minimizes potential data entry errors. This was accomplished
by electronically routing, tracking and querying optically scanned case report
forms. Chrysalis' data management professionals also assisted in the design and
development of study protocols and case report forms, training manuals and
training sessions for investigators and coordinators.

      Prior to the shutdowns, Chrysalis' biostatistics professionals provided
biostatistical consulting, database design, data analysis and statistical
reporting. Chrysalis' biostatisticians provided clients with assistance in all
phases of drug development. These professionals developed and reviewed
protocols. They also designed appropriate analysis plans and report formats to
address the objectives of the study protocol and the client's individual
objectives. Chrysalis' ability to provide clinical data management and
biostatistical services has been materially adversely impacted by the
restructuring of its clinical operations. If the merger is not completed,
Chrysalis will have only a small operation in Eastern Europe to perform these
services. Chrysalis would have to expand its facilities significantly to
continue to provide these services.

Product Registration Services/Regulatory Affairs. The pharmaceutical companies
have their own regulatory expertise and generally register their products
without the assistance of third parties. In connection with its Phase II through
Phase IV services to these pharmaceutical companies, Chrysalis provides
regulatory strategy formulation and consultation. If requested, Chrysalis also
acts as a liaison with the FDA and other international regulatory agencies.
Until the shutdowns, Chrysalis provided similar services in connection with its
Phase I services.

Marketing

      The majority of new studies conducted by Chrysalis are derived from
existing clients. To obtain new clients, Chrysalis contacts potential clients
directly through its marketing and sales representatives and its senior business
management. Chrysalis also participates in various scientific association and/or
business symposia. In addition, Chrysalis contacts potential clients indirectly
through other media, including scientific and trade journal advertising,
brochures and direct mailings. Further, Chrysalis' sales and marketing
representatives target promotion efforts to potentially new clients who are not
familiar with Chrysalis' services. These representatives also target the
expansion of services for existing clients. In addition, Chrysalis' scientific
personnel participate in a variety of business/scientifically oriented
endeavors. These endeavors include publishing scientific papers and making
presentations at scientific meetings. Chrysalis also participates in commercial
conferences and advertises at these conferences. Further, Chrysalis also attends
and provides exhibits at selected industry trade shows in the United States and
Europe.


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      Chrysalis' marketing personnel:

      o     seek new clients;

      o     seek contracts with new therapeutic areas or divisions with existing
            clients;

      o     cross-sell other services to existing clients; and

      o     develop strategic alliances with major pharmaceutical and
            biotechnology companies.

      However, Chrysalis' ability to coordinate its marketing efforts and
cross-sell other services has been materially adversely affected by its
liquidity constraints and shutdowns. See " -General- Restructuring of Clinical
Operations" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Chrysalis."

Loss of a Large Clinical Trial

      One of Chrysalis' largest clients, a leading pharmaceutical company,
notified Chrysalis that it decided to delay a large clinical trial originally
expected to begin during the fourth quarter of 1997. In April 1998, the client
informed Chrysalis that the drug being developed in this trial would be
out-licensed or co-developed with a partner. In December 1998, the client
advised Chrysalis that the drug had been out-licensed to another company that
did not intend to use Chrysalis' services.

      During 1997, Chrysalis incurred significant expenses to expand its
infrastructure to support the clinical trial. These expenses primarily consisted
of additional operational, managerial and administrative personnel and facility
expansion costs. Chrysalis leased additional real estate and acquired or leased
additional office and computer equipment in anticipation of this trial.
Chrysalis estimates that its clinical cost structure would have increased
annually by approximately $5 million through expansion activities undertaken to
accommodate the trial. After being notified in December 1997 of the delay in the
trial, Chrysalis decided to maintain this additional infrastructure to improve
its ability to compete for other large global studies. However, shortly after
receiving the April 1998 notice, Chrysalis began to reduce this infrastructure.
As a result of the expenses associated with the expanded infrastructure,
Chrysalis' results for the fourth quarter of 1997 and for fiscal year 1998 were
negatively impacted.

      Although Chrysalis obtained additional clients and contracts during 1998,
these new clients and contracts did not and will not result in significant
revenue in the near term. Revenues from these additional contracts will not be
sufficient to offset the significant expenses associated with the expanded
infrastructure. See "- Backlog," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Chrysalis."

Customers

      Chrysalis has in the past derived, and may in the future derive, a
significant portion of its net service revenue from a relatively limited number
of major projects or clients. Contract research organizations often have
customer concentrations. Concentrations are increasing as large pharmaceutical
and biotechnology companies are outsourcing larger clinical trials and large
multiple site trials to fewer contract research organizations. For the year
ended December 31, 1998, Chrysalis' top five customers accounted for


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approximately 37% of Chrysalis' combined net service revenue. One customer of
Chrysalis, a large international pharmaceutical company with revenues in excess
of $10 billion, accounted for approximately 13% of net service revenues for the
year ended December 31, 1998. This customer delayed the large clinical trial
which was originally expected to begin during the fourth quarter of 1997. See
"-Loss of a Large Clinical Trial" above. Chrysalis believes that the loss of any
of these customers would have a material adverse effect on Chrysalis unless it
was able to replace the customer or expand services provided to other customers.
Chrysalis may not be able to replace the loss of any of those customers or
expand services to existing customers on terms acceptable to Chrysalis.

Backlog

      Chrysalis reports backlog based on anticipated net revenues from
uncompleted projects which have been authorized by the client. The authorization
may be through a written contract or by other means . Once work under a letter
of intent or contract commences, net service revenue is recognized over the life
of the contract using the percentage-of-completion method of accounting. In
certain cases, Chrysalis will commence work on a project prior to finalizing a
letter of intent or contract. Contracts included in backlog are subject to
termination or delay at any time by the client or regulatory authorities.
Termination or delays can result from a number of factors, many of which are
beyond Chrysalis' control. Delayed contracts remain in Chrysalis' backlog until
a determination is made to continue, modify or cancel the contract.

      Chrysalis believes that its backlog as of any date is not necessarily a
meaningful indicator of future results. Chrysalis may not be able to realize net
service revenue included in backlog. As of December 31, 1998, Chrysalis' backlog
was approximately $14.5 million compared to approximately $41 million at
December 31, 1997 and approximately $25 million at December 31, 1996. The
increase in backlog from December 31, 1996 to December 31, 1997 reflects
primarily the addition of the large clinical trial that was originally expected
to begin during the fourth quarter of 1997 but was delayed. In April 1998, the
customer informed Chrysalis that the drug being developed in this trial would be
out-licensed or co-developed with a partner. As a result of this information,
Chrysalis removed from its backlog the anticipated revenue associated with this
large clinical trial. This removal accounts for a majority of the decrease in
backlog from December 31, 1997 to December 31, 1998. See "- Loss of a Large
Clinical Trial" above.

Competition

      Chrysalis competes primarily against pharmaceutical companies' own
in-house research departments, other contract research organizations and
universities and teaching hospitals. The contract research organization industry
includes several hundred small, limited service providers, several medium sized
clinical research organizations, and a few full service global drug development
companies. The clinical research organization industry is consolidating as a
result of competitive pressures and economies of scale. Mergers and acquisitions
have resulted in the emergence of full service contract research organizations
with the international human, technical and financial resources to conduct the
full range of preclinical and clinical drug development trials on behalf of
pharmaceutical and biotechnology companies. These large, full service
competitors may have substantially greater capital, technical and other
resources, may be better known, and may have more experienced personnel than
Chrysalis. Chrysalis' major competitors include: Covance, Inc.; Parexel
International Corporation; Quintiles Transnational Corporation; ClinTrials
Research Inc.; Pharmaceutical Products Development Corporation; Huntington Life
Sciences Ltd.; Kendle International, Inc. and Phoenix.


                                       13
<PAGE>   14

      Contract research organizations generally compete on the basis of:

      o     previous experience;

      o     medical and scientific expertise in specific therapeutic areas;

      o     specialty preclinical capabilities;

      o     the quality of contract research;

      o     the ability to manage large and complex medical databases;

      o     the ability to provide statistical and regulatory services;

      o     the ability to recruit investigators;

      o     the ability to integrate information technology with systems to
            improve the efficiency of contract research;

      o     an international presence with strategically located facilities; and

      o     financial viability.

      In some markets, price also is a significant factor. Chrysalis has begun
to shut down certain of its facilities and to downsize significantly its
international clinical operations. Chrysalis expects these activities to
materially adversely affect its ability to compete if the merger is not
completed.

Microinjection Patent Licensing

      Chrysalis possesses an exclusive license to a U.S. patent awarded to Ohio
University. The patent covers DNA microinjection. Chrysalis uses DNA
microinjection to provide its specialty transgenic-based services.

      Chrysalis grants sublicenses of its proprietary DNA microinjection
technology, the process widely used in the pharmaceutical and biotechnology
industries to develop transgenic animals. These sublicenses entitle Chrysalis to
receive revenues consisting of fees and, in some cases, royalties.

      While Chrysalis has retained the exclusive rights to use DNA
microinjection for its drug development services, it has granted several
non-exclusive sublicenses for the use of DNA microinjection in a variety of
applications. These applications include the development, use and sale of other
commercial transgenic animal based products and transgenic animal models. In
those instances where Chrysalis grants a sublicense for


                                       14
<PAGE>   15

commercial applications, Chrysalis receives an annual license fee and revenue
based royalties upon commercialization of the products and services. In the case
of sublicenses for noncommercial applications, Chrysalis generally receives an
annual license fee. Chrysalis will continue to license this technology for the
development of transgenic animals and transgenic animal derived products which
do not conflict with the specialty transgenic animal services offered by
Chrysalis.

Government Regulation

      Chrysalis' operations are subject to numerous regulatory requirements
designed to assure the quality and integrity of its drug development services.
In recent years, these regulations have become more numerous and stringent,
reflecting an increased public concern about the dangers of potentially toxic
drugs, chemicals and other substances. The following information describes
current statutory or regulatory provisions. Any change in applicable law or
regulation may have a material effect on the business and prospects of
Chrysalis.

      The industry standard for conducting biological testing is embodied in
regulations called "good laboratory practices." Good laboratory practices has
been adopted by the Environmental Protection Agency and the FDA in the United
States and the Minister des Affaires Sociales et de la Solidarite Nationale in
France. Good laboratory practices stipulates requirements for facilities,
equipment and professional staff. The regulations mandate standardized
procedures for controlling studies, for recording and reporting data and for
retaining appropriate records. Any governmental agency with the authority to
control marketing approval for new products can reject test results if they do
not comply with good laboratory practices. Chrysalis monitors ongoing compliance
with good laboratory practices standards.

      In addition, Chrysalis is subject to scrutiny by many regulators regarding
its laboratories and materials. On the federal level in the United States,
Chrysalis is regulated by the Department of Transportation, Occupational Safety
and Health Administration, Nuclear Regulatory Commission and the Drug
Enforcement Administration. At the state level, Chrysalis is monitored by the
Commonwealth of Pennsylvania Department of Labor and Industry and the
Pennsylvania Department of Environmental Resources. In addition, some of
Chrysalis' European operations are subject to regulations in France similar to
the federal and state regulations in the United States.

      In addition to the regulatory framework and good laboratory practices
standards for preclinical drug development services, Chrysalis is subject to
other regulations under federal, state and foreign law. These regulations
include requirements regarding:

      o     occupational safety;

      o     laboratory practices;

      o     the care and use of animals in experimentation and testing;

      o     the use, handling and disposition of radioactive materials;

      o     environmental protection; and

      o     hazardous substance control.


                                       15
<PAGE>   16

      Chrysalis may be subject to other current and future local, state, federal
and foreign regulation, including future regulation of the preclinical drug
development industry, the biotechnology field and the biological testing
industry.

      The clinical services provided by Chrysalis are ultimately subject to FDA
regulation in the United States and comparable agencies in other countries. The
level of regulation in other countries is generally less comprehensive than
regulation in the United States. The industry standard for conducting clinical
research and development studies is embodied in regulations and guidelines
called "good clinical practices." Although the FDA has not formally adopted a
single good clinical practices guideline, some provisions of good clinical
practices have been included in FDA regulations. In Europe, all work is carried
out in accordance with the European Union Note For Guidance, "Good Clinical
Practice for Trials on Medicinal Products in the European Community." As a
matter of practice, the FDA and many other regulatory authorities require that
test results submitted to such authorities be based on studies conducted in
accordance with good clinical practice. These regulations include:

      o     complying with FDA regulations governing the selection of qualified
            investigators;

      o     obtaining specific written commitments from the investigators;

      o     verifying that the patient's informed consent is obtained;

      o     monitoring the validity and accuracy of data;

      o     verifying drug or device accountability; and

      o     instructing investigators to maintain records and reports.

      Chrysalis must also maintain reports for each study for specified periods
for inspection by the study sponsor and the applicable regulatory authorities.
Non-compliance with good clinical practices can result in the disqualification
of data collected during the clinical trial.

      Chrysalis' standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region where they will be used.
Chrysalis' North American standard operating procedures are based on FDA
regulations and guidelines. Chrysalis has developed operating procedures in
accordance with local requirements and in harmony with the North American and
European operations. Chrysalis has implemented common standard operating
procedures across geographic regions to assure consistency whenever feasible and
appropriate.

Intellectual Property

      Chrysalis has an exclusive commercial license to a U.S. patent awarded to
Ohio University in October 1989. As Chrysalis becomes aware of activities
potentially infringing on its commercial rights it takes appropriate action to
curtail infringing activities. However, Chrysalis' actions may not result in
proof of infringement or curtailment of the potentially infringing party's
activities. The potentially infringing party may not become properly licensed
and financially obligated to Chrysalis. In addition, technology circumventing
the DNA microinjection process may be developed in the future. If new technology
is developed, Chrysalis may not be able to continue to practice the processes
contained in the DNA microinjection patent. In addition,


                                       16
<PAGE>   17

Chrysalis may not be able to obtain licenses for the new technology on
reasonable terms or at all. Outside of the U.S., the DNA microinjection process
is non-proprietary. However, the commercialization of any products in the United
States using the DNA microinjection process are protected by the patent. The
license has a term equal to the life of the last to expire of all patents
covered by the license. The license can be terminated earlier by either party
for cause.

Potential Liability and Insurance

      Chrysalis attempts to manage its potential liability by obtaining
indemnity provisions in its contracts with clients and investigators hired by
Chrysalis on behalf of its clients. These indemnities generally do not, however,
protect Chrysalis against some of its own actions, including those involving
negligence. Moreover, these indemnities are contractual arrangements that are
subject to negotiation with individual clients. The terms and scope of these
indemnities can vary from client to client and from study to study. Finally, the
financial performance of these indemnities is not secured. As a result,
Chrysalis bears the risk that an indemnifying party may not have the financial
ability to fulfill its indemnification obligations. In addition to
indemnification provisions, Chrysalis maintains limited coverage for
professional service liability insurance. Chrysalis could be materially and
adversely affected if it were required to pay damages or incur defense costs in
connection with a claim that is outside the scope of an indemnity or in excess
of its insurance coverage. In addition, Chrysalis could be materially adversely
affected if a client or investigator failed to honor its indemnification
obligations.

      Chrysalis believes that the risk of liability to patients in clinical
trials is mitigated by various regulatory requirements. These requirements
include the role of institutional review boards and the need to obtain each
patient's informed consent. The FDA requires each human clinical trial to be
reviewed and approved by the institutional review board at each study site. An
institutional review board is an independent committee that includes both
medical and nonmedical personnel. It is obligated to protect the interests of
patients enrolled in the trial. After the trial begins, the institutional review
board monitors the protocol and the measures designed to protect patients,
including the requirement to obtain informed consent.

Nextran

      On August 29, 1994, Chrysalis entered into a Joint Venture Agreement with
Baxter Transplant Holdings, Inc., a wholly-owned subsidiary of Baxter Healthcare
Corporation, which is a subsidiary of Baxter International, Inc. Under the joint
venture agreement, Chrysalis and Baxter Transplant formed Nextran, a Delaware
general partnership. Chrysalis had a 30% partnership interest and Baxter
Transplant had a 70% partnership interest. Chrysalis contributed to Nextran $2.5
million in cash and specified rights under patent licenses, research agreements,
and other intangible assets related to its xenograft, meaning animal to human
organ transplantation, and blood substitute programs. The contributed assets
included limited rights to practice under the DNA microinjection patent
specifically within the xenograft and hemoglobin blood substitute fields of use.
Chrysalis also contributed laboratory and office space in Princeton, New Jersey,
swine research facilities near Athens, Ohio and certain related equipment and
other related assets with a net book value of $2.4 million to Nextran. Baxter
Healthcare contributed to Nextran $20 million in cash and specified rights under
research and product marketing programs between Baxter Healthcare and various
third parties related to certain of its transplantation programs.


                                       17
<PAGE>   18

      In September 1995, Chrysalis sold its 30% partnership interest in Nextran
to Transplant Acquisition Inc., a wholly-owned subsidiary of Baxter Healthcare,
for a cash purchase price of $18 million. In connection with this sale,
Chrysalis eliminated its investment in Nextran and recorded an estimated
nonrecurring gain, net of expenses, income taxes and related accruals, of
approximately $17.3 million. If Nextran develops and commercializes hemoglobin
blood substitutes using technologies licensed to Nextran by Chrysalis, Chrysalis
will receive royalty income equal to 3% of end product sales.

Employees

      As of January 31, 1999, Chrysalis employed approximately 365 individuals
on a full-time basis. None of Chrysalis' U.S. employees are represented by trade
unions. All of the employees of its European preclinical operations, except
senior management, are represented by a legal trade union. These employees are
governed by an agreement that is subject to annual renegotiation. Although no
employees of the European clinical operations are covered by a trade union, many
of them have written contracts with Chrysalis in accordance with local law. The
recent uncertainty regarding Chrysalis' future and the announcement of the
proposed merger have contributed to the departure of a number of employees of
Chrysalis. In addition, the restructuring of Chrysalis' clinical operations has
and will continue to result in the termination or departure of a number of other
employees. Chrysalis may not be able to retain a sufficient number of skilled
personnel to continue adequately providing services to its customers, whether or
not the merger occurs.

Segment and Geographic Information

      Note 20 to the audited consolidated financial statements of Chrysalis
includes information about revenue, operating profit and identifiable assets
attributable to Chrysalis' segments. Note 20 also includes information regarding
geographic breakdowns.

Item 2. Properties

      Chrysalis' corporate headquarters are located in Raritan, New Jersey.
Chrysalis, under an option provision of the lease agreement, extended its lease
on this facility through February 2000. If the merger is completed, Phoenix
expects to eventually shut down Chrysalis' corporate headquarters.

      Chrysalis' U.S. preclinical operations are located in two adjacent
facilities near Scranton, Pennsylvania. Chrysalis leases one facility with
approximately 21,000 square feet. This lease expires after August 1999.
Chrysalis has not yet decided whether it will renew this lease or pursue other
alternatives. Chrysalis owns the other facility with 20,000 square feet, subject
to a mortgage. Chrysalis owns and operates approximately 100,000 square feet of
facilities on approximately nine acres near Lyon, France for its preclinical
operations in Europe. Chrysalis has an option to purchase land adjacent to these
facilities.

      Chrysalis' specialty transgenic services business operates in Princeton,
New Jersey. Chrysalis leases a facility for administrative offices and research
laboratories. This lease expires in May 2000. In addition, until August 1999
Chrysalis shares an adjacent facility pursuant to an agreement with Nextran.
Chrysalis has entered into a lease for one facility under construction near
Princeton, New Jersey to replace these two facilities. Chrysalis expects the new
lease to begin during the second half of 1999. The new lease will have a
ten-year term.

      Chrysalis' U.S. clinical operations are conducted in a leased facility in
Austin, Texas. This lease expires in February 2001. Chrysalis expects to
terminate or sublet this lease. Chrysalis leases its European clinical
headquarters in Cham, Switzerland. This lease expires in March 2000. Chrysalis
expects to terminate or sublet this lease. Chrysalis also maintains offices in
Mannheim, Germany; Sweden; Denmark; Norway; Finland; Israel; Vilnius, Lithuania;
Poland; Russia; and the Ukraine for its clinical operations. In connection


                                       18
<PAGE>   19

with the restructuring of its clinical operations, Chrysalis has begun to shut
down its offices at the following locations: Canada; France; Belgium; The
Netherlands; the United Kingdom; Spain; and Italy. See "-General-Restructuring
of Clinical Operations."

      Chrysalis also leases a facility in Dusseldorf, Germany which it uses for
Phase II trials. The facility is Chrysalis' information systems, data management
and biostatistical center. This lease expires in August 2001. Chrysalis expects
to terminate or sublet this lease. See " -General-Restructuring of Clinical
Operations."

      Chrysalis has included expected lease termination costs for the facilities
in Germany, Switzerland and Austin, Texas in the restructuring charge that it
took in the fourth quarter of 1998. Chrysalis has included expected lease
termination costs for its corporate headquarters in the estimated restructuring
charge it expects to take in the second quarter of 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Chrysalis."

Item 3. Legal Proceedings

      Chrysalis is not a party to any material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

      No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.

                                     PART II

Item 5. Market for Registrant's Common Equity And Related Stockholder Matters

      As of the close of business on March 20, 1999 there were approximately 
3,786 beneficial holders of Chrysalis common stock. Chrysalis has not declared 
or paid any cash dividends on shares of its equity securities, including its 
common stock, since its incorporation in 1988. Chrysalis currently intends to 
retain its earnings, if any, to finance its business and does not anticipate 
paying any cash dividends on its capital stock in the foreseeable future.

      Chrysalis' common stock is traded on The Nasdaq National Market. The
symbol is CRLS.

      The table below sets forth the high and low closing prices of Chrysalis
common stock by quarter during 1998 and 1997.

<TABLE>
<CAPTION>
Quarter 1998           High            Low           Quarter 1997           High           Low
------------           ----            ---           ------------           ----           ---
<S>                    <C>            <C>                <C>                <C>           <C>  
    1st                $3.38          $2.19              1st                $5.94         $4.44
    2nd                 3.00           1.38              2nd                 5.00          4.06
    3rd                 1.59           0.75              3rd                 4.50          3.44
    4th                 1.63           0.34              4th                 4.38          2.06
</TABLE>

      In January 1999, Nasdaq informed Chrysalis that its common stock will be
delisted from the Nasdaq National Market beginning April 8, 1999. The Chrysalis
common stock will be delisted unless the closing price is $1 or more for any
consecutive ten-day period prior to April 6, 1999. Based on recent trading
prices and the estimated exchange ratio, Chrysalis does not expect the closing
price requirement to be met.


                                       19
<PAGE>   20

Item 6. Selected Financial Data

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                          Years Ended December 31,
                                                           1998         1997        1996        1995        1994
                                                           ----         ----        ----        ----        ----
Statement of Operations Data:                                       (in thousands, except per share data)
-----------------------------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>         <C>         <C>         <C>     
Net revenues                                             $ 39,384    $ 42,298    $ 41,487    $ 39,609    $ 36,188
-----------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
  Direct costs                                             31,041      29,217      27,313      27,691      25,499
   Research and development                                    --         166         528       1,063       3,940
   General, administrative and marketing                   12,828      12,416      10,942       9,631       9,975
   Depreciation and amortization                            2,092       2,699       2,780       2,907       3,594
   Restructuring costs(1)                                   3,872          --          --          --          --
   Business combination costs(2)                               --          --       3,649          --          --
                                                         --------    --------    --------    --------    --------
-----------------------------------------------------------------------------------------------------------------
                                                           49,833      44,498      45,212      41,292      43,008
   Loss from operations                                   (10,449)     (2,200)     (3,725)     (1,683)     (6,820)
                                                         --------    --------    --------    --------    --------
   Other income (expense), net                               (992)        390         742        (635)       (525)
-----------------------------------------------------------------------------------------------------------------
   Net loss before equity in net loss of Nextran, gain
        on sale of Nextran and taxes                      (11,441)     (1,810)     (2,983)     (2,318)     (7,345)
   Equity in net loss of Nextran(3)                            --          --          --      (2,700)     (1,329)
   Gain on sale of Nextran, net of income taxes(3)             --          --          --      17,266          --
   Income tax expense (benefit)                               716         240         477        (177)        390
                                                         --------    --------    --------    --------    --------
        Net income (loss)                                $(12,157)     (2,050)     (3,460)     12,425      (9.064)
                                                         ========    ========    ========    ========    ========
-----------------------------------------------------------------------------------------------------------------
   Basic earnings (loss) per share                       $  (1.06)      (0.18)      (0.31)       1.12       (0.82)
                                                         ========    ========    ========    ========    ========
   Diluted earnings (loss) per share                     $  (1.06)      (0.18)      (0.31)       1.06       (0.82)
                                                         ========    ========    ========    ========    ========
-----------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at year end):
-----------------------------------------------------------------------------------------------------------------
   Cash, cash equivalents and investments                $  6,705       6,925      13,470      23,102       6,234
   Restricted cash                                             --         460       5,010         777       1,724
   Accounts receivable, net                                 8,766       9,669      10,788      10,907       9,340
   Property, equipment and leasehold improvements,
        net                                                15,686      15,127      15,963      17,806      18,548
   Intangible assets, net                                     809         805         953       1,035         991
   Investment in Nextran(3)                                    --          --          --          --       3,844
   Other assets                                             2,615       2,254       1,759       1,797       1,454
                                                         --------    --------    --------    --------    --------
-----------------------------------------------------------------------------------------------------------------
        Total assets                                     $ 34,581    $ 35,240    $ 47,943    $ 55,424    $ 42,135
                                                         ========    ========    ========    ========    ========
-----------------------------------------------------------------------------------------------------------------
   Current liabilities, excluding debt                     17,681      12,295      17,501      15,292      16,047
   Short-term debt                                          3,250       2,668      11,238      11,559       9,876
   Current portion of long-term debt(4)                     4,821         768         180         744         784
   Long-term debt, excluding current portion                6,010       6,561       2,376       7,830       8,502
   Deferred income taxes                                    1,832       1,646       2,053       2,059       2,075
   Other liabilities                                          725         633       1,054         948       1,180
   Total stockholders' equity                                 262      10,669      13,541      16,992       3,671
                                                         --------    --------    --------    --------    --------
-----------------------------------------------------------------------------------------------------------------
        Total liabilities and stockholders' equity       $ 34,581    $ 35,240    $ 47,943    $ 55,424    $ 42,135
                                                         ========    ========    ========    ========    ========
-----------------------------------------------------------------------------------------------------------------
</TABLE>

----------
(1)   In the fourth quarter of 1998, Chrysalis recorded a restructuring charge
      of $3,872,000 in connection with the restructuring of its clinical
      operations. Chrysalis expects to record an additional restructuring charge
      of $825,000 in the second quarter of 1999 in connection with this
      restructuring. See "Business -- General -- Restructuring of Clinical
      Operations" and "Management's Discussion and Analysis of Financial
      Condition and Results of Operations -- General Summary."


                                       20
<PAGE>   21

(2)   In the fourth quarter of 1996, Chrysalis recorded business combination
      costs of approximately $3.6 million for costs incurred as a result of its
      acquisition of the Bioclin Group on December 18, 1996. See Note 6 of the
      Notes to Consolidated Financial Statements included in Part IV of this
      Annual Report on Form 10-K.
(3)   On August 29, 1994, Chrysalis entered into a Joint Venture Agreement with
      Baxter to form Nextran, a partnership in which Chrysalis had a 30%
      partnership interest. On September 22, 1995, Chrysalis consummated the
      sale of its 30% partnership interest in Nextran for a cash purchase price
      of $18 million. As a result of the sale of its partnership interest in
      Nextran, Chrysalis recorded a nonrecurring gain, net of expenses, income
      taxes and related accruals of approximately $17.3 million. See "Business
      -- Nextran."
(4)   As a result of Chrysalis' default under its senior term loan, the
      principal amount of the loan is classified as short-term debt at December
      31, 1998. See "Business -- General -- Forbearance Agreement."

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

General Summary

      Chrysalis is an international contract research organization. Chrysalis
provides drug development services primarily to the pharmaceutical and
biotechnology industries. Chrysalis' services include transgenic discovery
research, preclinical development and clinical capabilities. Chrysalis'
financial condition and results of operation since January 1, 1996 have been
affected by a number of factors described under "Business." These factors
include:

      o     Chrysalis' downsizing and restructuring of its clinical operations;

      o     Chrysalis' default under its senior secured loan;

      o     Execution of the merger agreement, forbearance agreement and the
            guaranty and cash collateral pledge related to the forbearance
            agreement;

      o     Chrysalis' issuance of a $5.0 million subordinated note and warrant
            to an MDS subsidiary;

      o     Chrysalis' acquisition of the Bioclin Group;

      o     Chrysalis' client concentration;

      o     The formation of Nextran and Chrysalis' subsequent sale of its
            interest in Nextran; and

      o     The delay and loss of a large clinical trial.

      Chrysalis took a charge of $3,872,000 in the fourth quarter of 1998
related to the downsizing and restructuring. This restructuring charge related
primarily to employee termination costs, provisions for real estate termination
expenses and asset write downs. Chrysalis expects to take an additional charge
of $825,000 in the second quarter of 1999 related to the downsizing and
restructuring. The second quarter charge relates primarily to additional
employee termination costs and the anticipated closing of its executive offices
as a result of the merger.

      Chrysalis' financial statements are denominated in U.S. dollars. Changes
in the exchange rate between non-U.S. currencies and the U.S. dollar affect the
translation of non-U.S. revenues and operating results into U.S. dollars for
purposes of reporting Chrysalis' financial results. Fluctuations in the exchange
rate between the French Franc and the U.S. dollar may have a material effect on
Chrysalis' operating results. See "-Liquidity and Capital Requirements-Exchange
Rate Fluctuations."

      Most of Chrysalis' contracts are fixed price contracts that require a
portion of the contract amount to be paid at or near the time the trial is
initiated. Chrysalis generally bills its clients upon the completion


                                       21
<PAGE>   22

of negotiated performance requirements and, to a lesser extent, on a date
certain basis. Some of Chrysalis' contracts are subject to cost limitations,
which cannot be exceeded without client approval. Because, in many cases,
Chrysalis bears the risk of cost overruns, unbudgeted costs in connection with
performing these contracts may have a detrimental effect on the financial
results of Chrysalis. If Chrysalis determines that a loss will result from the
performance of a contract, it charges the entire amount of the estimated loss
against income in the period in which it makes the determination.

      Chrysalis' contracts generally may be terminated with or without cause. In
the event of termination, Chrysalis is typically entitled to receive all sums
owed for work performed through the notice of termination and all costs
associated with termination of the study. Once a trial has been commenced,
change orders may be requested by clients based on the results of the trial to
date. Change orders include changes in the scope of the trial and in the
services to be provided by Chrysalis. Therefore, compensation under a contract
may increase or decrease during the duration of a contract. In addition,
termination or delay in the performance of a contract may occur for various
reasons. These reasons include:

      o     unexpected or undesired results from studies conducted by Chrysalis
            or others;

      o     inadequate patient enrollment or investigator recruitment;

      o     production problems resulting in shortages of the drug being tested;

      o     adverse patient reactions to the drug being tested; and

      o     the client's decision to de-emphasize a particular trial.

      Chrysalis' service contracts contain provisions designed to address the
negative impact on Chrysalis' revenues and profitability as a result of
non-controllable delays. These provisions, however, may not be included in all
of Chrysalis' service contracts. Chrysalis attempts to negotiate reimbursement
of fees whether or not these provisions are included in the service contract.
However, Chrysalis is not always successful in negotiating reimbursement. The
loss of or delay of a large contract or multiple contracts could adversely
affect Chrysalis' future revenues and results of operations.

      Revenue for contracts is recognized on a percentage of completion basis as
work is performed. Revenue is affected by the mix of trials conducted and the
degree to which effort is expended. Chrysalis incurs travel costs and may
subcontract with third party investigators in connection with multi-site
clinical trials. These costs are passed through to clients and are included in
service revenue. Costs may vary significantly from contract to contract.
Therefore, changes in service revenue may not be indicative of trends in revenue
growth. Chrysalis considers net service revenue, which equals service revenue
less these costs, as its primary measure of revenue growth.

      Between July 1997 and June 1998, Chrysalis incurred expenses to expand and
retain its infrastructure, primarily in the clinical operations. Chrysalis
expanded and retained infrastructure to support global drug development
capabilities. Management primarily communicated these expanded capabilities to
its existing client base and the pharmaceutical and biotechnology industries.
However, Chrysalis has begun to shut down and discontinue providing services at
several of its clinical operations in Europe and the United States. Even if the
merger is not consummated, Chrysalis will discontinue operations in Dusseldorf,
Germany and Austin, Texas and downsize significantly its European clinical
operations. See "Business -- General-Restructuring of Clinical Operations" and
"-Loss of a Large Clinical Trial."

      Chrysalis' future operating results will be contingent upon successfully
controlling its expenses and using its transgenics, preclinical and remaining
clinical infrastructure. This will require Chrysalis to


                                       22
<PAGE>   23

convert proposals into contracts and revenues. Chrysalis may not be able to
successfully use its remaining clinical infrastructure in a cost efficient
manner or convert proposals into revenues in a timely manner. Chrysalis' ability
to convert its remaining clinical infrastructure into future operating results
may also be affected by other factors. These factors include:

      o     delays in initiating or completing significant preclinical and
            clinical trials;

      o     the lengthening of lead times to convert proposals into contracts
            and revenues; and

      o     the termination of preclinical and clinical trials.

All of these factors may be beyond the control of Chrysalis. See "- Quarterly
Results."

      As a result of the Nextran transactions, Chrysalis no longer funds the
development of organ transplantation or blood substitute programs. Historically,
these programs accounted for a substantial portion of Chrysalis' research and
development expenses, capital expenditures, working capital and accumulated
deficit.

Results of Operations (1998, 1997 and 1996)

Revenues By Business And Geographic Region

<TABLE>
<CAPTION>
                                                      REVENUES ($000'S)
                                                      -----------------
                                              1998           1997          1996
                                              ----           ----          ----
<S>                                          <C>           <C>           <C>    
Transgenics/Preclinical ..............       $30,157       $27,258       $29,090
Clinical .............................         8,361        14,244        11,883
Licensing/Other ......................           866           796           514
                                             -------       -------       -------
         Total .......................       $39,384       $42,298       $41,487
                                             =======       =======       =======
International ........................       $23,998       $26,778       $28,322
United States ........................        14,520        14,724        12,651
Licensing/Other ......................           866           796           514
                                             -------       -------       -------
         Total .......................       $39,384       $42,298       $41,487
                                             =======       =======       =======
</TABLE>

Fiscal Year Ended December 31, 1998 As Compared To The Fiscal Years Ended
December 31, 1997 and 1996.

      Revenues. Revenues were $39,384,000 for 1998 compared to $42,298,000 for
1997 and $41,487,000 for 1996. Excluding the impact of foreign currency
translations, revenues for 1997 would have been approximately $46,204,000. The
decrease in revenues for 1998 as compared to 1997 was primarily the result of a
decrease in the worldwide clinical business that resulted from:

      o     the completion in the second quarter of 1998 of a large global
            clinical study with one of Chrysalis' largest customers that
            generated $3.0 million more revenue in 1997 compared to 1998; and

      o     the cancellation in April 1998 of a large clinical trial, that
            generated $4.0 million of revenue in 1997, with the same customer.


                                       23
<PAGE>   24

Chrysalis was unable to replace completely this revenue from new contracts. This
decrease was slightly offset by an increase in Chrysalis' transgenic services,
particularly those supporting functional genomics research programs.

      The increase in revenues from 1996 to 1997 was primarily the result of the
following:

      o     an increase in the clinical business, including services provided
            under contracts with Chrysalis' largest customer;

      o     an increase in Chrysalis' specialty transgenic and molecular biology
            services; and

      o     an increase in preclinical business in Europe.

This increase was offset by the unfavorable impact of foreign currency
translations and a decrease in the preclinical business in North America and the
Phase I clinical business in Europe.

      Chrysalis believes that revenue growth for the clinical business for 1997
and 1998 was adversely affected by:

      o     the long lead times in Chrysalis' conversion of proposals into
            contracts and revenues; and

      o     the continuing impact, as a result of these long lead times, of
            clinical senior management's focus on negotiating and consummating
            the BioClin Group acquisition during 1996.

This focus prevented them from devoting efforts to business development and
marketing the clinical business.

See "-- Liquidity and Capital Resources - Exchange Rate Fluctuations," and
"Business - Loss of Large Clinical Trial."

      Operating Expenses. Direct costs were $31,041,000 or 79% of net revenues
for 1998 compared to $29,383,000 or 69% of net revenues for 1997. For 1996,
direct costs were $27,841,000 or 67% of net revenues. Direct costs for 1997 and
1996 include research and development costs. The increase in direct costs in
1998 as compared to 1997 was primarily due to:

      o     incremental investments of approximately $5.0 million on an
            annualized basis made between July 1997 and June 1998 to expand and
            maintain Chrysalis' clinical personnel and infrastructure to support
            its business strategy at that time to accommodate global clinical
            trials, including the large clinical trial that was discontinued in
            April 1998; and

      o     investments in personnel and infrastructure to support the growth in
            Chrysalis' transgenics services, particularly those supporting
            functional genomics research programs.

The increase in these costs, as a percent of revenues, is due to a base cost
structure, primarily in the clinical business, of personnel, facilities and
related expenses capable of supporting a higher level of revenues.

In June 1998, Chrysalis began to reduce its clinical infrastructure by
approximately $1.5 million on an annualized basis. After execution of the merger
agreement, Chrysalis began to shut down and discontinue providing clinical
services in North America and at some of its European locations.


                                       24
<PAGE>   25

      Excluding the impact of foreign currency translations, the increase in
direct costs of $1,904,000 for the year ended December 31, 1997, as compared to
the same period in 1996, would have been approximately $4,491,000. This increase
in direct costs was primarily due to:

      o     investment in personnel and infrastructure to support Chrysalis'
            long-term business expansion strategy and to accommodate the large
            clinical trial which was delayed in the last quarter of 1997; and

      o     increased variable costs as a result of increased business activity
            in Chrysalis' European preclinical services and specialty transgenic
            and molecular biology services in 1997.

The increase in these costs in 1997 as a percent of revenues is due to a base
cost structure of personnel, facilities and related expenses capable of
supporting a higher level of revenues. The majority of the expanded
infrastructure related to the large clinical trial was in place by the fourth
quarter of 1997. This expanded infrastructure increased costs by approximately
$1.2 million in 1997. See "Business - Loss of a Large Clinical Trial."

      General, administrative and marketing expenses were $12,828,000 in 1998
compared to $12,416,000 in 1997 and $10,942,000 in 1996. Chrysalis incurred
approximately $320,000 in 1998 for professional fees in connection with the
merger agreement. Chrysalis anticipates that it will incur approximately
$1,050,000 for professional fees in 1999 prior to the merger. Excluding these
professional fees, general, administrative and marketing expenses in 1998 would
have increased only slightly compared to 1997. These costs did not decrease
along with revenues because Chrysalis maintained its personnel and related costs
for marketing and business development, information systems, accounting and
general management.

      Excluding the impact of foreign currency translation, the increase of
$1,474,000, for 1997 compared to 1996 would have been approximately $2,590,000.
This increase in expenses for 1997 was primarily due to:

      o     the increase in personnel and related costs for marketing and
            business development, information systems, general management and
            financial management activities;

      o     the increase in personnel and related costs associated with the
            management of the European clinical business; and

      o     the increase in personnel and facility costs associated with the
            increase in Chrysalis' specialty transgenic and molecular biology
            services.

      Depreciation and amortization expense decreased to $2,092,000 for 1998
compared to $2,699,000 for 1997 and $2,780,000 for 1996. This decrease resulted
from the full depreciation prior to 1998 of assets, primarily associated with
Chrysalis' European preclinical operations.

      Business Combination Costs. Chrysalis incurred costs in 1996 associated
with the BioClin Group acquisition. These costs totaled $3,649,000. These costs
included expenses associated with the acquisition of the clinical business, the
name change from DNX Corporation to Chrysalis and other related items.

      Restructuring Costs. In connection with the merger agreement, Chrysalis
agreed to shut down and discontinue providing clinical services in North America
and at several of its European locations. Chrysalis incurred $3,872,000 of
expenses related to this restructuring in the fourth quarter of 1998. See
"-General Summary" and "Business -- General - Restructuring of Clinical
Operations."


                                       25
<PAGE>   26

      Other Income (Expense). Other income (expense) was expense of $992,000 in
1998 compared to income of $390,000 in 1997 and income of $742,000 for 1996. The
increase in expense for 1998 compared to 1997 primarily resulted from:

      o     a settlement agreement with Virginia Commonwealth University signed
            in the third quarter of 1997 which resulted in a $700,000 gain in
            1997;

      o     an increase in interest expense resulting from higher outstanding
            debt balances and the amortization of the MDS warrant; and

      o     a decrease in interest income earned as a result of a decrease in
            average available cash and other investment balances.

      The decrease from 1996 to 1997 was partially due to a decrease in interest
expense resulting from lower outstanding debt balances. The decrease in interest
expense was offset by a decrease in interest income earned in 1997 resulting
from a decrease in cash and other investment balances. Other income in 1997 also
included the $700,000 nonrecurring gain resulting from the settlement agreement.
Other income in 1996 primarily consisted of interest from higher cash balances
primarily resulting from (1) the proceeds from the Nextran sale in the third
quarter of 1995 and (2) a foreign currency gain of $517,000. The foreign
currency gain resulted primarily from exchange rate fluctuations between the
German Mark and Swiss Franc associated with short-term borrowings of Chrysalis'
German operations denominated in Swiss Francs. Chrysalis repaid this debt
denominated in Swiss Francs in 1997. The interest income for 1996 was offset
primarily by interest expense of $1,445,000 on outstanding debt.

      Taxes. Chrysalis' foreign subsidiaries are subject to foreign income taxes
under foreign tax laws on the profits generated in those countries. In general,
these tax laws do not permit profits generated in those countries to be offset
by losses from operations in other countries. As a result, primarily for its
French operations, Chrysalis recorded an income tax expense of $716,000 in 1998
compared to $240,000 in 1997 and $477,000 in 1996. These expenses are primarily
due to profits generated by Chrysalis' French operations. These profits are
partially offset by tax benefits recorded as a result of losses in other
European operations. Included in 1998 is a charge of $214,000 for the write-down
of deferred tax assets impaired by the shut down of some European clinical
operations.

      The impact from United States federal income taxes is currently not
significant because Chrysalis has available net operating loss carryforwards. At
December 31, 1998, Chrysalis' available net operating loss carryforwards were
approximately $34,873,000 for United States federal income tax purposes. These
loss carryforwards expire through 2012. Chrysalis also has research and
development tax credit carryforwards of approximately $2,932,000 for U.S.
federal income tax reporting purposes. These tax credit carry forwards are
available to reduce U.S. federal income taxes, if any, through 2012. Chrysalis
has alternative minimum tax credit carryforwards of approximately $164,000 for
U.S. federal income tax purposes which are available to reduce U.S. federal
income taxes, if any. These tax credits have an unlimited carryforward period.
Chrysalis' acquisition of the Bioclin Group resulted in an ownership change
under the Internal Revenue Code. Accordingly, Chrysalis' ability to use its net
operating loss carryforwards to offset operating profits may be limited in the
future by the Internal Revenue Code. Chrysalis may not use these net operating
loss carryforwards to offset profit in other countries.


                                       26
<PAGE>   27

Quarterly Results

      Chrysalis' operating results vary from quarter to quarter. Variations are
caused by factors that include:

      o     delays in initiating or completing significant preclinical and
            clinical trials;

      o     termination of preclinical and clinical trials;

      o     acquisitions; and

      o     exchange rate fluctuations.

      Clients or regulatory authorities often cause delays in or terminate
studies or trials. Chrysalis typically cannot control these actions. Because a
large portion of Chrysalis' operating costs are relatively fixed while its
revenues are subject to fluctuation, minor variations in the commencement,
progress or completion of trials may cause significant variations in quarterly
operating results. Chrysalis took a restructuring charge in the fourth quarter
of 1998 and expects to take an additional restructuring charge in the second
quarter of 1999. See "- General Summary."

      The following table presents Chrysalis' unaudited quarterly operating
results for each of the fiscal quarters of 1997 and 1998. In the opinion of
Chrysalis, this information has been prepared on the same basis as the audited
consolidated financial statements and reflects all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of results of
operations for those periods. You should read this quarterly financial data in
conjunction with Chrysalis' consolidated financial statements and notes thereto.
The operating results for any quarter are not necessarily indicative of the
results to be expected in any future period.


                                       27
<PAGE>   28

                             QUARTER ENDED ($000'S)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                    MARCH 31,  JUNE 30,    SEPT. 30,   DEC. 31,     MARCH 31,  JUNE 30,    SEPT. 30,   DEC. 31,
                                      1997       1997        1997        1997         1998       1998        1998        1998
                                      ----       ----        ----        ----         ----       ----        ----        ----
<S>                                <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>     
Net Revenues ...................   $  9,905    $ 10,145    $ 10,623    $ 11,624    $  9,673    $ 10,292    $  8,799    $ 10,620
Operating Expenses:
   Direct costs ................      6,970       7,054       7,392       7,802       7,702       8,112       7,832       7,395
   Research and development ....         52          47          31          36          --          --          --          --
   General, administrative and  
   marketing ...................      2,874       2,976       3,123       3,442       3,223       3,110       2,924       3,571
   Depreciation and amortization        638         654         708         699         493         514         522         563
   Restructuring costs .........         --          --          --          --          --          --          --       3,872
                                   --------    --------    --------    --------    --------    --------    --------    --------
                                     10,534      10,731      11,254      11,979      11,418      11,736      11,278      15,401

Loss from operations ...........       (629)       (586)       (631)       (355)     (1,745)     (1,444)     (2,479)     (4,781)
Other income (expenses):
   Interest Income .............        181         123          93          72         127          56          87          46
   Interest expenses ...........       (191)       (165)       (206)       (213)       (248)       (420)       (399)       (434)
   Foreign currency gain .......         --          --          --          11          --          --          --          --
   Other .......................          4          (6)        692          (4)         (7)         (5)         (3)        208
                                   --------    --------    --------    --------    --------    --------    --------    --------
                                         (6)        (48)        579        (134)       (128)       (369)       (315)       (180)
Loss before income taxes .......       (635)       (634)        (52)       (489)     (1,873)     (1,813)     (2,794)     (4,961)
Income tax expense (benefit) ...          9          31          41         159         129         (11)         86         512
Net loss .......................   $   (644)   $   (665)   $    (93)   $   (648)   $ (2,002)   $ (1,802)   $ (2,880)   $ (5,473)
                                   ========    ========    ========    ========    ========    ========    ========    ========
</TABLE>


                                       28
<PAGE>   29

Revenues By Business And Geographic Region By Quarter

                             QUARTER ENDED ($000'S)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                          MARCH 31,   JUNE 30,   SEPT. 30,  DEC. 31,   MARCH 31,  JUNE 30,   SEPT. 30,  DEC. 31,
                            1997        1997       1997       1997       1998       1998       1998       1998
                            ----        ----       ----       ----       ----       ----       ----       ----
<S>                        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>    
Transgenics/Preclinical    $ 6,720    $ 6,708    $ 6,476    $ 7,355    $ 6,043    $ 7,466    $ 7,394    $ 9,254
Clinical ..............      2,909      3,277      3,972      4,085      3,406      2,624      1,180      1,151
Licensing/Other .......        276        160        175        184        224        202        225        215
                           -------    -------    -------    -------    -------    -------    -------    -------
     Total ............    $ 9,905    $10,145    $10,623    $11,624    $ 9,673    $10,292    $ 8,799    $10,620
                           =======    =======    =======    =======    =======    =======    =======    =======

International .........    $ 6,779    $ 6,661    $ 6,168    $ 7,170    $ 5,952    $ 6,554    $ 5,194    $ 6,298
United States .........      2,850      3,324      4,280      4,270      3,497      3,536      3,380      4,107
Licensing/Other .......        276        160        175        184        224        202        225        215
                           -------    -------    -------    -------    -------    -------    -------    -------
     Total ............    $ 9,905    $10,145    $10,623    $11,624    $ 9,673    $10,292    $ 8,799    $10,620
                           =======    =======    =======    =======    =======    =======    =======    =======
</TABLE>

Liquidity and Capital Requirements

Default

      At December 31, 1998, Chrysalis failed to satisfy certain financial
covenants contained in the loan agreement related to its senior secured term
loan and, therefore, was in default under the loan agreement. This loan is
classified as a current liability on the balance sheet at December 31, 1998. See
"Business -- General -- Forbearance Agreement."

      As a result of this default and the other factors affecting Chrysalis, the
auditors' opinion for Chrysalis contained in this Form 10-K contains an
explanatory paragraph stating as follows:

      "The consolidated financial statements have been prepared assuming that
      [Chrysalis] and its subsidiaries will continue as going concerns.
      [Chrysalis] has suffered recurring losses from operations, has a net
      working capital deficiency and is in default of [some of its] debt
      covenants which raise substantial doubt about their ability to continue as
      going concerns. The consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty."

Cash Reserves

      Chrysalis finances its operations and activities by relying on cash flows
from operating activities, cash reserves and available lines of credit. As of
December 31, 1998, Chrysalis had cash reserves of $6,705,000. Cash reserves
consists of cash and cash equivalents and short-term investments. Chrysalis
invests its excess cash in a diversified portfolio of high-grade money market
funds, United States Government backed securities and commercial paper and
corporate obligations. Chrysalis' cash reserves decreased by $680,000 during
1998 from 1997 primarily due to:


                                       29
<PAGE>   30

      o     $2,950,000 of net cash used in operating activities;

      o     $2,391,000 of net cash used for capital expenditures; and

      o     $464,000 of principal repayments on long-term debt.

      This decrease was offset partially by the receipt of $5,000,000 for the
subordinated note issued to MDS's subsidiary on March 16, 1998.

Capital Expenditures

      In 1998, Chrysalis invested approximately $2,391,000 in property and
equipment compared to approximately $3,281,000 for 1997. The 1998 increase was
primarily associated with:

      o     solidifying and expanding Chrysalis' position in preclinical
            continuous infusion capabilities;

      o     updating and expanding information systems; and

      o     supporting the growth of the transgenic/gene targeting services
            business.

Debt

      Chrysalis has a working line of credit with a Swiss bank. As of December
31, 1998, the outstanding balance under this line of credit was approximately
$2,931,000. This line is secured by the European clinical operation's trade
accounts receivable. Chrysalis maintains a cash balance at this Swiss Bank in
the amount of $2,661,000 as of December 31, 1998. Chrysalis and the Swiss Bank
expect the cash balance to satisfy the majority of the outstanding amount under
the line of credit. Chrysalis also has lines of credit and overdraft privileges
with French banks in the aggregate amount of 10.5 million French Francs. At the
exchange rate in effect on December 31, 1998, the amount was US $1.9 million. At
December 31, 1998, there were no short-term borrowings outstanding under these
French facilities.

      On March 16, 1998, Chrysalis issued, in exchange for $5,000,000 cash, a
subordinated note and a warrant to purchase 2,000,000 shares of its common stock
at an exercise price of $2.50 per share, to a wholly-owned subsidiary of MDS.
The terms of the subordinated note provide for semi-annual interest payments
with the aggregate principal amount payable on March 16, 2001. This note is
subordinate to some outstanding indebtedness of Chrysalis, including its
existing bank debt and mortgages. In addition, a portion or the entire principal
amount of the note may, at the option of the holder, be satisfied by issuance of
the shares of Chrysalis common stock, in accordance with the terms of the
warrant. Chrysalis failed to make a semi-annual interest payment on the
subordinated note in March 1999. The MDS subsidiary has agreed to waive its
rights arising from the failure under the conditions that (1) the unpaid
interest bears interest at the rate of 6% per annum, and (2) the unpaid interest
is paid by April 30, 1999 or, if earlier, the date of the merger.

      In the third quarter of 1997, Chrysalis entered into a five-year $5.0
million senior secured term loan with the Bank with the principal payable in
quarterly installments beginning September 1998. The balance outstanding at
December 31, 1998 is $4,687,500. Interest is paid monthly over the life of the
loan. This loan is secured by substantially all of Chrysalis' domestic assets,
including the capital stock of its subsidiaries. At December 31, 1998, Chrysalis
was in default under this loan. See "Business -- General -- Forbearance
Agreement."


                                       30
<PAGE>   31

      In connection with its U.S. preclinical facility, Chrysalis secured a $1.5
million mortgage with a bank and a $1.2 million mortgage from a Pennsylvania
agency, which required cash collateral of $450,000. These two loans are due in
monthly installments through 2009. As of December 31, 1998, the aggregate
outstanding balance under these mortgages was approximately $2,170,000. The cash
collateral of $450,000 on the mortgage loan with the Pennsylvania agency was
classified on the balance sheet as restricted cash as of December 31, 1997. In
July 1998, Chrysalis satisfied the financial covenants related to the cash
collateral and the $450,000 was released. The favorable interest rate on the
mortgage with the Pennsylvania agency is subject to change upon review by the
agency of future conditions.

Capital Requirements

      The ability of Chrysalis to meet ongoing debt service requirements, to
meet cash funding requirements and to otherwise satisfy its obligations to
vendors and lenders from cash solely provided by operations has been adversely
affected by significant losses from clinical operations. In response to these
liquidity constraints, Chrysalis has begun to discontinue some of its clinical
operations. See "Business - General - Restructuring of Clinical Operations."

      Chrysalis anticipates that its capital requirements through April 30, 1999
will include:

      o     satisfying working capital needs;

      o     costs to shut down certain of its European and United States
            clinical operations;

      o     capital expenditures for the preclinical and transgenic businesses;
            and

      o     meeting its principal and interest requirements under debt
            arrangements.

      Chrysalis will use cash and cash equivalents, which was $6,705,000 as of
December 31, 1998, and cash provided by operations to fund some of these cash
requirements.

      If the forbearance agreement does not terminate, Chrysalis believes that
it will have sufficient cash to continue to fund operating activities through
April 1999. However, if the forbearance agreement terminates, Chrysalis will not
have sufficient cash to satisfy its obligations to its creditors and fund
operating activities. The forbearance agreement will terminate prior to April
30, 1999 if:

      o     Chrysalis breaches the documents related to the term loan;

      o     either Chrysalis or Phoenix materially breaches the merger
            agreement; or

      o     the merger agreement terminates.

      As a result of these issues, Chrysalis must consummate the merger in a
timely manner. Although Chrysalis has been exploring various strategic
alternatives for some period of time, it now believes that an outright sale of
Chrysalis through a vehicle other than the merger is unlikely. After evaluating
a number of strategic alternatives with the assistance of Vector Securities,
Chrysalis currently believes that the merger agreement offers the most viable
solution to Chrysalis' financial condition. However, the merger may not be
consummated in a timely manner. If Chrysalis cannot consummate the merger or
otherwise resolve its liquidity constraints by April 30, 1999, Chrysalis will
likely not have sufficient liquidity both to operate its business and to satisfy
its obligations to various creditors. In addition, if the forbearance agreement
were to terminate, other of Chrysalis' debt would also be in default. Chrysalis
intends to pursue alternatives outside of bankruptcy. However, alternative
strategies may not be successful. It is possible that Chrysalis


                                       31
<PAGE>   32

could be forced into bankruptcy by its creditors. Although Chrysalis currently
intends, if necessary, to seek reorganization under chapter 11 of the Bankruptcy
Code, it also believes that a successful reorganization would likely require a
transaction involving a sale of one or more of Chrysalis' facilities or
operations to generate a source of liquidity during any bankruptcy proceeding.

Exchange Rate Fluctuations

      Chrysalis derived approximately 61% of its net revenues for 1998, 63% of
its net revenues for 1997 and 68% of its net revenues for 1996 from operations
outside the United States. Chrysalis' consolidated financial statements are
denominated in U.S. dollars. Changes in exchange rates between the applicable
foreign currency and the U.S. dollar affect the translation of some subsidiary's
financial results into U.S. dollars for purposes of Chrysalis' consolidated
financial results. Translation adjustments are reported as a separate section of
stockholders' equity.

      Chrysalis may be subject to foreign currency transaction risks when
Chrysalis' multicountry contracts are denominated in a currency other than the
currency in which Chrysalis incurs the expenses related to these contracts. For
these multicountry contracts, Chrysalis seeks to impose on its client the effect
of fluctuations in the relative values of the contract currency and the currency
in which the expenses are incurred. To the extent Chrysalis is unable to impose
on its clients the effects of currency fluctuations, these fluctuations could
have a material effect on the results of operations of Chrysalis. Chrysalis
generally does not hedge its currency translation and transaction exposure.

      The percentage of Chrysalis' total revenues recorded in French francs is
significant because Chrysalis' preclinical operations in France account for a
significant portion of total revenues. Chrysalis' French operations accounted
for approximately 46% of revenues in 1998, 44% of revenues in 1997 and 48% of
revenues in 1996. Fluctuations in the exchange rate between the French franc and
the U.S. dollar affect the translation of the French preclinical operation's
revenues and operating results into U.S. dollars for purposes of Chrysalis'
consolidated financial results. Fluctuations also affect the U.S. dollar amounts
actually received by Chrysalis from the French preclinical operations. If the
French preclinical operations continue to represent a significant portion of
Chrysalis' business, the appreciation of the U.S. dollar against the French
franc would have an unfavorable impact on Chrysalis' revenues and a favorable
impact on Chrysalis' operating expenses. However, the depreciation of the U.S.
dollar against the French franc would have a favorable impact on Chrysalis'
revenues and an unfavorable impact on Chrysalis' operating expenses. The net
effect of these impacts cannot be predicted with certainty.

      For purposes of Chrysalis' consolidated financial results, the results of
operations of the French preclinical business denominated in French francs have
been translated from French francs into U.S. dollars using the following
exchange rates:


                                       32
<PAGE>   33

<TABLE>
<CAPTION>
   PERIOD                                   
   ------                                    FRENCH FRANC       U.S. DOLLAR PER
                                            PER U.S. DOLLAR       FRENCH FRANC
                                            ---------------       ------------
<S>                                              <C>                 <C>  
   Years
   1998                                          5.5980              .1786
   1997                                          5.8364              .1713
   1996                                          5.1187              .1954
   Quarters
   1st quarter 1997                              5.6038              .1785
   2nd quarter 1997                              5.7831              .1729
   3rd quarter 1997                              6.0838              .1644
   4th quarter 1997                              5.8817              .1700

   1st quarter 1998                              6.0948              .1641
   2nd quarter 1998                              6.0157              .1662
   3rd quarter 1998                              5.8835              .1700
   4th quarter 1998                              5.5854              .1790
</TABLE>

      The rates in the above tables represent an average exchange rate
calculated using rates quoted in The Wall Street Journal. As of March 26, 1999,
the French franc per U.S. dollar rate was 6.0917.

Accumulated Deficit

      From its inception in 1988 until the formation in 1994 and subsequent sale
of its ownership interest in Nextran in 1995, Chrysalis expended substantial
funds for research and development and capital expenditures. A significant
portion of these expenditures were made to support Chrysalis' organ
transplantation and blood substitute research and development programs.
Chrysalis transferred these programs to Nextran. Historically, these
expenditures accounted for a substantial portion of Chrysalis' accumulated
deficit. Costs associated with the prior strategy to develop a worldwide
clinical business also contributed to the accumulated deficit. See "Business --
Loss of a Large Clinical Trial" and "- Nextran."

Inflation

      Chrysalis believes that inflation has not had a material impact on its
results of operations.

Year 2000

      Information technology systems are an integral part of the services
Chrysalis provides. Non-information technology systems play a nominal role in
Chrysalis' operations. Chrysalis has been assessing Year 2000 compliance issues
from an internal, supplier and customer perspective and has been actively
involved in resolving related issues since 1997. Chrysalis is in the process of
undertaking actions to ensure that its information technology systems are Year
2000 compliant. It expects to finish this process by the end of the second
quarter of 1999. Chrysalis has not yet determined whether a testing phase of its
information technology systems will be necessary or, if necessary, when testing
would be undertaken or completed. Any failure of Chrysalis to adequately correct
its information technology systems or any failure of any supplier or customer on
whom Chrysalis is dependent to be Year 2000 compliant could materially adversely
affect Chrysalis' ability to conduct operations and, therefore, could materially
adversely affect its financial condition, results of operations and cash flows.
Chrysalis currently estimates that costs and expenses of assessment and
corrective activities will be approximately $1,000,000, of which approximately
$475,000 has been spent through December 31, 1998. However, Chrysalis' current
financial


                                       33
<PAGE>   34

condition may prevent it from expending sufficient sums to adequately resolve in
a timely manner all Year 2000 issues. Further, Chrysalis is dependent on the
efforts of a limited number of key employees to address Year 2000 compliance
issues. The loss of one or more of these employees could materially adversely
impact Chrysalis' ability to assess and resolve Year 2000 issues in a timely
manner. Chrysalis may not have the resources or ability to resolve in a timely
manner the Year 2000 compliance of its information technology systems and third
parties on which it depends. In addition, Chrysalis may not be able to retain
the services of the key employees addressing Year 2000 compliance issues.
Further, the costs related to assessing and resolving Year 2000 issues may be
material. Finally, Chrysalis' operations, financial condition and results of
operations may be materially adversely impacted by a failure to achieve any of
the foregoing. See "- Liquidity and Capital Requirements - Capital
Requirements."

Euro Conversion

      On January 1, 1999, eleven of the fifteen countries that are members of
the European Union introduced a new currency unit called the "euro ." The euro
will ultimately replace the national currencies of these eleven countries. The
conversion rates between the euro and the participating countries' currencies
were fixed irrevocably as of January 1, 1999. The participating countries'
national currencies will be removed from circulation between January 1, 1999 and
June 30, 2002 and replaced by euro notes and coinage. During the "transition
period" from January 1, 1999 through December 31, 2001, public and private
entities and individuals may pay for goods and services using either checks,
drafts or wire transfers denominated in euro or the participating country's
national currency.

Under the regulations governing the transition to the euro, there is a "no
compulsion, no prohibition" rule which states that no one is obligated to use
the euro until the notes and coinage have been introduced on January 1, 2002. In
keeping with this rule, Chrysalis is able to:

      o     receive euro denominated payments;

      o     invoice in euro as requested by customers and suppliers; and

      o     perform appropriate conversion and rounding calculations.

      Chrysalis expects to complete full conversion of all affected country
operations to the euro by the time national currencies are removed from
circulation. Chrysalis does not expect software and business process conversion
costs required to achieve these abilities to be material.

      Chrysalis does not anticipate that the introduction and use of the euro
will materially affect Chrysalis' foreign exchange and hedging activities or
Chrysalis' use of derivative instruments. Chrysalis does not anticipate that the
euro will have a material adverse effect on its operating results, financial
condition or cash flows. However, Chrysalis cannot yet determine the ultimate
effect that the euro will have on competition due to price transparency, foreign
currency risks and relationships and transactions with third parties. Chrysalis
continues to monitor and assess the potential risks imposed by the euro.

New Accounting Pronouncements

      In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 provides guidance for the accounting treatment of various
costs typically incurred during the development or purchase of computer software
for internal use. SOP 98-1 is effective for fiscal periods beginning after
December 15, 1998. Chrysalis does


                                       34
<PAGE>   35

not expect the application of SOP 98-1 to have a material impact on its
consolidated results of operations, financial position or cash flows.

      In April 1998, the AcSEC issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities. SOP 98-5 provides guidance on the financial
reporting of start-up and organization costs and requires these costs be
expensed as incurred. SOP 98-5 is effective for fiscal periods beginning after
December 15, 1998. Chrysalis does not expect the application of SOP 98-5 to have
a material impact on its consolidated results of operations, financial position
or cash flows.

      In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities and requires all derivatives to be recorded on the balance
sheet at fair value. This statement is effective for years beginning after June
15, 1999. Chrysalis does not expect the adoption of this statement to have a
material impact on its consolidated results of operations, financial position or
cash flows.

Forward Looking Statements

      The statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere throughout this
Annual Report on Form 10-K that are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange of 1934. These forward-looking statements
are subject to certain risks and uncertainties described below, which could
cause actual results to differ materially from those reflected in the
forward-looking statements. These forward-looking statements reflect
management's analysis, judgment, belief or expectation only as of the date
hereof. Chrysalis undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof or to publicly release the results of any revisions to such
forward-looking statements that may be made to reflect events or circumstances
after the date hereof. In addition to the disclosure contained herein, readers
should carefully review any disclosure of risks and uncertainties contained in
other documents Chrysalis files or has filed from time to time with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.

      In addition to factors discussed above in "--Year 2000," factors that
could cause actual results to differ materially from those reflected in the
forward looking statements include, without limitation: the consummation of the
merger, the success in obtaining the necessary regulatory and stockholder
approvals for the merger, the satisfaction of other closing conditions (some of
which are beyond Chrysalis' control) and the subsequent consummation of the
merger; the degree of Chrysalis' success in obtaining new contracts; the scope
and duration of existing drug development trials; the loss of downsizing of, or
delay in, existing drug development trials; the lengthening of the lead time to
convert proposals into contracts and Chrysalis' dependence on certain clients,
especially its larger clients, and on the pharmaceutical and biotechnology
industries; adverse trends in the regulatory environment, including health care
reform measures; Chrysalis' dependence on key management personnel; competition
and consolidation in the drug development services industry; liability for
negligence or errors and omissions arising out of drug development trials;
foreign exchange rate fluctuations; the ability to obtain future financings; and
costs of restructuring the clinical operations. In addition, Chrysalis'
quarterly operating results will continue to be subject to variation as a result
of factors such as those discussed above in"--Quarterly Results" as well as the
"--General Summary" and "Business -- General -- Restructuring of Clinical
Operations."


                                       35
<PAGE>   36

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      Chrysalis is exposed to market risk from changes in interest rates on some
portions of its long-term debt. Currently, Chrysalis does not use derivative
financial instruments to manage its interest rate risk. The $5.0 million term
loan and the mortgage with a commercial bank both had a variable interest rate
of 9.25% at December 31, 1998. The carrying interest rate on the term loan and
mortgage with a commercial bank bears interest at market rates and therefore,
the carrying value approximates fair value.

Chrysalis conducts business in foreign countries and international operations
were material to Chrysalis' consolidated financial position, results of
operations and cash flows as of December 31, 1998. Accordingly, Chrysalis is
subject to material foreign currency exchange risk. Approximately 61%, 63% and
68% of Chrysalis' net revenues for 1998, 1997 and 1996, respectively, were
derived from Chrysalis' operations outside the United States. Chrysalis'
consolidated financial statements are denominated in U.S. dollars and,
accordingly, changes in exchange rates between the applicable foreign currency
and the U.S. dollar will affect the translation of such subsidiary's financial
results into U.S. dollars for purposes of reporting Chrysalis' consolidated
financial results. Translation adjustments are reported as a separate section of
stockholders' equity.

Chrysalis may be subject to foreign currency transaction risks when Chrysalis'
multi-country contracts are denominated in a currency other than the currency in
which Chrysalis incurs the expenses related to such contracts. For such
multi-country contracts, Chrysalis seeks to require its client to incur the
effect of fluctuations in the relative values of the contract currency and the
currency in which the expenses are incurred. To the extent Chrysalis is unable
to require its clients to incur the effects of currency fluctuations, these
fluctuations could have a material effect on the results of operations of
Chrysalis. Chrysalis does not hedge its currency translation and transaction
exposure.

Item 8. Financial Statements And Supplementary Data

The information required by this Item 8 is set forth at pages F-1 through F-25
of the Consolidated Financial Statements contained in Part IV hereof.

Item 9. Changes In And Disagreements With Accountants On Accounting And
        Financial Disclosure

Not Applicable.


                                       36
<PAGE>   37

                                    PART III

Item 10. Directors And Executive Officers Of The Registrant

      The following table sets forth certain information with respect to each of
Chrysalis' directors and executive officers as of March 20, 1999.

<TABLE>
<CAPTION>
                                        Director
Name                      Age             Since           Positions With  Chrysalis
----                      ---             -----           --------------  ---------
<S>                        <C>            <C>             <C>
Paul J. Schmitt            47             1988            Director, Chairman of the Board,
                                                          President and Chief Executive Officer
Jack Barbut                46             1996            Director
J. Christian Jensen        48             1997            Director
Desmond H. O'Connell       63             1991            Director
Photios T. Paulson         60             1995            Director
Barry M. Sherman           57             1997            Director
W. Leigh Thompson          60             1995            Director
John G. Cooper             40               --            Senior Vice President and
                                                          Chief Financial Officer
Leif Modeweg D.V.M.        62               --            Senior Vice President and Director of
                                                          International Operations
</TABLE>

The Chrysalis Board is divided into three classes with each class serving a
staggered three-year term. Each executive officer serves until his successor is
duly appointed.

      Paul J. Schmitt. Mr. Schmitt has served as Chairman of the Board of
Directors since October 1994. Mr. Schmitt joined Chrysalis as President and
Chief Executive Officer and was elected as a Director of Chrysalis in November
988. From May 1986 to October 1988, Mr. Schmitt was President of Biolectron,
Inc., a medical device company. Prior to joining Biolectron, Mr. Schmitt was
with the BOC Group, PLC, an industrial gas and health care company, where, from
October 1981 until May 1986, he served as Vice President and General Manager in
BOC's health care group. Mr. Schmitt received his B.S. degree in finance from
Lehigh University and his M.B.A. degree from Rutgers University. Mr. Schmitt's
current three-year term as a Director will expire in 2000.

      Jack Barbut, Sc.D., Director. In December 1996, in connection with the
acquisition of the BioClin Group, Dr. Barbut was appointed as Vice Chairman of
the Board of Directors and President, Clinical Services of Chrysalis and was
elected to the Board of Directors of Chrysalis. By letter agreement dated as of
October 29, 1998, Dr. Barbut and Chrysalis entered into arrangements related to
his termination of employment. See "Certain Relationships and Related
Transactions." Dr. Barbut founded the clinical services business in 1979 and
oversaw its operations thereafter. Dr. Barbut received his Sc.D. degree in
systems engineering from The Polytechnic Institute in Lausanne, Switzerland. Mr.
Barbut's current three-year term will expire in 2001.

      J. Christian Jensen, Ph.D., Director. In December 1996, in connection with
the acquisition of the Bioclin Group, Dr. Jensen was appointed as President,
International Services of Chrysalis and was elected to the Board of Directors of
Chrysalis at the 1997 annual meeting of stockholders. During August, 1998, Dr.
Jensen entered into an agreement with Chrysalis releasing Dr. Jensen from
performing most of his services to Chrysalis and terminating his employment as
of December 31, 1998. See "Certain Relationships and


                                       37
<PAGE>   38

Related Transactions." Dr. Jensen joined the BioClin Group in 1991 and, prior to
the BioClin Group acquisition, served as President of the BioClin Group's
European operations and Chief Operating Officer of the BioClin Group. Dr. Jensen
served as Human Pharmacology Expert from 1989 to 1991 and Pharmacological and
Medical Expert from 1986 to 1989 at Sandoz Pharma Ltd. From 1981 to 1986, he was
a pharmacologist and toxicologist at the University of Bonn Medical Clinics. In
1986, Dr. Jensen became an associate professor of Clinical Pharmacology at the
University of Bonn and received his B.S. degree in Biology from Baker University
and a Ph.D. degree in Pharmacology and Toxicology from the University of Kansas.
Dr. Jensen's current three-year term as a Director will expire in 2000.

      Desmond H. O'Connell, Jr., Director. Mr. O'Connell has served as a
Director of Chrysalis since April 1991. He is also a Director of Abiomed, Inc.
and Serologicals, Inc. From December 1992 until December 1993, he served as the
Chairman, Management Committee of Chrysalis Preclinical Services. During 1991,
he served as Chairman of the Board and Chief Executive Officer of Osteotech,
Inc., a medical products company. Since September 1990, he has been an
independent management consultant. Prior to 1990, Mr. O'Connell's career focused
on the health care industry and included ten years (1980-1990) at BOC Health
Care, his last position being President and CEO, and ten years (1970-1980) at
Baxter Laboratories, Inc., where his responsibilities included Vice President,
Corporate Development, President, Hyland Division and President, International
Division. Mr. O'Connell received a B.S. degree from the University of Notre Dame
and received an M.B.A. degree from Harvard University. Mr. O'Connell's current
three-year term as a Director will expire in 1999.

      Photios T. Paulson, Director. Mr. Paulson has served as a Director since
August 1995. Mr. Paulson is a Vice President of bioMerieux Alliance S.A., a
French holding company whose businesses include Clinical Laboratory Diagnostics
and Biotechnology Research in Genetic Therapy. From 1991 to 1995, he was
Chairman of bioMerieux Vitek, Inc., a diagnostics systems company. Between 1987
and 1991, Mr. Paulson was Senior Advisor of Health Care Industry for Prudential
Securities Inc. Prior to 1987, Mr. Paulson had a long career with Becton
Dickinson and Company where he served last as Executive Vice President and Chief
Operating Officer. Mr. Paulson is also a Director of Novametrix, Inc., a medical
electronics company. Mr. Paulson received his B.S. and M.S. degrees from Stevens
Institute of Technology. Mr. Paulson's current three-year term will expire in
2001.

      Barry M. Sherman, M.D., Director. Dr. Sherman has served as a Director of
Chrysalis since August 1997. He is currently a Director of Celtrix
Pharmaceuticals, Inc., a biopharmaceutical company. From 1996 until February
1999, he was President and Chief Executive Officer of Anergen, Inc., a
biotechnology company. Prior to joining Anergen, he was with Genentech, Inc., a
biotechnology company, from 1985 until 1996, most recently serving as Senior
Vice President and Chief Medical Officer. Dr. Sherman received his AB and MD
degrees from the University of Michigan. Dr. Sherman's term as a Director will
expire in 1999.

      W. Leigh Thompson, Ph.D., M.D., Director. Dr. Thompson has served as a
Director since December 1995. Dr. Thompson is Chief Executive Officer of
Profound Quality Resources, Ltd., a consulting firm and a director of various
privately held companies. From 1982 to 1994, Dr. Thompson was an employee of Eli
Lilly and Company, a pharmaceutical company, holding positions including
Executive Vice President of Lilly Research Laboratories and corporate Chief
Scientific Officer. He is a Fellow of the American College of Physicians and the
American College of Critical Care Medicine and served as President of the
Society of Critical Care Medicine. Dr. Thompson received his M.S. and Ph.D.
(Pharmacology) degrees and an honorary Sc.D. from the Medical University of
South Carolina. Mr. Thompson's current three-year term will expire in 2001.

      John G. Cooper. Mr. Cooper has served as Senior Vice President and Chief
Financial Officer of Chrysalis since June 1996. He was Vice President, Chief
Financial Officer, Treasurer and Secretary from February 1991 to June 1996 and
has been Chrysalis' principal financial officer since January 1989. Prior


                                       38
<PAGE>   39

to joining Chrysalis, Mr. Cooper served in several senior corporate financial
management positions for Pharmacia ENI, Inc., a public medical diagnostics
company, since March 1984. Previously, Mr. Cooper held financial positions with
C.R. Bard, Inc., a health care company, from July 1982 to March 1984. Mr. Cooper
is a Certified Public Accountant and received his B.S. degree in commerce from
Rider University.

      Leif Modeweg. Dr. Modeweg has served as Senior Vice President and Director
of International Operations since June 1998. He served as President of
Preclinical Services of Chrysalis from September 1994 to June 1998. Dr. Modeweg
has also served as President of the European preclinical operations since
December 1992. From June 1989 to December 1992, he served as Managing Director
of Hazleton France, predecessor to Chrysalis' European preclinical operations.
From 1980 to 1989, Dr. Modeweg was employed by BioResearch Laboratories, a
contract preclinical drug development services organization in Montreal, Canada,
and served as Vice President from 1988 to 1989. From 1972 to 1980, he served as
a toxicologist and department head for Toxicology for Novo Industri A/S, the
leading pharmaceutical company in Denmark. Previously, Dr. Modeweg was employed
by the Danish Institute for Biochemical Research and Development. Dr. Modeweg
received his D.V.M. degree from the Royal Veterinary University, Copenhagen,
Denmark.

      Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires Chrysalis' Directors and executive officers, and persons who own more
than ten percent (10%) of a registered class of Chrysalis' equity securities, to
file with the Commission initial reports of beneficial ownership and reports of
changes in beneficial ownership of Chrysalis' Common stock and other equity
securities of Chrysalis. The rules promulgated by the Commission under Section
16(a) of the Exchange Act require those persons to furnish Chrysalis with copies
of all reports filed with the Commission pursuant to Section 16(a).

      Reports received by Chrysalis indicate that each of Mr. Paulson and Mr.
Modeweg failed to timely file a Form 5 in 1998 disclosing one exempt stock
option grant.

Item 11. Executive Compensation

Summary Compensation Table

      The following table sets forth the annual and long-term compensation for
Chrysalis' CEO and each of the two other most highly compensated executive
officers, other than the CEO, who were serving as executive officers at the end
of Chrysalis' last completed fiscal year and two individuals who would have been
among the four most highly compensated executive officers at year-end but ceased
to be executive officers during 1998 (collectively, the "Named Executive
Officers"), as well as the total compensation paid to each of these individuals
by Chrysalis for its previous two fiscal years.

<TABLE>
<CAPTION>
                                                           Annual Compensation                 Long-Term Compensation
                                                           -------------------                 ----------------------

                                                                                            Securities                        
                                                                                            Underlying           All Other   
     Name and Principal Position         Year           Salary ($)        Bonus($)        Options/SARs ($)    Compensation ($)
     ---------------------------         ----           ----------        --------        ----------------    ----------------
<S>                                      <C>              <C>              <C>                 <C>                <C>     
Mr. Schmitt                              1998             246,401              --                  --             8,698(1)
Chairman of the Board of Directors,      1997             260,000          19,250                  --             8,598(2)
President and Chief Executive            1996             251,625              --              60,000             8,013(3)
Officer
</TABLE>


                                       39
<PAGE>   40

<TABLE>
<S>                                      <C>              <C>              <C>                <C>                <C>     
Dr. Modeweg(11)                          1998             160,772              --             100,000            4,645(12)
President, Chrysalis Preclinical         1997             155,953          20,084                  --               --
Services, Vice President                 1996             167,685          12,600                  --               --

Mr. Cooper(13)                           1998             160,747              --              50,000            6,116(14)
Senior Vice President, Chief             1997             155,000          10,870                  --            5,882(15)
Financial Officer, Treasurer and         1996             146,026              --              42,500            5,650(16)
Secretary

Dr. Jack Barbut                          1998             246,101              --                  --               696(4)
Vice Chairman of the Board of            1997             247,510              --                  --             1,000(5)
Directors, President, Chrysalis          1996               --(6)              --              50,000                --
Clinical Services
                                         1998             142,000              --                  --            46,000(8)
Dr. J. Christian Jensen(7)               1997             160,850              --                  --            45,460(9)
President, International Services        1996           14,139(6)              --              50,000            2,333(10)
</TABLE>

----------

(1)   Includes $5,000 of Company matching contributions under Chrysalis
      International Corporation Employee Savings Plan, which were paid in Common
      stock, $522 of group term life insurance premiums paid by Chrysalis and
      $3,167 of long-term disability insurance premiums paid by Chrysalis.

(2)   Includes $4,700 of Company matching contributions under Chrysalis
      International Corporation Employee Savings Plan, which were paid in Common
      stock, $731 of group term life insurance premiums paid by Chrysalis and
      $3,167 of long-term disability insurance premiums paid by Chrysalis.

(3)   Includes $4,750 of Company matching contributions under Chrysalis
      International Corporation Employee Savings Plan, which were paid in Common
      stock, $413 of group term life insurance premiums paid by Chrysalis and
      $2,850 of long-erm disability insurance premiums paid by Chrysalis.

(4)   Includes $696 of life insurance premiums paid by Chrysalis.

(5)   Includes $1,000 of life insurance premiums paid by Chrysalis.

(6)   Dr. Barbut and Dr. Jensen commenced employment with Chrysalis on December
      18, 1996. The salary for Dr. Jensen for fiscal 1996 only reflects payments
      by Chrysalis for the period from December 18, 1996 to December 31, 1996.
      There were no payments made to Dr. Barbut for this period.

(7)   Dr. Jensen's salary and other cash compensation, except payments to
      Chrysalis' pension plan, were in Swiss Francs. Payments to Chrysalis'
      pension plan were made in Deutsche Marks. Dr. Jensen's salary and other
      compensation, excluding payments to Chrysalis' pension plan, totaled
      344,772 CHF and 275,000 CHF in 1998 and 1997, respectively. Payments to
      Chrysalis' pension plan totaled 20,022 DM in 1998. The salary amounts
      contained in this table have been translated to U.S. dollars based on an
      average exchange rate for 1998 of 1.4130 Swiss Francs per U.S. dollar and
      1.6685 Deutsche Marks per U.S. dollar, and for 1997 based on an average
      exchange rate of 1.4485 Swiss Francs per U.S. dollar.

(8)   Includes $12,000 of Company contributions to a pension plan, $23,000 of
      tuition expenses and $11,000 of car related expenses paid by Chrysalis.


                                       40
<PAGE>   41

(9)   Includes $16,465 of Company contributions to a pension plan, $20,711 of
      tuition expenses and $8,284 of car related expenses paid by Chrysalis.

(10)  Includes $2,333 of car related expenses paid by Chrysalis.

(11)  Dr. Modeweg's salary and other cash compensation is paid in French Francs.
      Dr. Modeweg received total compensation in French Francs of 926,000 in
      1998, 1,027,706 in 1997 and 922,824 in 1996. The salary amounts contained
      in this table have been translated to U.S. dollars based on an average
      exchange rate for 1998 of 5.598 French Francs per U.S. dollar, an average
      exchange rate for 1997 of 5.838 French Francs per U.S. dollar and an
      average exchange rate for 1996 of 5.1187 French Francs per U.S. dollar.

(12)  Includes $2,680 of car and $1,965 of phone-related expenses paid by
      Chrysalis.

(13)  On May 29, 1996, Mr. Cooper was elected as Senior Vice President of
      Chrysalis. Prior to such time, Mr Cooper had been Vice President of
      Chrysalis.

(14)  Includes $4,909 of Company matching contributions under Chrysalis
      International Corporation Employee Savings Plan, which were paid in Common
      stock, $214 of group term life insurance premiums paid by Chrysalis and
      $993 of longterm disability insurance premiums paid by Chrysalis.

(15)  Includes $4,750 of Company matching contributions under Chrysalis
      International Corporation Employee Savings Plan, which were paid in Common
      stock, $138 of group term life insurance premiums paid by Chrysalis and
      $994 of long-term disability insurance premiums paid by Chrysalis.

(16)  Includes $4,628 of Company matching contributions under Chrysalis
      International Corporation Employee Savings Plan, which were paid in Common
      stock, $128 of group term life insurance premiums paid by Chrysalis and
      $894 of long-term disability insurance premiums paid by Chrysalis.

Stock Options

      The following table contains information concerning grants of stock
options made during 1998 to the Named Executive Officers and Directors.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                           Potential Realizable Value at
                                                                                              Assumed Annual Rates of
                                                                                           Stock Price Appreciation for
                                   Individual Grants                                                Option Term
                     ----------------------------------------------------------------      -----------------------------
                                       Percent of
                      Number of          Total
                     Securities       Options/SARs
                     Underlying        Granted to       Exercise of
                     Opton/SARs       Employees in       Base Price        Expiration
Name                 Granted (#)      Fiscal Year          ($/Sh)             Date             5%($)            10%($)
----                 -----------     -------------         ------             ----             -----            ------
<S>                  <C>                 <C>               <C>              <C>              <C>               <C>     
Mr. Modeweg          100,000(1)          20.75             $1.69            06-25-08         $106,000          $269,000
Mr. Cooper            50,000(1)          10.37              1.69            06-25-08          53,000           134,500
</TABLE>

----------
(1)   These stock options were to become exercisable to the extent of 25 
      percent of the shares of Common stock covered thereby on June 25, 1999, 
      the first anniversary of the date on which vesting would commence, 
      and become


                                       41
<PAGE>   42

      exercisable at a per diem rate over the next three years thereafter for so
      long as the optionee remained in the continuous employ of Chrysalis or a
      subsidiary. These options vested in full upon the execution of the merger
      agreement.

Option Exercises and Holdings

      The following table contains information regarding unexercised options
held by the Named Executive Officers at the end of 1998. None of the Named
Executive Officers exercised stock options during 1998.

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                           AND FYEND OPTION/SAR VALUES

<TABLE>
<CAPTION>
                               Number of Securities Underlying       Value of Unexercised in-the-
                                Unexerercised Options/SARs at        Money Options/SARs at Fiscal
                               Fiscal Year-End Exercisable(E)/         Year-EndExercisable (E)/
Name                                  Unexercisable (U)                    Unexercisable (U)
----                                  -----------------                    -----------------
<S>                                      <C>                                  <C>       
Mr. Schmitt                              445,500(E)                           $24,124(E)
                                             0(U)                                 0(U)
Mr. Cooper                               292,500(E)                             8,150(E)
                                             0(U)                                 0(U)
Dr. Modeweg                              250,000(E)                               0(E)
                                             0(U)                                 0(U)
Dr. Barbut                                50,000(E)                               0(E)
                                             0(U)                                 0(U)
                                          50,000(E)                               0(E)
Dr. Jensen                                   0(U)                                 0(U)
</TABLE>

Employment Agreements

Messrs. Schmitt and Cooper and Dr. Modeweg are parties to employment agreements
with Chrysalis (or, in Dr. Modeweg's case, with Chrysalis International
Preclinical Services Corporation). See "Certain Relationships and Related
Transactions."

Compensation Committee Interlocks and Insider Participation

      Desmond H. O'Connell, Jr. and Photios T. Paulson are members of the
Compensation Committee. Mr. O'Connell, Chairman of the Compensation Committee,
also served as Chairman of the Management Committee of Chrysalis Preclinical
Services from December 1992 until December 1993.

Compensation of Directors

      The Directors of Chrysalis do not receive annual retainers, meeting fees
or other cash compensation of any kind for their service as Directors, but are
reimbursed for their travel expenses in attending meetings. Pursuant to
Chrysalis' 1996 Stock Option Plan, Directors who were not employees of Chrysalis
or any of its subsidiaries ("Nonemployee Directors") received certain automatic
grants of stock options under Chrysalis' 1996 Stock Option Plan as follows: (i)
each Nonemployee Director elected to the Board of Directors would receive
options to purchase 30,000 shares of Common stock with the option price set at
the fair market value of the underlying shares on the date of election to the
Board of Directors; (ii) every three years subsequent to the date of the initial
grant of 30,000 options, each Director who remains on the Board of Directors
would


                                       42
<PAGE>   43

receive an additional 30,000 options with the option price set at the fair
market value of the underlying shares on the date of the grant; and (iii)
immediately following the fifth annual meeting of Chrysalis' stockholders that
is held following the commencement of a Nonemployee Director's continuous
service as such, he will be automatically granted an option to purchase 7,000
shares of Common stock. All outstanding and unvested options granted to
Nonemployee Directors under the 1996 Stock Option Plan vested in full upon
execution of the merger agreement. During 1998, Mr. O'Connell and Mr. Paulson 
each received a stock option for 30,000 shares at an exercise price of $1.25 
under the 1996 Stock Option Plan.

Item 12. Security Ownership Of Certain Beneficial Owners And Management

      The following contains information regarding the beneficial ownership of
Chrysalis Common stock as of March 1, 1999, by (1) each person known to
Chrysalis to be a beneficial owner of more than five percent of Chrysalis Common
stock, (2) each of Chrysalis' directors and executive officers and (3) all
directors and executive officers of Chrysalis as a group. The directors and
executive officers have furnished their information. Chrysalis obtained the
information in the table regarding share ownership of other persons beneficially
owning five percent or more of Chrysalis Common stock from required filings with
the Securities and Exchange Commission. Mr. Hackel, Dr. Barbut and Dr. Jensen
have filed a Schedule 13D disclosing that they intend to vote all shares owned
beneficially by them as a group. MDS Inc., MDS Washington, Inc. and Panlabs
International Inc. have filed a Schedule 13D disclosing that they share the
power to vote and dispose of the 2,000,000 shares shown as beneficially owned by
them. These 2,000,000 shares are issuable under a warrant granted to Panlabs.
Otherwise, each of the persons named below has sole voting and investment power
over the shares indicated in the table.

      Outstanding shares of Chrysalis Common stock owned beneficially are listed
in one column. Shares of Chrysalis Common stock owned beneficially through stock
options and warrants that can be exercised by April 30, 1999 are shown in a
separate column. The percentage column reflects all shares owned beneficially.
An asterisk in the percent column means the person owns less than one percent of
the Chrysalis common stock.


                                       43
<PAGE>   44

<TABLE>
<CAPTION>
                                                    Shares Beneficially Owned
                                                    -------------------------
            Names and Addresses             Outstanding Shares      Options/Warrants         Percent
            -------------------             ------------------      ----------------         -------
<S>                                                  <C>                   <C>                  <C> 
Jack Barbut, Sc.D                                      933,974                     0             8.0
         1 El Camino Bueno
         Ross, CA 94957
Alec Hackel                                            933,975                     0             8.0
         Flueliweg 3
         6045 Meggan,
         Switzerland
MDS Inc.
MDS Washington, Inc.                                         0             2,000,000            17.1
Panlabs International Inc.
         11804 North Creek Parkway South
         Bothell, WA 98011
J. Christian Jensen                                    622,649                     0             5.3
         Speedel Pharma Inc.
         Petersgraben 35
         4051 Basel
         Switzerland
Paul J. Schmitt
John G. Cooper                                         155,881               297,500             3.9
Leif Modeweg, D.V.M.                                     8,259               292,500             2.5
Desmond H. O'Connell                                         0               250,000             2.1
Photios T. Paulson                                      35,220                69,000               *
W. Leigh Thompson, Ph.D., M.D.                           6,000                60,000               *
Barry M. Sherman, M.D.                                       0                30,000               *
All directors and executive officers as                      0                30,000               *
         a group (9 persons)                         1,761,983             1,029,000            22.0
</TABLE>

Item 13. Certain Relationships And Related Transactions

      Chrysalis Preclinical Services entered into an employment agreement with
Dr. Modeweg in 1993 that provides that in the event that Dr. Modeweg is
terminated for reasons other than reckless or gross misconduct, Chrysalis
Preclinical Services and Dr. Modeweg will enter into a consulting agreement.
Such consulting agreement would provide for the continued services of Dr.
Modeweg for a term, at the option of Chrysalis Preclinical Services, of one or
two years for annual payments equal to his annual salary and health and medical
benefits. In the event that Chrysalis Preclinical Services elects a term of two
years for the consulting agreement, Dr. Modeweg would be subject to a
noncompetition clause for a period of one year following the effective date of
his termination. The agreement is subject to automatic renewal on a year-to-year
basis unless Chrysalis Preclinical Services provides advance notice of its
intent to terminate the arrangement.

      Chrysalis is a party to a letter agreement with Paul J. Schmitt that
provides Mr. Schmitt with a severance package in the event that he is terminated
without cause, as defined in the agreement. The agreement obligates Chrysalis to
provide Mr. Schmitt with pay at his base salary rate and certain benefit
coverage for up to 12 months following his termination and an 18-month extension
of all of his stock options. In addition, in the event of a change of control of
Chrysalis, resulting in his termination or a change of duties or
responsibilities of Mr. Schmitt, that he may, under certain circumstances, treat
as a termination of employment, he would be entitled to receive 12 months of
salary, continuation of medical and dental coverage for 12 months plus immediate
vesting of all outstanding options. The term of his agreement expires on June 2,
2000.


                                       44
<PAGE>   45

      Chrysalis is a party to a letter agreement with John G. Cooper that
provides Mr. Cooper with a severance package in the event that he is terminated
without cause, as defined in the agreement. The agreement obligates Chrysalis to
provide Mr. Cooper with pay at his base salary rate and certain benefit coverage
for up to 12 months following his termination, provided that certain conditions
are met. In addition, in the event of a change of control of Chrysalis,
resulting in a change of duties or responsibilities of Mr. Cooper, he may, under
certain circumstances, treat such change as a termination of employment and he
would be entitled to receive 12 months of salary plus immediate vesting of all
outstanding options. The term of his agreement expires on May 28, 2001.

      By a letter agreement dated October 29, 1998, Chrysalis and Dr. Barbut
settled matters related to the termination of Dr. Barbut 's employment. Pursuant
to the agreement, Chrysalis agreed to:

      o     pay to Dr. Barbut $19,167 per month (or portion thereof) through
            December 31, 1998, (which amount represents Dr. Barbut's salary in
            effect at the time of termination);

      o     continuation of substantially similar medical and dental coverage
            until December 31, 1998 or, if earlier, the date Dr. Barbut became
            eligible for such coverage by a new employer;

      o     reimburse Dr. Barbut for up to $75,000 of closing costs resulting
            from the sale of his residence in Virginia, such amount to be
            payable upon the date of the merger or October 29, 1999.

      In consideration for these benefits, Dr. Barbut released certain claims he
may have against Chrysalis or its agents and representatives and agreed to a
two-year non-solicitation provision and a limited two-year non-compete
provision.

      In connection with the Barbut letter agreement:

      o     Chrysalis executed a subordinated note evidencing a loan previously
            made by Dr. Barbut's father to one of Chrysalis' subsidiaries. The
            principal amount of the loan is 437,000 CHF and bears interest at
            the annual rate of 6-3/4%. The principal amount of the loan, less
            127,500 DM owed by Dr. Barbut to Chrysalis, and accrued interest is
            payable on October 29, 1999 or, if earlier, consummation of a
            transaction, including the merger, resulting in a change of control
            of Chrysalis. The note is subordinated to all indebtedness of
            Chrysalis for borrowed money.

      o     Dr. Barbut, on behalf of himself, Alec Hackel and Dr. Jensen,
            delivered to Chrysalis 56,851 shares of Chrysalis common stock in
            satisfaction of indemnification obligations arising from the
            acquisition of the Bioclin Group. The number of shares was
            determined by Chrysalis and agreed to by those stockholders.

      In August 1998, Chrysalis and Dr. Jensen executed an agreement related to
the termination of Dr. Jensen's employment. The agreement provided for the
termination of Dr. Jensen's former employment agreement as of December 31, 1998.
Dr. Jensen was released from performing most of his services to Chrysalis as of
August 1998. With minor exceptions, Dr. Jensen continued to receive compensation
through December 31, 1998 unless Dr. Jensen found other employment prior to
year-end. The agreement also released Dr. Jensen from non-competition
obligations contained in his former employment agreement. In return, Dr. Jensen
released certain claims he may have against Chrysalis or its agents or
representatives.


                                       45
<PAGE>   46

Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K

      (a)   (1) and (2) Financial Statement and Financial Statement Schedules

            The responses to Items 14(a) (1) and (2) are set forth beginning at 
page F-1 of this Annual Report on Form 10-K.

            (3) Listing of Exhibits

            See the exhibit index beginning at page X-1 of this Annual Report on
            Form 10-K.

      (b)   Reports on Form 8-K

            Chrysalis filed a Form 8-K dated November 18, 1998, reporting under
            Item 5 the execution of the merger agreement.

      (c)   Exhibits

            The response to Item 14(c) is set forth beginning at page X-1 of
            this Annual Report on Form 10-K.

      (d)   Financial Statement Schedules

            The response to Item 14(a) is set forth beginning at page F-25 of
            this Annual Report on Form 10-K.


                                       46
<PAGE>   47

                           ANNUAL REPORT ON FORM 10-K

                      ITEM 8, ITEM 14(a) (1) AND ITEM 14(d)

                   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          LIST OF FINANCIAL STATEMENTS

                          YEAR ENDED DECEMBER 31, 1998

                       CHRYSALIS INTERNATIONAL CORPORATION

                               RARITAN, NEW JERSEY


                                      F-1
<PAGE>   48

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES

                                                                            Page
                                                                            ----

Independent Auditors' Report................................................F-3

Consolidated Balance Sheets - December 31, 1998 and 1997....................F-4

Consolidated Statements of Operations -
  Years ended December 31, 1998, 1997 and 1996..............................F-5

Consolidated Statements of Stockholders' Equity -
  Years ended December 31, 1998, 1997 and 1996..............................F-6

Consolidated Statements of Cash Flows -
 Years ended December 31, 1998, 1997 and 1996...............................F-7

Notes to Consolidated Financial Statements..................................F-8

Financial Statement Schedules...............................................F-25

                                      F-2
<PAGE>   49

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Chrysalis International Corporation:

We have audited the accompanying consolidated balance sheets of Chrysalis
International Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for each of the years in the three-year period
ended December 31, 1998. In connection with our audits of the consolidated
financial statements, we also have audited the accompanying financial statement
schedule. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these consolidated financial 
statements and the financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chrysalis
International Corporation and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth herein.

The accompanying consolidated financial statements and the financial statement
schedule have been prepared assuming that Chrysalis International Corporation 
and its subsidiaries will continue as going concerns. As discussed in Note 5 
to the financial statements, the Company has suffered recurring losses from 
operations, has a net working capital deficiency and is in default of certain 
of its debt covenants which raise substantial doubt about their ability to 
continue as going concerns. Management's plans in regard to those matters are 
also described in Note 5. The consolidated financial statements and the
financial statement schedule do not include any adjustments that might result 
from the outcome of this uncertainty.

                                                       KPMG  LLP

Philadelphia, Pennsylvania
February 5, 1999


                                      F-3
<PAGE>   50

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1998 and 1997
                (in thousands except share and per share amounts)

<TABLE>
<CAPTION>
                                                                1998        1997
                                                                ----        ----
<S>                                                          <C>            <C>  
                                     Assets

Current assets
    Cash and cash equivalents                                $  6,705       6,925
    Trade accounts receivable, net (note 7)                     8,766       9,669
    Prepaid expenses and other current assets                   1,928       1,916
                                                             --------    --------
         Total current assets                                  17,399      18,510

Property and equipment, net (note 9)                           15,686      15,127
Intangible assets, net (note 10)                                  809         805
Other assets                                                      687         338
Restricted cash (note 12)                                          --         460
                                                             --------    --------

                                                             $ 34,581      35,240
                                                             ========    ========

                      Liabilities and Stockholders' Equity

Current liabilities
    Short-term borrowings (note 11)                             2,931       2,377
    Note payable - related party (note 16)                        319         291
    Current portion of long-term debt (notes 4 and 12)          4,821         768
    Accounts payable                                            3,490       3,204
    Accrued expenses (note 8)                                   8,894       5,567
    Deferred revenue                                            5,297       3,524
                                                             --------    --------
         Total current liabilities                             25,752      15,731

Long-term debt, excluding current portion (note 12)             6,010       6,561
Deferred income taxes (note 15)                                 1,832       1,646
Other liabilities                                                 725         633
                                                             --------    --------
         Total liabilities                                     34,319      24,571
                                                             --------    --------

Stockholders' equity (notes 13 and 14):
    Serial preferred stock, $.01 par value, 5,000,000
       shares authorized; no shares issued and outstanding         --          --
    Common stock, $.01 par value, 20,000,000 shares
       authorized; issued and outstanding 11,518,105 in
       1998 and 11,430,764 in 1997                                115         114
    Additional paid-in capital                                 59,089      57,768
    Cumulative comprehensive loss                                (108)       (536)
    Employee stock purchase loans                                 (86)        (86)
    Accumulated deficit                                       (58,748)    (46,591)
                                                             --------    --------
       Total stockholders' equity                                 262      10,669
                                                             --------    --------

Commitments and contingencies (notes 17 and 19)
                                                             $ 34,581      35,240
                                                             ========    ========
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>   51

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  Years Ended December 31, 1998, 1997 and 1996
                     (in thousands expect per share amounts)

<TABLE>
<CAPTION>
                                                  1998        1997        1996
                                                  ----        ----        ----
<S>                                            <C>           <C>         <C>   
Revenues:
  Service revenue                              $ 43,426      47,271      47,398
  Less: reimbursed costs                         (4,908)     (5,769)     (6,425)
                                               --------    --------    --------
     Net service revenue                         38,518      41,502      40,973

  License fees                                      866         796         514
                                               --------    --------    --------
                                                 39,384      42,298      41,487
                                               --------    --------    --------

Operating expenses:
  Direct costs                                   31,041      29,383      27,841
  General, administrative and marketing          12,828      12,416      10,942
  Depreciation and amortization                   2,092       2,699       2,780
  Business combination costs (note 6)                --          --       3,649
  Restructuring costs (note 3)                    3,872          --          --
                                               --------    --------    --------
                                                 49,833      44,498      45,212
                                               --------    --------    --------

        Loss from operations                    (10,449)     (2,200)     (3,725)
                                               --------    --------    --------

Other income (expense):
  Interest income                                   316         465       1,187
  Interest expense (notes 11 and 12)             (1,501)       (769)     (1,445)
  Foreign currency gain, net                         --          11         517
  Other (note 19)                                   193         683         483
                                               --------    --------    --------
                                                   (992)        390         742
                                               --------    --------    --------

         Loss before income taxes               (11,441)     (1,810)     (2,983)

Income tax expense (note 15)                        716         240         477
                                               --------    --------    --------

         Net loss                              $(12,157)     (2,050)     (3,460)
                                               ========    ========    ========

Basic loss per share                           $  (1.06)      (0.18)      (0.31)
                                               ========    ========    ========

Basic weighted average shares outstanding        11,467      11,396      11,307
                                               ========    ========    ========

Diluted loss per share                         $  (1.06)      (0.18)      (0.31)
                                               ========    ========    ========

Diluted weighted average shares outstanding      11,467      11,396      11,307
                                               ========    ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>   52

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                  Years Ended December 31, 1998, 1997 and 1996
                       (in thousands except share amounts)

<TABLE>
<CAPTION>
                                                                            Accumulated    Employee                 Total
                                                                Additional     other        stock                   stock-
                                                       Common     paid-in   comprehensive  purchase  Accumulated   holders'
                                                       stock      capital       loss        loan       deficit      equity
                                                       -----      -------       ----        ----       -------      ------
<S>                                                  <C>           <C>           <C>           <C>     <C>          <C>   
Balance, December 31, 1995                           $    112      57,291        763           (93)    (41,081)     16,992
Issuance of 101,650 shares of common                                                      
  stock upon exercise of stock options                                                    
  (note 14)                                                 1         112         --            --          --         113
Issuance of 18,065 shares of common                                                       
  stock pursuant  to 401(k) plan (note 18)                 --          95         --            --          --          95
Cash received on employee stock                                                           
 purchase loan                                             --          --         --             7          --           7
Comprehensive income                                                                      
  Translation adjustment                                   --          --       (224)           --          --        (224)
  Increase in net unrealized gain on                                                      
   marketable debt securities                              --          --         18            --          --          18
  Net Loss                                                 --          --         --            --      (3,460)     (3,460)
                                                     --------    --------   --------      --------    --------    --------
Total comprehensive loss                                                                                            (3,666)
                                                                                                                  --------
Balance, December 31, 1996                                113      57,498        557           (86)    (44,541)     13,541
Issuance of 26,006 shares of common                                                       
  stock upon exercise of stock options                                                    
  and warrants (note 14)                                   --          82         --            --          --          82
Issuance of 45,037 shares of common                                                       
  stock pursuant to 401(k) plan (note 18)                   1         188         --            --          --         189
Comprehensive income                                                                      
  Translation adjustment                                   --          --       (998)           --          --        (998)
  Decrease in net unrealized gain on                                                      
   marketable debt securities                              --          --        (95)           --          --         (95)
  Net loss                                                 --          --         --            --      (2,050)     (2,050)
                                                     --------    --------   --------      --------    --------    --------
Total comprehensive loss                                                                                            (3,143)
                                                                                                                  --------
Balance, December 31, 1997                                114      57,768       (536)          (86)    (46,591)     10,669
Issuance of  2,864 shares of common                                                       
  stock upon exercise of stock options                                                    
  and warrants (note 14)                                   --           1         --            --          --           1
Issuance of 141,328 shares of common                                                      
  stock pursuant to 401(k) plan (note 18)                   1         204         --            --          --         205
Receipt and retirement of 56,581shares (note 16) --      (284)         --         --            --                    (284)
Issuance of 2,000,000 warrants                                                            
  convertible to common stock                                                             
  upon exercise                                            --       1,400         --            --          --       1,400
Comprehensive income                                                                      
  Translation adjustment                                   --          --        428            --          --         428
  Net loss                                                 --          --         --            --     (12,157)    (12,157)
                                                     --------    --------   --------      --------    --------    --------
Total comprehensive loss                                                                                           (11,729)
                                                                                                                  --------
Balance, December 31, 1998                           $    115      59,089       (108)          (86)    (58,748)        262
                                                     ========    ========   ========      ========    ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>   53

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1998, 1997 and 1996
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                          1998         1997        1996
                                                                          ----         ----        ----
<S>                                                                     <C>           <C>         <C>    
Cash flows from operating activities:
  Net loss                                                              $(12,157)     (2,050)     (3,460)
  Adjustments to reconcile net loss to net cash provided by (used in)
    operating activities:
        Non-cash items:
         Depreciation and amortization                                     2,092       2,699       2,958
         Foreign currency transaction loss                                    --         (11)       (517)
         Deferred income tax expense (benefit)                               482        (306)        (37)
         Loss on disposal of property and equipment                            3           4          12
         Impairment of property and equipment                                815          --          --
         Amortization of premium on short and long-term investments           --          --         195
         Amortization of warrant value                                       372          --          --
         Return of common stock held in escrow                              (284)         --          --
         Non-cash charges                                                    204         188          96
         Gain on settlement                                                   --        (700)         --
  Change in operating assets and liabilities:
         (Increase) decrease in accounts receivable, net                   1,277         207        (460)
         Increase in prepaid expenses and other current assets              (343)       (461)        (22)
         Increase in  other assets                                          (348)        (68)       (179)
         Increase in accounts payable                                        162          66         590
         Increase (decrease) in accrued expenses                           3,034      (1,528)      2,271
         Increase (decrease) in deferred revenue                           1,583      (1,847)         30
         Increase (decrease) in  other liabilities                           158        (212)        502
                                                                        --------    --------    --------
                  Net cash provided by (used in) operating activities     (2,950)     (4,019)      1,979
                                                                        --------    --------    --------

Cash flows from investing activities:
  Decrease in restricted cash                                                460          --         317
  (Increase) decrease in cash in escrow                                       --       4,550      (4,550)
  Purchases of property and equipment                                     (2,391)     (3,281)     (1,815)
  Proceeds from disposal of property and equipment                            (3)         --          73
  Purchases of intangible assets                                              (4)        (22)        (31)
  Purchases of investments                                                    --          --      (5,409)
  Proceeds from maturities of investments                                     --       2,518       3,697
                                                                        --------    --------    --------
         Net cash provided by (used in) investing activities              (1,938)      3,765      (7,718)
                                                                        --------    --------    --------

Cash flows from financing activities:
  Proceeds from short-term borrowings                                        548       2,398         660
  Payments on short-term borrowings                                           --      (5,401)     (5,130)
  Proceeds from borrowings of long-term debt                               5,000       5,000          --
  Principal payments on long-term debt                                      (464)     (5,203)     (1,014)
  Proceeds from stock options exercised and warrants issued                    1          82         113
  Payments received on employee stock purchase loans                          --          --           7
  Increase in note payable - related party                                    --          --          17
                                                                        --------    --------    --------
         Net cash provided by (used in) financing activities               5,085      (3,124)     (5,347)
                                                                        --------    --------    --------

Effect of exchange rate changes on cash                                     (417)       (152)        373
                                                                        --------    --------    --------

Decrease in cash and cash equivalents                                       (220)     (3,530)    (10,713)

Cash and cash equivalents, beginning of year                               6,925      10,455      21,168
                                                                        --------    --------    --------

Cash and cash equivalents, end of year                                  $  6,705       6,925      10,455
                                                                        ========    ========    ========

Supplemental disclosure of cash flow information 
  Cash paid during the year for:
     Interest                                                           $    977         769       1,005
     Income taxes                                                            570       1,093          57
                                                                        --------    --------    --------
   Noncash investing and financing activities:
     Unrealized gain on marketable debt securities                      $     --          --          95
                                                                        --------    --------    --------
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>   54

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996

(1) Summary of Significant Accounting Policies

Organization:

      Chrysalis International Corporation, a Delaware corporation incorporated
in 1988, (the "Company" ), formerly DNX Corporation ("DNX"), is an international
contract research organization ("CRO") providing drug development services
primarily to the pharmaceutical and biotechnology industries. The portfolio of
drug development services includes transgenic discovery research, preclinical
development and clinical capabilities. In addition, Chrysalis uses its
proprietary transgenic and licensed gene targeting technology to provide
services for its clients that require transgenic animal models in order to
determine the function of human genes and identify therapeutic targets
implicated in disease and for the evaluation of therapeutic lead compounds for
further development. Chrysalis generates substantially all of its revenues from
its drug development services.

      Chrysalis is also the exclusive commercial licensee of a U.S. patent
covering DNA Microinjection technology, the process widely used in the
pharmaceutical and biotechnology industries to develop transgenic animals. The
Company utilizes this license for its drug development services and grants
sublicenses for the use of this technology. These sublicenses entitle the
Company to receive revenues consisting of fees and, in certain cases, royalties.

      On December 18, 1996, the Company issued 2,632,600 shares of Common Stock
in connection with the acquisition by the Company of all of the outstanding
capital stock of, or equity interests in, BioClin, Inc., a Delaware corporation,
BioClin Europe AG, a Swiss corporation, BioClin GmbH, a German corporation,
Kilmer N.V., a Netherlands Antilles corporation, and BioClin Institute of
Clinical Pharmacology GmbH, a German corporation (collectively, the "BioClin
Group"). This transaction was recorded using the "pooling-of-interests" method
of accounting (note 6).

Principles of consolidation:

      The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.

Revenue recognition:

      Revenues from services are generally recognized in accordance with the
terms of the contract and in the periods in which the related services have been
rendered and the related costs incurred. Revenue related to contract
modifications is recognized after performance and when realization is assured
and the amounts are reasonably determinable. Adjustments to contract cost
estimates are made in the period in which the facts that require the revisions
become known. When the revised estimate indicates a loss, such loss is provided
for in its entirety. Revenues earned but not billed as of a given date are
reflected in the accompanying consolidated balance sheets as trade accounts
receivable (note 7). Funds received that relate to future performance under
service contracts are deferred and recognized as revenue when earned.

      Revenue from other contracts, primarily cost plus fixed-fee government
contracts, is recognized in the period in which the related services have been
rendered and costs incurred.

      Revenue from license fees is recognized upon issuance or renewal of
technology licenses. Additionally, sublicenses of the Company's proprietary DNA
Microinjection technology entitle the Company to receive additional revenues
consisting of royalties and milestone payments, which amounts are recognized as
revenue when received. To date, no material revenues have been received from
royalties and milestone payments.

Reimbursed costs:

      Substantially all amounts recorded as reimbursed costs in the accompanying
statements of operations relate to independent investigator and travel costs.
These costs are reimbursed by sponsors of the respective studies in accordance
with the respective contract terms. Payments received from sponsors for
investigator and travel costs in excess of costs incurred are classified as
deferred revenue and costs incurred in excess of amounts paid by sponsors are
classified as trade accounts receivable--unbilled.


                                      F-8
<PAGE>   55

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash and cash equivalents and short-term investments:

      The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market funds, corporate obligations and U.S.
Government obligations and are carried at cost, which approximates market value.
Short-term investments consist primarily of U.S. Government and corporate
obligations that mature in one year or less. The Company has both the intent and
ability to hold its investments until maturity, and accordingly, all investments
are carried at amortized cost.

      Concentration of credit risks:

      The Company invests its excess cash in deposits with major financial
institutions, money market funds and notes issued by companies with strong
credit ratings. The Company has established guidelines relating to
diversification and maturities that maintain safety and liquidity. To date, the
Company has not experienced any losses on its cash equivalents and short-term
investments.

      The Company extends unsecured trade credit in connection with its
commercial services to a diversified customer base comprised of both foreign and
domestic entities, most of which are concentrated in the pharmaceutical and
biotechnology industries.

Property and equipment:

      Major additions and replacements of assets are capitalized at cost.
Maintenance, repairs and minor replacements are expensed as incurred. Property
and equipment are depreciated using the straight-line method over the following
periods: buildings and improvements--twenty to forty years; laboratory
equipment, vehicles, office and computer equipment, furniture and
software--three to ten years. Leasehold improvements are amortized using the
straight-line method over the estimated useful life of the asset or the lease
term, whichever is shorter. Upon retirement or sale, the cost of the assets
disposed of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is credited or charged to operations.
Equipment leased under capital leases is capitalized with corresponding payment
obligations recorded in current and long-term debt.

Intangible assets:

      Costs in excess of net assets acquired are capitalized and are being
amortized on a straight-line basis over twenty years.

      Costs incurred in filing for patents are capitalized. Capitalized costs
related to unsuccessful patent applications are expensed when it becomes
determinable that such applications will be rejected. Capitalized costs related
to successful patent applications are amortized on a straight-line basis over a
period not to exceed seventeen years or the remaining life of the patent,
whichever is shorter.

Income taxes:

      The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
(FAS 109). Under the asset and liability method of FAS 109, deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Valuation allowances are established to reduce deferred tax assets if
it is determined to be "more likely than not" that all or some portion of the
potential deferred tax assets will not be realized. Under FAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date of the tax rate change.


                                      F-9
<PAGE>   56

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Earnings (loss) per share:

      SFAS No. 128, "Earnings Per Share" (SFAS 128), was adopted by the Company
on December 31, 1997. In accordance with the pronouncement, all prior year
earnings per share data were restated upon adoption to conform to the new
standards. SFAS 128 simplifies the calculation of earnings per share data by
replacing primary and fully diluted earnings per share with basic and diluted
earnings per share, respectively. Basic earnings per share excludes potentially
dilutive securities, including stock options, and is calculated by dividing net
income (loss) available to common stockholders by the weighted average common
shares outstanding for the period. Diluted earnings per share reflects the
dilution to earnings that would occur if convertible securities, stock options
and potentially dilutive securities were converted into common stock resulting
in the issuance of common stock.

      In computing diluted earnings per share for the years ended December 31,
1998, 1997 and 1996, the denominator did not change from the computation of
basic earnings per share, because the effect of including potential common
shares in this calculation would be antidilutive. If the effect on diluted
earnings per share had not been antidilutive, the denominator would have
increased by 189,000, 339,000 and 561,000 shares for 1998, 1997 and 1996,
respectively. This increase in shares represents the inclusion of stock options
and warrants outstanding at December 31, 1998, 1997 and 1996 with an exercise
price less than the average market price of Chrysalis' common stock during 1998,
1997 and 1996, respectively.

Foreign currency translation:

      The financial statements of the Company's European subsidiaries are
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Substantially all assets and liabilities are translated at
year-end exchange rates and income and expense items are translated at an
average exchange rate. Exchange adjustments resulting from foreign currency
transactions are generally recognized in operations, whereas adjustments
resulting from the translation of financial statements are reflected as a
separate component of stockholders' equity.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:

      Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.

Stock Option Plans:

      The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair value based method of
accounting for stock based employee compensation plans. The Company has elected
to remain on its current method of accounting, as described above, and has
adopted the disclosure requirements of SFAS No. 123.

Use of estimates:

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


                                      F-10
<PAGE>   57

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Comprehensive Income:

      On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This Statement establishes standards for the reporting
and display of comprehensive income and its components in the financial
statements. Components of comprehensive income include net income (loss) and all
other nonowner changes in equity such as the change in the cumulative
translation adjustment. In accordance with SFAS No. 130, total comprehensive
income (loss), is ($11,729,000), ($3,143,000), ($3,666,000) for the years ended
December 31, 1998, 1997 and 1996, respectively. The Company's total
comprehensive income represents net income (loss) plus the change in the
cumulative translation adjustment equity account for the periods presented.

Reclassification:

      Certain amounts contained in the 1996 and 1997 consolidated financial
statements have been reclassified to conform to the 1998 presentation.

New Accounting Pronouncements:

      In March 1998, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance for the
accounting treatment of various costs typically incurred during the development
or purchase of computer software for internal use. SOP 98-1 shall be effective
for fiscal periods beginning after December 15, 1998. Application of SOP 98-1 is
not expected to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.

      In April 1998, The AcSEC issued Statement of Position 98-5, Reporting on
the Costs of Start - Up Activities ("SOP 98-5"). SOP 98-5 provides guidance on
the financial reporting of start - up and organization costs and requires such
costs be expensed as incurred. SOP 98-5 shall be effective for fiscal periods
beginning after December 15, 1998. Application of SOP 98-5 is not expected to
have a material impact on the Company's consolidated results of operations,
financial position or cash flows.

      In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities and requires all derivatives to be recorded
on the balance sheet at fair value. SFAS 133 is effective for years beginning
after June 15, 1999. Adoption of SFAS 133 is not expected to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.

(2) Potential Merger

      On November 18, 1998, the Company executed an agreement and plan of merger
(the "Merger Agreement") pursuant to which the Company will be acquired by
Phoenix International Life Sciences Inc. ("Phoenix") pursuant to a merger of a
wholly owned subsidiary of Phoenix with and into the Company (the "Merger").
Pursuant to the Merger, each outstanding share of the Company's Common Stock
will be converted into Phoenix Common Shares and cash in lieu of fractional
shares having a value, determined under the Merger Agreement, equal to
approximately $0.71. Consummation of the Merger is subject to receipt of
necessary regulatory approvals, a proxy solicitation to obtain the adoption of
the Merger Agreement (and receipt of such adoption) by the Company's
stockholders and other closing conditions, some of which are beyond the control
of the Company and Phoenix.

      The Merger Agreement contains a number of covenants restricting the
Company's ability to conduct its operations. These covenants include
restrictions on the Company's ability to increase compensation to employees,
make capital expenditures and enter into or amend real property leases.

      The merger agreement also requires the Company to pay to Phoenix a
termination fee of $1.5 million if the Merger Agreement terminates under certain
circumstances described in the Merger Agreement. These circumstances include the


                                      F-11
<PAGE>   58

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

failure of the Company's stockholders to adopt the Merger Agreement and certain
bankruptcy or dissolution events involving the Company or its subsidiaries.
There can be no assurance that the Merger will be consummated.

      The Company has expensed approximately $320,000 in "General,
administrative and marketing expenses" in the fourth quarter of 1998 for
professional fees incurred in connection with the Merger Agreement.
Additionally, the Company anticipates incurring approximately $1,050,000 for
professional fees in the period or periods prior to the consummation of the
Merger.

(3) Restructuring of Clinical Operations

      In connection with the execution of the Merger Agreement, the Company
agreed to shut down and discontinue providing clinical services in the United
States and at several of its clinical operations in Europe. The Merger Agreement
contemplates the shut down of the Company's clinical operations in Austin,
Texas, Dusseldorf, Germany and Cham, Switzerland. As a result of these shut
downs, the Company will no longer provide services for Phase I clinical studies
and it will focus on providing services for any Phase II or Phase III clinical
studies in Germany, Eastern Europe and Israel. The Company has implemented plans
for shut downs in Dusseldorf, Germany, Austin, Texas and a significant
downsizing of European Clinical operations which will be executed even if the
Merger is not consummated. If the Merger is not consummated, the Company expects
to continue to provide Phase II and Phase III clinical services focused on
Eastern Europe and Israel, as well as in Western Europe on a significantly
downsized basis. If the Merger is consummated, the Company's principal executive
offices are also likely to be shut down.

      In connection with the restructuring of the clinical operations,
$3,872,000 of costs were expensed in the fourth quarter of 1998. These
restructuring expenses primarily consist of personnel related charges,
provisions for real estate leases, write downs of certain fixed assets and other
related expenses. See table below for further detail. In addition to the fourth
quarter expense, the Company expects to incur approximately $825,000 at the time
the merger is consummated primarily related to additional personnel related
expenses and corporate office shut down expenses.

      Related expenses in connection with the restructuring of the clinical
operations consists of the following:

<TABLE>
<CAPTION>
                                                                      1998
                                                                      ----
                                                                 (in thousands)
<S>                                                                  <C>   
Severance and related                                                $1,249
Lease termination                                                     1,211
Fixed asset impairment                                                  815
Other                                                                   597
                                                                     ------
                                                                      3,872

Paid (including asset write-down) as of December 31, 1998             1,110
                                                                     ------
Remaining costs to be paid                                           $2,762
                                                                     ======
</TABLE>

      The total number of employees to be terminated, as a result of the
restructuring is 75, of which 18 have been terminated as of December 31, 1998.
The balance of the termination will occur by June 30, 1999.

(4) Forbearance Agreement

      At September 30, 1998 and at December 31, 1998 the Company failed to
satisfy certain financial covenants contained in the loan agreement related to
its senior secured term loan and, thus, was in default under the loan agreement.
The amount outstanding under this loan was $4,687,500 at December 31, 1998. As a
result of the default, the entire outstanding amount of the senior secured term
loan is classified as a current liability at December 31, 1998. In connection
with the execution of the Merger Agreement on November 18, 1998, the Company's
senior secured lender (the "Bank"), the 


                                      F-12
<PAGE>   59

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Company and Phoenix executed a Forbearance Agreement, pursuant to which the Bank
(i) agreed not to accelerate the term loan or otherwise exercise its remedies
with respect to the September 30 and December 31 defaults so long as the Merger
is consummated by March 31, 1999 and the Company does not otherwise default on
its obligations under the loan agreement and (ii) waived the principal payment
due in December 1998. In connection with the Forbearance Agreement, Phoenix
delivered to the Bank a guaranty of the Company's obligations to the Bank and a
cash pledge to secure such guaranty. In addition, Phoenix obtained an option to
purchase the Company's debt to the Bank.

(5) Liquidity

      The Company anticipates that its capital requirements through March 31,
1999 will include satisfying working capital needs, costs to shut down certain
of its European and United States clinical operations, capital expenditures for
its preclinical and transgenic businesses and meeting its principal and interest
requirements under debt arrangements. Cash and cash equivalents (which was
$6,705,000 as of December 31, 1998) and cash provided by operations is expected
to fund certain of these cash requirements, including satisfying the outstanding
balance of $2,931,000 as of December 31, 1998 under a line of credit with a
Swiss bank. If the Forbearance Agreement does not terminate, the Company
believes that it will have sufficient cash to continue to fund operating
activities through March 1999. However, if the Forbearance Agreement terminates
(because of an additional default by the Company under the loan agreement, a
material breach by the Company or Phoenix of the Merger Agreement or termination
of the Merger Agreement), the Company will not have sufficient cash to satisfy
its obligations to its creditors and fund operating activities. There can be no
assurance that the Forbearance Agreement will not terminate.

      As a result of these issues, the Company must consummate the Merger in a
timely manner. While the Company has been exploring various strategic
alternatives for some period of time, it now believes that an outright sale of
the Company through a vehicle other than the Merger is unlikely. After
evaluating a number of strategic alternatives with the assistance of Vector
Securities International, Inc., the Company currently believes that the Merger
Agreement offers the most viable solution to the Company's financial condition.
There can be no assurance, however, that the Merger will be consummated in a
timely manner. If the Company cannot consummate the Merger or otherwise resolve
its liquidity constraints by March 31, 1999, the Company will likely not have
sufficient liquidity both to operate its business and to satisfy its obligations
to various lenders. In addition, if the Forbearance Agreement were to terminate,
other of the Company's debt would also be in default. It is the intention of the
Company to pursue alternatives outside of bankruptcy; however, alternative
strategies may not be successful, and it is possible that the Company could be
forced into bankruptcy by its creditors. In these circumstances, the Company
would most likely seek reorganization under chapter 11 of the Bankruptcy Code.
Although it would be the intention of the Company to seek reorganization under
chapter 11 of the Bankruptcy Code, it currently believes that a successful
reorganization would likely require a similar strategic transaction involving a
sale of one or more of the Company's facilities or operations to generate a
source of liquidity during any bankruptcy proceeding.

      The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations, has a net working capital deficiency and is in default
of its debt covenants which raise substantial doubt about their ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

(6) Merger with the BioClin Group

      On December 18, 1996, the Company issued approximately 2.6 million shares
of its common stock in exchange for all of the outstanding common stock of the
BioClin Group. The merger was accounted for as a pooling-of-interests and
accordingly, the Company's consolidated financial statements were restated to
include the accounts and operations of the BioClin Group for all periods prior
to the merger. Separate net revenue, net income (loss) and related earnings
(loss) per share amounts of the merged entities are presented in the following
table. In addition, the table includes unaudited pro forma net income (loss) and
earnings (loss) per share amounts that reflect the elimination of the
nonrecurring business combination costs in 1996.


                                      F-13
<PAGE>   60

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                                          1996
                                                                          ----
                                                          (in thousands, except per share data)
<S>                                                                    <C>     
Net revenue
         DNX (predecessor of Chrysalis)                                $ 29,604
         BioClin Group                                                   11,883
                                                                       --------
          Total                                                        $ 41,487
                                                                       ========

Net income (loss)
         DNX (predecessor of Chrysalis)                                $    474
         BioClin Group                                                     (285)
                                                                       --------
         Proforma net income (loss)                                         189
         Merger costs                                                    (3,649)
                                                                       --------
         Net income (loss), as reported                                $ (3,460)
                                                                       ========

Diluted Earnings (loss) per share
         As reported                                                   $  (0.31)
         Pro forma                                                         0.02
</TABLE>

      In connection with the merger, $3.6 million of business combination costs
and related expenses were incurred and expensed in the fourth quarter of 1996.
The business combination costs and expenses primarily consisted of legal,
accounting, and investment banking fees, expenses related to creating and
promoting the new company name and other related expenses.

(7) Trade Accounts Receivable

      Trade accounts receivable as of December 31, 1998 and 1997 consist of the
following:

<TABLE>
<CAPTION>
                                                             1998          1997
                                                             ----          ----
                                                                (in thousands)
<S>                                                         <C>            <C>  
Trade accounts receivable--billed                           $7,180         6,500
Trade accounts receivable--unbilled                          1,848         3,310
                                                            ------        ------
                                                             9,028         9,810
Less: allowance for doubtful accounts                          262           141
                                                            ------        ------
                                                            $8,766         9,669
                                                            ======        ======
</TABLE>

      Trade accounts receivable--unbilled relates to revenues earned on
commercial services when the related services have been rendered and costs
incurred, but which were not billed to the customer as of the end of the
reporting period. At December 31, 1998 and 1997, there were no prerequisites for
billing such unbilled trade accounts receivable.

(8) Supplemental Balance Sheet Information

      Accrued expenses as of December 31, 1998 and 1997 consist of the
following:

<TABLE>
<CAPTION>
                                                              1998          1997
                                                              ----          ----
                                                                 (in thousands)
<S>                                                          <C>           <C>  
Payroll and fringe benefits                                  $2,284        2,735
Value-added taxes                                             1,036          605
Investigator payment and contract expenses                      664          575
Restructuring costs                                           2,762           --
Other                                                         2,148        1,652
                                                             ------       ------
                                                             $8,894        5,567
                                                             ======       ======
</TABLE>


                                      F-14
<PAGE>   61

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(9) Property and Equipment

      A summary of property and equipment as of December 31, 1998 and 1997 is as
follows:

<TABLE>
<CAPTION>
                                                                1998      1997
                                                                ----      ----
                                                                 (in thousands)
<S>                                                           <C>            <C>
Land                                                          $   546        501
Buildings and improvements                                     12,725     11,620
Leasehold improvements                                            746        837
Laboratory equipment                                            8,646      7,497
Office and computer equipment, software and furniture           5,410      6,379
                                                              -------    -------
                                                               28,073     26,834
Less accumulated depreciation and amortization                 12,387     11,707
                                                              -------    -------
                                                              $15,686     15,127
                                                              =======    =======
</TABLE>

(10) Intangible Assets

      Intangible assets consist of the following components at December 31, 1998
and 1997:

<TABLE>
<CAPTION>
                                                             1998           1997
                                                             ----           ----
                                                                (in thousands)
<S>                                                         <C>              <C>
Costs in excess of net assets acquired                      $1,055           983
Licensed technology                                             61            61
Patent application costs                                        96            91
                                                            ------        ------
                                                             1,212         1,135
Less accumulated amortization                                  403           330
                                                            ------        ------
                                                            $  809           805
                                                            ======        ======
</TABLE>

(11) Short-Term Borrowings

      To support operations in France, the Company has lines of credit and
overdraft privileges with French banks in the aggregate amount of 10.5 million
French Francs ($1,876,000 at the exchange rates in effect on December 31, 1998).
At December 31, 1998 and 1997 there were no outstanding borrowings under these
credit facilities.

      To support its European clinical operations, the Company has a line of
credit arrangement with a Swiss bank totaling $3,000,000. The clinical
operation's trade accounts receivable and a guarantee by the Company secures
this line. The amount outstanding under this line of credit was approximately
$2,931,000 and $2,377,000 at December 31, 1998 and 1997, respectively.


                                      F-15
<PAGE>   62

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(12) Long-Term Debt

      Long-term debt consists of the following components at December 31, 1998
and 1997:

<TABLE>
<CAPTION>
                                                                                  1998       1997
                                                                                  ----       ----
                                                                                   (in thousands)
<S>                                                                              <C>         <C>  
Term loan with a large commercial bank bearing interest at the prime rate plus
  1.0% (9.25% and 9.5% as of December 31, 1998 and 1997)with interest payable
  monthly, and principal payable in
  quarterly installments beginning September 1998                                $ 4,688     5,000
Note payable to MDS Inc. bearing interest at 6.0%
  with interest payable semi annually and the principal
  payable March 16, 2001                                                           3,973        --
Mortgage with a commercial bank, bearing interest
  at the prime rate plus 1.5% (9.25% as of December 31,
  1998) due in monthly installments through 2009                                   1,270     1,348
Mortgage with a Pennsylvania state agency, bearing
  interest at 2%, due in monthly installments
  through 2009                                                                       900       975
Obligation under capital lease                                                        --         6
                                                                                 -------   -------
                                                                                  10,831     7,329
Less: Current portion                                                              4,821       768
                                                                                 -------   -------
                                                                                 $ 6,010     6,561
                                                                                 =======   =======
</TABLE>

      Future principal maturities of long-term debt at December 31, 1998 are as
follows:

<TABLE>
                                                                  (in thousands)
<S>                                                                   <C>  
         1999                                                         4,821
         2000                                                           158
         2001                                                         5,168
         2002                                                           178
         2003                                                           202
         Thereafter                                                   1,331
         Less unamortized warrant value                              (1,027)
                                                                    -------
                                                                    $10,831
                                                                    =======
</TABLE>

      In December 1992, the Company acquired preclinical operations in France.
Included in the purchase price were promissory notes having an aggregate
principal amount of $7,000,000 (the "Notes"). The unpaid principal balance on
the Notes as of December 31, 1996 of $5,000,000 was paid-off in August 1997. In
the third quarter of 1997, the Company refinanced this debt by obtaining a five
year $5,000,000 term loan from a large commercial bank, with the principal
payable in quarterly installments beginning September 1998. This loan is secured
by substantially all of the Company's domestic assets, including the capital
stock of its subsidiaries. The Company was in default at December 31, 1998 under
certain financial covenants set forth in the credit agreement with respect to
this term loan and accordingly the outstanding amount of this note amounting to
approximately $4,688,000 is classified as current. See also footnote (4)
"Forebearance Agreement".

      On March 16, 1998, the Company issued, in exchange for $5,000,000 cash, a
subordinated note and a warrant to purchase 2,000,000 shares of Common Stock for
$2.50 per share to a wholly - owned subsidiary of MDS Inc. ("MDS"). The terms of
the subordinated note provide for semi - annual interest payments with the
aggregate principal amount of $5.0 million payable on March 16, 2001. The note
is subordinate to certain outstanding indebtedness of the Company, including its
existing bank debt and mortgages. In addition, the principal amount of the note
may, at the option of the holder, be satisfied by issuance of shares of Common
Stock in accordance with the terms of the warrant. The Company will also incur
non-cash charges to interest expense over the life of the note related to the
amortization of the value of the warrants. The value of the warrants was
determined based upon the relative fair values of the two securities at the time
of issuance. As of December 31, 1998, the unamortized value of the warrants was
$1,027,000. When considering the amortization of the warrant value, the
effective interest rate on this note payable is approximately 15%.

      In connection with its U.S. facility, the preclinical business secured (i)
a $1,500,000, 15-year mortgage with a bank, which originally required cash
collateral of $180,000, and (ii) a $1,200,000, 15-year mortgage from a
Pennsylvania agency, 


                                      F-16
<PAGE>   63

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

which required cash collateral of $450,000. These two loans are also secured by
mortgages on the property acquired. As a result of achieving certain financial
covenants, the cash collateral on the mortgage loan with the bank was released
in 1995. The cash collateral on the mortgage with the Pennsylvania agency was
classified as restricted cash as of December 31, 1997. Upon the achievement of
certain financial milestones in 1998, this $450,000 of cash collateral was
released. Additionally, the favorable interest rate on the mortgage with the
Pennsylvania agency is subject to change upon review by the agency of certain
future conditions.

(13) Stockholders' Equity

Warrants:

      In March 1998, in conjunction with the $5.0 million subordinated debenture
with a wholly-owned subsidiary of MDS, the Company issued a warrant to purchase
2,000,000 shares of Common Stock at an exercise price of $2.50 per share. The
warrant is currently exercisable. It will expires in March 2001 or, if the
Merger is consummated, on the day before the Merger.

(14) Stock Option Plans

      The Company maintains three stock incentive plans, the 1988 Stock Plan,
the 1991 Stock Option Plan and the 1996 Stock Option Plan, (the Plans), which
provide for the granting of options to officers, directors, employees and
consultants at an option price equal to or above the fair market value of such
common shares at the date of grant. The Plans provide for an aggregate of
2,460,250 options to be granted. The options are exercisable for a period of ten
years after the date of grant and generally vest over a four-year period. The
weighted average exercise price of the options granted under these plans was
$3.40, $3.91 and $3.75 per share at December 31, 1998, 1997 and 1996,
respectively.

      A summary of activity under the Plans for the years ending December 31,
1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                   Common stock options
                                                        outstanding
                                                        -----------
                                                  Shares       Price per share
                                                  ------       ---------------
<S>                                            <C>            <C>         
Balance, December 31, 1995                     1,603,394      $  0.40 - 7.25

  Granted                                        473,150         4.44   - 7.25
  Exercised                                     (101,650)        0.40   - 6.00
  Canceled                                       (50,131)        2.50   - 6.50
                                                --------

Balance, December 31, 1996                     1,924,763         0.40 - 7.25

  Granted                                        123,000         3.44   - 5.50
  Exercised                                      (26,006)        0.50   - 4.75
  Canceled                                       (96,582)        2.50   - 6.00
                                               ---------

Balance, December 31, 1997                     1,925,175         0.40   - 7.25
                                               ---------

  Granted                                        481,915         1.13   - 2.98
  Exercised                                       (2,864)                 0.40
  Canceled                                      (344,375)        3.50   - 7.25
                                              -----------

Balance, December 31, 1998                     2,059,851         0.40   - 7.25
                                               =========

Shares exercisable at December 31, 1998        1,955,801
                                               =========
</TABLE>

      In June 1998, the Company authorized the repricing of potentially 524,000
stock options, held by non-officer employees, under the Company's 1991 and 1996
Stock Option Plans. The repricing excluded officers, directors and all
non-employee option holders. This repricing, with the agreement of the affected
employees, was a 2 for 1 exchange in option shares. Pursuant to the repricing
208,100 options were repriced at $1.6875, the fair value at the date of the
repricing, resulting in 104,050 new options. One-half of these options will vest
one year after the date of the agreement and the remaining one-half will vest
daily for a period of one year beginning June 25, 1999.


                                      F-17
<PAGE>   64

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The Company applies APB Opinion No. 25 in accounting for its Plans. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income (loss)
would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                         1998           1997          1996
                                         ----           ----          ----
                                                   (in thousands)
<S>                                  <C>           <C>          <C>        
      Net income (loss)
           As reported               $  (12,157)   $   (2,050)  $   (3,460)
           Pro forma                    (13,233)       (2,669)      (3,827)

      Loss per share:
           As reported               $    (1.06)   $    (0.18)  $    (0.31)
           Pro forma loss per share       (1.15)        (0.23)       (0.34)
</TABLE>

      The pro forma net income (loss) reflects only the options granted in 1998,
1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income (loss) amounts presented above because compensation cost is reflected
over the option's vesting period of four years and compensation cost for options
granted prior to January 1, 1995 is not considered.

      For purposes of pro forma disclosure requirements under SFAS No. 123, the
weighted average fair values of stock options granted during 1998, 1997 and 1996
were $1.91, $3.11 and $2.77 per share respectively. Such fair values are
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: in 1998, dividend yield of 0%; expected volatility of
75%; risk-free interest rates of 5.28%; and expected lives of 7 years. In 1997
the assumptions were: dividend yield of 0%; expected volatility of 66%;
risk-free interest rates of 6.25%; and expected lives of 7 years. In 1996 the
assumptions were dividend yield of 0%; expected volatility of 35%; risk-free
interest rates of 7%; and expected lives of 7 years.

      Summary information about the Company's stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                                    Options Outstanding                                   Options Exercisable
                       -----------------------------------------------------       --------------------------------
       Range             Number          Weighted-Avg.                               Number
        of             Outstanding         Remaining           Weighted-Avg.       Exercisable        Weighted-Avg.
  Exercise Price       at 12/31/98     Contractual Life       Exercise Price       at 12/31/98       Exercise Price
  --------------       -----------     ----------------       --------------       -----------       --------------
<S>                      <C>                  <C>                 <C>                 <C>                <C>   
    $ 0.40-0.50          229,143              0.62                $ 0.41              229,143            $ 0.41
      1.13-1.69          460,300              9.50                  1.63              356,250              1.61
      2.50-3.88          487,472              5.50                  3.22              487,472              3.22
      4.00-5.00          484,186              5.66                  4.53              484,186              4.53
      5.06-7.25          398,750              6.51                  5.68              398,750              5.68
                       ---------                                                    ---------
                       2,059,851                                                    1,955,801
                       =========                                                    =========
</TABLE>


                                      F-18
<PAGE>   65

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(15) Income Taxes

      Income tax expense (benefit) attributable to the net income (loss)
consists of the following during the years ended December 31, 1998, 1997 and
1996:

<TABLE>
<CAPTION>
                                             1998           1997           1996
                                             ----           ----           ----
                                                       (in thousands)
<S>                                         <C>              <C>            <C>
Current
  U.S. Federal                              $  --             --             --
  State and local                              --             --             --
  Foreign                                     121            756            514
                                            -----          -----          -----
                                              121            756            514
                                            -----          -----          -----
Deferred
  U.S. Federal                                 --             --             --
  State and local                              --             --             --
  Foreign                                     595           (516)           (37)
                                            -----          -----          -----
                                              595           (516)           (37)
                                            -----          -----          -----
                                            $ 716            240            477
                                            =====          =====          =====
</TABLE>

      Income tax expense (benefit) attributable to the net income (loss) for the
years ended December 31, 1998, 1997 and 1996 differed from the amounts computed
by applying the U.S. federal income tax rate of 34 percent to the income (loss)
before income tax expense (benefit) as a result of the following:

<TABLE>
<CAPTION>
                                                     1998        1997      1996
                                                     ----        ----      ----
                                                           (in thousands)
<S>                                                <C>           <C>      <C>    
Computed "expected" income tax expense (benefit)   $(3,890)      (615)    (1,014)
Increase (reduction) in income taxes resulting
  from:
  Change in the beginning-of-the-year balance
    of the valuation allowance  for Federal
    deferred tax assets allocated to income
    tax expense                                      4,129        326        206
  Nondeductible reorganization expenses                 --         --      1,241
  Foreign tax rate differential                        479        499         82
  Changes in enacted tax rates                          --         30         --
  Alternative minimum taxes                             --         --         --
  Other, net                                            (2)        --        (38)
                                                   -------    -------    -------

                                                   $   716        240        477
                                                   =======    =======    =======
</TABLE>


                                      F-19
<PAGE>   66

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:

<TABLE>
<CAPTION>
                                                              1998         1997
                                                              ----         ----
                                                               (in thousands)
<S>                                                        <C>           <C>
Deferred tax assets:
  Retirement indemnities                                   $     --         192
  Property and equipment                                        982          --
  Intangible assets                                             392          --
  Other                                                          55         139
  Deferred revenue                                              752         288
  Accrued expenses                                              645         223
  Capitalized research and development costs                    525         643
  Net operating loss carryforwards                           14,375      13,547
  Tax credit carryforward                                     2,932       3,179
                                                           --------    --------
         Total gross deferred tax assets                     20,658      18,211
  Less valuations allowance                                  20,658      17,803
                                                           --------    --------
         Net deferred tax assets                                 --         408
                                                           --------    --------

Deferred tax liabilities:
  Property and equipment, principally due to allocation
    of the purchase price of the French operation and
    differences in depreciation and capitalized interest     (1,736)     (1,259)
  Other                                                         (96)       (387)
                                                           --------    --------
         Total gross deferred liabilities                    (1,832)     (1,646)
                                                           --------    --------

         Net deferred tax liability                        $ (1,832)     (1,238)
                                                           ========    ========
</TABLE>

      The valuation allowance for deferred tax assets as of January 1, 1995 was
$17,197,000. The net change in the total valuation allowance for the years ended
December 31, 1998, 1997 and 1996 were increases of $3,181,000, $326,000, and
$206,000, respectively.

      At December 31, 1998, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $34,873,000 which are available to
offset future Federal taxable income, if any, through 2012.

      The Company also has research and development tax credit carryforwards of
approximately $2,932,000 for federal income tax reporting purposes which are
available to reduce federal income taxes, if any, through 2012. The Company has
alternative minimum tax credit carryforwards of approximately $164,000 for
federal income tax reporting purposes which are available to reduce federal
income taxes, if any. These tax credits have an unlimited carryforward period.

(16) Related Party Transactions

Note Payable - Related Party:

      As of December 31, 1998 and 1997, the Company owed approximately $319,000
and $291,000, respectively, to a relative of a former officer and major
shareholder. The note payable bears interest at a rate of 6.75%, is unsecured,
and due the earlier of October 29, 1999 or consummation of sale, merger,
reorganization or other arrangement resulting in a change of control of the
Company. Amounts outstanding as of December 31, 1998 and 1997 include accrued
interest of approximately $9,400 and $17,000, respectively.

Indemnification by certain stockholders:

      Pursuant to the acquisition agreement related to the acquisition of the
Bioclin Group (note 6), certain stockholders indemnify the Company for certain
named litigation costs. As a result of this indemnification, the Company
established a receivable due from the stockholders in the amount of $284,000 as
of December 31, 1997 payable in Common Stock at $5.0625 per share, the closing
price at December 18, 1996. In November of 1998 this receivable was satisfied by
the delivery and retirement of 56,851 shares of common stock to the Company.


                                      F-20
<PAGE>   67

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(17) Commitments and Contingencies

      The Company leases office and laboratory facilities and equipment under
various noncancellable operating lease agreements. In September 1998, the
Company entered into an operating lease for a facility under construction for
its Transgenics business. The new lease is expected to commence during the
summer of 1999 and will have a ten year term. The following table includes an
estimate of this annual lease commitment. Future minimum rental commitments for
the next five years as of December 31, 1998 on the aforementioned operating
leases are as follows:

<TABLE>
<CAPTION>
                                                                     Operating
                                                                      Leases
                                                                      ------
                                                                  (in thousands)
<S>                                                                  <C>    
1999                                                                 $ 1,693
2000                                                                   1,579
2001                                                                     996
2002                                                                     843
2003                                                                     784
Thereafter                                                             4,994
                                                                      ------
Total minimum lease payments                                        $ 10,889
                                                                      ======
</TABLE>

Rental expense aggregated $1,853,000, $1,493,000, and $1,312,000 in 1998, 1997
and 1996, respectively.

(18) Employee Benefits

Pension Plans:

      The clinical business maintains a pension plan for its key management
employees in Europe, one of whom is also a major shareholder. The plan provides
benefits based upon age, years of service, and remuneration. The plan is an
unfunded book reserve plan. Expenses for this plan totaled approximately $0,
$158,000, and $104,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.

      Most retirement benefits in France are paid out under the auspices of a
government-sponsored defined contribution retirement plan. Under the terms of
labor agreements, however, employees are entitled to an additional lump sum
payment at retirement provided they are still employed by the French preclinical
operation at their normal retirement date.

      Net periodic pension cost, related to the French preclinical operations,
for 1998, 1997 and 1996 includes the following components:

<TABLE>
<CAPTION>
                                                          1998     1997     1996
                                                          ----     ----     ----
                                                              (in thousands)
<S>                                                      <C>         <C>      <C>
Service costs-benefits earned during the period          $ 198       32       34
Interest cost on projected benefit obligation              165       26       25
Net amortization and deferral                             (140)     (18)      25
                                                         -----    -----    -----
         Net periodic pension cost                       $ 223       40       84
                                                         =====    =====    =====
</TABLE>


                                      F-21
<PAGE>   68

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      The present value of benefit obligations and the funded status of the
French preclinical operation's retirement indemnities recognized in the
Company's consolidated balance sheets as of December 31, 1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
                                                                   1998     1997
                                                                   ----     ----
                                                                   (in thousands)
<S>                                                                <C>       <C>
Actuarial present value of accumulated benefit
obligations (no amounts are vested)                                $490      418
Additional amounts related to salary increases                       40       38
                                                                   ----     ----
  Total projected benefit obligation                                530      456
                                                                   ----     ----
Plan assets at fair value                                            --       --
  Accrued pension cost                                             $530      456
                                                                   ====     ====
</TABLE>

      Assumptions used in the actuarial computations for 1998, 1997 and 1996 are
as follows:

<TABLE>
<CAPTION>
                                                      1998        1997        1996
                                                      ----        ----        ----
<S>                                                   <C>         <C>         <C> 
Discount rate                                         5.0%        6.0%        6.0%
Rate of compensation increases                        2.5%        2.0%        2.0%
</TABLE>

Profit-sharing of the operations in France:

      Profit-sharing is a requirement under French law. The payments are made to
employees after a period of 5 years unless certain conditions are met and
payment can be made earlier. During 1998, 1997 and 1996, profit sharing costs
aggregated $0, $199,000 and $181,000, respectively.

Savings Plan:

      The Company has an employee savings plan ("Savings Plan"), that qualifies
as a deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, participating U.S. employees may defer a portion
of their pretax earnings, up to the Internal Revenue Service annual contribution
limit. Effective May 1, 1993, the Company amended the Savings Plan to provide
for a Company match of 50% of each employee's contributions with newly issued
common stock of the Company. For the years ended December 31, 1998, 1997 and
1996, the Company issued 141,328, 45,037 and 18,065 shares of common stock,
respectively, to participants in the Savings Plan. Charges to operations for the
years ended December 31, 1998, 1997 and 1996 aggregated $204,000, $188,000 and
$95,000, respectively, under this plan.

(19) Legal Proceedings

      In the ordinary course of business, the Company is involved in certain
legal actions. In the opinion of management, based upon the advice of counsel,
the resolution of these legal matters will not have a material effect upon the
Company or its financial condition.

      In 1995, the Company terminated its relationship with the Virginia
Commonwealth University (VCU), which performed Phase I and analytical services
on behalf of the Company in the United States. The Company signed a settlement
agreement with VCU in the third quarter of 1997 that was significantly less than
the recorded liability. This action resulted in a book gain of $700,000, which
was recorded in other income in the third quarter of 1997.


                                      F-22
<PAGE>   69

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(20) Geographical Segment, Business Segment and Customer Information

Geographical segment information:

      The Company operates in two geographic areas. Information on the Company's
geographic operations is set forth in the table below.

<TABLE>
<CAPTION>
                                                 1998         1997         1996
                                                 ----         ----         ----
                                                        (in thousands)
<S>                                            <C>           <C>          <C>   
Net revenues:
  United States operations                     $15,386       15,520       13,165
  International operations                      23,998       26,778       28,322
                                               -------      -------      -------
         Total net revenues                    $39,384       42,298       41,487
                                               =======      =======      =======

Identifiable assets:
  United States operations                     $ 9,566       11,017        9,388
  International operations                      22,678       19,839       24,129
  General corporate                              2,337        4,384       14,426
                                               -------      -------      -------
         Total identifiable assets             $34,581       35,240       47,943
                                               =======      =======      =======
</TABLE>

Business segment information:

      The Company has three reportable segments: Transgenics, Preclinical and
Clinical services. Transgenic services include the use of transgenic laboratory
animal model technology as a tool to improve drug discovery programs.
Preclinical services include a broad range of preclinical drug development
services that provide a majority of the preclinical testing requirements
necessary to secure FDA (U.S.), EC (Europe) and MHW (Japan) approval to initiate
human clinical trials. Clinical services include clinical trial management
services, clinical data management and biostatistical services, and product
registration and regulatory services.

<TABLE>
<CAPTION>
                                                1998         1997         1996
                                                ----         ----         ----
                                                        (in thousands)
<S>                                          <C>             <C>          <C>  
Net Revenues:
  Transgenics                                $  4,735        2,066        1,150
  Preclinical                                  25,422       25,192       27,940
  Clinical                                      8,361       14,244       11,883
  Licensing/Other                                 866          796          514
                                             --------     --------     --------
         Total net revenues                  $ 39,384       42,298       41,487
                                             ========     ========     ========

Operating Income (loss):
  Transgenics                                $    811         (386)        (433)
  Preclinical                                     444          424        1,606
  Clinical                                     (9,464)      (1,123)      (1,415)
  Licensing/Other                              (2,240)      (1,115)      (3,483)
                                             --------     --------     --------
         Total operating loss                $(10,449)      (2,200)      (3,725)
                                             ========     ========     ========

Identifiable assets:
  Transgenics                                $  2,726        2,445          745
  Preclinical                                  24,418       20,895       25,430
  Clinical                                      5,100        7,516        7,342
  Licensing/Other                               2,337        4,384       14,426
                                             --------     --------     --------
         Total identifiable assets           $ 34,581       35,240       47,943
                                             ========     ========     ========
</TABLE>


                                      F-23
<PAGE>   70

              CHRYSALIS INTERNATIONAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Customer information:

      For the year ended December 31, 1998 net revenues from one customer
aggregated approximately $5,166,000 or 13% of the Company's total net revenues.
For the year ended December 31, 1997 net revenues from one customer aggregated
approximately $9,537,000 or 23% of the Company's total net revenues. For the
year ended December 31, 1996, net revenues from one customer aggregated
approximately $5,021,000 or 12% of the Company's total net revenues.

(21) Disclosure About Fair Value of Financial Instruments

Cash and cash equivalents, short-term investments, trade accounts receivable,
accrued interest receivable, restricted cash, accounts payable, and accrued
expenses:

      The carrying amount approximates fair value because of the short term
maturity of these instruments.

Long-term debt:

      The carrying amount of long-term debt with variable interest rates
approximates fair value due to its variable nature. The fair value of long-term
debt with fixed interest rates is estimated based on the current rates offered
to the Company for debt of the same remaining maturities. The carrying amount of
long-term debt with fixed interest rates aggregated $900,000 and $975,000 while
the fair value approximated $601,000 and $605,000 as of December 31, 1998 and
1997, respectively.


                                      F-24
<PAGE>   71

CHRYSALIS INTERNATIONAL CORPORATION
FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts


<TABLE>
<CAPTION>

FISCAL YEAR ENDED DECEMBER 31, 1996

     Col. A             Col. B           Col. C             Col. D      Col. E
----------------    -------------  ----------------       ----------  ----------
<S>                 <C>            <C>                    <C>         <C>
                    Balance at            Additions        Deductions Balance at
                     Beginning           (1)           (2)             Beginning
                     of Period    Charged to    Charged to             of Period
                                   Costs and         Other
                                    Expenses      Accounts

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

Allowance for
Doubtful Accounts   $ 55,000          75,000                           $130,000

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



<TABLE>
<CAPTION>

FISCAL YEAR ENDED DECEMBER 31, 1997

     Col. A             Col. B           Col. C             Col. D      Col. E
----------------    -------------  ----------------       ----------  ----------
<S>                 <C>            <C>                    <C>         <C>
                    Balance at            Additions        Deductions Balance at
                     Beginning           (1)           (2)             Beginning
                     of Period    Charged to    Charged to             of Period
                                   Costs and         Other
                                    Expenses      Accounts
--------------------------------------------------------------------------------

Allowance for
Doubtful Accounts    $130,000         11,000                            $141,000

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


<TABLE>
<CAPTION>

FISCAL YEAR ENDED DECEMBER 31, 1998
     Col. A             Col. B           Col. C             Col. D      Col. E
----------------    -------------  ----------------       ----------  ----------
<S>                 <C>            <C>                    <C>         <C>
                    Balance at            Additions        Deductions Balance at
                     Beginning           (1)           (2)             Beginning
                     of Period    Charged to    Charged to             of Period
                                   Costs and         Other
                                    Expenses      Accounts

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

Allowance for
Doubtful Accounts    $141,000        121,000                           $262,000

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

                                      F-25

<PAGE>   72

                                   SIGNATURES

      Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Chrysalis has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                             CHRYSALIS INTERNATIONAL CORPORATION


                             By: /s/ John G. Cooper
                                 -----------------------------------------------
                                 John G. Cooper
                                 Senior Vice President, Chief Financial Officer,
                                 Treasurer and Secretary

                                 Date: March 31, 1999

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

*Paul J. Schmitt          Chairman of the Board, President and    March 31, 1999
------------------------  Chief Executive Officer (Principal
Paul J. Schmitt           Executive Officer), Director      
                          

/s/ John G. Cooper        Senior Vice President, Chief Financial  March 31, 1999
------------------------  Officer, Treasurer and Secretary
John G. Cooper            (Principal Financial Officer and
                          Principal Accounting Officer)   
                          

* Jack Barbut             Director                                March 31, 1999
------------------------
Jack Barbut

                          Director                                              
------------------------
J. Christian Jensen

* Desmond H. O'Connell    Director                                March 31, 1999
------------------------
Desmond H. O'Connell

* Photios T. Paulson      Director                                March 31, 1999
------------------------
Photios T. Paulson

* Barry M. Sherman        Director                                March 31, 1999
------------------------
Barry M. Sherman
       
                          Director
------------------------
W. Leigh Thompson

*John G. Cooper, by signing his name hereto, does hereby sign this Annual Report
on Form 10-K on behalf of each of the above named and designated officers and
Directors of Chrysalis pursuant to a Power of Attorney executed by such persons
and filed with the Securities and Exchange Commission.

/s/ John G. Cooper                                                              
----------------------------------
John G. Cooper, Attorney-in-Fact


                                       47
<PAGE>   73

                                  EXHIBIT INDEX

2.    Plan of Acquisition, Reorganization, etc.

        (i)     Agreement and Plan of Merger, dated November 18, 1998, among
                Chrysalis, Phoenix International Life Sciences Inc. ("Phoenix")
                and Phoenix Merger Sub Corp. ("Merger Sub") is incorporated
                herein by reference to Exhibit 2.1 to Chrysalis' Current Report
                on Form 8-K dated November 18, 1998.

        (ii)    Amendment No. 1 to Agreement and Plan of Merger, dated as of
                March 24, 1999, among Chrysalis, Phoenix and Merger Sub is filed
                herewith as Exhibit 2(ii).

        (iii)   Form of Support/Voting Agreement, dated as of November 18, 1998,
                by and between Phoenix and each of the following: Jack Barbut,
                John G. Cooper, J. Chris Jensen, Lief Modeweg, Desmond H.
                O'Connell, Photios Paulson, Paul J. Schmitt, Barry M. Sherman,
                W. Leigh Thompson and Alec Hackel is incorporated herein by
                reference to Exhibit 99.2 to Chrysalis' Current Report on Form
                10-K dated November 18, 1998.

3.    Articles of Incorporation and Bylaws

        (i)     Third Amended and Restated Certificate of Incorporation of
                Chrysalis is incorporated herein by reference to Exhibit 3.1 to
                Chrysalis' Current Report on Form 8-K dated December 18, 1996.

        (ii)    Third Amended and Restated Bylaws of Chrysalis is incorporated
                herein by reference to Exhibit 3.2 to Chrysalis' Current Report
                on Form 8-K dated December 18, 1996.

4.    Instruments defining the Rights of Security Holders, including Indentures

        (i)     Rights Agreement between Chrysalis and American Stock Transfer &
                Trust Company, as Rights Agent, is incorporated herein by
                reference to Exhibit to Chrysalis' Current Report on Form 8-K
                dated July 1, 1998.

        (ii)    Amendment to Rights Agreement dated as of November 18, 1998
                between Chrysalis and American Stock Transfer & Trust Company,
                as Rights Agent, is incorporated herein by reference to Exhibit
                4.1 to Chrysalis' Current Report on Form 8-K dated November 18,
                1998.

        (iii)   Stockholders' Agreement, dated as of December 18, 1996, among
                DNX Corporation, Dr. Gerald Rittershaus, as Trustee and Employee
                Trustee, Manfred Wissman, as Trustee, Dr. Jack Barbut, Alec
                Hackel, Dr. John Christian Jensen, Sherby N.V., Martha Lee
                Reynolds, Barry Dvorchik, Bettina Donhardt and Christine
                Dune-Kraatz is incorporated herein by references to Exhibit 2.4
                to Chrysalis' Current Report on Form 8-K dated December 18,
                1996.


                                      x - 1
<PAGE>   74

10.   Material Contracts

        (i)     *1998 Stock Plan of Chrysalis, as amended, is incorporated
                herein by reference to Exhibit 10(i) of Chrysalis' Annual Report
                on Form 10-K for the fiscal year ended December 31, 1995.

        (ii)    *1991 Stock Option Plan of Chrysalis, as amended, is
                incorporated herein by reference to Exhibit 10(ii) of Chrysalis'
                Annual Report on Form 10-K for the fiscal year ended December
                31, 1995.

        (iii)   *1996 Stock Option Plan of Chrysalis is incorporated by
                reference to Appendix G to Chrysalis' Schedule 14A dated
                November 8, 1996.

        (iv)    *Employment Agreement between Pharmakon Research International,
                Inc. and Leif Modeweg, dated as of June 28, 1993, is
                incorporated herein by reference to Exhibit 10(iv) of Chrysalis'
                Annual Report on Form 10-K for the fiscal year ended December
                31, 1995.

        (v)     *Employment Agreement between Chrysalis and John G. Cooper,
                dated May 29, 1996, is incorporated herein by reference to
                Exhibit 10(v) of Chrysalis' Annual Report on Form 10-K for the
                fiscal year ended December 31, 1996.

        (vi)    *Amendment to Employment Agreement between Chrysalis and John G.
                Cooper, dated January 20, 1999, is filed herewith as Exhibit
                10(vi).

        (vii)   *Employment Agreement between Chrysalis and Paul J. Schmitt,
                dated June 2, 1995, is incorporated herein by reference to
                Exhibit 10.1 of Chrysalis' Quarterly Report on Form 10-Q for the
                period ended June 30, 1995.

        (viii)  *Amendment to Employment Agreement between Chrysalis and Paul J.
                Schmitt, dated January 20, 1999, is filed herewith as Exhibit
                10(viii).

        (ix)    *Employment Agreement between Chrysalis and John Christian
                Jensen, dated December 18, 1996, is incorporated herein by
                reference to Exhibit 10(vii) of Chrysalis' Annual Report on Form
                10-K for the fiscal year ended December 31, 1996.

        (x)     *Agreement between Chrysalis Holding (Europe) AG and Dr. J.
                Christian Jensen regarding termination of employment, dated
                August 25, 1998, and related release, dated August 25, 1998 is
                filed herewith as Exhibit 10(x).

        (xi)    *Employment Agreement between Chrysalis and Dr. Jack Barbut,
                dated December 18, 1996, is incorporated herein by reference to
                Exhibit 10(viii) of Chrysalis' Annual Report on Form 10-K for
                the fiscal year ended December 31, 1996.


                                      x - 2
<PAGE>   75

        (xii)   *Consulting Agreement between Chrysalis and Dr. Jack Barbut
                dated December 18, 1996, is incorporated herein by reference to
                Exhibit 10(ix) of Chrysalis' Annual Report on Form 10-K for the
                fiscal year ended December 31, 1996.

        (xiii)  *Letter agreement, dated as of October 29, 1998, between
                Chrysalis and Dr. Jack Barbut is filed herewith as Exhibit
                10(xiii).

        (xiv)   Subordinated promissory note dated October 29, 1998 issued by
                Chrysalis to Dr. Jules Barbut is filed herewith as Exhibit
                10(xiv).

        (xv)    *Form of Individual Long Term Disability Policy of New England
                Mutual Life Insurance Company for Corporate Officers is
                incorporated herein by reference to Exhibit 10(vii) of
                Chrysalis' Annual Report on Form 10-K for the fiscal year ended
                December 31, 1995.

        (xvi)   Assignment Agreement between Genetic Engineering, Inc. and
                Chrysalis dated October 30, 1989, is incorporated herein by
                reference to Exhibit 10(viii) of Chrysalis' Annual Report on
                Form 10-K for the fiscal year ended December 31, 1995.

        (xvii)  License Agreement between Ohio University and DNX, Inc. dated
                June 13, 1985, as amended July 1, 1991, is incorporated herein
                by reference to Exhibit 10.6 to Amendment No. 2 to Chrysalis'
                Registration Statement on Form S-1 filed December 10, 1991
                (Registration Statement No. 33-43553). Certain confidential
                information contained in such Exhibit 10.6 has been granted
                confidential treatment by the Commission on December 10, 1991.

        (xviii) Exclusive Worldwide License Agreement between Princeton
                University and DNX, Inc. dated December 22, 1987, as amended
                December 28, 1990, is incorporated herein by reference to
                Exhibit 10.7 to Amendment No. 3 to Chrysalis' Registration
                Statement on Form S-1 filed December 10, 1991 (Registration
                Statement No. 33-43553). Certain confidential information
                contained in such Exhibit 10.7 has been granted confidential
                treatment by the Commission on December 10, 1991.

        (xix)   License Agreement between The Board of Trustees of the Leland
                Stanford Junior University and DNX, Inc. effective as of July 1,
                1990, is incorporated herein by reference to Exhibit 10(x) to
                Chrysalis' Annual Report on Form 10-K for the fiscal year ended
                December 31, 1995.

        (xx)    Lease made as of August 28, 1991 between Richard J. Matthews and
                Sally G. Matthews and Pharmakon is incorporated herein by
                reference to Exhibit 10(xii) to Chrysalis' Annual Report on Form
                10-K for the fiscal year December 31, 1995.


                                      x - 3
<PAGE>   76

        (xxi)   *Form of Indemnification Agreement between Chrysalis and its
                officers and directors is incorporated herein by reference to
                Exhibit 10(xiii) to Chrysalis' Annual Report on Form 10-K for
                the fiscal year ended December 31, 1995.

        (xxii)  Agreement of Sale dated March 3, 1993 between Scranton
                Lackawanna Industrial Building Company and Pharmakon is
                incorporated herein by reference to Exhibit 10(xxxv) to
                Chrysalis' Annual Report on Form 10-K for the fiscal year ended
                December 31, 1995.

        (xxiii) Loan Agreement dated June 29, 1993 between First Eastern Bank,
                N.A. and Pharmakon is incorporated herein by reference to
                Exhibit 10(xxxvi) to Chrysalis' Annual Report on Form 10-K for
                the fiscal year ended December 31, 1995.

        (xxiv)  Joint Venture Agreement, dated as of August 29, 1994 by and
                among DNX Biotherapeutics and Baxter Transplant Holdings, Inc.
                is incorporated herein by reference to Exhibit 10(xxxvii) to
                Chrysalis' Annual Report on Form 10-K for the fiscal year ended
                December 31, 1995.

        (xxv)   Asset Transfer Agreement, dated as of August 29, 1994 by and
                among Chrysalis, DNX Biotherapeutics, Baxter Healthcare
                Corporation and Baxter Transplant Holdings, Inc. is incorporated
                herein by reference to Exhibit 10(xxxviii) to Chrysalis' Annual
                Report on Form 10-K for the fiscal year ended December 31, 1995.

        (xxvi)  Guaranty Agreement (DNX), dated as of August 29, 1994 by and
                among Chrysalis, Nextran, Baxter Transplant Holdings, Inc., and
                Baxter Healthcare Corporation is incorporated herein by
                reference to Exhibit 10(xxxix) to Chrysalis' Annual Report on
                Form 10-K for the fiscal year ended December 31, 1995.

        (xxvii) Assignment and Assumption of Lease, dated August 29, 1994 by and
                among Chrysalis, DNX Biotherapeutics, Inc. and Baxter Transplant
                Holdings, Inc. is incorporated herein by reference to Exhibit
                10(xl) to Chrysalis' Annual Report on Form 10-K for the fiscal
                year ended December 31, 1995.

       (xxviii) Agreement, dated October 8, 1996, between Chrysalis and Nextran
                is incorporated by reference to Exhibit 10(xxiv) to Chrysalis'
                Annual Report on Form 10-K for the fiscal year ended December
                31, 1997.

        (xxix)  Intentionally omitted.

        (xxx)   Loan Agreement, dated as of October 3, 1994 by and between
                Scranton Lackawanna Industrial Building Company and The
                Pennsylvania Industrial Development Authority is incorporated
                herein by reference to Exhibit 10(xliii) to Chrysalis' Annual
                Report on Form 10-K for the fiscal year ended December 31, 1995.


                                      x - 4
<PAGE>   77

        (xxxi)  Promissory Note in the principal amount of $1,200,000, dated as
                of October 3, 1994, made by Scranton Lackawanna Industrial
                Building Company to the order of The Pennsylvania Industrial
                Development Authority is incorporated herein by reference to
                Exhibit 10(xliv) to Chrysalis' Annual Report on Form 10-K for
                the fiscal year ended December 31, 1995.

        (xxxii) Consent, Subordination and Assumption Agreement, effective as of
                October 3, 1994 by Pharmakon and Scranton Lackawanna Industrial
                Building Company in favor of The Pennsylvania Industrial
                Development Authority is incorporated herein by reference to
                Exhibit 10(xlv) to Chrysalis' Annual Report on Form 10-K for the
                fiscal year ended December 31, 1995.

       (xxxiii) Loan Agreement, dated May 25, 1994 by and between Pharmakon and
                the Commonwealth of Pennsylvania, acting by and through the
                Department of Commerce is incorporated herein by reference to
                Exhibit 10(xlvi) to Chrysalis' Annual Report on Form 10-K for
                the fiscal year ended December 31, 1995.

        (xxxiv) Purchase Agreement, dated as of September 23, 1995, by and among
                Transplant Acquisition Inc., Baxter HealthCare Corporation, DNX
                Biotherapeutics, Inc. and DNX Corporation is incorporated herein
                by reference to Exhibit 2.1 of Chrysalis' Current Report on Form
                8-K filed on October 31, 1995.

        (xxxv)  Amendment No. 1 to Purchase Agreement, dated as of September 29,
                1995, by and among Transplant Acquisition Inc., Baxter
                HealthCare Corporation, DNX Biotherapeutics, Inc. and DNX
                Corporation is incorporated herein by reference to Exhibit 2.2
                of Chrysalis' Current Report on Form 8-K filed on October 31,
                1995.

        (xxxvi) Merger Agreement, dated as of August 19, 1996, among DNX
                Corporation, DNX Acquisition Corporation, Dr. Jack Barbut, Alec
                Hackel, Dr. John Christian Jensen, Sherby N.V. and BioClin, Inc.
                is incorporated herein by reference to Exhibit 2.1 to the
                Current Report on Form 8-K filed by Chrysalis on August 19,
                1996.

       (xxxvii) Share Exchange Agreement, dated as of August 19, 1996, among
                DNX Corporation, Mr. Manfred Wissman, as Trustee, Dr. Gerald
                Rittershaus, as Employee Trustee, Dr. Jack Barbut, Alex Hackel,
                Dr. John Christian Jensen, Bettina Donhardt, Christine
                Dune-Kraatz, BioClin GmbH, Kilmer N.V. and BioClin Europe AG is
                incorporated herein by reference to Exhibit 2.2 to Chrysalis'
                Current Report on Form 8-K filed on August 19, 1996.

        (xxxviii) Share Acquisition Agreement, dated as of August 19, 1996,
                among DNX Corporation, Dr. Gerald Rittershaus, as Trustee, Dr.
                Jack Barbut, Alex Hackel, Dr. John Christian Jensen and BioClin
                Institute of Clinical Pharmacology GmbH is incorporated herein
                by reference to Exhibit 2.3 to Chrysalis' Current Report on Form
                8-K filed on August 19, 1996.


                                      x - 5
<PAGE>   78

        (xxxix) Term Loan and Security Agreement, dated as of August 29, 1997,
                among Chrysalis, Chrysalis International Preclinical Services
                Corporation, Chrysalis DNX Transgenic Sciences Corporation,
                Chrysalis International Clinical Services Corporation and
                CoreStates Bank, N.A. is incorporated by reference to Exhibit
                10(xxxv) to Chrysalis' Annual Report on Form 10-K for the fiscal
                year ended December 31, 1997.

        (xl)    Promissory Note in the principal amount of $5,000,000, dated
                August 29, 1997, made by Chrysalis, Chrysalis International
                Preclinical Services Corporation, Chrysalis DNX Transgenic
                Sciences Corporation and Chrysalis International Clinical
                Services Corporation, to the order if CoreStates Bank, N.A. is
                incorporated by reference to Exhibit 10(xxxvi) to Chrysalis'
                Annual Report on Form 10-K for the fiscal year ended December
                31, 1997.

        (xli)   Security Agreement, dated August 29, 1997, among Chrysalis,
                Chrysalis International Preclinical Services Corporation,
                Chrysalis DNX Transgenic Sciences Corporation, Chrysalis
                International Clinical Services Corporation and CoreStates Bank,
                N.A. is incorporated by reference to Exhibit 10(xxxvii) to
                Chrysalis' Annual Report on Form 10-K for the fiscal year ended
                December 31, 1997.

        (xlii)  Stock Pledge Agreement, dated August 29, 1997, between Chrysalis
                and CoreStates Bank, N.A. is incorporated by reference to
                Exhibit 10(xxxviii) to Chrysalis' Annual Report on Form 10-K for
                the fiscal year ended December 31, 1997.

        (xliii) Collateral Agreement of Contracts, dated August 29, 1997, among
                Chrysalis, Chrysalis International Preclinical Services
                Corporation, Chrysalis DNX Transgenic Sciences Corporation,
                Chrysalis International Clinical Services Corporation and
                CoreStates Bank, N.A. is incorporated by reference to Exhibit
                10(xxxix) to the Chrysalis' Annual Report on Form 10-K for the
                fiscal year ended December 31, 1997.

        (xliv)  First Amendment to Term Loan and Security Agreement, dated
                September 24, 1997, among Chrysalis, Chrysalis International
                Preclinical Services Corporation, Chrysalis DNX Transgenic
                Sciences Corporation, Chrysalis International Clinical Services
                Corporation and CoreStates Bank, N.A. is incorporated by
                reference to Exhibit 10(xl) Chrysalis' Annual Report on Form
                10-K for the fiscal year ended December 31, 1997.

        (xlv)   Second Amendment to Term Loan, dated March 16, 1998, among 
                Chrysalis, Chrysalis International Preclinical Services 
                Corporation, Chrysalis DNX Transgenic Sciences Corporation, 
                Chrysalis International Clinical Services Corporation and 
                CoreStates Bank, N.A.

        (xlvi)  Third Amendment to Term Loan and Security Agreement, dated March
                20, 1998, among Chrysalis, Chrysalis International Preclinical
                Services Corporation,


                                      x - 6
<PAGE>   79

                Chrysalis DNX Transgenic Sciences Corporation, Chrysalis
                International Clinical Services Corporation and CoreStates Bank,
                N.A.

        (xlvii) Forbearance Agreement, dated as of November 18, 1998, by and
                among Chrysalis, its subsidiaries named therein and First Union
                National Bank is incorporated herein by reference to Exhibit
                99.3 to Chrysalis' Current Report on Form 8-K dated November 18,
                1998.

       (xlviii) [Intentionally Omitted].

        (xlix)  Note and Warrant Purchase Agreement effective March 16, 1998, by
                and between Chrysalis and Pan Labs International, Inc. is
                incorporated by reference to Exhibit 7.2 to the Schedule 13D
                dated March 16, 1998 filed by MDS Inc., MDS Washington, Inc. and
                Pan Labs International, Inc. (the "MDS Schedule 13D").

        (l)     6% Subordinated Note of Chrysalis dated March 16, 1998 is
                incorporated by reference to Exhibit 7.3 to the MDS Schedule
                13D.

        (li)    Warrant Agreement effective March 16, 1998 by and between
                Chrysalis and Pan Labs International, Inc. is incorporated by
                reference to Exhibit 7.4 to the MDS Schedule 13D.

        (lii)   Standstill and Confidentiality Agreement effective March 16,
                1998, by and among Pan Labs International, Inc., MDS Inc. and
                Chrysalis is incorporated by reference to Exhibit 7.5 to the MDS
                Schedule 13D.

        (liii)  Security Agreement delivered by Chrysalis to Pan Labs
                International, Inc. dated March 16, 1998 is incorporated by
                reference to Exhibit 7.6 to the MDS Schedule 13D.

        (liv)   Agreement, dated as of November 16, 1998, among Chrysalis, MDS
                Inc. and Pan Labs International, Inc. is filed herewith as
                Exhibit 10(liv).

21.             Subsidiaries of Chrysalis is incorporated by reference to
                Exhibit 21 to Chrysalis' Annual Report on Form 10-K on the
                fiscal year ended December 31, 1997.

23.             Consent of Experts

                (i)     The Consent of KPMG LLP regarding Chrysalis'
                        Registration Statement on Form S-8 (File No. 33-49124)
                        and Registration Statement on Form S-8 (File No.
                        33-70976) is attached hereto as Exhibit 23(i).

24.             Powers of Attorney are filed herewith as Exhibit 24.


                                      x - 7
<PAGE>   80

27.             Financial Data Schedule

        *Management contract or compensatory plan or arrangement required to be
        filed as an exhibit pursuant to Item 14(c) of Form 10-K.


                                      x - 8