<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                  FORM 10-KSB
(Mark One)

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

       For the fiscal year ended March 31, 1999

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

       For the transition period from ________ to ____________
                                    Commission File No. 000-22501

                           SpectruMedix Corporation
--------------------------------------------------------------------------------
                (Name of Small Business Issuer in Its Charter)

   Delaware                                             25-1686354
--------------------------------------------------------------------------------
  (State or Other Jurisdiction of         (I.R.S. Employer Identification No.)
  Incorporation or Organization)

 2124 Old Gatesburg Road, State College, Pennsylvania               16803
--------------------------------------------------------------------------------
  (Address of principal executive offices)                        (ZIP Code)

                                (814) 867-8600
--------------------------------------------------------------------------------
               (Issuer's Telephone Number, Including Area Code)

SECURITIES REGISTERED UNDER TO SECTION 12 (b) OF THE EXCHANGE ACT:    NONE

SECURITIES REGISTERED UNDER TO SECTION 12 (g) OF THE EXCHANGE ACT:

                       Common Stock, $0.00115 par value
--------------------------------------------------------------------------------
                               (Title of Class)

   Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.  Yes ________
No    X
    -----

   Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B 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-KSB or any amendment to
this Form 10-KSB.  [X]

   State issuer's revenue for its most recent fiscal year.    $317,672
                                                              --------

   The aggregate market value of the voting and non-voting Common Stock held by
non-affiliates of the registrant, computed by reference to the closing sales
price of the Common Stock on the OTC Bulletin Board on September 10, 1999 was
$1,655,153.*

   The number of shares of the Registrant's Common Stock outstanding was
3,658,041 as of September 10, 1999.

   Transitional Small Business Disclosure Format (check one):  Yes __ No X
                                                                         -

                      DOCUMENTS INCORPORATED BY REFERENCE

   None.
_______________
   *Excludes 1,355,220 shares of the Registrant's Common Stock held by the chief
executive officer and director and affiliated parties at September 10, 1999.
Exclusion of such shares should not be construed to indicate that any such
person possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the Registrant or that such person is
controlled by or under common control with the Registrant.
<PAGE>

                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS
         -----------------------

     All statements contained herein that are not historical facts, including,
but not limited to, statements regarding SpectruMedix Corporation (the
"Company") and its current business strategy, projected sources and uses of
cash, and plans for future development and operation, are based on current
expectations. The statements are forward-looking in nature and involve a number
of risks and uncertainties. Actual results may differ materially. The risks and
uncertainties are described more fully under the heading "Risk Factors," and
include, but are not limited to, the ability of the Company to obtain the
necessary funds to continue its operations. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which statements are made pursuant to the Private Litigation Reform Act of 1995
and, as such, speak only as of the date made.

The Company

Introduction

     The Company, a Delaware corporation, devotes substantially all of its
resources to the development of high-speed DNA/gene sequencing instrumentation
(the "DNA Sequencer"), an instrument for the acquisition, analysis and
management of complex genetic information.  The DNA Sequencer was developed in
part from research efforts conducted at the United States Department of Energy
and Ames Laboratories' Institute for Physical Research and Technology/Iowa State
University ("Ames Laboratories").  The Company believes DNA sequencing has
significant implications for medical, genetic and forensic science applications.

     In May 1995, the Company entered into an agreement with Iowa State
University Research Foundation, an affiliate of Ames Laboratories ("ISURF")
pursuant to which the Company received an option to acquire an exclusive
worldwide license to technology developed at ISURF for the commercial
development of the DNA Sequencer. The Company believes the DNA Sequencer may be
capable of substantially increasing the rate of sequencing over the other
commercially available sequencing instruments on the market today and provide
reliable results at a lower cost. In July 1997, R & D Magazine selected the
Company's DNA Sequencer technology to receive the R&D 100 Award recognizing it
as one of the top 100 technical innovations of 1997. The Company has completed
development of the DNA Sequencer and has a limited number of models available
for the market.

     In June 1997, the Company exercised its option and entered into an
exclusive, worldwide licensing agreement for the technology developed by ISURF.
Due to the Company's financial condition during fiscal year 1999 and through the
end of July 1999, however, it was not able to make certain required payments
under the licensing agreement. On July 30, 1999, ISURF and the Company entered
into an amendment to the license agreement, pursuant to which the Company agreed
to pay $500,000 under the license agreement and ISURF agreed to waive any
defaults for the failure to pay such required payments, the parties agreed to a
revised schedule of minimum royalties, ISURF consented to the grant of
sublicense to The Perkin-Elmer Corporation, now known as PE Biosystems ("PE
Bio") and the Company agreed to pay ISURF a majority portion of the minimum
royalties received by the Company from PE Bio under the sublicense agreement and
the Company granted ISURF a phantom stock award equal to 150,000 shares of the
Company's common stock, par value $0.00115 per share (the "Common Stock").

     Concurrently with the restructuring of its license agreement with ISURF,
the Company entered into a sublicense agreement with PE Bio pursuant to which
the Company granted PE Bio an exclusive sublicense to use certain patents for
the development of DNA sequencing machines using 30 or fewer capillaries using
side entry illumination.  The Company also granted PE Bio a right of first
refusal to sublicense such technology for use in DNA sequencing machines using
more than 30 capillaries.  On July 30, 1999, PE Bio paid the Company a non-
refundable sublicense issue fee of $1,000,000, and, commencing with the twelve-
month period beginning August 1, 2001, PE Bio agreed to pay to the Company
certain minimum annual royalties.  Such minimum royalties are non-refundable,
but are credited against the earned royalties payable pursuant to the sub-
license agreement.

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<PAGE>

     In connection with the sublicense agreement, PE Corporation, the parent
company of PE Bio, purchased 2,000 shares of the Company's Series A Preferred
Stock for $1,000 per share.  The Series A Preferred Stock will be paid dividends
only if the Company pays dividends on its common stock, and the Series A
Preferred Stock may be converted into shares of common stock at a conversion
price of $2.50 per share, subject to adjustment in the event of a consolidation,
merger, reorganization or sale of substantially all of the assets of the
Company. In addition, PE Bio and the Company entered into a multi-year
consulting agreement pursuant to which the Company will provide consulting
services to PE Bio. Upon execution of the consulting agreement, the Company
received a lump sum fee of $2,000,000.

Company History

     Since its formation in 1992, the Company has devoted all of its resources
to develop, upgrade and improve its existing line of scientific instrumentation,
which initially consisted of mass spectrometers and luminoscopes, electronic
components and software.  Despite the technological achievements of the
Company's products, the Company has not been able to achieve significant sales
of its scientific instrumentation, partly as a result of its significant
liquidity concerns and management turnover.

     From its inception through December 1998, the Company financed its
operations primarily through the sale of equity securities and loans, most of
which loans were repaid with the proceeds from the Company's initial public
offering.  Sales from the Company's existing product lines were limited and the
Company shifted its focus to the development of the DNA Sequencer and, to a
substantially lesser degree, certain other research products.

     Substantially all of the Company's funds were expended on the development
and commercialization of the Company's products, including the DNA Sequencer.
From January 1999 through July 1999, the Company was primarily dependent on
funds advanced to it by the Company's Chief Executive Officer to meet payroll
and expenses. Due to its financial condition, the Company was unable to make
required payments under its license agreements and was unable to maintain an
option for the right to use a patent critical to another technology the Company
was developing.

     DNA Sequencer

     The Company believes DNA sequencing has significant implications for
medical, genetic and forensic applications. The Company currently licenses
technology from ISURF which was used to develop the Company's DNA Sequencer.
The license agreement with ISURF was restructured on July 30, 1999 and the
Company sublicensed certain of such technology to PE Bio.

     DNA is the chemical material in living organisms that defines the physical
characteristics of each organism and is responsible for everything within the
organism concerning the reproduction, maintenance, repair and (some scientists
believe) the general behavior of a given individual or organism. At the
molecular level, DNA appears as a ladder-like structure. Two ribbons of sugar
molecules, positioned side-by-side, are cross-linked at regular intervals along
their length. The rungs of the ladder represent the actual genetic code and the
outer sugar molecules are believed to be merely physical supports to keep the
cross-linked ladder rungs in order. Each rung of the DNA ladder is composed of
two molecules called base pairs. Only four specific molecular bases are used to
make the DNA cross-links: Adenine, Thymine, Cytosine and Guanine, abbreviated A,
T, C and G.  The molecules themselves are described in chemical terms as bases
(i.e., the opposite of acids), and the term "base," or "base pair," is used to
describe the DNA molecules without specifying A, T, C or G.

     The search for the genetic sequence of living organisms has been an active
sphere of research since 1953, when the scientists James Watson and Francis
Crick published the discovery that DNA was in fact two cross-linked molecular
strands in the shape of a helical ladder. The complete DNA sequence for an
organism is called the genome. Coordinated by the U.S. Department of Energy and
the National Institute of Health, many research centers and laboratories are
engaged in a project to map the human genome (the "Human Genome Project").
Among the goals of the Human Genome Project are to identify all the estimated
80,000 to 100,000 genes in human DNA and determine the sequences of the three
billion chemical bases that make up human DNA.

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     Since the inception of the Human Genome Project, there have been
substantial increases in speed and great reductions in the cost of dealing with
the large amount of genetic information that constitutes the human genome. Over
the past five years, significant progress has been made to map the human genome,
i.e., to provide a guide to the various pieces of DNA comprising the human
genome. There is therefore added urgency to start large scale sequencing to
further decipher and to make use of these physical maps.

     DNA Sample Preparation. The DNA ladder scheme is first separated along the
long axis of the molecule (see Figure 1), yielding a "single strand" sequence of
DNA bases tethered along a single sugar backbone. The single strand is
chemically modified to obtain the fragment series as illustrated in Figure 1.
The resulting DNA pieces include a small tag molecule at one end of the strand.
This tag will fluoresce (emit light) when it is irradiated with a laser. The
color of the laser light is different from the tag fluorescence light, so it is
possible to tell them apart. In order to discern the four possible bases, each
base type reacts exclusively with one of four possible tags in the solution. The
different tags fluoresce different colors, acting as a color-code, and the four
types of bases can thus be identified. The fragments correspond to a series of
DNA pieces that increase in length by one molecule character (C, T, A or G).
Only the last base on the tail end of the strand is tagged. This is important
because it means that the signal detected by the instrument is specific to the
last base on the strand, and the rest of the strand is invisible to the
detector. The significance of keeping the strand length will be illustrated
below. The sample preparation, from the bulk raw material to the fluorescent-
tagged DNA series, is performed by laboratory personnel, and is the precursor to
using the Company's DNA Sequencer. The instrument is then used to identify, in
order, the individual bases that appear along the DNA strand.


                [CHART OF DNA SAMPLE PREPARATION APPEARS HERE]

     Figure 1. Illustration of the DNA structure, prepared fragment samples, and
     resulting data format.

     Currently Commercially Available DNA Sequencer Instrumentation. The general
separation method employed by the Company's instrument, as well as most of the
other instruments available from competitors, is electrophoresis (the movement,
under the influence of an electrical field, of electrically charged particles
suspended in a fluid). The older of the two most common instrumental
applications employing electrophoresis uses a plate of conductive, solid-like
gelatin material as the sample solution. At one end of the plate, the sample is
injected into the

                                       3
<PAGE>

gel. When an electric field is applied across the gel, the molecules migrate
across the gel. The smallest fragments migrate the greatest distance for a given
time and voltage. To obtain the final data, the voltage is applied across the
gel for a given period of time, and then removed. The separated DNA fragments
are separated across the plate according to their size, and the entire plate is
scanned with the laser. The fluorescent tags, corresponding to each of the four
possible bases, are observed by a secondary light detector.

     This instrument design has certain inherent limitations: (i) the technique
is mechanically cumbersome; (ii) the gel material must be made immediately prior
to their use; (iii) the gel material is prepared from a monomer compound that is
a highly dangerous neurotoxin that requires specialized handling and disposal
methods; (iv) due to the dense solid-like nature of the gel material, the
migration times of the DNA fragments are very long, and thus the process is very
slow; (v) slab gels can only maintain comparatively low (e.g., 5,000 volts)
voltage loads as greater voltage causes overheating and destroys the gel
integrity (the greater the voltage an electrophoretic instrument can safely
handle, the faster the analysis rate); (vi) the technique is not well-suited for
use with existing robotic-based preparation techniques commonly found in
biological laboratories, due to the incompatibility of the hardware associated
with each system, e.g., gel electrophoresis instrumentation does not utilize the
microtiter wells universally associated with DNA preparation; and (vii) the
limit to the available space on the slab means that the slab is capable of only
a limited number of "side-by-side" runs.  As a result of such limitations, the
slab gel technique cannot exceed a sequencing rate of approximately 500 bases
per hour.

     The SpectruMedix DNA Instrument: the SCE9600 Multiplexed Capillary
Electrophoresis DNA Sequencer. Unlike gel slab-based systems, the Company's DNA
Sequencer utilizes tubes, a process known as capillary gel electrophoresis. The
tube, or capillary, is composed of a non-conductive glass, roughly three feet in
length (See Figures 2 and 3), and is very thin in size, with an outer diameter
of 0.006 inches (150 microns) and an inner diameter of roughly 0.003 inches (75
microns). The capillaries may be compared to a three-foot long hollow tube the
thickness of sewing thread. The tube is filled with the Company's proprietary
(patented) gel material, and a very small volume of the DNA sample solution is
introduced at one end of the capillary (see Figure 2). In order to apply a
voltage across the capillary (the gel material is conductive), each end of the
capillary is immersed in a container of salt solution, along with the power
supply electrodes. In response to the voltage, the charged fragments migrate
through the gel matrix, from one end of the capillary to the other. The
fragments separate according to their size while traveling through the
capillary.

                    [CHART OF DNA SEQUENCING APPEARS HERE]

     Figure 2. Capillary electrophoresis setup, single lane shown.

                                       4
<PAGE>

     A significant difference between slab gel electrophoresis ("SGE") and
capillary gel electrophoresis ("CGE") is the method of detection. With an SGE
based system, the sample is injected onto the gel plate, the voltage is applied
for a given amount of time, and then the voltage is removed and the entire gel
plate is scanned with the laser for analysis. Using the Company's CGE technique,
the analysis is performed "on the fly" with a light detector or charged-couple
device (CCD) camera. As the separated fragments pass through the capillary, they
pass through a region that is irradiated with laser light, and the subsequent
fluorescence is measured by the light detector. The data is presented in a plot
of light color versus the migration time of the fragments.  Because each
fragment length exists in the sample solution, the bases are identified in
order, as a function of how long it takes for them to reach the laser/detector
region (see Figure 2). The Company believes that CGE provides several advantages
over the slab gel technique: (i) less gel material, sample volumes and reagents
are used for each analysis and (ii) the issue of resistive heating is greatly
reduced, because the cross-sectional area of the 0.006 inch diameter capillary
is considerably smaller than a 10 x 0.25 inch gel plate.

     In addition, because less heat is generated, greater voltage can be applied
to the system, resulting in shorter analysis times. The SCE9600 system can apply
15,000 to 30,000 volts across the capillary tube reducing run times from hours
in the SGE case to minutes in the Company's CGE instrument. Samples may be
continuously run, and the entire analytical procedure may be computer
controlled. In addition, the on-column sample analysis provided by the SCE9600
provides continuous discrete isolation of concurrent samples during the analysis
and eliminates chemical cross contamination from neighboring lanes.



                             [CHART APPEARS HERE]

     Figure 3. The SpectruMedix SCE9600 Multiplexed 96-Capillary Electrophoresis
DNA Sequencer.

     The Company believes that the SpectruMedix sequencer provides advantages
over current technology by, among other things, increasing the number of
capillaries that are used simultaneously and by simplifying the construction of
the instrument through keeping both the laser light source and the detector
stationary.  The SpectruMedix SCE9600 combines simultaneous fluorescence and
detection of 96 discreet capillary lanes with CGE base calling (see Figure 3).
The Company's capillary array configuration allows the introduction and analysis
of 96 individual DNA samples, with multiple runs possible via two computer
controlled eight-tray carrousels. These

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carrousels are multiple-tray holders that allow for pre-loading the DNA samples
and buffers necessary for each of several runs and then having the instrument's
computer control the instrument functions automatically without further operator
intervention. The samples are handled by the SCE9600 in standard, commercially
available 96-well microtiter plates and, the Company believes, should be
compatible with the preparation processes commonly used in laboratories. Samples
may therefore be prepared and analyzed in the same container, reducing the
possibility of cross contamination and sample loss.

     The Company is also developing a fluid gel matrix capable of increased DNA
fragment resolution at increased sample migration speeds. The less viscous
nature of the gel matrix being developed by the Company, compared to currently
available materials, also allows the capability of flushing out consumed matrix
for fresh gel as part of the automated instrument sequence, and complete
capillary column reconditioning between each sample series run.

     In addition, the SCE9600 utilizes direct sample injection from the tray in
which the samples were prepared, which help assure the integrity prior to its
analysis.  Other capillary systems employ a robotic arm that transfers the
samples from the  well tray to a secondary loading station. This raises concerns
with cross-contamination because neither the pipet tip nor the loading tray are
replaced after each use.  In July 1997, R & D Magazine selected the SCE9600
Multiplexed Capillary Electrophoreses DNA Sequencer to receive the R&D 100 Award
recognizing it as one of the top 100 technical innovations of 1997.

Other Products

     The Company also manufactures and sells mass spectrometers and
luminoscopes.  Historically, the Company has not been able to generate
significant sales of these products.  The Company has shifted its focus to the
commercialization of the DNA Sequencer, but it may continue to make limited
sales of its mass spectrometers and luminoscopes.

     Mass spectrometers are scientific instruments capable of determining the
composition of matter with great precision, whether it be a solid, liquid, gas
or plasma. Mass spectrometers identify a sample by analyzing its component atoms
and molecules, on the basis of atomic weights or "masses." Key applications for
mass spectrometers include: (i) environmental testing and monitoring, including
monitoring of air pollution levels, water purity, recirculated atmospheres (such
as in submarines, spacecraft and mines), air quality in private residences and
offices, and pesticides in the soil, rivers and well water; (ii) geologists
routinely use mass spectrometers for such tasks as determining the age of rocks
and meteorites, computing the temperatures in ancient oceans, and studying the
composition of gases in rock formations; (iii) the metallurgical industry has
the need for an instrument that can perform several analyses simultaneously,
such as testing a sample for the presence of hydrogen, carbon, nitrogen and
oxygen, and for the concentration profiles of these elements; (iv) the Company's
mass spectrometers have many applications in materials science, ranging from the
analysis of semiconductor substrates to corrosion analysis of structural
materials to the analysis and eventual synthesis of new-high-temperature
materials, etc.

     The Luminoscope is a fine-scale analytical device used to determine, in a
nondestructive manner, the composition and structure of solid samples. The
Luminoscope consists primarily of a small vacuum chamber fitted with an electron
"gun" that is capable of producing a beam of energetic electrons of up to 30KV.
When this beam bombards a sample in the vacuum chamber, luminescence and/or X-
rays are produced. The output is studied either visually with a microscope or
with various photon and X-ray sensors. The image defines the composition and
structure of the material.

     In its traditional field of application, petrology, the Luminoscope has
proven valuable in studies of compositional zoning, secondary crystallization,
exsolution, intergrowths, fracture filling, radiation halos, organic remains,
delineation of cementation stages and cementation of sand stones and shales.
Another application for the Luminoscope is gemstone determination, where the
analysis technique must be truly nondestructive. To determine whether a diamond
is genuine or whether it has been artificially altered by one of several recent
processes which removes the value-reducing defects, or perhaps is a synthetic
diamond grown in a laboratory, a Luminoscope is, the Company believes, the best
available method. The Luminoscope easily identifies the telltale signs of the
synthetic growing process.

                                       6
<PAGE>

Other Technologies under Development

     Laser Diagnostics.  In support of the Company's work on the DNA Sequencer,
the Company retained the sole staff person of Laser Diagnostics and acquired
certain assets of Laser Diagnostics.  Laser Diagnostics developed a technology
known as Laser-Induced Breakdown Spectroscopy ("LIBS") in collaboration with the
Los Alamos National Laboratory, Sandia National Laboratory in Livermore, CA, and
the Diagnostic and Analysis Instrumentation Laboratory at Mississippi State
University. The LIBS technique involves focusing a high peak-power pulsed laser
to create a small spark from which optical emission is used to perform elemental
analysis. This technology can be used to continuously monitor the off-gases from
incinerators and other thermal treatment facilities for heavy metals released
into the atmosphere. The U.S. Department of Energy granted a Small Business
Technology Transfer ("STTR") grant to Laser Diagnostics in support of this work.
Laser Diagnostics also developed a novel near-infrared diode laser system to
monitor water vapor and carbon dioxide in the atmosphere. The National Science
Foundation, Atmospheric Sciences Division issued an STTR grant in support this
work.  The Company is continuing the development of both these technologies with
the STTR grants.

     Pulmonary Diagnostics.  The Company, in collaboration with researchers at
the University of Pennsylvania, is developing technology that is designed to
enable the accurate and rapid assessment of pulmonary functioning.  This method,
known as the Micropore Membrane Inlet Mass Spectrometry ("MMIMS") method, is
designed to detect impaired gas exchange associated with pulmonary disorders
such as acute respiratory distress syndrome, pneumonia, asthma and emphysema.
The new technique under development is expected to improve the existing testing
method known as the Multiple Inert Gas Elimination Technique ("MIGET") by
increasing the speed, accuracy and sensitivity required to assist physicians to
make diagnosis and treatment decisions for pulmonary disease patients.  The
MMIMS instrumentation under development is expected to allow the measurement to
be made more accurately, more rapidly and with greater sensitivity.

     The MIGET method measures the retention and excretion of a series of
infused inert gases covering a wide range of blood solubilities.  The technique
is expected to allow for the determination of the distribution of pulmonary
ventilation/perfusion ("V/Q") ratios of a patient.  With this knowledge, MIGET
provides detailed information about the mechanisms of a patient's impaired lung
oxygen and carbon dioxide exchange.  The ability to measure lung function
routinely is expected to allow a physician to provide a pulmonary disease
patient with a more accurate diagnosis, to select the optimal treatment, and to
quickly determine the efficacy of the prescribed medical therapy.

Research and Development

     The Company's research and development efforts currently are focused on the
commercialization and improvement of the Company's DNA Sequencer, and, to a
lesser extent, the development of a mass spectrometer for its pulmonary
diagnostic technology.  As of March 31, 1999, the Company had 12 full-time
employees engaged in research and development. Expenditures for research and
development, net of grants received, in the fiscal years ended March 31, 1999
and 1998 were $1,050,933 and $1,279,959, respectively. The Company believes that
its success will depend upon its ability to develop and introduce new products
and features to incorporate new technologies, enhance its existing products and
meet changing customer requirements and emerging industry standards on a timely
and cost-effective basis.  Accordingly, the Company currently intends to
continue to devote a substantial portion of its resources to research and
development activities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Sales and Marketing

     All of the Company's sales and marketing to date has been conducted on a
part-time basis by one or two of the Company's employees. The Company will need
to develop a full-time sales and marketing force and undertake a concerted
marketing effort to market the DNA Sequencer. The establishment of a sale force
and marketing program will require substantial funds, and there can be no
assurance that the Company will be able to generate significant sales of the DNA
Sequencer.

                                       7
<PAGE>

Competition

     DNA Sequencers. Competition in the market for DNA sequencing technology is
rapidly evolving and the competitors include major universities and research
centers, large corporations with significantly more financing than the Company,
and a large number of smaller instrument, software and genomics companies that
are developing complete, or components of, DNA sequencing equipment. Although
the Company believes that its technology will compete favorably with the
approaches being taken by such third parties, there can be no assurance that the
superior funding or experience levels of such competitors will not materially
and adversely affect the Company's own development and commercialization
efforts.

     Current Technology. The primary commercially-available, semi-automated DNA
sequencer, the ABI377, is manufactured by PE Biosystems ("PE Bio"), a subsidiary
of PE Bio.  This slab gel-based technology is capable of running 96 lanes of DNA
samples of 400-450 bases in four hours.  Based on discussions with scientists
who use the ABI377, the Company believes that the ABI377 is labor-intensive for
gel and sample preparation and requires highly skilled operators.  In addition,
the ABI377 allows only a single run of 96 lanes, after which the instrument must
be reset. Other companies involved in this area include Beckman Instruments,
Fisons Scientific Equipment and Pharmacia Biotech.

     In early 1999, PE Bio released a new 96-capillary DNA sequencer, the ABI
Prism(R) 3700 DNA Analyzer, and PE Bio has reported significant sales for this
product. The Company believes that the technology employed in the SCE9600 should
allow the SCE9600 to compete favorably with the ABI Prism(R) 3700 DNA Analyzer.
PE Bio has sublicensed certain aspects of the Company's technology and may
incorporate such technology into its future DNA sequencing instrumentation, but
only for machines with 30 or fewer capillaries and employing an optics system
not currently being considered for commercialization by the Company.

     Other Electrophoresis-based Instrumentation. Other manufacturers of DNA
sequencing machines are developing alternatives to both the ABI377 and the
SCE9600.  One such multi-capillary device being commercialized by Molecular
Dynamics, Inc., the MEGABACE 1000, employs a single scanning detector that
"looks" at each single capillary in the array in sequence. The system has been
in the later stages of development for at least the last three to four years,
and commercial release has been postponed within that time. The Company believes
that the SCE9600 should compete favorably with the  MEGABACE 1000 because (i)
the single detector of the MEGABACE 1000 can accurately scan a relatively low
maximum number of capillaries before the detector must return to its starting
position to monitor the first capillary and (ii) the capillary/detector system
of the MEGABACE 1000 is considerably more complex than that of the SCE9600.

     In the last two to three years, other capillary electrophoresis-based
technology companies (e.g., Seurat Technologies) have been reported to be in
initial stages of development. However, no progress reports, either released
from the companies themselves or in trade publications, have been forthcoming
and the status of these devices is currently unknown.

     In addition to the capillary array electrophoresis technology used by the
Company, various other technologies are being developed to sequence DNA.  These
include: (i) single-molecule sequencing, where the bases are clipped off one at
a time and read with respect to their color labels, a technology which depends
on several separate revolutionary breakthroughs in enzymology, detection,
labeling chemistry and micromanipulation; (ii) mass-spectrometry by Matrix-
Assisted Laser Desorption Ionization, which determines DNA sequences based upon
the molecular mass of the DNA and its fragments; and  (iii) sequencing by
hybridization, which involves binding the sample DNA fragments to complimentary,
known sequence targets anchored to a substrate.

Markets

     The market for DNA sequencing instruments is rapidly evolving and includes
large well-financed corporations such as PE Bio, Beckman Instruments, Fisons
Scientific Equipment, Pharmacia Biotech and Molecular Dynamics, as well as a
large number of smaller companies, such as Genomyx and Visible Genetics, and
software and genomics companies that are developing complete, or components of,
DNA sequencing equipment.  In addition, the potential applications for lower-
cost and higher throughput equipment are rapidly expanding.  Consequently, it is

                                       8
<PAGE>

difficult to predict with accuracy the current market for sequencers capable of
producing data at the speed being targeted by the Company. The Company's
capillary-array electrophoresis approach is but one of a number of approaches
being developed to improve the throughput speed of currently available DNA
sequencing equipment. In addition, research is separately being conducted at a
number of major universities and research centers to refine DNA sequencing
technologies. Although the Company believes that its technology will compete
favorably with the approaches being taken by such third parties, there can be no
assurance that the superior funding or experience levels of at least some such
competitors will not materially and adversely affect the Company's own
development and commercialization efforts.

Patents and Proprietary Technology

     Proprietary protection for the Company's products, processes and know-how
is important to the Company's business. The Company's policy is to file patent
applications to protect technology, inventions and improvements that are
considered commercially important to the development of its business.  The
Company also relies upon trade secrets, know-how and continuing technological
innovation to develop and maintain its competitive position. The Company plans
to aggressively prosecute and defend its patents, when issued, and proprietary
technology.

     The Company has acquired an exclusive worldwide license to certain
technology owned by ISURF, including three issued patents and two pending
divisional applications, each of which relate to the Company's DNA Sequencer.

     The Company presently has been issued two U.S. patents, has been allowed
one additional patent, has five U.S. patent applications pending, and three
divisional patents are under review.  In addition, foreign filings have been
submitted on all 11 patents.  There can be no assurance that the Company's
pending patent applications will result in patents being issued or that, if
issued, such patents will afford protection against competitors with similar
technology; nor can there be any assurance that others will not obtain patents
that the Company would need to license or circumvent. See "Risk Factors --
Uncertainty of Protection of Patents and Proprietary Rights."

     Laser Diagnostics was issued a U.S. patent, entitled "Method for
Determining the Concentration of Atomic Species in Gases and Solids" (No.
5715053), in connection with its LIBS technology.  The patent was included in
the assets purchased by the Company and has been assigned to the Company.

     The Company's success depends on its ability to obtain patents, protect its
trade secrets and operate without infringing upon the proprietary rights of
others. A number of patents have been applied for by the Company's existing and
potential competitors. There can be no assurance, however, that any future
patent applications will be approved, that the Company will develop additional
proprietary products that are patentable, or that any patents issued to the
Company will provide the Company with any significant protection or will not be
successfully challenged by third parties. Furthermore, there can be no assurance
that others will not design around the patented products developed by the
Company. There can be no assurance that the Company's products will not be found
to infringe upon the patents of others. If the Company's products are found to
infringe upon the patents, or otherwise impermissibly utilize the intellectual
property, of others, the Company's development, manufacture, and sale of such
products could be severely restricted or prohibited. The Company may be required
to obtain licenses from such third parties or otherwise obtain licenses to
utilize patents or proprietary rights of others. No assurance can be given that
any licenses required under any such patents or proprietary rights could be
obtained on terms acceptable to the Company, or at all. If the Company does not
obtain such licenses, the development, manufacture, or sale of products
requiring such licenses could be materially adversely affected. In addition, the
Company could incur substantial costs in defending itself against challenges to
its patents or infringement claims made by third parties or in enforcing its own
patents.

     The Company's competitive position is also dependent upon unpatented trade
secrets. The Company takes measures to protect its trade secrets, however, trade
secrets are difficult to protect. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to the Company's trade secrets. The Company
pursues a policy of having its employees, consultants and advisors execute
confidentiality agreements to maintain the proprietary nature of its technology.
There can be no

                                       9
<PAGE>

assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets or other proprietary information in the event of
unauthorized use or disclosure of such information.

     The Company may be required to obtain licenses to patents or proprietary
rights of others. No assurance can be given that any licenses required under any
such patents or proprietary rights would be made available on terms acceptable
to the Company. If the Company does not obtain such licenses, it could encounter
delays in product introductions while it attempts to design around such patents,
or could find that the development, manufacture or sale of such products could
be foreclosed. Litigation may be necessary to defend against or assert claims of
infringement, to enforce the Company's or its licensors' patents, to protect
trade secrets or know-how owned by the Company, or to determine the scope and
validity of the proprietary rights of others, and could result in substantial
cost to and diversion of effort by, and may have a material adverse impact on,
the Company.

Government Regulation

     Some of the Company's research and development activities and the future
manufacturing and marketing of products by the Company are subject to regulation
for safety and efficacy by numerous governmental authorities in the United
States and other countries. In the United States, the Company's diagnostic
kinetics equipment may be the subject of rigorous FDA regulation in its use for
the diagnosis and treatment of diseases. In addition to FDA regulations, the
Company is also subject to other federal and state regulations such as the
Occupational Safety and Health Act, the Environmental Protection Act, the
Resource Conservation and Recovery Act, the Clean Air Act, the Atomic Energy Act
and import, export and customs regulations. Product development and approval
within this regulatory framework takes a number of years and involves the
expenditure of substantial resources. In addition, there can be no assurance
that this regulatory framework will not change or that additional regulation
will not arise at any stage of the Company's product development that may affect
approval or delay an application or require additional expenditures by the
Company.

     Federal, state and local regulations impose various environmental controls
on the storage, handling, discharge and disposal of chemicals and gases used in
the Company's manufacturing process. The Company believes that its activities
conform to present environmental regulations. Although the Company has not
experienced any materially adverse effects on its operations from environmental
regulations, there can be no assurance that changes in such regulations will not
impose the need for additional capital equipment or other requirements or
restrict the Company's ability to expand its operations. Any failure by the
Company to adequately restrict the discharge of hazardous substances could
subject the Company to future liabilities or could cause its manufacturing
operations to be suspended.

     In addition, certain instruments in the Company's mass spectrometer line
are subject to export control regulations, including restrictions on export into
certain countries. While the Company believes it has obtained all permits
necessary to conduct its business, the failure to comply with present and future
regulations could result in fines being imposed on the Company or suspension or
cessation of operations, and thus result in a material adverse effect to the
Company's business, results of operations and financial condition.

Employees

     As of March 31, 1999, the Company had 28 employees. Of the total, one was
engaged part-time in sales and marketing, twelve in research and development,
and nine in electronics and mechanical assembly. None of the Company's employees
is represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good. See "Risk
Factors --Dependence Upon Key Personnel."

                                       10
<PAGE>

Risk Factors

     All statements contained herein that are not historical facts, including,
but not limited to, statements regarding SpectruMedix Corporation (the
"Company") and its current business strategy, projected sources and uses of
cash, and plans for future development and operation, are based on current
expectations.  The statements are forward-looking in nature and involve a number
of risks and uncertainties.  Actual results may differ materially.  The risks
and uncertainties are described more fully under the heading "Risk Factors," and
include, but are not limited to, the ability of the Company to obtain the
necessary funds to continue its operations.  The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which statements are made pursuant to the Private Litigation Reform Act of 1995
and, as such, speak only as of the date made.

     The Company has incurred losses since its inception, requires significant
amounts of additional capital and may not be able to continue as a going
concern.  The Company has incurred operating losses since its inception in 1992.
At March 31, 1999, the Company had an accumulated deficit of $11,512,684.  The
Company's current revenues from operations are limited and are not sufficient to
fund its operating expenses. The Company needs to successfully develop and
commercialize the DNA Sequencer to reach profitability. No assurance can be
given that the Company will be able to accomplish such objective. The Company
will be required to conduct significant research, development, testing and
regulatory compliance activities which, together with projected general and
administrative expenses, are expected to result in operating losses for at least
the next several years. The Company may not achieve significant revenues or
profitable operations. To date the Company's operations have been characterized
by chronic underfunding and limited ability to maintain inventories of key
components, parts and supplies. The Company has used the proceeds of its initial
public offering (the "Public Offering") and since January 1999 the Company has
been primarily dependent upon cash advances from its Chief Executive Officer to
fund its operations. While the Company's most immediate liquidity concerns may
have been alleviated by the agreements with PE Bio, the Company will require
significant additional capital to achieve its business plans. As a result of its
liquidity problems, the Company must rely on "just-in-time" manufacturing and
the inherent dependence upon sources of components, parts and supplies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

     As a result of the Company's current financial condition, the Company's
independent accountants have included an explanatory paragraph stating that the
Company's financial statements have been prepared assuming that the Company will
continue as a going concern and that the Company has suffered recurring net
losses from operations which raises substantial doubt about the Company's
ability to continue as a going concern.

     The Company is still in the development stage. Since the Company's
incorporation in April 1992, the Company has been engaged in organizational
activities, acquisition of assets, hiring of personnel and financing activities.
Since operations began in July 1992, the Company has engaged in the following
activities: manufacturing, research and development, limited sales and
marketing, capital raising, exploration of strategic relationships and
collaborations, and other general corporate activities. The Company has
generated limited revenues to date. The Company will require additional capital,
above the amounts received from PE Bio, to commercialize and market the DNA
Sequencer and pursue other research and development activities. As the Company
is in the development stage, its operations are subject to all of the risks
inherent in the establishment of a new business enterprise and the
commercialization of new products. The likelihood of the success of the Company
must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business, and, accordingly, is highly speculative.

     The Company has failed to pay royalty fees under existing licenses. The
Company's DNA Sequencer was developed in part from research efforts conducted at
the Ames Laboratories. The Company entered into a world-wide exclusive licensing
agreement with ISURF, which agreement was restructured as a result of the
Company's failure to make timely payments under the agreement. If the Company
continues to fail to make payments under the license agreement, such agreement
may be terminated and the Company will not be ably to market the DNA Sequencer.
In February 1999, an option held by the Company to license technology in the
field of diagnostic kinetics expired unexercised because the Company did not
have the funds available to pay amounts to the licensor. If the Company fails to
pay license fees to ISURF it may lose the right to market the DNA Sequencer.


                                       11
<PAGE>

     The ability of the Company to protect its technology through patents and
other propriety rights is uncertain. The Company's success depends on its
ability to obtain patents, protect its trade secrets and operate without
infringing upon the proprietary rights of others.  The Company's existing and
potential competitors have applied for a substantial number of patents. There
can be no assurance that any of the Company's future patent applications will be
approved, that the Company will develop additional proprietary products that are
patentable, or that any patents issued to the Company will provide the Company
with any significant protection or will not be successfully challenged by third
parties. Furthermore, there can be no assurance that others will not design
around the patented products developed by the Company. There can be no assurance
that the Company's products will not be found to infringe upon the patents of
others. The area of gene sequencing, in particular, is subject to intense
competition and active filing of patent applications. Any of such patent
applications filed by one or more third parties may conflict with the Company's
products under development. If the Company's products are found to infringe upon
the patents or otherwise impermissibly utilize the intellectual property of
others, the Company's development, manufacture and sale of such products could
be severely restricted or prohibited. Any such infringement could have a
material adverse effect on the Company's prospects, business, results of
operations or financial condition. The Company may be required to obtain
licenses from such third parties or otherwise obtain licenses to utilize patents
or proprietary rights of others. No assurance can be given that any licenses
required under any such patents or proprietary rights could be obtained on terms
acceptable to the Company, or at all. If the Company does not obtain such
licenses, the development, manufacture or sale of products requiring such
licenses could be materially adversely affected. If the Company does not obtain
such licenses, it could encounter delays in product introductions while it
attempts to design around such patents, or could find that the development,
manufacture or sale of such products could be foreclosed. Litigation may be
necessary to defend against or assert claims of infringement, to enforce the
Company's or its licensors' patents, to protect trade secrets or know-how owned
by the Company, or to determine the scope and validity of the proprietary rights
of others, and could result in substantial cost to and diversion of effort by,
and may have a material adverse impact on, the Company.

     The Company's competitive position is also dependent upon unpatented trade
secrets. Although the Company takes measures to protect its trade secrets, trade
secrets are difficult to protect. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to the Company's trade secrets. The Company
pursues a policy of having its employees, consultants and advisors execute
confidentiality agreements to maintain the proprietary nature of its technology.
There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets or other proprietary
information in the event of unauthorized use or disclosure of such information.

     The science and technology of the Company's products is rapidly evolving
and substantial further research and development is required. The science and
technology of the Company's products, particularly the Company's DNA Sequencer,
is rapidly evolving. Many of the Company's products and proposed products will
require significant further research, development, testing and possibly
regulatory clearances and are subject to the risks of failure inherent in the
development of products based on innovative technologies. The Company's
development efforts in the areas of diagnostic kinetics and pulmonary
diagnostics involve new areas of medicine which necessarily involves
unforeseeable risks and uncertainties.  These risks include the possibility that
any or all of the products or proposed products are found to be ineffective or
unsafe, or otherwise fail to receive necessary regulatory clearances, if any,
that the proposed products, although effective, are uneconomical to market, that
such products will not satisfy cost and performance criteria, that third parties
hold proprietary rights that preclude the Company from marketing such products,
or that third parties market a superior or equivalent product. Accordingly, the
Company is unable to predict whether its research and development activities
will result in any commercially viable products. Further, the Company cannot
predict with certainty when or if the Company will be able to commercialize
certain of its proposed products or that such products will satisfactorily
perform all of the functions for which they have been designed or prove to be
sufficiently reliable in long-term applications.

     The Company's new technologies are untested on a commercial scale and may
not be accepted by the market. The production of the DNA Sequencer, pulmonary
diagnostics technology and other proposed products of the Company represents new
manufacturing processes which are untested on a commercial scale. Although the
Company believes that its technologies and products will, if ultimately
commercialized, represent significant technological advances, demand for the
Company's proposed products, all of which are based upon new designs, concepts
and manufacturing processes, is subject to a high degree of uncertainty. Many
potential customers of the

                                       12
<PAGE>

Company, including original equipment manufacturers ("OEM") and commercial end
users, may be reluctant to utilize or sell the Company's proposed products until
a sufficient number of other OEMs and commercial end users have already
committed to do so. The Company currently has limited marketing experience and
limited financial, personnel and other resources to undertake the extensive
marketing activities that will be necessary to market its proposed products. The
Company's ability to generate revenues from the sale of its proposed products
will be dependent upon, among other things, its ability to build an effective
sales organization. In its limited marketing efforts to date, the Company has
relied solely upon the efforts of its executive officers. If the Company is
unable to market and distribute its products directly, the Company may have to
enter into arrangements with others, such as joint ventures, licensing or
similar arrangements or distribution agreements. Any such contractual
arrangements may result in a lack of control by the Company over any or all of
the marketing and distribution of such products and may increase its marginal
costs. There can be no assurance that the Company will be able to formalize any
marketing arrangements or that its marketing efforts will be successful.

     The Company has only limited manufacturing capabilities.  The Company
maintains limited manufacturing facilities and will need to expand such
facilities to effectively manufacture its products on a profitable basis. The
expansion of the Company's manufacturing facilities and capabilities will
subject the Company to numerous risks, including unanticipated technological
problems or delays. Such expansion will also require additional sources of
capital, which may not be available on commercially reasonable terms, if at all.
In the event that the Company is unable to expand its manufacturing facilities
and capabilities, the Company maybe required to enter into arrangements with
others for the manufacture and packaging of its proposed products. There can be
no assurance that the Company will be able to enter into any such arrangements
on commercially reasonable terms, or at all, or that the Company will ever be
able to establish the capability to manufacture its products on a commercial
basis, in which case the Company's business, results of operations and financial
condition would be materially adversely affected.

     The Company is dependent upon third party suppliers for components and raw
materials. The Company's existing and proposed products require high quality
components and raw materials which the Company currently purchases and will
continue to purchase from third-party suppliers. Certain raw materials or
components may, however, from time to time, be difficult to obtain and may cause
production delays or require the Company to find alternate means of production.
In particular, both the lasers and capillaries used in the DNA Sequencer are
each purchased from one manufacturer who only produces a limited number of
units. Such manufacturers may not be able to supply all of the Company's needs.
Thus, the Company's ability to manufacture its products will depend on its
ability to establish and maintain commercial relationships with at least certain
of such suppliers. The Company does not currently maintain supply agreements
with any of its suppliers.

     The Company's production will also be dependent upon its suppliers
satisfying the Company's performance and quality specifications and dedicating
sufficient production capacity to meet the Company's scheduled delivery times.
There can be no assurance that the Company will be able to establish any
commercial relationships with suppliers or, if it is able to do so, that such
suppliers will be able to satisfy the Company's scheduled delivery or
performance requirements or have sufficient production capacity to satisfy such
requirements during any period of sustained demand. Failure or delay by the
Company's suppliers in supplying the Company with needed raw materials and
components would materially adversely affect the Company's operating margins and
the Company's ability to manufacture and deliver products on a timely and
competitive basis, which could, in turn, have a material adverse effect on the
Company.

     The Company's lack of working capital may adversely impact its relationship
with its suppliers, creditors and customers.  Since inception, the Company has
been characterized by inadequate capitalization.  Accordingly, the Company's
lack of working capital has at times prevented the Company from making timely
payments to suppliers and creditors or from repairing relationships with such
entities.  Such financial difficulties have also prevented the Company from
providing parts and service to certain of its customers in a timely manner.  As
a result, the Company's relationships with its customers have also been damaged.
The deterioration of these relationships may make the Company's strategy for
expansion more difficult and may adversely affect the development of the
Company's business.  There can be no assurance that the Company will be able to
reestablish relationships with its suppliers, creditors and customers or that
the Company will successfully implement its expansion plan.

                                       13
<PAGE>

     A significant portion of the Company's sales come from a limited number of
customers.  Approximately 51% and 42% of the Company's net sales for the years
ended March 31, 1999 and 1998, respectively, were derived from sales to the
Company's top three customers. During the fiscal year ended March 31, 1999,
product sales to each of the three top customers amounted to approximately 24%,
15%, and 12%, respectively.  During the fiscal year ended March 31, 1998,
product sales to each of the four top customers amounted to approximately 15%,
14%, 13% and 12%, respectively.  Certain customers may not necessarily purchase
instrumentation from the Company on a regular basis.  The loss of, or
significant adverse change in, the relationship between the Company and these
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. The loss of or reduction in
orders from any significant customer, losses arising from customer disputes
regarding shipments, fees, merchandise condition or related matters, or the
Company's inability to collect accounts receivable from any major customer could
have a material adverse impact on the Company's business, financial condition
and results of operations.

     Currently, the only customer for the DNA Sequencer is PE Bio.  Except for a
license of technology to PE Bio, the Company has not sold any DNA Sequencers or
related technology and the Company does not have a sufficient marketing staff
and manufacturing capacity to properly develop the DNA Sequencer.  PE Bio may
terminate the license agreement at any time.

     The Company must continually upgrade its products and introduce new
technologies in order to compete. The Company's success depends upon
establishing and maintaining a competitive position in the research, development
and commercialization of products and technologies in its areas of focus. The
medical and industrial instrumentation industry is highly competitive and
requires substantial capital. The Company competes with, and will compete with,
numerous international, national and regional companies, many of which have
significantly larger operations and greater financial, marketing, human and
other resources than the Company. Accordingly, such competitors may have
substantial competitive advantages over the Company, including the ability to
negotiate favorable supply and distribution agreements and the ability to
negotiate more favorable terms with developers of technology, including
universities. In addition, the Company plans to develop additional products and
acquire additional technologies in order to expand the Company's product and
technology portfolio. No assurance can be given that the Company will
successfully compete in any market in which it conducts or may conduct
operations or that developments by such competitors will not render the
Company's current or future products or technologies uncompetitive or obsolete.

     The Company is dependent upon its key employees and must recruit additional
personnel.  The Company is dependent upon the efforts and abilities of Dr.
Joseph K. Adlerstein, its Chairman of the Board of Directors, Chief Executive
Officer and President, and on other members of its scientific and management
staff. Dr. Adlerstein is the only executive officer of the Company.  In
addition, the Company is dependent on collaborators at research institutions and
on the Company's scientific advisors and consultants. Recruiting and retaining
qualified personnel, collaborators, advisors and consultants will be critical to
the Company's success.  Due to the financial condition, the Company has had
difficulty attracting and retaining the personnel necessary for its operations.

     Dr. Adlerstein is a substantial stockholder of the Company, holding
approximately 21%, of the outstanding shares. The Company has entered into an
employment agreement with Dr. Adlerstein. The loss or unavailability of the
services of Dr. Adlerstein for any significant period of time could have a
material adverse effect on the Company's business prospects. The Company has
obtained, and is the sole beneficiary of, key-person life insurance in the
amount of $1,000,000 on the life of Dr. Adlerstein.

     Bernard Sonnenschein, the Company's former Secretary and Treasurer,
resigned in January 1999.  As a result, Dr. Adlerstein and other personnel have
had to handle responsibilities previously assigned to Mr. Sonnenschein,
including, without limitation, preparation of the Company's financial
statements.  Due to the Company's continuing liquidity difficulties, the Company
has been unable to hire a replacement for Mr. Sonnenschein, nor has the Company
been able to hire marketing professionals.

     The Company is actively seeking and must retain a chief financial officer.
In addition, the Company is also seeking to expand its board of directors to at
least three members.

                                       14
<PAGE>

     Product Warranties. The Company generally warranties parts and services for
each of its products for one year from the date of purchase. Although there have
been few requests for extensive servicing and repairs for products that have
already been sold by the Company during the warranty period, a large number of
requests for such servicing could have a material adverse effect on the Company
by requiring additional expenditures for parts as well as the repair efforts of
the Company's personnel.

     The Company's products are heavily regulated. A portion of the Company's
future products may be regulated by the United States Food and Drug
Administration (the "FDA"). Such regulations extend to manufacturing practices,
the conduct of clinical investigations, pre-market approval, record keeping and
reporting requirements and labeling, among other matters. To date the Company
has not yet obtained clearance from the FDA for commercial marketing of its
primary products. In addition, other products that the Company might develop may
also be subject to FDA regulation. There can be no assurance that the Company
will be able to obtain FDA clearance for commercial marketing of its products.
Even if FDA clearance is received, government regulation may have an adverse
impact on the timing and cost of new product introductions, may interfere with
the marketing of existing products and may require the recall of products from
customer locations.

     The Company is subject to a variety of United States and foreign government
regulations related to the discharge or disposal of toxic, volatile or otherwise
hazardous chemicals used in its manufacturing process. The failure by the
Company to comply with present or future environmental regulations could result
in fines, suspension of production or cessation of operations. Such regulations
could also require the Company to acquire equipment or to incur other
substantial expenses to comply with environmental regulations. If substantial
additional expenses were incurred by the Company, product costs could
significantly increase, thus materially and adversely affecting the Company's
results of operations. Additionally, the Company is subject to a variety of
government regulations relating to its operations, such as environmental, labor
and export control regulations. While the Company believes it has obtained all
permits necessary to conduct its business, the failure to comply with present
and future regulations could result in fines being imposed on the Company or
suspension or cessation of operations. Any failure by the Company to control the
use of, or adequately restrict the discharge of, hazardous substances could
subject the Company to future liabilities, and could have a material adverse
effect on the Company's business and results of operations.

     The Company's products may be subject to recall. Products such as those
sold by the Company may be subject to recall for unforeseen reasons. In
addition, certain projected applications of the Company's products entail the
risk of product liability claims. The Company performs extensive testing of its
products at each stage of their design to minimize the risk of recall or product
liability claims. A recall or product liability claim could materially adversely
affect the Company's operation and reputation. The Company does not maintain any
insurance related to recalls or product liability and, accordingly, a product
recall of the Company's principal products or successful product liability
claims against the Company would have a material adverse effect on the Company.

     The Company is controlled by its management and current stockholders and
there are no independent directors. The Company's current management owns
approximately 21% of the outstanding shares of Common Stock. Management may,
therefore, have the ability to elect a majority of the directors of the Company
and to control the outcome of all issues submitted to a vote of the stockholders
of the Company. The Company currently has only one director, Dr. Adlerstein ,
the Chief Executive Officer and a principal stockholder of the Company.
Accordingly, he is in a position to control the actions and decisions of the
Board of Directors.  Although the Company is seeking to expand its Board of
Directors to at least three members, there can be no assurance that it will be
able to do so.

     Year 2000 Compliance. The Company is in the process of assessing the impact
of year 2000 on its operations and systems, including those of its suppliers and
collaborators and other third parties. Management is in the process of
formalizing its assessment procedures and developing a plan to address
identified issues, if any. To date, the Company has evaluated its financial and
accounting systems and believes that these systems are not and will not be
materially affected by the year 2000.  The Company has determined that the
software developed by the Company in support of the instrumentation sold by the
Company is year 2000 compliant.  The Company has not determined if the all the
components produced by third parties and used in the Company's products are year
2000 compliant.  If the vendors of such components can not certify to the
Company that such components are year 2000

                                       15
<PAGE>

compliant, the Company will have to locate other suppliers. The Company does not
yet know the extent, if any, of the impact of the year 2000 on its other systems
and equipment or those of third parties with which the Company does business.
There can be no assurance that third parties, such as suppliers, clinical
research organizations and collaborative parties, are using systems that are
year 2000 compliant or will address any year 2000 issues in a timely fashion, or
at all. Any year 2000 compliance problems of either the Company, its suppliers,
its clinical research organizations, or its collaborative partners could have a
material adverse effect on the Company's business, operating results and
financial conditions.

     The Company's stock price may be volatile. There can be no assurance that
an active trading market for the Company's Common Stock or redeemable warrants
to purchase shares of Common Stock (the "Redeemable Warrants") will be sustained
in the future.  In fact, there have been extended periods during which there has
been limited trading in the Company's Common Stock and the Redeemable Warrants.
The market price of the shares of common stock and the redeemable warrants, like
that of many other small cap and emerging technology companies, is likely to be
highly volatile.

     The Company has not paid dividends.  The Company has not paid any cash
dividends on the Common Stock since inception and does not intend to pay any
dividends to its stockholders in the foreseeable future. The Company currently
intends to reinvest earnings, if any, in the development and expansion of its
business.

     A significant number of shares of capital stock will become eligible for
sale in the near future and any sale may adversely affect the price of the
Company's Common Stock.  1,512,647 shares of the Company's outstanding shares of
Common Stock are subject to a 24-month restriction against transfer, which
expires on September 16, 1999.  Rule 144 provides, in essence, that a person
holding "restricted securities" for a period of one year may sell only an amount
every three months equal to the greater of (a) one percent of the Company's
issued and outstanding shares or (b) the average weekly volume of sales during
the four calendar weeks preceding the sale. The amount of "restricted
securities" which a person who is not an affiliate of the Company may sell is
not so limited, since non-affiliates may sell without volume limitation their
shares held for two years if there is adequate current public information
available concerning the Company. In such an event, "restricted securities"
would be eligible for sale to the public at an earlier date. The sale in the
public market of such shares of Common Stock may adversely affect prevailing
market prices of the Common Stock.  An additional 660,498 shares of Common Stock
of the Company held by people and institutions who provided financing to the
Company prior to its initial public offering became available for resale in
September and October 1998.

     A significant number of shares of Common  Stock are subject to outstanding
options and warrants.  At March 31, 1999, there were outstanding stock options
to purchase an aggregate of 127,827 shares of Common Stock at an exercise price
of $0.00115 per share, warrants to purchase an aggregate of 100,000 shares of
Common Stock at an exercise price of $1.00 per share, stock options to purchase
an aggregate of 35,000 shares of Common Stock at an exercise price of $5.00 per
share, stock options and warrants to purchase an aggregate of 173,915 shares of
Common Stock at an exercise price of $2.88 per share, stock options to purchase
an aggregate of 180,008 shares of Common Stock at an exercise price of $4.60 per
share, warrants to purchase an aggregate of 1,200,600 at $7.50 per share,
stock options to purchase an aggregate of 57,000 shares of common stock at a
price an exercise price of $6.25 per share, stock options to purchase an
aggregate of 25,000 shares of Common Stock at an exercise price of $6.00 per
share, stock options to purchase an aggregate of 100,000 shares of Common Stock
at an exercise price of $10.00 per share, warrants to purchase 322,000 Units (as
defined below) at an exercise price of $5.75 per Unit and warrants to purchase
104,400 Units at an exercise price of $9.49 per Unit.  Of the foregoing,
warrants and options to purchase 534,578 shares of Common Stock are subject to a
24-month lock-up restriction, which expires on September 16, 1999. In addition,
on July 30, 1999, the Company issued 2,000 shares of its Series A Preferred
Stock which are convertible into 800,000 shares of common stock. The exercise of
such outstanding options and warrants will dilute the percentage ownership of
the Company's stockholders, and any sales in the public market of shares of
Common Stock underlying such securities may adversely affect prevailing market
prices for the Common Stock. Moreover, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected since the
holders of such outstanding securities can be expected to exercise their
respective rights therein at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in such securities.

        In May 1999, Dr. Adlestein exercised an option to purchase 127,827
shares of Common Stock.

                                       16
<PAGE>

     Holders of the Company's redeemable warrants may only exercise such
warrants if a current prospectus is available.  The Company will be able to
issue shares of its Common Stock upon exercise of the Redeemable Warrants only
if there is then a current prospectus relating to such Common Stock and only if
such Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws of the jurisdictions in which the various
holders of the Redeemable Warrants reside. The Company has undertaken and
intends to file and keep current a prospectus which will permit the purchase and
sale of the Common Stock underlying the Redeemable Warrants, but there can be no
assurance that the Company will be able to do so. Although the Company intends
to seek to qualify for sale the shares of Common Stock underlying the Redeemable
Warrants in those states in which the securities are to be offered, no assurance
can be given that such qualification will occur. The Redeemable Warrants may be
deprived of any value and the market for the Redeemable Warrants may be limited
if a current prospectus covering the Common Stock issuable upon the exercise of
the Redeemable Warrants is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Redeemable Warrants then reside.

     The Company has the right to redeem certain warrants. The Redeemable
Warrants may be redeemed by the Company at a redemption price of $.01 per
Redeemable Warrant upon 30 days written notice given at any time after September
16, 1998 in the event that the market price of the Common Stock equals or
exceeds $10.00 per share. "Market price" shall mean: (i) the average closing
sale price of the Common Stock, for any 10 consecutive trading days within a
period of 30 consecutive trading days ending within five days of the date of
notice of redemption, as reported on the National Association of Securities
Dealers, Inc. ("NASD") Automated Quotation System or the NASD Electronic
Bulletin Board or (ii) the average of the last reported sales price of the
Common Stock for the 10 consecutive business days ending within five days of the
date of notice of redemption, on the primary exchange on which the Common Stock
is traded, if traded on a national securities exchange. Notice of redemption of
the Redeemable Warrants could force the holders to exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so, to sell the Redeemable Warrants at the current market price when
they might otherwise wish to hold the Redeemable Warrants, or to accept the
redemption price which would be substantially less than the market value of the
Redeemable Warrants at the time of redemption.

     The Company has the right to issue preferred stock, which may have possible
anti-takeover effects. The Company's Certificate of Incorporation, as amended,
authorizes the Board of Directors to issue up to 2,000,000 shares of preferred
stock, par value $0.00115 per share.  The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the Board of Directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. However, the issuance of any such preferred stock
could materially adversely affect the rights of holders of Common Stock and,
therefore, could reduce the value of the Common Stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
the Company's ability to merge with, or sell its assets to, a third party. The
ability of the Board of Directors to issue preferred stock could discourage,
delay, or prevent a takeover of the Company, thereby preserving control of the
Company by the current stockholders.

     There can be no assurance that there will be a public trading market for
the Company's securities. Although the Company's securities are included on the
OTC Bulletin Board, there can be no assurance that a regular trading market for
the securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain and purchasers of
the Company's securities may be unable to resell the securities at or near their
purchase price or at any price. In the event the securities are not included on
the OTC Bulletin Board, quotes for the securities may be included in the "pink
sheets" for the over-the-counter market. See "--'Penny Stock' Regulations May
Impose Certain Restrictions on Marketability of Securities."

     Certain restrictions may be imposed upon the Company's Common Stock so long
as it trades below $5.00 per share. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define "penny stock" to be
any equity security that is not traded on a national securities exchange or

                                       17
<PAGE>

Nasdaq and that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. If the
Company's securities that are currently included on the OTC Bulletin Board are
trading at less than $5.00 per security at any time, the Company's securities
may become subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally, such investors have assets in
excess of $1,000,000 or an individual annual income exceeding $200,000, or,
together with the investor's spouse, a joint income of $300,000). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require, among other things, the delivery, prior to the transaction, of a
risk disclosure document mandated by the Commission relating to the penny stock
market and the risks associated therewith. The broker-dealer must also disclose
the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
penny stock rules may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of stockholders to sell the
Company's securities in the secondary market. See "-- No Assurance of Public
Trading Market."

ITEM  2. DESCRIPTION OF PROPERTY
         -----------------------

     The Company currently leases approximately 18,500 square feet of laboratory
and office space in State College, Pennsylvania. The Company leases this space
under an operating lease that expired on June 30, 1997. The lease provides that
it will continue for successive one-year periods until terminated by giving
written notice not less than three months prior to the end of the then-current
term. As of March 31, 1999, no such notice had been given. The Company has the
right to use this space for laboratory research and development, storage and
distribution, offices, marketing and other related uses. Although the Company
believes that its existing facilities are adequate to meet its requirements for
the near term, additional space may be necessary in the future. There can be no
assurance that sufficient additional space will be available in the area upon
acceptable terms, or at all.

ITEM  3. LEGAL PROCEEDINGS
         -----------------

     Robert M. Rubin v. SpectruMedix Corporation et. al. On April 21, 1997, a
complaint was filed in the Supreme Court of the State of New York alleging
breach of contract. Specifically, the plaintiff alleges that the Company
defaulted under a promissory note issued to plaintiff on May 16, 1996 in the
amount of $175,000 (the "Rubin Note") while such Note was outstanding and
therefore that the Company is liable and indebted to plaintiff in the principal
amount of $175,000, together with interest and expenses. The Company, on May
2,1997, paid the principal and interest due under the Rubin Note. The main
remaining issue asserted by the plaintiff is whether, pursuant to an alleged
related agreement, the plaintiff is entitled to 152,174 shares (adjusted to
reflect stock splits) of Common Stock or, alternatively, $875,000. Plaintiff
alleges that the Company undertook to enter into a securities purchase agreement
pursuant to which he should have received the aforementioned shares of Common
Stock. The Company contends that such securities purchase agreement was never
discussed and therefore that no agreement was reached with respect to the terms
thereof. Such securities purchase agreement was not signed by either of the
parties to the Rubin Note. The Company believes that it has meritorious defenses
to the above-described claims and it intends to defend the litigation
vigorously. However, due to the nature of litigation and because the lawsuit is
in the initial stages, the Company cannot determine the total expense or
possible loss, if any, that may ultimately be incurred either in the context of
a trial or as a result of a negotiated settlement. While management believes
that the resolution of this matter will not have a material adverse effect on
the Company's business financial condition and results of operations, the
results of these proceedings are uncertain and there can be no assurance to that
effect. Regardless of the ultimate outcome of the litigation, it could result in
significant diversion of time by the Company's personnel.

     Other than the foregoing, the Company is not a party to any other material
legal proceedings.

                                       18
<PAGE>

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
         -----------------------------------------------------

     No matters were submitted to a vote of securities holders during the fourth
quarter of the fiscal year ended March 31, 1999.

                                       19
<PAGE>

                                    PART II

ITEM  5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            --------------------------------------------------------


Market For Common Equity And Related Stockholder Matters

     The Company's Common Stock and Redeemable Warrants trade on the Nasdaq OTC
Bulletin Board under the symbols SMDX AND SMDXW, respectively. The Company's
units, with each unit consisting of one share of Common Stock and one Redeemable
Warrant to purchase one share of Common Stock (the "Units"), were traded from
September 16, 1997 through September 1998. The Company's Common Stock and
Redeemable Warrants began trading separately on December 17, 1997.

     Set forth below is the range of high and low bid prices for the Company's
Common Stock for each quarter commencing on or after December 17, 1997, as
regularly quoted on the Nasdaq OTC Bulletin Board. The quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions.

<TABLE>
<CAPTION>
                                                    High            Low
                                                    ----            ---
     <S>                                            <C>             <C>
     Q3 FY 98 (commencing December 17, 1997)         5 1/2          5 1/2
     Q4 FY 98                                        7 3/8          5 1/2
     Q1 FY 99                                        9 1/8          6
     Q2 FY 99                                        9              1
     Q3 FY 99                                        2              3/16
     Q4 FY 99                                       17/32           3/16
     Q1 FY 00                                        9/32           3/32
     Q2 FY 00 (through August 10, 1999)             7 1/6           5/32
</TABLE>

     As of August 20, 1999, there were approximately 61 holders of record of the
Company's Common Stock. No dividends have been paid on the Common Stock since
the Company's inception, and the Company does not anticipate paying any
dividends in the foreseeable future.

Recent Sales of Unregistered Securities; Use of Proceeds From Registered
Securities

     Recent Sales of Unregistered Securities

     In July 1999, the Company issued 2,000 shares of its Series A Preferred
Stock to PE Corporation in exchange for $2,000,000.

     In May 1999, Dr. Adlerstein, the Company's Chief Executive Officer
exercised an option to purchase 127,827 shares of the Company's Common Stock.

     In October 1998, the Company issued 15,000 shares of Common Stock in
exchange for the assets of Laser Diagnostics.

     In March 1998, the Company issued 22,000 shares of Common Stock as a gift
to a certain charitable organization.

     In February 1998, the Company issued to a consultant 7,000 shares of Common
Stock as compensation in connection with a consulting services agreement between
such consultant and the Company.

     In October 1997, the holder of a $300,000 promissory note converted such
note into 104,348 shares of Common Stock.

                                       20
<PAGE>

     In September 1997, the Company issued 8,166 shares of Common Stock in lieu
of interest payments on a note payable.

     Use of Proceeds From Registered Securities.

     In the Company's initial public offering ("Public Offering"), the Company
registered and sold 1,200,600 units, with each unit consisting of one share of
the Company's common stock and one redeemable warrant to purchase one share of
the Company's common stock, for an aggregate price of $6,903,450. In connection
with the Public Offering, the issuer allowed underwriting discounts and
commissions of $690,345 and incurred aggregate expenses of $1,015,100, broken
down as follows: a non-accountable expense allowance of $207,104, a consulting
fee in the amount of $100,000 and offering expenses of $707,996. Net offering
proceeds to the Company after deducting expenses were $5,198,055. Of the net
proceeds, approximately $250,000 has been used to pay professional fees,
approximately $1,620,000 has been used to repay indebtedness, including
approximately $75,000 of indebtedness to officers and directors of the Company,
and approximately $620,000 has been used towards repayment of accounts payable.
The remaining proceeds were allocated substantially as set forth in the
prospectus (the "Prospectus") included in the Registration Statement (File No.
333-31843) relating to the Public Offering. This use of proceeds does not
represent a material change in the use of proceeds described in the Prospectus.

                                       21
<PAGE>

ITEM  6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
          ---------------------------------------------------------

     The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-KSB. All statements contained herein
that are not historical facts, including, but not limited to, statements
regarding SpectruMedix Corporation (the "Company") and its current business
strategy, projected sources and uses of cash, and plans for future development
and operation, are based on current expectations. The statements are forward-
looking in nature and involve a number of risks and uncertainties. Actual
results may differ materially. The risks and uncertainties are described more
fully under the heading "Risk Factors," and include, but are not limited to, the
ability of the Company to obtain the necessary funds to continue it operations.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Litigation Reform Act of 1995 and, as such, speak only as of the date made.

Overview

     During the period from April 1992 (inception) through June 1992, the
Company was engaged in organizational activities, including negotiating
agreements with the Bankruptcy Court in Harrisburg, Pennsylvania to lease, on a
temporary basis, the assets and facilities of Nuclide Corporation ("Nuclide")
and Measurement and Analytic Systems, Inc. ("MAAS"). In December 1992, via court
order, the Company acquired the assets of Nuclide and MAAS. In April 1993, the
Company acquired all the assets of Lab Data, including an inventory of computer
hardware and a complete line of data acquisition and instrument control
software. Since June 1992, the Company has devoted substantially all of its
resources to upgrade and improve the Company's existing line of instrumentation
(Mass Spectrometers, Luminoscopes, etc.), electronic components and software and
to initiate the Company's strategy of carving out new and commercially promising
areas of application for its instrumentation and its scientific expertise and
capabilities, as well as finding new technologies that lie within its technical
purview for licensing and commercialization. The Company sells a line of
magnetic sector mass spectrometers, new and improved Luminoscope add-ons, and
high-performance software for a variety of applications in the petrochemical,
environmental and geochemical areas, among others. Sales of these products,
however, has been limited. Accordingly, the Company has shifted its focus to the
commercialization of the DNA Sequencer.

     The Company has not been profitable since inception and had an accumulated
deficit of $11,512,689 at March 31, 1999. Successful future operations depend
upon the Company's ability to develop and commercialize its products.

     The Company has financed its operations primarily through the private sale
and issuance of equity securities and proceeds from an initial public offering
(the "Public Offering") of equity securities during September 1997. All such
funds have been utilized by the Company and since January 1999 the Company has
relied on cash infusions from its Chief Executive Officer. On July 30, 1999, the
Company restructured its license agreement with the ISURF for technology used to
develop the DNA Sequencer and entered into a sublicense agreement relating to
certain of such technology with PE Bio. In connection with the sublicense
agreement, PE Bio made an investment in the Company and retained the Company as
a consultant.

     The aggregate gross proceeds from the sublicense and related agreements
with PE Bio will provide the Company with additional liquidity, and allow it to
pay amounts owing under its license agreements, and, the Company believes, meet
its current obligations over the next twelve months. There can be no assurance,
however, that such funds will be sufficient. In order to proceed with the
realization of its plans for development and growth, the Company anticipates
that over the next twelve months it will need significant additional capital to
greatly expand its manufacturing capabilities, and launch a substantial sales
and marketing campaign.

     The Company was awarded a grant from the United States Department of Energy
during September 1997 which paid the Company $75,000 over a period of six
months, subject to certain terms and conditions, and through March 31, 1998,
grant proceeds of $75,000 have been received. In addition, the Company has been
awarded a Phase II award by the Department of Energy's Small Business
Innovations Research Program and has acquired a Phase I STTR through its
acquisition of the assets of Laser Diagnostic. The respective amounts of these
awards are $750,000 over a period of eighteen months, and $100,000 over a period
of twelve months, in each case, subject to certain terms and conditions. Through
March 31, 1999, grant proceeds of $521,654 have been received.

                                       22
<PAGE>

Results of Operations for the Years Ended March 31, 1999 and 1998

     The Company had total revenue of $317,672 and $341,813 for the fiscal years
ended March 31, 1999 and 1998, respectively. Revenue for both periods reflect
sales from old product lines. To date, the Company has received limited revenues
from the sales of products. The decreases in revenue of $24,141, or
approximately 7%, during fiscal year 1999 and $220,497, or approximately 39%,
during fiscal year 1998, were due primarily to the increased focus of the
Company on its various research and development, commercialization and
fundraising efforts, which resulted in the shifting of key personnel from sales
and marketing into such activities, and secondarily to the lack of any full time
sales and marketing staff.

     Of the total revenue discussed above, revenue derived from the sale of the
Company's services totaled $38,491 and $71,938 for the fiscal years ended March
31, 1999 and 1998, respectively. The decrease in service revenue of $33,447, or
approximately 46%, during fiscal year 1999 was due to the non-renewal of one
major service contract ascribable entirely to the discontinued use of the
underlying instrumentation by the customer.

     Research and development expenses decreased 18% to $1,050,933 in 1999 due
to the offsetting SBIR research grant and increased 132% in 1998 to $1,279,959,
due primarily to increased expenditures for the Company's new licensed
technologies. The proceeds of the public offering in September 1997 and the
Bridge Financing during the second half of the fiscal year ended March 31, 1997,
enabled the Company to increase its research and development activities, which
are dependent primarily on cash availability. The Company anticipates that
research and development expenses will increase for fiscal year 2000 as a result
of expenses relating to its license agreements with ISURF, and its license and
research and development agreements with the University of Pennsylvania.

     General and administrative expenses were $1,380,630 and $1,282,002 during
the fiscal years ended March 31, 1999 and 1998, respectively, an increase of
$98,636, or approximately 8% in fiscal 1999. Approximately $386,118 and $355,125
of general and administrative expenses for the fiscal years ended March 31, 1999
and 1998, respectively, were attributable to payroll, payroll taxes and employee
benefits. This represents an increase of $30,993 during fiscal 1999 as compared
to the preceding fiscal year. During fiscal 1999, legal, accounting and
consulting fees increased by $149,349 to $611,600. The Company expects its
general and administrative expenses to increase in the future as a result of
further Company expansion.

     Interest expense of $13,527 and $133,372 for the fiscal years ended March
31, 1999 and 1998, respectively, resulted from borrowings. Interest expense
decreased during fiscal 1999 due to the repayment of outstanding debt from the
proceeds of the Company's initial public offering. Interest expense decreased
during fiscal 1998 primarily because the obligations which caused such interest
expense were repaid during September 1997 and October 1997.

                                       23
<PAGE>

Liquidity and Capital Resources

     From its inception through March 1999, the Company has financed its
operations primarily through the sale of equity securities and loans, most of
which loans were repaid with the proceeds from the Company's initial public
offering. All of such funds were expended on the development and
commercialization of the Company's products. Since January 1999, the Company has
been primarily dependent on funds advanced by its Chief Executive Officer to
meet payroll and expenses, and the Company has failed to make payments under its
license agreements. As a result of its financial condition, the Company was not
able to exercise or renew its option with the University of California, Berkeley
relating to diagnostic kinetics technology.

     On July 30, 1999, the Company restructured its license agreement with ISURF
for technology used to develop the Company's DNA Sequencer and entered into a
sublicense agreement relating to certain of such technology with PE Bio.  In
connection with the sublicense agreement, PE Bio made an investment in the
Company. PE Bio also retained the Company as a consultant.

     The aggregate $5,000,000 in gross proceeds from the sublicense and
other agreements with PE Bio will provide the Company with additional
liquidity, allow it to pay amounts owing under its license agreement with ISURF,
complete the commercialization of the DNA Sequencer and, the Company believes,
meet all of its existing obligations over the next twelve months. There can be
no assurance, however, that such Funds will be sufficient. In order to further
develop and expand the business in accordance with it plans, the Company
anticipates that over the next twelve months it will need significant additional
capital to greatly expand its manufacturing capabilities, launch a substantial
sales and marketing program, pay various required license and milestone fees,
establish third-party collaborations and pursue additional research and
development. The Company's capital requirements depend on many factors,
including the status of the development of its products, obtaining manufacturing
capabilities to produce its products in volume, prosecuting and enforcing its
intellectual property rights, competing technological and market developments,
and the ability of the Company to develop new collaborative and licensing
arrangements.

     If the Company is unable to obtain the necessary funds, by issuing equity
or debt securities, entering into collaborative agreements or obtaining grants,
it will not be able to complete the commercialization of its DNA Sequencer or
the development of its other products and may not be able to continue its
operations.

                                       24
<PAGE>

     New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for derivative
instruments. The Company does not expect that the adoption of this standard will
have a material effect on the Company.

     Year 2000 Compliance

     The Company is in the process of assessing the impact of year 2000 on its
operations and systems, including those of its suppliers and collaborators and
other third parties. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues, if any. To date,
the Company has evaluated its financial and accounting systems and believes that
these systems are not and will not be materially affected by the year 2000.

     The Company has determined that the software developed by the Company in
support of the instrumentation sold by the Company is year 2000 compliant. The
Company has not determined if all the components produced by third parties and
used in the Company's products are year 2000 compliant. The Company has
requested its vendors to certify that the products purchased by the Company from
such vendors are year 2000 compliant, but not all the vendors have responded to
the Company's request. If the vendors of such components can not certify to the
Company that such components are year 2000 compliant, the Company will have to
locate other suppliers.

     The Company does not yet know the extent, if any, of the impact of the year
2000 on its other systems and equipment or those of third parties with which the
Company does business. There can be no assurance that third parties, such as
suppliers, clinical research organizations and collaborative parties, are using
systems that are year 2000 compliant or will address any year 2000 issues in a
timely fashion, or at all. The Company is developing contingency plans in the
event that certain of its vendors, suppliers of collaborative partners are not
year 2000 compliant. Such contingency plans include locating additional
suppliers and modifying systems. Certain of the Company's suppliers produce
highly specialized instrumentation and it may prove difficult to locate
alternate suppliers.

     Any year 2000 compliance problems of the Company, its suppliers, its
clinical research organizations, or its collaborative partners could have a
material adverse effect on the Company's business, operating results and
financial conditions.

                                       25
<PAGE>
       ITEM 7. FINANCIAL STATEMENTS
               --------------------
                           SpectruMedix Corporation

                         Index to Financial Statements

                                                               Page

Report of Independent Accountants.............................  F-2

Balance Sheets as of March 31, 1999 and 1998..................  F-3

Statements of Operations for the years ended March 31, 1999
  and 1998....................................................  F-4

Statements of Stockholders' Equity (Deficit) for the years
  ended March 31, 1999 and 1998...............................  F-5

Statements of Cash Flows for the years ended March 31, 1999
  and 1998....................................................  F-6

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


                                      F-1
<PAGE>

                       Report of Independent Accountants


To the Board of Directors and Stockholders of
SpectruMedix Corporation


In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of SpectruMedix Corporation as
of March 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.  These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit.  We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.  The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

PricewaterhouseCoopers LLP
New York, New York
July 9, 1999, except as to the information presented
in Note 18 for which the date is July 30, 1999

                                      F-2
<PAGE>

                           SpectruMedix Corporation
                                Balance Sheets
<TABLE>
<CAPTION>
                                                                                  March 31,
                                                                           1999               1998
<S>                                                                     <C>               <C>
Assets
Current assets
   Cash and cash equivalents                                             $  20,318        $ 1,680,643
   Accounts receivable                                                      55,319             12,806
   Inventories                                                             527,979            381,393
   Prepaid expenses                                                          4,582             49,426
                                                                  -----------------  -----------------
      Total current assets                                                 608,198          2,124,268
                                                                  -----------------  -----------------

Property and equipment, net                                                463,536            279,717
Patent fees                                                                358,816            216,947
License and license options, net of accumulated
   amortization of $88,672 and $35,669                                     106,343            159,346
Security deposit                                                             8,479              8,479
                                                                  -----------------  -----------------
      Total assets                                                     $ 1,545,372        $ 2,788,757
                                                                  =================  =================
Liabilities and Stockholders' Equity
Current liabilities
   Accounts payable and accrued expenses                               $ 2,389,486        $ 1,132,580
   Current portion of long-term obligations                                 29,926              5,041
   Customer deposits                                                             -              5,960
   Officer's note                                                          161,423                  -
                                                                  -----------------  -----------------
      Total current liabilities                                          2,580,835          1,143,581
                                                                  -----------------  -----------------

Long-term obligations, net of current portion                              103,273             29,217
                                                                  -----------------  -----------------

Commitments and contingencies                                                    -                  -

Stockholders' equity (deficit)
   Preferred stock, $.00115 par value, 2,000,000 shares
     authorized, none issued or outstanding                                      -                  -
   Common stock, $.00115 par value, 23,000,000 shares
     authorized, 3,530,214 and 3,515,214 shares issued
     and outstanding at March 31, 1999 and 1998,
     respectively                                                            4,059              4,042
   Additional paid-in-capital                                           10,631,756         10,623,823
   Accumulated deficit                                                 (11,512,684)        (8,570,152)
                                                                  -----------------  -----------------
                                                                          (876,869)         2,057,713
   Less: deferred compensation                                            (261,867)          (441,754)
                                                                  -----------------  -----------------
      Total stockholders' equity (deficit)                              (1,138,736)         1,615,959
                                                                  -----------------  -----------------
      Total liabilities and stockholders' equity (deficit)             $ 1,545,372        $ 2,788,757
                                                                  -----------------  -----------------
</TABLE>

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

                                      F-3
<PAGE>

                           SpectruMedix Corporation
                           Statements of Operations

<TABLE>
<CAPTION>
                                                                      For the Year Ended
                                                                           March 31,
                                                                    1999               1998
<S>                                                            <C>                <C>
Revenues:
   Products                                                    $    279,181       $   269,875
   Services                                                          38,491            71,938
                                                          ------------------ -----------------

      Total revenue                                                 317,672           341,813
                                                          ------------------ -----------------

Cost of revenues:
   Products                                                         815,416           292,311
   Services                                                          15,748            28,775
                                                          ------------------ -----------------

      Total cost of revenues                                        831,164           321,086
                                                          ------------------ -----------------

      Gross profit (loss)                                          (513,492)           20,727
                                                          ------------------ -----------------

Operating expenses:
   Research and development, net                                  1,050,933         1,279,959
   General and administrative                                     1,380,638         1,282,002
                                                          ------------------ -----------------

      Total operating expenses                                    2,431,571         2,561,961
                                                          ------------------ -----------------

      Loss from operations                                       (2,945,063)       (2,541,234)
                                                          ------------------ -----------------

Other income (expense):
   Interest income                                                   16,058            47,695
   Amortization of original issue discount and deferred
     bridge financing costs                                               -        (1,674,705)
   Interest expense                                                 (13,527)         (133,372)
                                                          ------------------ -----------------

      Total other income (expense)                                    2,531        (1,760,382)
                                                          ------------------ -----------------

      Loss from operations before extraordinary items            (2,942,532)       (4,301,616)

Extraordinary item:
   Gain on  forgiveness of debt                                           -           252,396
                                                          ------------------ -----------------

      Net loss                                                $  (2,942,532)    $  (4,049,220)
                                                          ================== =================

Basic and diluted loss per share:
   Loss from operations before extraordinary item                   $ (0.84)          $ (1.51)
   Extraordinary item                                                     -              0.09
                                                          ------------------ -----------------

   Basic and diluted loss per share                                 $ (0.84)          $ (1.42)
                                                          ================== =================

Weighted average common shares outstanding
   used for basic and diluted loss per share                      3,521,419         2,846,749
                                                          ------------------ -----------------
</TABLE>

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

                                      F-4
<PAGE>

                           SpectruMedix Corporation
                 Statements of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>
                                                               Additional                                        Total
                                           Common Stock         Paid-In     Accumulated      Deferred       Stockholders'
                                       Shares       Amount      Capital       Deficit      Compensation    Equity (Deficit)
<S>                                    <C>         <C>         <C>          <C>            <C>              <C>
Balance at March 31, 1997               2,173,100    $2,499    $ 3,013,053   $ (4,520,932)              -    $  (1,505,380)

Issuance of common shares and
   warrants in connection with initial
   public offering, net of offering costs
   of $1,705,395                        1,200,600     1,381      5,196,674              -                        5,198,055
Issuance of warrants in connection
   with bridge financing restructuring          -         -        869,007              -                          869,007
Issuance of common shares
   in lieu of interest payments             8,166         9         37,557              -                           37,566
Issuance of common shares
   upon conversion of note payable        104,348       120        299,880              -                          300,000
Issuance of common shares
   to consultant                            7,000         8         43,742              -                           43,750
Issuance of common shares
   as charitable contribution              22,000        25        140,225              -                          140,250
Compensatory stock options issued
   to non-employees                             -         -        629,285              -     $  (441,754)         187,531
Issuance of common stock warrants
   in connection with note payable              -         -        394,400              -               -          394,400
Net loss                                        -         -              -     (4,049,220)              -       (4,049,220)
                                    -------------- --------- -------------    ------------   -------------  --------------

Balance at March 31, 1998               3,515,214     4,042     10,623,823     (8,570,152)       (441,754)       1,615,959

Issuance of common stock in
   in connection with asset purchase       15,000        17          7,933              -               -            7,950
Amortization of compensatory stock
   options issued to non-employees              -         -              -              -         179,887          179,887
Net loss                                        -         -              -     (2,942,532)              -       (2,942,532)
                                    -------------- --------- -------------    ------------   -------------  --------------

Balance at March 31, 1999               3,530,214    $4,059   $ 10,631,756   $(11,512,684)    $  (261,867)   $  (1,138,736)
                                    ============== ========= =============    ============   =============  ===============
</TABLE>

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

                                      F-5
<PAGE>

                           SpectruMedix Corporation
                           Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                      For the Year Ended
                                                                          March 31,
                                                                    1999              1998
<S>                                                            <C>               <C>
   Cash flows from operating activities:
   Net loss                                                    $  (2,942,532)    $  (4,049,220)
   Adjustments to reconcile net loss to net cash used
     in operating activities:
      Amortization of original issue discount and deferred
        bridge financing costs                                             -         1,674,705
      Extraordinary gain on forgiveness of debt                            -          (252,396)
      Depreciation and amortization                                  148,899            64,128
      Noncash compensation expense                                   179,887           192,446
      Noncash charitable contribution                                      -           140,250
      Noncash interest expense                                         4,843            37,566
      Changes in assets and liabilities:
        Accounts receivable                                          (42,513)           68,147
        Inventory                                                   (146,856)         (271,943)
        Prepaid expenses                                              44,844           (10,591)
        Other assets                                                (148,006)         (345,487)
        Accounts payable and accrued expenses                      1,252,063            32,971
        Customer deposits                                             (5,960)            5,960
                                                            -----------------  ----------------
         Net cash used by operating activities                    (1,655,331)       (2,713,464)
                                                            -----------------  ----------------
   Cash flows from investing activities:
     Capital expenditures                                           (144,635)         (212,216)
                                                            -----------------  ----------------
         Net cash used by investing activities                      (144,635)         (212,216)
                                                            -----------------  ----------------
   Cash flows from financing activities:
     Repayment of bridge financing                                         -          (805,000)
     Proceeds from notes payable - others                                  -           495,000
     Repayment of notes payable - others                                   -          (885,728)
     Principal payments on long term obligations                     (21,782)           (2,356)
     Proceeds from initial public offering, net                            -         5,198,055
     Deferred initial public offering costs                                -           328,228
     Proceeds from officer's notes                                   161,423                 -
     Repayment of officer's notes                                          -           (74,166)
                                                            -----------------  ----------------
         Net cash provided by financing activities                   139,641         4,254,033
                                                            -----------------  ----------------
   Net (decrease) increase in cash and cash equivalents           (1,660,325)        1,328,353
     Cash and cash equivalents, at beginning of period             1,680,643           352,290
                                                            -----------------  ----------------
     Cash and cash equivalents, at end of period                 $    20,318      $  1,680,643
                                                            =================  ================
Supplemental disclosures of cash flows information
   Cash paid during the year for
     Interest                                                    $     8,684       $    95,806

</TABLE>


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

                                      F-6
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998

1. The Company

  SpectruMedix Corporation (the "Company") was incorporated in the State of
  Delaware on April 16, 1992. The Company develops, manufactures, and markets
  high technology measuring instruments and software packages with a strong
  focus on DNA sequencing instrumentation and other medical and scientific
  technologies and associated instrumentations. The Company also provides
  systems maintenance for the measuring instruments it manufactures.

2. Basis of Presentation

  These financial statements have been prepared assuming the Company will
  continue as a going concern. The Company has limited capital resources,
  incurred substantial losses since its inception in 1992, and expects to incur
  additional losses to complete the commercialization of its technologies.
  These conditions raise substantial doubt about the Company's ability to
  continue as a going concern.  The Company's ability to continue as a going
  concern is dependent upon its ability to generate sufficient cash flow to meet
  its obligations as they come due.  Management is actively pursuing various
  options; which include securing additional equity financing and believes that
  sufficient funding will be available to meet its planned business objectives.
  However, no assurance can be made that the Company will be able to secure
  additional equity financing. (See subsequent events - Note 18) These financial
  statements do not include any adjustments that might result from the outcome
  of this uncertainty.

3. Summary of Significant Accounting Policies

  Use of estimates

  To prepare financial statements in accordance with generally accepted
  accounting principles, management makes certain estimates and assumptions,
  where applicable, that affect the reported amounts of assets and liabilities
  at the date of the financial statements, as well as the reported amounts of
  revenues and expenses during the reporting period. Certain material estimates
  include the carrying value of inventory and the continued use of intangible
  assets (see Note 18).  Actual results could differ from those estimates and
  the difference could be material.

  Cash and cash equivalents

  The Company considers all highly liquid investments purchased with an original
  maturity of three months or less to be cash equivalents.  The Company invests
  its excess cash in certificates of deposit and money market funds of major
  financial institutions which are subject to minimal credit and market risk.

  Supplemental cash flow information
  In September 1997, the Company issued 8,166 shares of its common stock valued
  at approximately $4.60 per share in lieu of interest payments on a note.

  In October 1997, the Company financed the purchase of transportation equipment
  through the issuance of long-term debt in the amount of $36,614.

                                      F-7
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998


  During the year ended March 31, 1998, the holder of a $300,000 promissory note
  elected to convert the principal into 104,348 shares of the Company's common
  stock.

  In February 1998, the Company issued 7,000 shares of its common stock valued
  at approximately $6.25 per share in exchange for services to be provided by a
  consultant.

  In March 1998, the Company donated 22,000 shares of its common stock valued at
  approximately $6.38 per share to a charitable organization.

  During the year ended March 31, 1999, the Company issued 15,000 common stock
  valued at approximately $0.53 per share as consideration for the purchase of
  certain assets of another company.

  During the year ended March 31, 1999, the Company acquired $120,723 of assets
  under a capital lease.

  Revenue recognition

  Revenue from the sale of products is recognized at the time goods are shipped.
  Revenue from maintenance and service agreements is recognized over the terms
  of the agreements. Related costs are charged to expense in the period
  incurred.

  Research and development

  Research and development costs, other than software development costs, are
  charged to expense as incurred and are reported net of grants received from
  U.S. federal agencies.  Grants received for the years ended March 31, 1999 and
  1998, were $521,654 and $75,000 respectively.  Software development costs
  incurred to establish technological feasibility of the Company's products are
  charged to expense when incurred. Costs incurred subsequent to the
  establishment of technological feasibility are capitalized. As of March 31,
  1999, no software development costs have been capitalized. Capitalization of
  computer software costs is discontinued when the product is available to be
  sold or leased.

  Costs of maintenance and customer support are expensed when the related
  revenue is recognized or when the costs are incurred, whichever occurs first.

  Inventories

  Inventories are stated at the lower of cost (first-in, first-out method) or
  market.

  Property and equipment

  Property and equipment are stated at cost. Depreciation and amortization are
  provided on a straight-line basis over the estimated useful lives of the
  assets, as follows:

                                      F-8
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998

  Equipment                                                            5 years
  Furniture and fixtures                                               7 years
  Transportation equipment                                             5 years
  Property improvements         Shorter of lease term or estimated useful life


  Expenditures for maintenance and repairs are charged to expense when incurred.

  License fees
  License fees include costs of obtaining licensed technology and are amortized
  over the shorter of their estimated useful lives or the agreement terms.

  Patent fees

  The Company has incurred patent application and related legal fees through
  March 31, 1999 and 1998 of $364,953 and $216,947, respectively.  If patents
  are granted, the patent fees will be amortized over the expected useful lives
  of the patents, or otherwise expensed.  During the year ended March 31, 1999,
  approximately $6,137 of costs associated with an abandoned patent application
  were charged to expense.

  Fair value of financial instruments

  The carrying value of accounts receivable, accounts payable and accrued
  expenses, and officer's note approximate their fair values due to the
  relatively short maturity of these instruments.

  Income taxes

  Income taxes are accounted for under the asset and liability method.  Deferred
  income taxes are recorded for temporary differences between financial
  statement carrying amounts and the tax basis of assets and liabilities.
  Deferred tax assets and liabilities reflect the tax rates expected to be in
  effect for the years in which the differences are expected to reverse.  A
  valuation allowance is provided if it is more likely than not that some or all
  of the deferred tax asset will not be realized.

  Loss per share

  Loss per share is accounted for under Financial Accounting Standards No. 128,
  "Earnings per Share" ("FAS 128") which requires presentation of basic earnings
  per share ("Basic EPS") and diluted earnings per share ("Diluted EPS").  FAS
  128 also requires presentation of earnings per share by an entity that has
  made a filing or is in the process of filing with a regulatory agency in
  preparation for the sale of those securities in a public market.  Basic EPS is
  computed by dividing income available to common stockholders by the weighted
  average number of common stock outstanding during the period.  Diluted EPS
  adjusts the Basic EPS to give effect to all potentially dilutive common stock
  equivalents (options, warrants, convertible securities or contingent stock
  arrangements) outstanding during the period.  The computation of Diluted EPS
  does not assume conversion, exercise or contingent exercise of securities that
  would be antidilutive.

  At March 31, 1998 and 1999, outstanding options and warrants to purchase
  2,761,892 and 2,852,150, respectively, shares of common stock with exercise
  prices ranging from $.00115 to $12.38 per share have been excluded from the
  computation of diluted loss per share as they were antidilutive.

                                      F-9
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998


  New accounting pronouncements

  In June 1998, the FASB issued Financial Accounting Standards No. 133,
  "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
  which establishes accounting and reporting standards for derivative
  instruments, including certain derivative instruments embedded in other
  contracts and for hedging activities.  It requires that an entity recognize
  all derivatives as either assets or liabilities in the Statement of Financial
  Position and measure those instruments at fair value.  FAS 133 is effective
  for fiscal years beginning after June 15, 2000.  This statement should not be
  applied retroactively to financial statements of prior periods.  The adoption
  of FAS 133 is not expected to have a material impact on the Company's
  financial statements.

4. Inventories

  The components of inventory as of March 31, 1999 and 1998 are as follows:

                                          1999               1998
  Raw materials                         $ 201,505          $ 238,710
  Work-in-process                         203,889            142,683
  Finished goods                          122,585                  -
                                       -----------        -----------
                                        $ 527,979          $ 381,393
                                       ===========        ===========


  The Company allocates general and administrative expenses to inventory based
  on the degree to which its infrastructure is utilized for manufacturing
  purposes.  At March 31, 1999 and 1998, general and administrative expenses
  included in inventory amounted to $74,759 and $43,347, respectively.

                                      F-10
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998


5.  Property and Equipment

  Property and equipment consists of the following as of March 31, 1999 and
  1998:


                                                           1999           1998
  Equipment                                            $ 616,498       $343,190
  Furniture and fixtures                                   1,006          1,006
  Transportation equipment                                38,339         38,339
  Property improvements                                    2,589          2,589
                                                     ------------   ------------

                                                         658,432        385,124

  Less - accumulated depreciation and amortization      (194,896)      (105,407)
                                                     ------------   ------------

                                                       $ 463,536       $279,717
                                                     ============   ============



  Equipment includes $120,723 of assets acquired under capital leases during the
  year ended March 31, 1999.  Accumulated depreciation related to those assets
  was $10,415 at March 31, 1999.

6.  License, License Options and Sponsored Research Agreements

  In March 1998, the Company entered into a license agreement with the research
  department of a major university.  Under the terms of the agreement, the
  Company has been granted an exclusive worldwide license to make, have made,
  use, and sell products derived from the licensed technologies.  In
  consideration of the license grant, the Company is obligated to pay royalties
  equal to a specified percentage of net sales of products incorporating the
  licensed technologies, subject to annual minimums beginning in 2002, and
  annual license maintenance fees until minimum royalties are due. In the event
  the Company sublicenses any technologies covered by this agreement, the
  university is entitled to receive a significant percentage of the sublicense
  revenue.  The Company has also agreed to sponsor further research by the
  university for the development of the licensed technologies for a period of
  one year from the date of the agreement in exchange for a cash payment and the
  use of certain services, equipment and related support not to exceed $160,000.
  Costs incurred in connection with sponsored research amounted to $4,995 during
  the year ended March 31, 1999.

  In May 1995, the Company entered into an option agreement at a cost of $15,000
  with the research department of a major university which, upon exercise, would
  grant the Company an exclusive license to manufacture, use, and sell DNA
  sequencers. The option was exercised in December 1996.  In June 1997, the
  Company entered into a license agreement with the university that expires upon
  termination of the last patented item to be acquired under the agreement.  In
  connection therewith, the Company paid a license issuance fee of $150,000.  In
  additional consideration of the license grant, the Company is obligated to pay
  royalties equal to a specified percentage of net sales of products
  incorporating the licensed technologies, subject to annual minimums.
  Additionally, in the event the Company sublicenses any technologies covered by
  this agreement, the university is entitled to receive a significant percentage
  of the sublicense revenue. During the year ended March 31, 1999,

                                      F-11
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998


  the Company extended the due dates for minimum royalty payments until April
  1999. (See Note 18).

  In December 1996, the Company entered into an option agreement with the
  research department of another major university which, upon exercise of the
  option, would grant the Company an exclusive license for certain technology
  relating to diagnostic kinetics, which the university has either patented or
  intends to file patent applications. The option had been extended to February
  1999. During the year ended March 31, 1999, the option expired unexercised.

  The Company is obligated to pay aggregate sponsored research and development,
  minimum royalty and license maintenance fees of $325,000 for the years ended
  March 31, 2000 and 2001, and $250,000 per year, thereafter, until the last
  patented item to be acquired under the agreements expires.

7.  Accounts Payable and Accrued Expenses

  Accounts payable and accrued expenses are comprised of the following at March
  31, 1999 and 1998:


                                                   1999             1998
  Trade accounts payable                        $ 823,726         $ 505,374
  Accrued payroll tax interest and penalties       85,509           128,194
  Accrued legal                                   385,817           274,826
  Accrued sponsored research fees                 399,757           110,829
  Accrued license royalties                       437,500                 -
  Other accrued liabilities                       257,177           113,357
                                              ------------     -------------
                                               $2,389,486        $1,132,580
                                              ============     =============


8.  Notes Payable

  In July, August and September 1997 the Company issued an aggregate of $495,000
  in promissory notes to one investor.  In connection therewith, the Company
  issued the investor warrants to purchase 100,000 shares of the Company's
  common stock at an exercise price $1.00 per share.  The Company has valued the
  warrants at $394,400 which was recorded as a debt discount and amortized over
  the life of the notes.  The notes were repaid in September 1997 upon the
  closing of the Company's initial public offering ("IPO")(see Note 12).

  In August 1994, the Company borrowed $300,000 pursuant to a convertible note
  agreement. The note provided for 10% interest per annum, and was payable on
  August 4, 1997.  Pursuant to the note agreement, the Company had the option to
  issue the noteholder shares of the Company's common stock in lieu of cash
  interest payments.  The Company has issued the noteholder 8,166 and 41,742
  shares of common stock valued at approximately $4.60 per share and has
  recorded interest expense

                                      F-12
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998

  of $37,566 in the year ended March 31, 1998. During the year ended March 31,
  1998, the note was converted into 104,348 shares of the Company's common
  stock.

9.  Bridge Financing

  From July 1996 through February 1997, the Company sold in a private placement
  offering 16.1 units, each unit consisting of $100,000 of 10% promissory notes
  and 34,783 shares of common stock for an aggregate purchase price of
  $1,610,000. The shares were valued at approximately $4.60 per share and an
  original issue discount on the notes of $2,576,000 was recorded (resulting in
  an annualized effective interest rate of 170%).  In connection with the
  offering, the Company also incurred $167,432 of other financing costs related
  to the bridge financing transaction, of which $103,808 and $63,624 have been
  allocated to equity and debt, respectively.   The original issue discount and
  deferred financing costs were amortized on a straight-line basis through the
  original maturity date of June 30, 1997.

  In July 1997, effective upon the consummation of the Company's IPO (see Note
  12), the Company renegotiated the terms of the Bridge Financing with its
  noteholders. Under the revised terms, one-half of the face amount of the
  promissory notes ($805,000) and accrued but unpaid interest thereon of
  approximately $64,000 were converted into 322,000 warrants ("the Warrants") to
  purchase units at an exercise price of $5.75 per unit (each unit consisting of
  one share of common stock and one redeemable warrant to purchase one
  additional share of common stock at an exercise price of $7.50 per share). The
  Warrants are exercisable for a period of four years commencing one year from
  the effective date of the IPO.  The balance of the promissory notes, including
  accrued but unpaid interest of approximately $64,000, were repaid from the
  proceeds of the IPO.

10.  Officer's Note

  During the period between January and March 1999 an officer and stockholder
  advanced the Company $161,423 under a note.  The note bears interest at a rate
  of 12% per annum and is due in December 1999.  Interest expense on the note
  was $4,843 for the year ended March 31, 1999 and was payable at March 31,
  1999.

11.  Long Term Obligations

  In October 1997, the Company entered into a loan agreement for the purchase of
  an automobile in the principal amount of $36,614, of which $29,916 and $34,258
  was outstanding at March 31, 1999 and 1998, respectively.  The loan bears
  interest at 9% per annum and is due in 72 equal monthly installments of $660
  through October 2003.

  During the year ended March 31, 1999, the Company entered into three new
  capital lease agreements.

                                      F-13
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998

  Future minimum annual payments due under long term obligations are as follows
  at March 31, 1999:

  Year

  2000                                                             $ 35,466
  2001                                                               35,266
  2002                                                               31,863
  2003                                                               30,387
  2004                                                               13,950
                                                                ------------

                                                                    146,932

  Less: amount representing interest                                 13,733
                                                                ------------

                                                                    133,199

  Less: current portion                                              29,926
                                                                ------------

                                                                   $103,273
                                                                ============

12.  Capital Stock

  On June 30, 1997, the Company's Board of Directors declared an approximate
  eight-for-nine (or .8695652:1) reverse stock split of the Company's common
  stock.  In addition, the Company reduced the authorized shares of preferred
  stock from 5,000,000 to 2,000,000 and of common stock from 100,000,000 to
  23,000,000.  All shares of common stock, common stock options and warrants
  included in these financial statements have been restated to give retroactive
  effect to the reverse stock split for all periods presented.

  In September 1997, the Company completed an IPO of 1,200,600 units (the
  "Units"), each unit consisting of one share of the Company's common stock and
  one redeemable Common Stock purchase warrant (the "Redeemable Warrants"), each
  Redeemable Warrant entitling the holder to purchase one share of Common Stock
  at an exercise price of $7.50 per share.  The Redeemable Warrants are
  exercisable for a period of four years commencing in September 1998 and are
  subject to redemption by the Company at $.01 per Redeemable Warrant upon
  thirty days written notice at any time after September 1998, provided the
  market price (as defined) of the Company's common stock equals or exceeds
  $10.00 per share.  The Company realized gross proceeds from the IPO of
  $6,903,450 and net proceeds, after deducting underwriting discounts and
  commissions, and other offering expenses payable by the Company, of
  $5,198,055.

  In February 1998, the Company granted a consultant 7,000 shares of its common
  stock in exchange for services to be provided by the consultant.  The Company
  has recorded $43,750 in consulting expense based upon the fair value of the
  shares on the date of issue.

                                      F-14
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998


  In March 1998, the Company donated 22,000 shares of its common stock to a
  charitable organization.  The Company has recorded $140,250 in expense based
  upon the fair value of the shares on the date of issue.

  During the year ended March 31, 1999, the Company issued 15,000 common stock
  valued at approximately $0.53 per share as consideration for the purchase of
  certain assets of another company.

13.  Stock Options and Warrants

  In April 1992, the Company issued to its Chairman options to purchase 127,827
  shares if its common stock at an exercise price of $.00115 per share, the
  market value of the Company's common stock on the date of grant.  The options
  vested on the issuance date and expire in April 2012.  As of March 31, 1999,
  none of the options have been exercised.

  During the years ended March 31, 1995 and 1996, the Company issued warrants to
  purchase an aggregate of 73,914 shares of the Company's common stock at an
  exercise price of $2.88 per share in connection with the issuance of notes
  payable.  The warrants expired unexercised in May 1999.

  In September 1997, and in connection with the Company's IPO (see Note 12), the
  Company granted the underwriters options to purchase 104,400 units (the
  "Underwriter's Unit Purchase Options").  Each of the Underwriter's Unit
  Purchase Options are exercisable to purchase one unit at $9.49, each unit
  consisting of one share of the Company's common stock and one Class B
  Redeemable Warrant. The Class B Redeemable Warrant is identical to the
  Redeemable Warrants (see Note 12) except that it has an exercise price of
  $12.38 per share and is subject to redemption in the event the market price of
  the Company's common stock equals or exceeds $16.50 per share.  The
  Underwriters Unit Purchase Options are exercisable for a period of four years
  commencing in September 1998.

  In March 1997, the Company implemented its Stock Incentive Plan (the "Plan").
  The Plan is divided into three separate equity programs: (i) the Discretionary
  Option Grant Program; (ii) the Stock Issuance Program and (iii) the Automatic
  Option Grant Program.  The programs provide for the grant of incentive and
  nonqualified stock options for the purchase of up to an aggregate of 500,000
  shares of the Company's common stock to employees, members of the Board of
  Directors and independent consultants to the Company.  However, no participant
  may receive option grants or direct stock issuances of more than 100,000
  shares in the aggregate per calendar year.  The exercise and vesting periods
  for options granted under the Plan are determined by a Committee of the Board
  of Directors.  The Plan stipulates that no option may be (i) exercisable after
  ten years from the date of grant, or (ii) granted with an exercise price less
  than the fair market value of Common Stock on the option grant date.   Option
  vesting provisions are determined for each grant by the Company's Board of
  Directors.

  In June 1997, the Company granted options to purchase 217,403 shares of its
  common stock to employees under the Plan at an exercise price of $4.60 per
  share, the estimated fair value of the common stock on the date of grant.  The
  options vest in annual installments over a four-year period commencing in June
  1997 and are exercisable for a period of ten years from the date of grant.

                                      F-15
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998

  In May 1998, the Company granted options to purchase 57,000 shares of its
  common stock to employees under the Plan at an exercise price of $6.25 per
  share, the estimated fair value of the commons stock on the date of grant.
  The options vest in annual installments over a four-year period commencing in
  May 1998 and are exercisable for a period of ten years from the date of grant.

  Transactions under the Plan are summarized as follows:

<TABLE>
<CAPTION>
                                                                           1999                        1998
                                                               -------------------------    --------------------------
                                                                              Weighted                      Weighted
                                                                              Average                       Average
                                                                 Number         Exercise      Number         Exercise
                                                                 of Shares     Price          of Shares      Price
<S>                                                             <C>           <C>            <C>            <C>
     Options outstanding at beginning of year                     207,836       $  4.60              -              -
     Options granted                                               57,000          6.25        217,403         $ 4.60
     Options forfeited                                            (27,828)         4.60         (9,567)          4.60
                                                               -----------   -----------    -----------    -----------

     Options outstanding at end of year                           237,008       $  5.00        207,836         $ 4.60
                                                               ===========   ===========    ===========    ===========

     Options available for future grant at March 31, 1999         262,992
                                                               ===========

     Weighted average fair value of options granted during the year
      ended March 31, 1999                                         $ 3.55                       $ 2.63
                                                               -----------                  -----------
</TABLE>

    Exercise          Options Outstanding at    Weighted Average Years
    Price              March 31, 1999         Remaining Contractual Life
    At $4.60                 180,008                    8.2
    At $6.25                  57,000                    9.9


  In April and June 1997, the Company granted non-plan options to purchase
  173,915 shares of its common stock to consultants.  The options have an
  exercise price of $2.88 per share and expire in April 2007.  The estimated
  fair value of the Company's common stock at the date of grant was $4.60 per
  share.  On the dates of grant, a total of 17,392 of such options vested
  immediately.  The remaining options vest over a three-year period commencing
  on the grant dates.  During the year ended March 31, 1998, the Company
  recorded $543,485 in deferred compensation expense related to these options
  that is being amortized over the vesting period.

  In December 1997, the Company granted non-plan options to purchase 25,000
  shares of its common stock to a consultant.  The options have an exercise
  price of $6.00 per share, the estimated fair value

                                      F-16
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998

  of the common stock on the date of grant, and expire in December 2007.
  The options vest in equal annual installments over a five-year period
  beginning in December 1998. During the year ended March 31, 1998, the Company
  recorded $85,800 in deferred compensation expense related to these options
  that is being amortized over the vesting period.

  In May 1998, the Company granted non-plan options to purchase 35,000 shares of
  its common stock to a consultant.  The options have an exercise price of $5.00
  per share, vest in one year from the date of grant, and expire in May 2008.

  In June 1998, the Company granted non-plan options to purchase 100,000 shares
  of its common stock to consultants.  The options have an exercise price of
  $10.00 per share, the estimated fair value of the common stock on the date of
  grant, and expire in June 2008.  The options vest in equal annual installments
  over a three-year period beginning in June 1998. In the event the Company
  receives $5,000,000 or more in equity investments, milestone payments and
  research support from a collaborative partner, one-half of the then unvested
  shares will become vested.  The remaining unvested shares would vest over the
  remaining term of the original three-year period.  However, upon a second
  qualifying collaboration, the remaining unvested shares would vest.

  The Company applies Accounting Principles Board Opinion No. 25, "Accounting
  for Stock Issued to Employees," and related interpretations in accounting for
  its Plan and other stock-based compensation issued to employees and directors.
  Had compensation cost for options grants to employees been determined based
  upon the fair value at the date of grant for awards under the Plan consistent
  with the methodology prescribed under Financial Accounting Standards No. 123,
  "Accounting for Stock Based Compensation," ("FAS 123"), the Company's net loss
  and loss per share for the years ended March 31, 1999 and 1998 would have
  increased by approximately $240,000 or $.07 and $173,000 or $0.06,
  respectively.

  The fair values of options granted to employees and consultants during the
  years ended March 31, 1999 and 1998 have been determined on the date of the
  respective grant using the Black-Scholes option pricing model based on the
  following assumptions:

                                                             1999     1998
Dividend yield                                               None      None
Weighted average risk free interest rate on date of grant    5.53      6.00
Volatility                                                   60%       60%
Forfeitures                                                  None      None
Weighted average expected life                               9 years   5 years



14.  Commitments

  In July 1996, the Company entered into an agreement to lease office and
  factory space in State College, Pennsylvania for one year at an annual rent of
  $101,750.  The Company has an option in perpetuity to renew the lease for
  additional one-year periods that must be exercised within three months of the
  end of the lease term for the respective year.  During the fiscal year ended
  March 31, 1999, the Company exercised its option to renew the lease through
  June 30, 2000.

                                      F-17
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998

  In March 1997, the Company entered into a three-year employment agreement with
  its Chairman of the Board of Directors, President and Chief Executive Officer.
  The agreement provides for annual compensation of $96,000, annual minimum
  increases of 5% and annual bonuses of up to 25% of base salary plus $24,000
  through the term of the agreement for past services rendered.

  During the year ended March 31, 1998, the Company entered into several
  consulting agreements that expire in 2002.  Under the terms of the agreements,
  the Company is obligated to pay aggregate annual consulting fees of $120,000.

15.  Income Taxes

  The Company has incurred losses since inception which have generated net
  operating loss carryforwards of approximately $11,638,000 and $8,268,000 at
  March 31, 1999 and 1998, respectively, for federal and state income tax
  purposes. These carryforwards are available to offset future taxable income
  and will expire in years 2006 through 2019 for federal income tax purposes.
  These losses may be subject to limitation on future years' utilization should
  certain ownership changes occur

  The net operating loss carryforwards and temporary differences between
  carrying amounts of assets and liabilities for financial reporting and income
  tax purposes result in a net deferred tax benefit of approximately $4,655,000
  and $3,307,000 at March 31, 1999 and 1998, respectively.  In consideration of
  the Company's accumulated losses and uncertainty about its ability to utilize
  this deferred tax benefit in the future, the Company has recorded a valuation
  allowance of an equal amount on such dates to fully offset the deferred tax
  benefit amount.


  For the years ended March 31, 1999 and 1998, the Company's effective tax rates
  differ from the federal statutory rate principally due to net operating losses
  for which no benefit has been recorded, state taxes and other permanent
  differences.

16.  Economic Dependency


  To date, the Company's revenues have been materially dependent on a limited
  number of customers. The nature of the Company's business (see Note 1) is such
  that during any individual accounting period it may sell its products to a
  limited number of significant customers.  During the year ended March 31,
  1999, product sales consisted of approximately 24%, 15% and 12% to three
  separate customers.  During the year ended March 31, 1998, product sales
  consisted of approximately 15%, 14% 13% and 12% to four separate customers.
  The Company's existing and proposed products require high quality raw
  materials and components that the Company purchases from third party
  suppliers. The Company believes adequate sources of supply exist for all raw
  materials and components it will need, and that such items are available on
  commercially reasonable terms.

17.  Legal Proceedings

                                      F-18
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998


  Rubin Matter

  On April 21, 1997, a complaint was filed in the Supreme Court of the State of
  New York alleging breach of contract.  Specifically, the plaintiff alleges
  that the Company defaulted under a promissory note issued to plaintiff on May
  16, 1996 in the amount of $175,000 (the "Rubin Note") while such Note was
  outstanding and therefore that the Company is liable and indebted to plaintiff
  in the principal amount of $175,000, together with interest and expenses.  The
  Company, on May 2, 1997, paid the principal and interest due under the Rubin
  Note.  The main remaining issue asserted by the plaintiff is whether, pursuant
  to an alleged related agreement, the plaintiff is entitled to 152,174 shares
  (adjusted to reflect stock splits) of Common Stock or, alternatively,
  $875,000.  Plaintiff alleges that the Company undertook to enter into a
  securities purchase agreement pursuant to which he should have received the
  aforementioned shares of Common Stock.  The Company contends that such
  securities purchase agreement was never discussed and therefore that no
  agreement was reached with respect to the terms thereof.  Such securities
  purchase agreement was not signed by either of the parties to the Rubin Note.
  The Company believes that it has meritorious defenses to the above-described
  claims and it intends to defend the litigation vigorously.  However, due to
  the nature of litigation and because the lawsuit is in the initial stages, the
  Company cannot determine the total expense or possible loss, if any, that may
  ultimately be incurred either in the context of a trial or as a result of a
  negotiated settlement.  While management believes that the resolution of this
  matter will not have a material adverse affect on the Company's business
  financial condition and results of operations, the results of these
  proceedings are uncertain and there can be no assurance to that effect.
  Regardless of the ultimate outcome of the litigation, it could result in
  significant diversion of time by the Company's personnel.

18.  Subsequent Events

  Stock options

  In May 1999, the Company granted options to purchase 28,500 shares of its
  common stock to employees under the Plan at an exercise price of $0.0938 per
  share, the estimated fair value of the common stock on the date of grant.  The
  options vest in annual installments over a four-year period commencing in May
  1999 and are exercisable for a period of ten years from the date of grant.

  Additionally, in May 1999, the Company provided to its employees an
  opportunity to exchange the options they previously received under the Plan
  for new options ("New Options").   The New Options have the same terms as the
  options granted under the Plan except that the exercise price has been changed
  from $4.60 to $0.0938 per share, the estimated fair value of the common stock
  on the date the New Options were granted.   In connection with the exchange,
  237,008 New Options were granted.  Commencing on the effective date of a
  proposed interpretation of Accounting Principles Board Opinion No. 25,
  "Accounting for Stock Issued to Employees", the Company will be required to
  recognize compensation expense related to the New Option grants based on the
  extent to which the future fair value of the Company's common stock is greater
  than its fair value on the effective date of the interpretation.

  In May 1999, an officer of the Company exercised stock options to purchase
  127,827 shares, par value $0.00115 per share, of the Company's common stock at
  $0.00115 per share.

                                      F-19
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998

  Amended license agreement and sublicense agreement

  Due to the Company's financial condition during fiscal year 1999, it was not
  able to make certain required payments under its licensing agreement with a
  major university. On July 30, 1999, the university and the Company entered
  into an amendment to the license agreement ("Amended License"), pursuant to
  which the Company agreed to pay $500,000 under the Amended License and the
  university agreed to waive any defaults for the failure to pay overdue
  amounts. The parties agreed to a revised schedule of minimum royalties.
  Additionally, the university consented to the grant of a sublicense
  ("Sublicense") to a company, and the Company agreed to pay the university
  approximately half of the royalities received under the Sublicense for the
  first two fiscal years, a majority in the third fiscal year, and all of the
  minimum royalties thereafter. However, in the event royalties under the
  Sublicense exceed certain milestone amounts they will be equally shared with
  the university. The Company also granted the university a phantom stock award
  equal to 150,000 shares of the Company's common stock, par value $0.00115 per
  share (the "Common Stock"), which will have the right to participate in the
  increase in value of the Company's common stock between July 30, 1999 and the
  date of any sale of the Company, as defined. However, in the event the Company
  consummates one or more transactions in which it receives net cash proceeds of
  $25,000,000 or more, as defined, the Company will be obligated to pay to the
  university in the same calendar year and thereafter (i) 100 percent of
  Sublicense fees up to $1,000,000 and (ii) 50 percent of Sublicense fees
  greater than $1,000,000.

  In the event the Company fails to make required payments to the university
  under the Amended License, the Amended License may be canceled.  The
  university may then require the Company to grant to the university a non-
  exclusive license to any patents, trade secrets and other technology owned or
  developed by the Company in connection with its business of manufacturing,
  distributing and/or selling DNA sequencing equipment.  The university would be
  required to pay the Company 50% of all revenues received by the university in
  connection with any such license.

  Concurrently with entering into the Amended License with the university, the
  Company entered into a Sublicense agreement pursuant to which the Company
  granted a company (the "Sublicensee") an exclusive sublicense to use certain
  patents for the development of DNA sequencing machines using 30 or fewer
  capillaries using side entry illumination.  The Company also granted the
  Sublicensee a right of first refusal to sublicense such technology for use in
  DNA sequencing machines using more than 30 capillaries.  On July 30, 1999, the
  Sublicensee paid the Company a non-refundable Sublicense issue fee of
  $1,000,000, and, commencing with the twelve-month period beginning August 1,
  2001, the Sublicensee agreed to pay to the Company certain minimum annual
  royalties.  Such minimum royalties are non-refundable, but are credited
  against the earned royalties payable pursuant to the Sublicense agreement.

  Series A preferred stock

  On July 30, 1999, the Company completed the sale and issuance of 2,000 shares
  of series A preferred stock ("Series A Preferred") at $1,000 per share,
  providing gross proceeds of $2,000,000 and net proceeds, after expenses paid
  by the Company, of $1,995,000.

                                      F-20
<PAGE>

                           SpectruMedix Corporation
                         Notes to Financial Statements
                            March 31, 1999 and 1998


  At March 31, 1999, the Company had authorized the issuance of 2,000,000 shares
  of preferred stock, $.00115 par value. The Company has designated 2,000 of
  such preferred shares as Series A Preferred. The holders of Series A Preferred
  are entitled to (i) share in dividends on a pro-rata basis with common
  stockholders on an as-converted basis; (ii) a liquidation preference equal to
  the sum of the price paid per share and all declared and unpaid dividends (the
  "Liquidation Preference"); (iii) optional redemption by the Company of the
  Liquidation Preference with notice of at least 20 days; (iv) vote on all
  matters on an as converted basis; and (v) convert to common stock at the
  Liquidation Preference Amount multiplied by the shares to be converted divided
  by the conversion price (the "Conversion Price") per share. The initial
  Conversion Price is equal to $2.50 per share of common stock, and is subject
  to adjustment in the event that shares of common stock are issued without
  consideration or for consideration per share less than the conversion price.

  Consulting agreement

  On July 30, 1999 the Company and the Sublicensee entered into a three-year
  consulting agreement pursuant to which the Company will provide consulting
  services to the Sublicensee.  In connection with such agreement, the Company
  received a lump sum fee of $2,000,000.

                                      F-21
<PAGE>

                                   PART III

ITEM  9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         -------------------------------------------------------------
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE OFFICERS
         ------------------------------------------------------

Directors, Executive Officers, Promoters and Control Persons

     Dr. Adlerstein co-founded the Company in April 1992 and currently serves as
its sole director, President and Chief Executive Officer. Dr. Adlerstein has
over 20 years of experience with high-tech companies focusing on energy, the
environment, bioengineering, pharmaceuticals, ultrasonics and metallurgy. Prior
to joining the Company, Dr. Adlerstein served as an officer, director and
principal of Kasiel Holdings Ltd. (a member of the Adir Group), a real estate
and construction firm. Dr. Adlerstein is a director of Future Energy Research
Corporation, a privately held company. Dr. Adlerstein received a B.S. from City
University of New York, a Masters in Physics from New York University and a
Ph.D. in Physics from the Massachusetts Institute of Technology.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) reports they file.

     Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that during the fiscal year ended March 31, 1999, its officers,
directors and holders of more than 10% of the Company's Common Stock complied
with all Section 16(a) filing requirements.

ITEM  10. EXECUTIVE COMPENSATION
          ----------------------

Board Report on Executive Compensation

     The following is a summary of the policies which governed the decisions of
the Board of Directors concerning the compensation paid to the Company's
executive officers, including the compensation reflected in the tables which
appear elsewhere in this Proxy Statement.

General Compensation Policy

     Introduction. The compensation policy is designed to attract and retain
qualified key executive officers critical to the Company's success. In
developing this policy, the Board of Directors has concluded that it is not
appropriate to base a significant percentage of the compensation payable to the
executive officers upon traditional financial targets, such as return on equity.
This is primarily because the Company's early stage of development and all of
the Company's product candidates are still in either development or clinical
testing phases and because, through the end of fiscal 1999, the Company had not
yet realized any significant revenues or product sales. Instead, the decisions
are based upon the following standards: (i) base salary levels which are
commensurate with those of comparable positions at other biopharmaceutical
companies, given the level of seniority and skills possessed by the executive
officer, and which reflect the individual's performance with the Company over
time, (ii) annual bonuses tied to the achievement of corporate and individual
performance objectives and the Company's financial performance, and (iii) long-
term, stock-based incentive awards intended to strengthen the mutuality of
interests between the executive officers and the Company's stockholders.

     Factors. The primary factors which we considered in establishing the
components of each executive officer's compensation package for the 1999 fiscal
year are summarized below.  We may, however, apply entirely

                                       26
<PAGE>

different factors, particularly different measures of performance, in setting
executive compensation for future fiscal years.

     .    Base Salary. The base salary of each executive officer is initially
established through negotiation at the time the officer is hired. Base salary is
subsequently adjusted at periodic intervals, usually on an annual basis. When
establishing or reviewing base salary levels for each executive officer, we
consider the following factors: the qualifications of the executive officer and
the relevant individual experience he or she brings to the Company, strategic
goals for which the executive officer has responsibility, compensation levels at
biopharmaceutical companies at a development stage comparable to the Company and
at other companies which compete with the Company for executive talent.

     .    Annual Incentive Compensation. Annual bonuses payable in cash were
awarded based on achievement of corporate and individual performance objectives.
For the 1998 fiscal year, the corporate performance objectives were tied to the
following measures of financial success: (i) the successful completion of the
Company's initial public offering, (ii) the execution of certain license
agreements and (iii) the progress on the development of the Company's core
technologies. Each objective was assigned a relative weight in determining the
amount of the bonus attributable to corporate performance.

CEO Compensation

     In establishing Dr. Adlerstein's base salary, it was the intent of the
Board to provide him with a level of stability and certainty each year and not
to have this particular component of compensation affected to any significant
degree by Company performance factors. Accordingly, we primarily took Dr.
Adlerstein's personal performance into consideration in setting his base salary
at $96,000. In addition, Dr. Adlerstein is entitled to a five percent annual
increase in base salary and an annual payment of $24,000 in respect of services
performed for the Company prior to 1997. The remaining components of Dr.
Adlerstein's compensation package provide no dollar guarantees and are
contingent upon the attainment of performance objectives.

     In fiscal year 1999, Dr. Adlerstein accrued a bonus of $25,000, based
primarily upon the Company's progress in meeting the performance objectives
identified above for the year .

Compliance with Internal Revenue Code Section 162(m)

     As a result of Section 162(m) of the Internal Revenue Code, the Company
will not be allowed a federal income tax deduction for compensation paid to
certain executive officers, to the extent that compensation exceeds $1 million
per officer in any one year. This limitation will apply to all compensation paid
to the covered executive officers which is not considered to be performance
based. Compensation which does qualify as performance-based compensation will
not have to be taken into account for purposes of this limitation. The 1997 Plan
contains certain provisions that are intended to assure that any compensation
deemed paid in connection with the exercise of stock options granted under that
plan with an exercise price equal to the market price of the option shares on
the grant date will qualify as performance-based compensation.

     Because it is very unlikely that the cash compensation payable to any of
the Company's executive officers will approach the $1 million limit in the
foreseeable future, we have decided at this time not to take any other action to
limit or restructure the elements of cash compensation payable to the Company's
executive officers. We will reconsider this decision should the individual cash
compensation of any executive officer ever approach the $1 million level.

     The foregoing report has been submitted by the undersigned in our capacity
as members of the Company's Board of Directors.

                                     Joseph K. Adlerstein, Ph.D.

                                       27
<PAGE>

Summary of Cash and Certain Other Compensation

     The following table sets forth the compensation earned by the Company's
Chief Executive Officer, the only executive officer of the Company as of the end
of the 1999 fiscal year, for services rendered in all capacities to the Company
for the 1999, 1998 and 1997 fiscal years. Mr. Bernard Sonneschein, the Company's
former Treasurer and Secretary would have been included in the summary
compensation table had he not resigned as of January 28, 1999.

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                    Annual Compensation


                                                                      Other                 Long Term
                                                                      Annual               Compensation
                                                                    Compensation             Awards
                            ------------------------------------- ---------------- ----------------------------------------
Name and                                                                           Number of Securities       All Other
                                                                  ----------------
Principal Position(s)        Year       Salary        Bonus /(1)/                   Underlying Options      Compensation
-------------------------   -------   ----------    ------------- ---------------- --------------------- ------------------
<S>                         <C>       <C>           <C>           <C>              <C>                   <C>
 Joseph K. Adlerstein,       1999     $128,500/(2)/  $25,000/(3/)        ---                ---                ---
  Ph.D.
President, Chief Executive   1998     $116,221(4)        ---             ---                ---                ---
 Officer and Chairman of
 the Board
                             1997       73,415(5)    $ 5,000             ---                ---                ---
</TABLE>
______________________
(1)  The amounts shown under the Bonus column include cash bonuses earned for
     the indicated fiscal years, but paid in the following year.

(2)  Includes $13,000 paid under the Company's health insurance plan.

(3)  Includes a $25,000 bonus which was earned during the fiscal year but was
     not paid due to the Company's financial condition.

(4)  Includes $10,702 paid under the Company's health insurance plan.

(5)  Includes $8,800 paid under the Company's health insurance plan.

                                       28
<PAGE>

Stock Options

     No options were granted to the Named Officers in the fiscal year ending
March 31, 1999.

Option Exercises and Holdings

     The table below sets forth information concerning the exercise of options
during the 1999 fiscal year and unexercised options held as of the end of such
year by the Named Officers. No stock appreciation rights were exercised during
such fiscal year, and except for the limited stock appreciation right which
forms part of each previously granted outstanding stock option, no stock
appreciation rights were outstanding at the end of the 1999 fiscal year.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                Number of
                                Number of                           Securities Underlying Unexercised      Value of Unexercised
                                 Shares         Aggregate                      Options at                In-the-Money Options at
                               Acquired on        Value                      March 31, 1999                March  31, 1999(2)
                                                                 -----------------------------------
Name                            Exercise        Realized(1)         Exercisable       Unexercisable      Exercisable  Unexercisable
---------------------------- ---------------- ------------------ ------------------  ----------------  -------------- -------------
<S>                          <C>              <C>                <C>                 <C>               <C>            <C>
Joseph K. Adlerstein, Ph.D.          ---             ---               127,827              ---              $15,831          ---
</TABLE>
______________________
(1)  Based on the closing price of the purchased shares on the option exercise
     date less the exercise price paid for such shares.

(2)  Based on fair market value of the Common Stock at fiscal year end ($0.125
     per share) less the option exercise price payable per share.

Employment Contracts, Termination of Employment and Change-in-Control
Arrangements


     In March 1997, the Company entered into an employment agreement, which was
amended in August 1997 (the "Executive Agreement"), with Joseph K. Adlerstein,
Ph.D. (the "Executive"), pursuant to which Dr. Adlerstein is employed as the
Company's Chairman of the Board, President and Chief Executive Officer. The
Executive Agreement provides that the Executive shall devote substantially all
of his respective business time to the affairs of the Company. The Executive
Agreement expires in March 2000, and shall be automatically renewed for
successive one-year periods unless, within 30 days of the expiration of the
Executive Agreement, either party notifies the other of its election not to
renew the Executive Agreement. The Executive Agreement provides for an initial
base salary of $96,000 (the "Base Salary") per annum and the payment of an
annual bonus of up to 25% of the Base Salary, as determined by the Board of
Directors of the Company based on performance and other criteria. In addition,
the Executive Agreement provides for additional compensation at a rate of
$24,000 for each year of the Executive Agreement for services rendered to the
Company since the Company's inception. Under the Executive Agreement, if the
Executive is terminated without cause, such terminated Executive shall receive a
severance payment equal to 18 months of his then applicable base salary. A
change in ownership or control of the Company shall be considered termination
without cause. The Executive Agreement contains confidentiality provisions and
covenants not to compete with the Company during the employment period. Also in
March 1997, the Company entered into an employment agreement with Bernard
Sonnenschein, the Company's Treasurer and Secretary. This agreement was
terminated in August 1997.

     As a result of the Company's dependence on Dr. Adlerstein as a key
employee, the Company has obtained and is the sole beneficiary of key-person
life insurance in the amount of $1,000,000 on the life of Dr. Adlerstein. There
is no assurance that such insurance will continue to be available on reasonable
terms or at all.

     All of the Company's employees are subject to certain confidentiality and
non-competition obligations. Each employee has also agreed that all inventions,
discoveries and developments which may be used in the

                                       29
<PAGE>

Company's business and that are developed by such employee during his or her
employment with the Company are the Company's property and the employee will
assign his or her rights therein to the Company. Should the Company be acquired
by merger or asset sale, then all outstanding options held by executive officers
under the 1997 Plan will automatically accelerate and vest in full, except to
the extent those options are to be assumed by the successor corporation. In
addition, the Plan Administrator of the 1997 Plan will have the authority to
provide for the accelerated vesting of the shares of Common Stock subject to
outstanding options held by any executive officer or any unvested shares of
Common Stock subject to direct issuances held by such individual, in connection
with the termination of that individual's employment following: (i) a merger or
asset sale in which these options are assumed or are assigned, (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or (iii) certain hostile changes in control of the
Company.

Compensation Committee Interlocks and Insider Participation

     The Company does not presently have a Compensation Committee. No executive
officer of the Company serves as a member of the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.

ITEM  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

     The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
August 20, 1999, unless otherwise noted, by (i) all persons who are beneficial
owners of five percent or more of the Company's Common Stock, (ii) each director
and nominee for director at the Annual Meeting, (iii) the Chief Executive
Officer and the next most highly compensated executive officer named in the
Summary Compensation Table below, and (iv) all current directors and executive
officers as a group. Unless otherwise noted, each of the stockholders has sole
voting and dispositive power with respect to the shares beneficially owned,
subject to community property laws, where applicable.

<TABLE>
<CAPTION>
          Name and Address, if Required,                            Shares                         Percent of Shares
               of Beneficial Owner                             Beneficially Owned                Beneficially Owned (1)
--------------------------------------------------        ------------------------           ---------------------------
<S>                                                       <C>                                <C>
Joseph K. Adlerstein, Ph.D.                                         780,001                            21.31%
  c/o SpectruMedix Corporation
  2124 Old Gatesburg Road
  State College, Pennsylvania  16803
Bernard Sonnenschein                                                575,219                             15.7%
  1519 49th Street
  Brooklyn, New York 11219
PE Corporation                                                      800,000 /(2)/                       17.9%
  761 Main Avenue
  Norwalk, CT 06859

All directors and executive officers                                780,001                             21.3%
  as a group (1 person)
</TABLE>

______________________
*  Less than one percent of the Company's outstanding Common Stock.

(1)  Percentage of beneficial ownership is calculated assuming 3,658,041 shares
     of Common Stock were outstanding on August 20, 1999. Beneficial ownership
     is determined in accordance with the rules of the United States Securities
     and Exchange Commission (the "SEC") and generally includes voting or
     dispositive power with respect to securities. Shares of Common Stock
     subject to stock options and warrants currently exercisable or exercisable
     within 60 days after August 20, 1999, are deemed outstanding for computing
     the percentage of the person holding such stock options and warrants but
     are not deemed outstanding for computing the percentage of any other
     person.

                                       30
<PAGE>

(2)  Represents shares of Common Stock issuable upon exercise of 2,000 shares of
     the Company's Series A Preferred Stock.

ITEM  12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

     Pursuant to the Delaware General Corporation Law, the Company has adopted
provisions in its Second Amended and Restated Certificate of Incorporation that
eliminate the personal liability of its directors to the Company and its
stockholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances and which authorize the Company to indemnify its
directors, officers and other agents, by bylaw, agreement or otherwise, to the
fullest extent permitted by law. The Company's Bylaws require the Company to
indemnify its directors and allow the Board of Directors in its discretion to
indemnify officers, employees and other agents to the fullest extent permitted
by law, including those circumstances in which indemnification would otherwise
be discretionary; provided, however, that the corporation shall indemnify any
such agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the Company.
Additionally, the Company shall advance to the Director, prior to any final
disposition of any threatened or pending action, suit or proceeding, whether
civil, criminal, administrative or investigative, any and all reasonable
expenses (including legal fees and expenses) incurred in investigating or
defending any such action, suit or proceeding within 10 days after receiving
copies of invoices presented to Director for such expenses.

     The Company has entered into separate indemnification agreements with its
directors and executive officers. These agreements may require the Company,
among other things, to indemnify directors and officers against certain
liabilities that may arise by reason of their status or service as directors and
officers. Management believes that these provisions in its Second Amended and
Restated Certificate of Incorporation and its Bylaws and contractual
indemnification are necessary to attract and retain qualified persons as
directors and officers.

     At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.

     Dr. Adlerstein agreed to extend up to $750,000 in loans to the Company, at
Dr. Adlerstein's option. In consideration of such credit, the Company granted
Dr. Adlerstein a promissory note which matures on December 31, 1999 and bears
interest at 12% per annum on all amounts outstanding thereunder. Currently, the
Company owes Dr. Adlerstein approximately $381,530.

ITEM  13. EXHIBITS LIST AND REPORTS ON FORM 8-K
          -------------------------------------

(a)  Exhibits

        Exhibit No.         Description
        -----------         -----------

         3.1(1)             Restated Certificate of Incorporation of the
                            Registrant, as filed with the Delaware Secretary of
                            State on March 5, 1993.
         3.2(1)             Certificate of Amendment to Restated Certificate of
                            Incorporation of the Registrant, as filed with the
                            Delaware Secretary of State on March 11, 1997.
         3.3(1)             Second Amended and Restated Certificate of
                            Incorporation of the Registrant, as filed with the
                            Delaware Secretary of State on September 17, 1997.
         3.4*               Certificate of Designation of the Company's Series A
                            Preferred Stock, as filed with the Delaware
                            Secretary of State on July 28, 1999.
         3.5(1)             Amended and Restated Bylaws of the Registrant.
         4.1(1)             Form of Stock Certificate.
         4.2(1)             Form of Registration Rights Agreement by and between
                            the Registrant and certain stockholders.
         4.3(1)(5)          1997 Stock Incentive Plan of the Registrant and
                            related documents.
         4.4(1)             Form of SpectruMedix Corporation Unit Purchase
                            Option.
         4.5(1)             Form of Warrant Agreeement by and between the
                            Registrant and ChaseMellon

                                       31
<PAGE>

                            Shareholder Services, L.L.C.
         4.6(1)(5)          Notice of Grant and Stock Option Agreement for
                            option to purchase shares of Common Stock granted to
                            Joseph K. Adlerstein.
         4.7(1)             Form of Unit.
         4.8(1)             Form of Redeemable Warrant.
         4.9(1)             Form of Warrant issued in the Bridge Financing.
        10.1(1)             Form of Indemnification Agreement.
        10.2(1)             Asset Purchase Agreement dated April 5, 1993 by and
                            between Lab Software Associates, Inc and the
                            Registrant.
        10.3(1)             Reserved.
        10.4(1)             Form of Warrant Agreement by and between the Company
                            and the Gross Foundation, Inc.
        10.5(1)(3)          Option Agreement dated May 1, 1995 by between the
                            Registrant and Iowa State University Research
                            Foundation.
        10.6(1)             Commercial Lease Agreement dated July 9, 1996 by and
                            between FMF Partnership and the Registrant.
        10.7(1)(3)          Option and Bailment Agreement for an Exclusive
                            License between the Registrant and the Regents of
                            the University of California dated December 1, 1996.
        10.8(1)(3)          Research Agreement No. M2498 dated December 1, 1996
                            by and between the Regents of the University of
                            California, Berkeley and the Registrant.
        10.9(1)(5)          Employment Agreement dated March 31, 1997 by and
                            between the Registrant and Joseph K. Adlerstein.
        10.10(1)(5)         Employment Agreement dated March 31, 1997 by and
                            between the Registrant and Bernard Sonnenschein.
        10.11(1)(3)         Scientific Advisory Board and Consulting Agreement
                            by and between the Registrant and Dr. Edward Yeung.
        10.12(1)(3)         Scientific Advisory Board and Consulting Agreement
                            by and between the Registrant and Dr. Marc
                            Hellerstein.
        10.13(1)(3)         License Agreement dated June 24, 1997 by and between
                            the Registrant and Iowa State University Research
                            Foundation, Inc.
        10.14(1)(5)         Amendment No. 1 to Employment Agreement by and
                            between the Registrant and Joseph K. Adlerstein.
        10.15(1)(5)         Letter Agreement by and between the Registrant and
                            Bernard Sonnenschein.
        10.16(4)            Amendment No. 1 to Option and Bailment Agreement for
                            an Exclusive License between the Registrant and the
                            Regents of the University of California, effective
                            as of January 15, 1998.
        10.17(4)            Amendment No. 1 to Research Agreement No. M2498 by
                            and between the Regents of the University of
                            California, Berkeley and the Registrant.
        10.18(4)            Sponsored Research Agreement, effective as of March
                            15, 1998, by and between The Trustees of the
                            University of Pennsylvania and the Registrant.
        10.19(4)            License Agreement, effective as of March 15, 1998,
                            by and between The Trustees of the University of
                            Pennsylvania and the Registrant.
        10.20(4)*           Amendment to License Agreement, dated July 30, 1999,
                            between Iowa State University Research Foundation,
                            Inc. and SpectruMedix Corporation
        10.21(4)*           Sublicense Agreement, dated July 30, 1999, between
                            SpectruMedix Corporation and The Perkin-Elmer
                            Corporation
        10.22*              Stock Purchase Agreement, dated July 30, 1999,
                            between SpectruMedix Corporation and PE Corporation
        10.23(4)*           Consulting Services Agreement, dated July 30, 1999,
                            between SpectruMedix Corporation and The Perkin-
                            Elmer Corporation
         23.1*              Consent of Independent Accountants.
         27*                Financial Data Schedule
--------------------

                                       32
<PAGE>

     *    Filed herewith.

     (1)  Incorporated by reference to exhibits filed with Registrant's
          Registration Statement on Form SB-2, File No. 333-31843, which was
          declared effective September 16, 1997.

     (2)  Incorporated by reference to exhibits filed with Registrant's Current
          Report on Form 8- K, filed with the Commission on December 15, 1997.

     (3)  Confidential treatment has been granted with respect to certain
          portions of this Exhibit.

     (4)  Confidential treatment has been requested with respect to certain
          portions of this Exhibit.  Such information has been omitted and filed
          separately with the Commission.

     (5)  Management contract or compensation plan.

(b)  Reports on Form 8-K

       No Current Reports on Form 8-K were filed in the last quarter of the
fiscal year ended March 31, 1999.SIGNATURES

                                       33
<PAGE>

                                  SIGNATURES


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

Dated:  August 17, 1999

                           SPECTRUMEDIX CORPORATION

                        By:/s/ Joseph K. Adlerstein
                           ------------------------

                           Joseph K. Adlerstein, Ph.D.
                           President, Chief Executive Officer and Sole Director