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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

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

              FOR THE TRANSITION PERIOD FROM _____________ TO ____________


                          COMMISSION FILE NO. 000-30369
                                 VIROLOGIC, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                                         94-3234479
     (STATE OR OTHER JURISDICTION OF                          (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                          IDENTIFICATION NO.)

          270 EAST GRAND AVENUE
     SOUTH SAN FRANCISCO, CALIFORNIA                                94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                         (ZIP CODE)


       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 635-1100
           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $0.001 PAR VALUE
                                (TITLE OF CLASS)

        Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [ ].

        The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 20, 2001 was $18,478,336.*

        The number of shares outstanding of the Registrant's Common Stock was
19,874,343 as of March 20, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Registrant's Definitive Proxy Statement to be filed with the Securities
and Exchange Commission (the "Commission") pursuant to Regulation 14A in
connection with the 2001 Annual Meeting of Stockholders to be held on May 24,
2001 (the "2001 Annual Meeting") is incorporated herein by reference into Part
III of this Report.


<PAGE>   2

        Certain Exhibits filed with the Registrant's (i) Registration Statement
on Form S-1 (Registration No. 333-30896), as amended; and (ii) Quarterly Report
on Form 10-Q for the three months ended September 30, 2000 are incorporated by
reference into part IV of this Report.

* Excludes 8,051,991 shares of Common Stock held by directors, officers and
stockholders whose beneficial ownership exceeds 5% of the Registrant's Common
Stock outstanding. The number of shares owned by such persons was determined
based upon information supplied by such persons and upon Schedules 13D and 13G,
if any, filed with the SEC. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
Registrant, that such person is controlled by or under common control with the
Registrant, or that the calculations reflects a determination that such persons
are affiliates for any other purpose.
================================================================================

================================================================================


                                    TABLE OF CONTENTS


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<S>         <C>                                                                   <C>
Part I
Item 1.     Business................................................................  3
Item 2.     Properties.............................................................. 22
Item 3.     Legal Proceedings....................................................... 22
Item 4.     Submission of Matters to a Vote of Security Holders..................... 22

Part II
Item 5.     Market for Registrant's Common Equity and Related Stockholder
               Matters.............................................................. 23
Item 6.     Selected Financial Data................................................. 24
Item 7.     Management's Discussion and Analysis of Financial Condition and
               Results of Operations................................................ 25
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.............. 29
Item 8.     Financial Statements and Supplementary Data.............................F-1
Item 9.     Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure...................................30

Part III
Item 10.    Directors and Executive Officers of the Registrant...................... 30
Item 11.    Executive Compensation.................................................. 30
Item 12.    Security Ownership of Certain Beneficial Owners and Management.......... 30
Item 13.    Certain Relationships and Related Transactions.......................... 30

Part  IV
Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 31
            Signatures.............................................................. 33
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        This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 including, without limitation,
statements regarding our PhenoSense testing products, the growth of our
Pharmaceutical Research business, research and development expenditures and
adequacy of capital resources. These statements, which sometimes include words
such as "expect," "goal," "may," "anticipate," "should," "continue," or "will,"
reflect our expectations and assumptions as of the date of this Annual Report
based on currently available operating, financial and competitive information.
Actual results could differ materially from those in the forward-looking
statements as a result of a number of factors, including our ability to raise
additional capital, the market acceptance of our PhenoSense testing products,
the effectiveness of our competition's existing products and new products, the
ability to effectively manage growth and the risks associated with our
dependence on patents and proprietary rights. These factors and others are more
fully described in "Risk Factors" and elsewhere in this Form 10-K. We assume no
obligation to update any forward-looking statements.


                                     PART I

ITEM 1.  BUSINESS

        We are a biotechnology company developing, marketing and selling
innovative products to guide and improve treatment of viral diseases. We
incorporated in the state of Delaware on November 14, 1995 and commenced
commercial operations in 1999. We developed a practical way of directly
measuring the impact of genetic mutations on drug resistance and using this
information to guide therapy. We have proprietary technology, called PhenoSense,
for testing drug resistance in viruses that cause serious viral diseases such as
AIDS, hepatitis B and hepatitis C. Our first product, PhenoSense HIV, is a test
that directly and quantitatively measures resistance of a patient's HIV to
anti-viral drugs. The results help physicians select appropriate drugs for their
HIV patients. We are also developing PhenoSense products for other serious viral
diseases and are collecting PhenoSense test results and related clinical data in
an interactive database that we plan to make available to physicians for use in
therapy guidance. We believe our products have the potential to revolutionize
the way physicians treat many serious viral diseases.


PUBLIC OFFERING

        On May 1, 2000, we completed our initial public offering and sold
5,000,000 shares of Common Stock at $7.00 per share. Total gross proceeds to
ViroLogic were approximately $35 million. See "Stockholders' Equity" Note to
the financial statements for further discussion.


BACKGROUND

Viruses

        Viruses are microorganisms that must infect living cells to reproduce,
or replicate. Many viruses cause disease in people. These viruses infect human
cells and replicate, making new viruses that can infect other cells. There are
many different types of viruses, but all viruses share structural and functional
characteristics associated with their ability to replicate. During the
replication cycle, viruses often change slightly, or mutate. For example, in an
untreated HIV patient, as many as ten billion new viruses are produced each day,
and at least one quarter of the new viruses have errors, or mutations, in their
genes. At any given time there can be many different variants of the virus
present within the body, each with a slightly different genetic sequence.

The Viral Drug Resistance Crisis

        Viruses are so adaptive that the drugs used to fight them can become
ineffective, making many serious viral diseases almost impossible to cure.
Currently available anti-viral drugs interfere with key viral functions to
prevent viruses from replicating, and therefore slow the progression of disease.
However, these drugs are typically effective for only a limited time because
viruses develop resistance to them through mutation, making the therapy less
effective. A resistant virus is one that is less sensitive to the drug that is
administered. Mutant viruses resistant to a particular drug therapy continue to
replicate while the others are eliminated. Over time the mutant, resistant virus




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predominates, and the drug therapy fails. In response to this effect, physicians
now use anti-viral drugs in combination, attacking different targets within a
virus simultaneously. Combination therapy slows replication more effectively
than a single drug, further delaying the development of drug resistance. In the
short term, combination therapy has helped many patients. However, even
combination drug therapy eventually fails in a great majority of patients, due
in large part to the fact that the virus becomes resistant to some or all of the
drugs used in combination.

        This drug resistance crisis is most serious in HIV/AIDS. There are
currently 15 FDA-approved drugs used in various combinations to treat HIV
infections. Combination therapy requires each drug in the combination to be
active for therapy to be most effective. If any of the drugs are not active, the
therapy will likely fail more quickly. To make matters worse, each treatment
failure increases the risk that the next drug combination will not work, and
leaves the patient with fewer future treatment options. And, not surprisingly,
drug resistant viruses are being transmitted to newly infected individuals,
increasing the risk that initial treatment will not work. New drugs with
increased potency and activity against drug resistant viruses are not becoming
available in time to overcome this crisis. Consequently, physicians are faced
with the challenge of tailoring therapy to individual patients without the tools
necessary to assess drug resistance. In fact, physicians face this challenge
numerous times per year for many patients.

Resistance Testing

        When anti-viral therapy does not completely suppress viral replication,
drug resistant variants can emerge rapidly, within days to weeks. If left
unchecked, patients may be at greater risk of becoming more seriously ill unless
effective drugs are promptly administered. Until recently, physicians chose
drugs based on a patient's treatment history and assumptions regarding drug
resistance of the patient's virus. Without drug resistance tests, physicians
select drugs not knowing which drugs the patient's virus is resistant to, and
frequently change all drugs in a treatment regimen even when some may still be
effective. When physicians select ineffective drugs, patients become more
seriously ill, suffer toxic side effects, and unnecessarily bear the costs of
the drugs.

        To achieve long-term clinical benefit, physicians must select drugs that
maximally suppress viral replication and avoid drugs to which a patient's virus
is resistant. We believe that long term solutions will rely on drug resistance
tests and information systems that can guide physicians in selecting the most
effective drugs against the patient's virus and avoiding drugs to which the
patient's virus is resistant. The need for resistance testing was affirmed in
recent guidelines from panels led by the U.S. Department of Health and Human
Services and the International AIDS Society-USA recommending that resistance
tests be routinely used when treating HIV patients. Resistance tests can also
assist pharmaceutical companies in the development of drugs to target resistant
viruses. In fact, a November 1999 FDA advisory committee recommended
emphatically that resistance testing be used in the development of all new
anti-viral drugs for HIV.

        Phenotypic tests determine "phenotype," which refers to an organism's
outward appearance or functional characteristics. For example, eye color is a
phenotype. One viral phenotype is the ability to replicate in the presence of
anti-viral drugs, also referred to as "drug resistance." Phenotypic drug
resistance tests directly measure the sensitivity of a patient's virus to
anti-viral drugs by adding a drug to a virus sample and determining whether the
virus is able to replicate in the presence of the drug. These tests eliminate
much of the guesswork in making treatment decisions by providing the physician
with information about drug resistance of a patient's virus.

        Early phenotypic tests required culturing, or growing viruses in the
laboratory. These tests were slow, labor intensive and not easily automated.
Since viruses mutate while growing in culture, the process could produce
inaccurate results since the virus in culture may be different from the virus in
the patient. As a result, early phenotypic testing was impractical for patient
management. In the absence of practical phenotypic drug resistance tests,
clinicians began to use genotypic tests in an attempt to predict drug resistance
indirectly. Genotypic tests detect mutations in the underlying gene sequence, or
genotype, and attempt to correlate these mutations with drug resistance.
However, the relationship between genotype and phenotype is complex and not
easily interpreted.


OUR SOLUTION

        Our PhenoSense technology has significantly improved viral drug
resistance testing. Our technology uses a genetically engineered virus that
replicates only once. As a result, we avoid the need to culture viruses during




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testing, which makes the tests more consistent and accurate and dramatically
shortens the time required to complete them. Also, our tests can be automated
and performed in large numbers, making them practical for routine use in
clinical management of patients. We believe that our tests and the information
that we collect from these tests have the potential to significantly change the
way physicians treat viral diseases.

        We believe our PhenoSense technology meets the needs of physicians and
patients because it is:

    -   DIRECT: detects drug resistance of viruses without need for complex
        interpretation of mutations

    -   QUANTITATIVE: measures the degree of drug resistance and susceptibility,
        providing more than a "yes" or "no" answer

    -   RELIABLE: results are accurate and reproducible

    -   COMPREHENSIVE: can evaluate drug resistance to all currently available
        anti-viral drugs

    -   VERSATILE: can be modified to evaluate new classes of anti-viral drugs

    -   USER-FRIENDLY: results are easy to read and understand

    -   RAPID: can be performed in eight to ten days, much faster than other
        phenotypic resistance tests

        The cornerstone of our PhenoSense technology is a proprietary vector,
which we call the "resistance test vector." This vector is a strand of viral
genes that replicates when introduced into a living cell. Our vector includes
two key elements. The first is a gene that produces a protein that can be easily
detected, which we call an "indicator." An example of an indicator we use is
luciferase, which is responsible for the glow of fireflies. The second key
element is one or more specific genes derived from the patient's virus. These
genes correspond to the targets of the anti-viral drugs being tested. For
example, many HIV drugs target an enzyme called protease that is needed for HIV
to replicate. We incorporate the gene that makes protease into the vector for
our HIV drug resistance test.

        To perform our PhenoSense tests, we:

    -   Obtain a blood sample from the patient

    -   Isolate and inactivate the virus

    -   Copy the viral genes corresponding to the drug targets

    -   Insert these genes into the vector

    -   Introduce the assembled vector into living cells in a test tube

    -   Add anti-viral drugs to the cells

    -   Allow the vector to complete a single round of replication

    -   Measure the replication of the vector using the indicator

        The amount of indicator we detect is used to measure drug resistance.
For example, we measure the amount of light produced by luciferase in our
PhenoSense HIV test. If the virus is sensitive to the drug being tested, less
light is detected. If the virus is resistant to the drug, more light is
detected.




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        We report our resistance test results using illustrative curve diagrams.
We plot the amount of luciferase, which corresponds to the amount of virus
replication, on the vertical axis against the amount of drug tested on the
horizontal axis. We generate curves for both a patient's virus and a
drug-sensitive control virus, and compare the two curves to quantitatively
measure drug resistance. Viruses with increased resistance require more drug to
inhibit replication. We produce curves for each available drug.


OUR STRATEGY

        Our objective is to be the leader in developing and commercializing
products and information systems to guide anti-viral therapy. Key elements of
our strategy are to:

    -   Establish PhenoSense HIV as the Standard of Care. We are marketing
        PhenoSense HIV to physicians directly and through scientific
        publications, clinical trials and scientific meetings, and to patients
        through direct-to-patient advertising. We intend to continue to rapidly
        expand our physician customer base by marketing the product directly to
        physicians in the United States through our own sales force, initially
        focusing on the 1,000 leading physicians who treat 80% of the total
        HIV/AIDS patient population. Numerous pharmaceutical companies are
        already using PhenoSense HIV in their clinical trials, which we expect
        will further establish the value of our product in treating HIV
        patients. We are expanding the use of our tests by pharmaceutical
        companies in their clinical trials. We have signed collaborative
        agreements with two of these companies to educate physicians about
        resistance testing.

    -   Expand Our PhenoSense Technology to Other Serious Viral Diseases. Using
        our proprietary PhenoSense technology, we intend to develop phenotypic
        drug resistance testing products for other viral diseases. We are
        developing a resistance test for hepatitis B and one for hepatitis C.

    -   Apply Our PhenoSense Technology to Drug Discovery and Development. We
        are developing our PhenoSense technology into a pharmacogenomics
        capability for use in high throughput screening applications and other
        drug discovery efforts. We are also assembling a library of resistance
        test vectors for testing of drug compounds and candidates. We are
        currently engaged in testing agreements with numerous pharmaceutical
        companies to conduct clinical trial and drug characterization work and
        we intend to enter into corporate partnerships to jointly discover and
        develop drug candidates for the treatment of HIV and other viral
        diseases.

    -   Develop Computer-Based Therapy Guidance Tools. We believe that the data
        generated from our resistance tests and related patient information will
        be useful in guiding treatment decisions. We are assembling a
        proprietary database and developing software to enable the use of this
        information by physicians and other healthcare providers to guide
        individual therapy.

    -   Maintain a Strong Intellectual Property Portfolio. We have patent
        coverage for our PhenoSense HIV product and patent applications directed
        to our other PhenoSense products. As we expand into new areas and
        diversify our business, we intend to build strong intellectual property
        positions to maintain our competitive advantage.


PRODUCTS

PhenoSense HIV

        PhenoSense HIV is a phenotypic drug resistance test that measures the
resistance of HIV to all available anti-viral drugs. When a physician orders a
PhenoSense HIV test, a blood sample is drawn from the patient. This sample is
sent to us to perform the test in our clinical laboratory located in South San
Francisco, California. We then send a report detailing the results of the test
to the physician, typically within two weeks. We began sales and marketing
activity for PhenoSense HIV in November 1999.

        HIV now affects nearly one million people in the United States and over
36 million people worldwide. Fifteen anti-viral drugs are FDA-approved for
treatment of HIV infection and more than 25 additional drugs are




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currently being tested in clinical trials. Despite the availability of
anti-viral drugs, HIV is difficult to treat effectively because it replicates
rapidly and becomes resistant to individual anti-viral drugs. Selecting the
right drugs when treating HIV patients is often difficult because physicians
have limited information about the susceptibility to specific anti-viral drugs
of the HIV infecting an individual patient. We estimate that the 300,000
HIV/AIDS patients in the United States currently receiving anti-viral therapy
will require an aggregate of at least 500,000 resistance tests per year.

        Physicians are increasingly using resistance testing because drug
resistance in HIV/AIDS treatment has become a serious crisis. New guidelines for
the management of patients with HIV, issued by separate panels led by the U.S.
Department of Health and Human Services and the International AIDS Society-USA
recommend that resistance tests be routinely used for HIV patients. The
guidelines also state that it is reasonable to use resistance testing when
selecting an initial anti-viral drug regimen because transmission of drug
resistant strains of HIV has now been documented. In addition, the FDA Antiviral
Drugs Advisory Committee in November 1999 emphatically recommended that
resistance tests should be utilized in the development of new anti-viral drugs
for HIV.

        All currently FDA-approved HIV drugs target an important step in the
replication cycle of HIV. One group of drugs, called "reverse transcriptase
inhibitors," blocks the virus from copying its genetic material. Another group,
called "protease inhibitors," blocks the formation of viral proteins that are
necessary for the virus to infect other cells. The vectors used in our
PhenoSense HIV test incorporate the protease and reverse transcriptase gene
segments from the virus of the patient being tested. A new group of HIV drugs,
called "virus entry inhibitors," blocks HIV from entering new cells, thereby
preventing the spread of the virus in the body. PhenoSense HIV is currently
being modified to test this new group of drugs. Based on our knowledge of the
mechanism of action of all of the HIV drugs currently in development, we believe
we will be able to incorporate appropriate genes corresponding to the targets of
the new drugs into our PhenoSense HIV vector.

        Three prospective clinical trials have demonstrated that the use of
resistance testing to guide selection of anti-viral drug treatment regimens
leads to significantly better treatment outcomes than therapy selection without
resistance testing. These trials included patients who had failed a standard
combination therapy regimen. Patients in these trials who had their therapy
guided by resistance tests had, on average, significantly lower amounts of virus
in their blood; and there was a significantly higher percentage of patients with
undetectable levels of virus in their blood after therapy. A recently completed
fourth prospective clinical trial sponsored by the California Collaborative
Treatment Group, or CCTG, and ViroLogic showed a similar benefit in the use of
PhenoSense HIV to guide selection of anti-viral drug treatment, over selection
of therapy without resistance testing, in patients with extensive prior
antiretroviral treatment or more highly drug resistant virus; although this
trial did not show a difference in primary endpoints, as described below.

        The CCTG study compared the use of PhenoSense HIV for therapy selection
to the selection of therapy without the use of resistance testing. The trial
involved 238 patients who were not responding to their current combination
therapy and measured treatment outcomes, in the form of viral suppression, after
their treatment regimen was changed. One group of patients was tested using
PhenoSense HIV prior to treatment changes. The control group was not tested. The
majority of the study patients had been treated with only one protease inhibitor
and had never been treated with non-nucleoside reverse transcriptase inhibitor
(NNRTI) anti-viral drugs. Although the patients with extensive treatment
experience had significantly better treatment outcomes in the PhenoSense arm of
the study, the trial results for the entire study population showed no
difference between the two groups in the primary endpoints of the study (the
amount of virus in a patient's blood and the percentage of patients having
undetectable levels of virus) at twelve months. The study also showed that
PhenoSense HIV was a very significant predictor of a patient's response to
therapy. The lack of difference in the primary endpoints was likely due to
multiple factors, including: 1) The control group in this study was relatively
treatment-inexperienced and had an unusually high rate of good treatment
outcomes as compared to other prospective resistance testing studies completed
to date, indicating that the selection of an effective treatment regimen for the
study patients with little prior therapy was relatively easy for the
highly-experienced investigators who participated in the study. Notably,
subgroup analyses showed that PhenoSense provides a significant clinical benefit
when used to direct therapy for key HIV patient populations, including those
with more extensive prior antiretroviral drug treatment. 2) The high response
rate in the control group blunted the ability of the study to demonstrate a
difference between the two study groups. 3) The study utilized an early version
of PhenoSense HIV, before precise clinical cutoffs, which define the level of
drug susceptibility that is associated with the best treatment response to a
drug, were established for three




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key anti-viral drugs: abacavir, didanosine, and stavudine. The lack of clinical
cutoffs for these drugs resulted in the inappropriate overuse of didanosine and
stavudine and under-use of abacavir in the PhenoSense group. The inappropriate
use of these drugs blunted the treatment response in the PhenoSense group. This
study demonstrated for the first time the clinically relevant cutoffs for
sensitivity to didanosine and stavudine, two drugs that have historically been
difficult to assess with any drug resistance assay. The current PhenoSense HIV
assay has been modified to provide better therapy guidance information to
clinicians by incorporating the new clinical cutoffs for these three anti-viral
drugs.

        We have, with our collaborators, performed numerous retrospective
clinical studies that support the conclusion that resistance testing of HIV
patients improves their treatment outcomes. A retrospective study of 20 patients
who were treated with a new drug combination after failing a previous
combination regimen found that those patients whose new regimen included a
greater number of susceptible drugs, as determined using PhenoSense HIV, had a
significantly greater reduction in viral load for a longer period of time than
those patients whose new regimen included fewer susceptible drugs. Another
retrospective study of 86 HIV-infected patients found that PhenoSense HIV was a
significantly better predictor of treatment outcome after failure of multiple
treatment regimens than patient treatment history or other clinical factors. Two
additional studies using PhenoSense HIV detected reduced drug susceptibility in
the virus strains infecting approximately 25% of newly infected and untreated
patients, demonstrating the value of resistance testing for these patients.

        Additional clinical trials are evaluating the role of PhenoSense HIV in
guiding treatment decisions in newly infected adult patients, in adult patients
treated previously with one or more treatment regimens, in pregnant patients,
and in pediatric patients. We expect these trials to demonstrate the benefits of
using PhenoSense HIV at different stages of HIV therapy.


PHENOSENSE HBV

        We are currently developing our PhenoSense technology to analyze drug
resistance of hepatitis B virus, or HBV. HBV infection is a leading cause of
liver disease and liver cancer, and leads to more than one million deaths
worldwide each year. The Center for Disease Control and Prevention estimates
that there are over one million people in the United States chronically infected
with HBV, and over 350 million people chronically infected worldwide, mostly in
Asia. We estimate that approximately half of those chronically infected would
benefit from anti-viral drug therapy.

        As in the case of HIV, drug resistance is a problem when treating HBV.
Similar to the treatment of HIV infection, effective therapy of chronic HBV
infection will likely require complex combinations of anti-viral drugs. As more
drugs become available, physicians will face increasing difficulty selecting the
most appropriate drug combinations for HBV patients. Therefore, we believe drug
resistance testing will play a significant role in guiding HBV treatment.

        The FDA has approved two drugs for the treatment of HBV infection and
more than 15 drugs are in preclinical or clinical stages of development. Many of
these drugs target HBV reverse transcriptase, which acts in a manner similar to
HIV reverse transcriptase, to prevent the virus from copying its genes. Research
efforts are ongoing to discover drugs that target other aspects of HBV's life
cycle, such as the assembly of HBV viruses, or the entry of HBV into liver
cells. Based on our knowledge of the mechanism of action of these drugs in
research, we believe that we will be able to incorporate genes corresponding to
the targets of these drugs into our PhenoSense HBV vector.

        As the use of HBV drugs increases, we expect the demand for PhenoSense
HBV to grow dramatically. Prior to that time, we expect PhenoSense HBV will be
used in discovery and development of new HBV drugs.


PHENOSENSE HCV

        We are currently developing our PhenoSense technology to analyze drug
resistance of hepatitis C virus, or HCV. HCV infection causes liver disease and
liver cancer, similar to HBV. The CDC estimates that four million




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people in the United States and more than 170 million people worldwide are
infected with HCV. We estimate that approximately 75% of patients infected with
HCV may benefit from anti-viral drug therapy.

        HCV replicates and mutates at extremely high rates inside an infected
patient, similar to HIV and HBV. The virus is likely to develop resistance to
drugs being developed for treatment. Complex combinations of drugs may then be
required to increase the success of treatment. As a result, a number of major
pharmaceutical companies are discovering and developing new drugs for HCV.

        HCV drugs are in development that target many different aspects of HCV's
life cycle. Similar to HIV drugs, there are efforts to develop HCV protease
inhibitors as well as drugs that block the replication of the genetic material
of HCV or the production of HCV proteins. Based on our knowledge of the
mechanism of action of these drugs in research, we believe we will be able to
incorporate appropriate genes that correspond to the targets of these drugs into
our PhenoSense HCV vector.

        We expect PhenoSense HCV will be utilized to assist in the discovery and
development of HCV drugs and the assessment of drug resistance in HCV patients.
As effective treatments for HCV become more widely available, we intend to offer
PhenoSense HCV to assist physicians in drug treatment decisions.


OTHER PRODUCTS

        GeneSeq HIV. We have commercialized a genotypic test, GeneSeq HIV.
Genotypic tests identify gene sequence mutations that may be associated with
resistance to certain drugs. We have developed GeneSeq HIV as a tool to examine
and evaluate the genetic sequences of patients' HIV. We are also developing
rules correlating genotypic and phenotypic results to improve genotypic
interpretation and our understanding of drug resistance. We intend to use the
genetic sequence information and the rules as a component of the database
supporting our Therapy Guidance System described below. In addition, we also
sell GeneSeq HIV to physicians who request genotypic testing and pharmaceutical
companies that are developing new drugs.

        Viral Fitness Test. We are developing a modified version of our
PhenoSense technology to measure viral fitness. Viral fitness is a measure of a
virus' ability to replicate and infect new cells. It is different from
resistance in that it is a measure of the virus' ability to replicate in the
absence of anti-viral drugs, rather than a measure of drug activity against the
virus. While this technology is new, we believe that there will be numerous
applications for our Viral Fitness Test. For example, in a heavily treated
patient infected with a resistant strain of virus with low viral fitness, a
physician may choose to maintain that patient on the regimen even though it does
not fully suppress the virus. We also believe that viral fitness will be an
important data category in our Therapy Guidance System.


THERAPY GUIDANCE SYSTEM

        We are developing a proprietary database derived from the results of
PhenoSense HIV and other tests that we perform, as well as from clinical data we
obtain from other sources. We expect to combine this database with highly
sophisticated data mining and outcome modeling software to build our Therapy
Guidance System. Our Therapy Guidance System database will include genetic and
physical characteristics of viruses, including their drug resistance patterns
and genetic mutations. In addition, we will incorporate other clinical data
including viral load, drug interactions, patient demographic data, drug side
effects and cost-benefit data. We expect our Therapy Guidance System to give
doctors an interactive computer tool that can be used to help them select
optimal therapies based on both virus and patient characteristics. We expect to
provide our Therapy Guidance System as a fee-based service over the Internet.


PHARMACEUTICAL BUSINESS

        ViroLogic's Pharmaceutical Research Business, or Pharma Business,
comprises resistance testing and research with industry, academia and government
for clinical studies, drug screening/characterization and basic research. Given
the FDA's endorsement of the important role of resistance testing in drug
development, and the large number of drugs in development for HIV and other
viral diseases, the Pharma Business has become a significant aspect of our
product and service offerings.




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        Clinical Trials. Because clinical trials are the most expensive part of
drug development, pharmaceutical companies are trying to improve the outcomes of
clinical trials by using the methods of "pharmacogenomics," the scientific
discipline focused on how genetic differences among patients determine or
predict responsiveness or adverse reactions to particular drugs. In a similar
way, pharmaceutical companies are applying our PhenoSense technology to help
select patients for clinical trials. This selection process may allow companies
to guide important drug development decisions before large resource commitments
are made. To date, we have signed testing agreements with the following
pharmaceutical companies involved in AIDS drug development: Agouron, Abbott,
Bristol-Myers Squibb, Chiron, Gilead Sciences, GlaxoSmithKline, Hoffmann-La
Roche, Merck and Vertex Pharmaceuticals. We are involved in more than 60
clinical research and drug characterization studies with these pharmaceutical
companies as well as other government and academic organizations evaluating a
number of HIV drugs and drug regimens.

        We intend to grow our clinical research business by applying our
technology and expertise to new HIV targets and other serious viral diseases. We
are conducting collaborative research with numerous investigators to study viral
replication capacity with our Viral Fitness Test and we are establishing
relationships with pharmaceutical companies to use our PhenoSense HIV Entry
Assay in the development of the new HIV entry inhibitor drugs. As PhenoSense HBV
and HCV are developed, we intend to expand our clinical trial business into
those disease areas as well.

        Drug and Vaccine Discovery. Two important components of our therapy
guidance system include the database of viral resistance data and information
and our specimen library of resistance test vectors, clones and site-directed
mutants. Using these tools as a foundation, we are developing a pharmcogenomics
capability for use in high throughput screening applications to evaluate large
libraries of potential drugs or vaccines. We believe our drug resistance
technology can be supplemented and enhanced to provide more extensive
information about the activity of chemical compounds than conventional assays.
We expect to enter into corporate partnerships to jointly discover and develop
drug candidates for the treatment of viral diseases as well as potential
vaccines. We will evaluate the activity of compounds or vaccines against viruses
selected from our extensive collection of patient samples.


SALES AND MARKETING

        We commenced sales and marketing activity for PhenoSense HIV in November
1999. We currently have sixteen experienced field sales representatives
promoting PhenoSense HIV, and focus on major U.S. markets. Within these regions,
we are targeting the 1,000 leading HIV physicians who treat 80% of the HIV/AIDS
patients in the United States. Outside the United States, we intend to enter
into relationships with other companies to serve these markets.

        We employ a wide range of public relations and communications channels
to promote our products. Our marketing strategies focus on physician, patient
and payor education in order to increase market awareness of PhenoSense HIV and
resistance testing. We routinely sponsor and participate in conferences and
scientific meetings, sponsor educational forums for physicians, and advertise in
relevant journals and publications. Additionally we target patients directly
through educational programs and advertising.

        We have launched an active reimbursement strategy, and educate both
private and public payors concerning drug resistance testing in an effort to
maximize reimbursement. Federal payors and private insurance companies are
establishing reimbursement policies for HIV drug resistance testing. For
example, on November 1, 2000, New York State Medicaid and California MediCal
established coverage policies for HIV drug resistance testing, and multiple
other states either have made or are in the process of making coverage
decisions. Medicare and many private insurers also reimburse for drug resistance
testing nationally.

        In addition, we have made PhenoSense HIV broadly available through
multiple national and regional reference laboratories and hospitals. We
currently have distribution agreements with national reference laboratories
including Quest Diagnostics, Laboratory Corporation of America, Specialty
Laboratories, American Medical Laboratories, ARUP Mayo, as well as multiple
regional laboratories. Under these agreements, these entities perform numerous
services for us including collection of samples, shipping the samples to us,
billing and reporting the results to doctors.




                                       10
<PAGE>   11

PATENTS AND PROPRIETARY RIGHTS

        We will be able to protect our technology from unauthorized use by third
parties only to the extent that our proprietary rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. Patents and
other proprietary rights are an essential element of our business. We have an
issued U.S. patent, with claims to the method of carrying out our PhenoSense HIV
test and composition of matter claims for our HIV resistance test vector. As of
January 31, 2001, we had filed nine patent applications in the United States and
corresponding foreign patent applications. Our policy is to file patent
applications and to protect technology, inventions and improvements to
inventions that are commercially important to the development of our business.
Our commercial success will depend in part on obtaining this patent protection.
We also seek protection through confidentiality and proprietary information
agreements. Some of the intellectual property we use is owned by Roche Molecular
Systems, Inc., or Roche, and licensed to us on a non-exclusive basis. Other
companies may have patents or patent applications relating to products or
processes similar to, competitive with or otherwise related to our products.
These products and processes include technologies relating to HIV and hepatitis
C virus. Patents covering these technologies may adversely impact our ability to
commercialize one or more of our PhenoSense products.

Roche License

        We license technology for performing a step in our PhenoSense test from
Roche. This license is non-exclusive and lasts for the life of the patent term
of the last licensed Roche patent. In general, newly-issued patents have a term
of twenty years. In addition, if Roche develops or acquires additional patents
covering technology related to the licensed technology, we have the option of
licensing that additional technology under the terms of this agreement. In
exchange for the license, we have agreed to pay Roche a royalty based on the net
service revenues we receive from our products. At least sixty days prior to
introducing a new product utilizing the Roche technology, we must notify Roche
of that introduction. If we fail to notify Roche, we would have to pay a higher
royalty. We also agreed to participate in proficiency testing in accordance with
applicable quality assurance standards and to comply with all relevant
regulations and standards. Further, we have agreed to give Roche a reasonable
opportunity to negotiate for a license to use any technology we develop related
to the reaction technology we license from Roche, such as the automation of the
method for performing the reaction. Royalty expense recorded under this
agreement was $0.2 million for the year ended December 31, 2000. Royalty expense
for the years ended December 31, 1999 and 1998 was minimal.

COMPETITION

        We face, and will continue to face, competition from organizations such
as other biotechnology companies and commercial laboratories, as well as
academic and research institutions.

        Our major competitors include manufacturers and distributors of
phenotypic drug resistance technology, such as Virco N.V., or Virco, and makers
of genotypic tests and instrumentation, such as Applied Biosystems, Visible
Genetics and laboratories performing genotypic testing. Each of these
competitors is attempting to establish its test as the standard of care among
opinion leaders. Although genotypic tests are currently cheaper and faster, we
believe that PhenoSense HIV is superior because it eliminates guesswork when
evaluating test results by providing:

    -   A direct measure which does not rely on correlation between genetic
        mutations and drug resistance

    -   A quantitative measure of the degree of drug resistance

    -   A clinically-derived cutoff to better predict treatment response

        Some of our competitors have substantially greater financial resources
and larger research and development staffs than we do. In addition, they may
have significantly greater experience in developing products, obtaining the
necessary regulatory approvals of products, and the processing and marketing of
products.

        Our ability to compete successfully will depend, in part, on our ability
to:




                                       11
<PAGE>   12

    -   Demonstrate the degree of clinical benefit of our products relative to
        their costs

    -   Develop proprietary products

    -   Develop and maintain products that reach the market first

    -   Develop products that are technologically superior to other products in
        the market

    -   Obtain patent or other proprietary protection for our products and
        technologies

    -   Obtain reimbursement coverage from payors

    -   Attract and retain scientific and product development personnel


REGULATION AND REIMBURSEMENT

Regulation of Clinical Laboratory Operations

        The Clinical Laboratory Improvement Amendments of 1988, extends federal
oversight to virtually all clinical laboratories by requiring that laboratories
be certified by the federal government, by a federally-approved accreditation
agency or by a state that has been deemed exempt from the regulation's
requirements. Pursuant to these Federal clinical laboratory regulations,
clinical laboratories must meet quality assurance, quality control and personnel
standards. Labs also must undergo proficiency testing and inspections. Standards
are based on the complexity of the method of testing performed by the
laboratory.

        These regulations categorize our laboratory as high complexity, and we
believe we are in compliance with the more stringent standards applicable to
high complexity testing for personnel, quality control, quality assurance and
patient test management. Our clinical laboratory holds a Certificate of
Registration under these regulations, which allows us to conduct testing pending
determination of compliance through a survey. Our clinical laboratory has been
surveyed by the College of American Pathologists, a federally-approved
accreditation agency, which has accredited our clinical laboratory.

        In addition to the Federal laboratory regulations, states, including
California, require laboratory licensure and may adopt regulations that are more
stringent than federal law. We believe we are in material compliance with
California and other applicable state laws and regulations.

        The sanctions for failure to comply with Federal or state clinical
laboratory regulations, or accreditation requirements of federally-approved
agencies, may be suspension, revocation or limitation of a laboratory's
certificate or accreditation. There also could be fines and criminal penalties.
The suspension or loss of a license, failure to achieve or loss of
accreditation, imposition of a fine, or future changes in applicable federal or
state laws or regulations or in the interpretation of current laws and
regulations, could have a material adverse effect on our business.

        Under our current labeling and marketing plans, our PhenoSense products
have not been subject to FDA regulation. However, we cannot predict the extent
of future FDA regulation, and we might be subject in the future to greater
regulation, or different regulations, that could have a material effect on our
finances and operations. See "Risk Factors Related to Our Business" below for
further discussion.

Medical Waste and Radioactive Materials

        We are subject to licensing and regulation under federal, state and
local laws relating to the handling and disposal of medical specimens and
hazardous waste and radioactive materials as well as to the safety and health of
laboratory employees. Our clinical laboratory is operated in material compliance
with applicable federal and state laws and regulations relating to disposal of
all laboratory specimens. We utilize outside vendors for disposal of specimens.
Although we believe that we are currently in compliance in all material respects
with such federal, state




                                       12
<PAGE>   13

and local laws, failure to comply could subject us to denial of the right to
conduct business, fines, criminal penalties and other enforcement actions.

Occupational Safety

        In addition to its comprehensive regulation of safety in the workplace,
the Federal Occupational Safety and Health Administration has established
extensive requirements relating to workplace safety for healthcare employers,
including clinical laboratories, whose workers may be exposed to blood-borne
pathogens such as HIV and the hepatitis B virus. These regulations, among other
things, require work practice controls, protective clothing and equipment,
training, medical follow-up, vaccinations and other measures designed to
minimize exposure to chemicals and transmission of the blood-borne and airborne
pathogens.

Specimen Transportation

        Regulations of the Department of Transportation, the International Air
Transportation Agency, the Public Health Service and the Postal Service apply to
the surface and air transportation of clinical laboratory specimens.

Regulation of Coverage and Reimbursement

        Revenues for clinical laboratory testing services come from a variety of
sources, including Medicare and Medicaid programs; other third-party payors,
including commercial insurers, Blue Cross Blue Shield plans, health maintenance
and other managed care organizations; and patients, physicians, hospitals and
other laboratories. We are a Medicare laboratory services provider. Medicare has
recently issued coverage policies and payment guidelines for resistance testing,
including phenotypic testing. We are an approved Medicaid provider in several
states and have submitted Medicaid provider applications in many other states.
Certain key states' Medicaid, for example New York's, have also issued coverage
policies and payment guidelines for resistance testing, including phenotypic
testing. Other states' Medicaid and other third party payors are evaluating
whether to cover services they deem to be investigational or otherwise not
reasonable and necessary for diagnosis or treatment. While recently issued
guidelines of the Department of Health and Human Services recommend drug
resistance testing for HIV patients, this does not assure coverage by state
Medicare or any other payors.

        We are unable to predict whether and under what circumstances state
agencies will implement Medicare and Medicaid coverage policies and payment
guidelines, and whether and the extent other payors will cover resistance
testing services. Denial of such coverage by payors would have a material
adverse impact on our business.

        Since 1984, Congress has periodically lowered the ceilings on Medicare
reimbursement for clinical laboratory services from previously authorized
levels. In addition, state Medicaid programs are prohibited from paying more
than Medicare for clinical laboratory tests. In most instances, they pay
significantly less. Similarly, other payors, including managed care
organizations, have sought on an ongoing basis to reduce the costs of healthcare
by limiting utilization and payment rates. Actions by Medicare or other payors
to reduce reimbursement rates or limit coverage or utilization of resistance
testing would have a direct adverse impact on our revenues and cash flows. We
cannot predict whether reductions or limitations will occur, though we feel some
reductions are likely.

Fraud and Abuse Regulation

        Existing federal laws governing Medicare and Medicaid and other federal
healthcare programs, as well as similar state laws, impose a variety of broadly
described fraud and abuse prohibitions on healthcare providers, including
clinical laboratories. Multiple government agencies enforce these laws. The
Health Insurance Portability and Accountability Act of 1996 provides for the
establishment of a program to coordinate federal, state and local law
enforcement programs. Over the last several years, the clinical laboratory
industry has also been the focus of major government enforcement actions.




                                       13
<PAGE>   14

        One set of fraud and abuse laws, the federal anti-kickback laws,
prohibits clinical laboratories from, among other things, making payments or
furnishing other benefits intended to induce the referral of patients for tests
billed to Medicare, Medicaid, or certain other federally funded programs.
California also has its own Medicaid anti-kickback law, as well as an
anti-kickback law that prohibits payments made to physicians to influence the
referral of any patients. California laws also limit the ability to use a
non-employee sales force.

        Under another federal provision, known as the "Stark" law or
"self-referral" prohibition, physicians who have an investment or compensation
relationship with a clinical laboratory may not, unless a statutory exception
applies, refer Medicare or Medicaid patients for testing to the laboratory. In
addition, a laboratory may not bill Medicare, Medicaid or any other party for
testing furnished pursuant to a prohibited referral. There is a California
self-referral law, as well, which applies to all patient referrals.

        Currently, we have a financial relationship with one referring
physician, who serves as part-time medical director at our clinical laboratory.
Very few of this physician's patients, if any, are federal healthcare program
patients. In addition, we do not bill for services furnished to any patients
referred by this physician. The California anti-kickback law may have exceptions
applicable to our relationship with this physician. We have requested a written
opinion from California officials to determine whether this relationship is
appropriate.

        There are a variety of other types of federal and state anti-fraud and
abuse laws, including laws prohibiting submission of false or otherwise improper
claims to federal healthcare programs, and laws limiting the extent of any
differences between charges to Medicare and Medicaid and charges to other
parties. We seek to structure our business to comply with the federal and state
anti-fraud and abuse laws. We cannot predict, however, how these laws will be
applied in the future, and we cannot be sure arrangements will not be found in
violation of them. Sanctions for violations of these laws may include exclusion
from participation in Medicare, Medicaid and other federal healthcare programs,
criminal and civil fines and penalties, and loss of license. Any of these could
have a material adverse effect on our business.


EMPLOYEES

        As of February 28, 2001, we had 159 employees, of whom 11 hold PhD or MD
degrees and 25 hold other advanced degrees. Approximately 59 employees are
engaged in clinical laboratory operations, including 28 licensed healthcare
professionals. There are 32 employees in research and development, and 68 in
sales, marketing, information systems, finance and other administrative
functions. We believe we maintain excellent relations with our employees.


EXECUTIVE OFFICERS

        The following table sets forth, as of March 5, 2001, certain information
concerning our executive officers:

<TABLE>
<CAPTION>
                NAME                    AGE                        POSITION
----------------------------------      ---   ------------------------------------------------
<S>                                     <C>   <C>
William D. Young..................      56    Chairman, Chief Executive Officer and Director
Karen J. Wilson...................      37    Vice President, Chief Financial Officer
Frank Barker......................      58    Vice President, Information Technology and Chief
                                              Information Officer
Nicholas S. Hellmann, MD..........      42    Vice President, Clinical Research
Christos J. Petropoulos, PhD......      47    Vice President, Research and Development
Robin M. Toft.....................      40    Vice President, Sales and Marketing
Patricia A. Wray..................      44    Vice President, Human Resources
</TABLE>

        WILLIAM D. YOUNG has served as our Chief Executive Officer since
November 1999 and has served as the Chairman of the Board since May 1999. From
March 1997 to October 1999, Mr. Young was Chief Operating Officer at Genentech,
Inc., a biotechnology company. As COO at Genentech, Mr. Young was responsible
for all of the company's development, operations and commercial functions. Mr.
Young joined Genentech in 1980 as Director of Manufacturing and Process Sciences
and held various positions prior to becoming COO. Prior to joining Genentech,
Mr. Young was employed by Eli Lilly and Company for 14 years. Mr. Young is a
member of the board




                                       14
<PAGE>   15

of directors of IDEC Pharmaceuticals, Inc., VaxGen, Inc. and Enchira, Inc. He
received his BS in chemical engineering from Purdue University and his MBA from
Indiana University.

        KAREN J. WILSON has served as our Chief Financial Officer since January
2001. Prior to joining ViroLogic, from November 1999 to January 2001, Ms. Wilson
held the position of Chief Financial Officer and Vice President of Operations
for Novare Surgical Systems, Inc., a medical device manufacturer. Prior to that,
from 1987 to 1993 and from 1996 to November 1999, she worked for Deloitte &
Touche LLP, a professional services firm, most recently as Senior Manager
serving a diverse list of global clients in both the medical and technology
fields. From 1993 to 1996, she was Controller for Lightwave Electronics
Corporation, a laser manufacturer. Ms. Wilson is a certified public accountant
and received her B.S. degree in Business from the University of California at
Berkeley.

        FRANK BARKER has served as our Vice President, Information Technology
and Chief Information Officer since November 1999. From 1996 until October 1999,
Mr. Barker was Senior Vice President and Chief Information Officer for
HealthCor, Inc., a home healthcare provider. From 1993 to 1996, Mr. Barker was
Vice President of Client Services for Antrim, Corp., a laboratory information
systems vendor. From 1987 to 1993, he was Chief Operating Officer for CHC, Inc.,
a hospital and laboratory information systems vendor.

        NICHOLAS S. HELLMANN, MD has served as our Vice President, Clinical
Research since September 1997. From 1995 to 1997, Dr. Hellmann was Director of
Clinical Research at Gilead Sciences, Inc., a biopharmaceutical company. In 1995
he was employed as a clinical scientist at Genentech. From 1993 to 1995, he was
Associate Director of Antiviral Clinical Research at Bristol-Myers Squibb, a
pharmaceutical company. Dr. Hellmann has been involved with clinical care of
patients with infectious diseases, especially HIV infection, and infectious
disease research since 1982. He received his MD degree from the University of
Kentucky and completed his Internal Medicine Residency and Infectious Diseases
Fellowship training at the University of California, San Francisco.

        CHRISTOS J. PETROPOULOS, PHD has served as our Director of Research and
Development since August 1996, became Senior Director of Research and
Development in September 1997 and was named our Vice President, Research and
Development in November 1999. From 1992 to 1996, Dr. Petropoulos was a scientist
at Genentech where he headed the Molecular Virology Laboratory and the Research
Virology and Molecular Detection Laboratories from 1994 to 1996. Dr. Petropoulos
received his PhD in molecular and cell biology from Brown University.

        ROBIN M. TOFT has served as our Vice President, Sales and Marketing
since May 1998. From 1996 to May 1998 Ms. Toft was employed with Laboratory
Corporation of America, or LabCorp, a national clinical laboratory, first as
national sales director and then as Associate Vice President of Business
Development. From 1991 through 1996, Ms. Toft worked in sales for National
Health Laboratories, a clinical laboratory, which merged with Roche Biomedical
Laboratories to form LabCorp in 1995. Ms. Toft received her BS in medical
technology from Michigan State University.

        PATRICIA A. WRAY has served as our Senior Director of Human Resources
since September 1998 and was named our Vice President of Human Resources in
November 1999. From 1997 until September 1998, Ms. Wray operated her own human
resources consulting business. From 1989 to 1997, Ms. Wray was an internal
consultant and director with Genentech. She received her MS from Michigan State
University.


SCIENTIFIC ADVISORY BOARD

        We have established an internationally renowned Scientific Advisory
Board to provide specific expertise in areas of research and development
relevant to our business. Our Scientific Advisory Board meets periodically with
our scientific and development personnel and management to discuss our present
and long-term research and development activities. Scientific Advisory Board
members include the following leaders in scientific and clinical HIV research:

        STEPHEN P. GOFF, PHD--Higgens Professor of Biochemistry and Molecular
Biophysics at the College of Physicians and Surgeons of Columbia University, and
an Investigator of the Howard Hughes Medical Institute




                                       15
<PAGE>   16

        DAVID D. HO, MD--Scientific Director and Chief Executive Officer of the
Aaron Diamond AIDS Research Center, and a Professor of The Rockefeller
University

        STEPHEN H. HUGHES, PHD--Chief, Retrovirus Replication Laboratory and
Head, Vector Design and Replication Section of the HIV Drug Resistance Program
at the National Cancer Institute--Frederick Cancer Research and Development
Center

        DOUGLAS D. RICHMAN, MD--Professor of Pathology and Medicine (Infectious
Diseases) at the University of California, San Diego School of Medicine

        ROBERT T. SCHOOLEY, MD--Gill Professor of Medicine and Head of the
Infectious Disease Division at the University of Colorado Health Sciences Center


                      RISK FACTORS RELATED TO OUR BUSINESS


        Except for the historical information contained or incorporated by
reference, this annual report on Form 10-K and the information incorporated by
reference contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed
here. Factors that could cause or contribute to differences in our actual
results include those discussed in the following section, as well as those
discussed in Part II, Item 7 entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere throughout this
annual report and in any other documents incorporated by reference into this
annual report. You should consider carefully the following risk factors,
together with all of the other information included in this annual report on
Form 10-K. Each of these risk factors could adversely affect our business,
operating results and financial condition, as well as adversely affect the value
of an investment in our common stock.


WE EXPECT TO INCUR FUTURE OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY,
WHICH MAY CAUSE OUR STOCK PRICE TO FALL.

        We have experienced significant and increasing operating losses each
year since our inception and expect to incur substantial additional operating
losses for at least the next two years. We experienced net losses allocable to
common stockholders of approximately $38.9 million, $20.2 million, and $8.1
million in 2000, 1999 and 1998, respectively. As of December 31, 2000, we had an
accumulated deficit of approximately $52.8 million. We expect to continue to
incur substantial operating losses for the foreseeable future primarily as a
result of expected increases in expenses for:

    -   Expanding patient sample processing capabilities

    -   Research and product development costs

    -   Sales and marketing

    -   Additional clinical laboratory and research space and other necessary
        facilities

    -   General and administrative costs

        If our history of operating losses continues, our stock price may fall
and you may lose part or all of your investment.


IF WE NEED TO RAISE ADDITIONAL CAPITAL AND IT IS NOT AVAILABLE ON COMMERCIALLY
REASONABLE TERMS, OUR ABILITY TO OPERATE OUR BUSINESS MAY BE DIMINISHED.

        We anticipate that our existing capital resources will enable us to
maintain currently planned operations through at least December 31, 2001.
However, we may need additional funding sooner than anticipated. Our inability
to raise capital would seriously harm our business and product development
efforts. In addition, we may




                                       16
<PAGE>   17

choose to raise additional capital due to market conditions or strategic
considerations even if we believe we have sufficient funds for our current or
future operating plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance of these
securities could result in dilution to our stockholders. To the extent operating
and capital resources are insufficient to meet future requirements, we will have
to raise additional funds to continue the development and commercialization of
our technologies. These funds may not be available on favorable terms, or at
all. If adequate funds are not available on attractive terms, we may be required
to curtail operations significantly or to obtain funds by entering into
financing, supply or collaboration agreements on unattractive terms.


OUR PHENOSENSE TESTING PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD
LIMIT OUR FUTURE REVENUE.

        Our ability to establish phenotypic resistance testing as the standard
of care to guide and improve the treatment of viral diseases will depend on
physicians' and clinicians' acceptance and use of phenotypic resistance testing.
Phenotypic resistance testing is new. We cannot predict the extent to which
physicians and clinicians will accept and use phenotypic resistance testing.
They may prefer competing technologies and products such as genotypic testing.
The commercial success of phenotypic resistance testing will require
demonstrations of its advantages and potential economic value in relation to the
current standard of care, as well as to genotypic testing. We have introduced
only one product using our proprietary PhenoSense technology, PhenoSense HIV,
which we began actively marketing in November 1999. We are still in the early
stages of development of new products applying our PhenoSense technology to
other viral diseases. If PhenoSense HIV is not accepted in the marketplace, our
ability to sell other PhenoSense products would be undermined. Market acceptance
will depend on:

    -   Our marketing efforts and continued ability to demonstrate the utility
        of PhenoSense in guiding anti-viral drug therapy, for example, through
        the results of retrospective and prospective clinical studies

    -   Our ability to demonstrate the advantages and potential economic value
        of our PhenoSense testing products over current treatment methods and
        other resistance tests

        If the market does not accept phenotypic resistance testing, or our
PhenoSense products in particular, our ability to generate revenue will be
limited.


OUR REVENUES WILL BE DIMINISHED IF PAYORS DO NOT AUTHORIZE REIMBURSEMENT FOR OUR
PRODUCTS.

        Government and third-party payors, which reimburse patients and
healthcare providers for medical expenses, are attempting to contain or reduce
the costs of healthcare. This could limit the price that we can charge for our
products and hurt our ability to generate revenues. In the United States,
federal and state government healthcare programs have been attempting to reduce
costs and otherwise implement government control of healthcare costs. In
addition, increasing emphasis on managed care in the United States will continue
to put pressure on the pricing of healthcare products. Significant uncertainty
exists as to the reimbursement status of new medical products like PhenoSense
HIV, especially in light of any negative results from clinical studies.
Third-party payors, including state payors and Medicare, are challenging the
prices charged for medical products and services. If government and other
third-party payors do not provide adequate coverage and reimbursement for
PhenoSense HIV or other phenotypic testing products, our revenues will be
reduced.


IF WE ARE UNABLE TO EXPAND OUR SALES AND MARKETING CAPABILITIES, WE MAY NOT BE
ABLE TO EFFECTIVELY COMMERCIALIZE OUR PRODUCTS.

        We currently have sixteen sales people and limited marketing resources.
In order to commercialize our products effectively, we must expand our sales and
marketing capabilities or arrange with a third party to perform these services,
and are taking steps in this direction. We may not be able to do this
successfully. If we enter into co-promotion or other marketing arrangements, our
share of product revenues is likely to be lower than if we directly marketed and
sold our products through our own sales force. If we fail to effectively
commercialize our products our revenue will be reduced.




                                       17
<PAGE>   18

WE HAVE LIMITED EXPERIENCE PROCESSING PATIENT SAMPLES FOR OUR PHENOSENSE HIV
TEST AND MAY ENCOUNTER PROBLEMS OR DELAYS IN PROCESSING TESTS, OR IN EXPANDING
OUR AUTOMATED TESTING SYSTEMS, WHICH COULD RESULT IN LOST SALES REVENUE.

        Over the last year, we have begun to process a significant number of
patient samples and are continuing to develop our quality-control procedures. In
order to meet the projected demand for PhenoSense HIV and other future
phenotypic resistance testing products, we will have to process many more
patient samples than we are currently processing. We also have to establish more
consistency with respect to test turnaround so that results are delivered in a
timely manner. Thus, we need to develop and implement additional automated
systems to perform our tests. We also need to develop more sophisticated
software to support the automated tests, analyze the data generated by our
tests, and report the results. We may not be able to do this. Further, as we
attempt to scale up our processing of patient samples, processing or quality
control problems may arise. If we are unable to consistently process patient
samples on a timely basis because of these or other factors, or if we encounter
problems with our automated processes, our revenues will be limited.


WE FACE INTENSE COMPETITION, AND IF OUR COMPETITORS' EXISTING PRODUCTS OR NEW
PRODUCTS ARE MORE EFFECTIVE THAN OUR PRODUCTS, THE COMMERCIAL OPPORTUNITY FOR
OUR PRODUCTS WILL BE REDUCED OR ELIMINATED.

        The commercial opportunity for our products will be reduced or
eliminated if our competitors develop and market new testing products that are
superior to, or are less expensive than, PhenoSense HIV or other phenotypic
resistance testing products we develop using our proprietary PhenoSense
technology. The biotechnology industry evolves at a rapid pace and is highly
competitive. Our major competitors include manufacturers and distributors of
phenotypic drug resistance technology, such as Virco. We also compete with
makers of genotypic tests such as Applied Biosystems, Visible Genetics Inc. and
laboratories performing genotypic testing as well as other genotypic testing
referred to as virtual phenotyping. Each of these competitors is attempting to
establish its test as the standard of care. Virco's phenotypic test and
genotypic tests have been commercially available for a longer time than has
PhenoSense HIV. Genotypic tests are cheaper and generally faster than our
phenotypic resistance tests. Our competitors may successfully develop and market
other testing products that are either superior to those that we may develop or
that are marketed prior to marketing of our testing products. Some of our
competitors have substantially greater financial resources and research and
development staffs than we do. In addition, some of our competitors have
significantly greater experience in developing products, and in obtaining the
necessary regulatory approvals of products and processing and marketing
products.

SOLE OR LIMITED SOURCES OF SUPPLY

We rely on a few vendors as the sole source of various materials in our testing
process. Any extended interruption in the supply of these materials could
result in the failure to meet customer demand. If significant customer
relationships were negatively impacted by our failing to report test results on
a timely basis, then our operations and revenues could be adversely effected.

WE ARE DEPENDENT ON A LICENSE FOR TECHNOLOGY WE USE IN OUR PHENOSENSE TESTING,
AND OUR BUSINESS WOULD SUFFER IF THE LICENSE WAS TERMINATED OR NOT RENEWED.

        We license technology that we use in our PhenoSense test from Roche. We
hold a non-exclusive license for the life of the patent term of the last
licensed Roche patent. We believe that many of our competitors, including Virco
and other resistance testing companies, also license this technology on
non-exclusive terms. In order to maintain this license, however, we must pay
royalties, make a semi-annual royalty report and participate in proficiency
testing. If Roche were to terminate this license or this license was not
renewed, we would have to change a portion of our testing methodology, which
would halt our testing, at least temporarily, and cause us to incur substantial
additional expenses.


THE INTELLECTUAL PROPERTY UNDERLYING OUR PHENOSENSE TECHNOLOGY AND TRADE SECRETS
MAY NOT BE ADEQUATE, ALLOWING THIRD PARTIES TO USE OUR PHENOSENSE TECHNOLOGY OR
SIMILAR TECHNOLOGIES, AND THUS REDUCING OUR ABILITY TO COMPETE IN THE MARKET.

        The strength of our intellectual property protection is uncertain. In
particular, we cannot be sure that we were the first to invent the technologies
covered by our patent or pending patent applications; we were the first to file
patent applications for these inventions; others will not independently develop
similar or alternative technologies or duplicate any of our technologies; any of
our pending patent applications will result in issued patents; any patents
issued to us will provide a basis for commercially viable products or will
provide us with any competitive advantages or will not be challenged by third
parties. Other companies may have patents or patent applications relating to
products or processes similar to, competitive with or otherwise related to our
products. Patent law relating to the scope of claims in the technology fields in
which we operate, including biotechnology and




                                       18
<PAGE>   19

information technology, is still evolving and, consequently, patent positions in
our industry are generally uncertain. We cannot assure you that we will prevail
in any of these lawsuits or that, if successful, we will be awarded commercially
valuable remedies. In addition, it is possible that we will not have the
required resources to pursue such litigation or to otherwise protect our patent
rights. We also rely on unpatented trade secrets to protect our proprietary
technology. Other companies may independently develop or otherwise acquire
equivalent technology or gain access to our proprietary technology.


OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD
CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.

        Third parties may assert infringement or other intellectual property
claims against us based on their patents or other intellectual property claims.
We may have to pay substantial damages, possibly including treble damages, for
past infringement if it is ultimately determined that our products infringe a
third party's patents. Further, we may be prohibited from selling our products
before we obtain a license, which, if available at all, may require us to pay
substantial royalties. Even if infringement claims against us are without merit,
defending a lawsuit takes significant time, may be expensive and may divert
management attention from other business concerns.


WE MAY BE UNABLE TO BUILD BRAND LOYALTY BECAUSE OUR TRADEMARKS AND TRADE NAMES
MAY NOT BE PROTECTED.

        Our registered or unregistered trademarks or trade names such as the
name PhenoSense, may be challenged, canceled, infringed, circumvented or
declared generic or determined to be infringing on other marks. We may not be
able to protect our rights to these trademarks and trade names, which we need to
build brand loyalty. Brand recognition is critical to our short-term and long
term marketing strategies especially as we commercialize future enhancements to
our products.


IF WE DO NOT SUCCESSFULLY INTRODUCE NEW PRODUCTS USING OUR PHENOSENSE
TECHNOLOGY, WE MAY NOT ACHIEVE PROFITABILITY.

        We may not be able to develop and market phenotypic resistance testing
products for viral diseases other than HIV, including hepatitis B and hepatitis
C. Demand for these products will depend in part on the development by others of
additional anti-viral drugs to fight these diseases. Physicians will likely use
our resistance tests to determine which drug is best for a particular patient
only if there are multiple drug treatment options. Several anti-viral drugs are
in development but we cannot assure you that they will be approved for
marketing, or if these drugs are approved that there will be a need for our
resistance tests. If we are unable to develop and market phenotypic resistance
test products for other viral diseases, or if an insufficient number of
anti-viral drug products are approved for marketing, we may not achieve
profitability.


OUR BUSINESS OPERATIONS AND THE OPERATION OF OUR CLINICAL LABORATORY FACILITY
ARE SUBJECT TO STRINGENT REGULATIONS AND IF WE ARE UNABLE TO COMPLY WITH THEM,
WE MAY BE PROHIBITED FROM ACCEPTING PATIENT SAMPLES OR MAY INCUR ADDITIONAL
EXPENSE TO ATTAIN AND MAINTAIN COMPLIANCE.

        The operation of our clinical laboratory facility is subject to a
stringent level of regulation under the Clinical Laboratory Improvement
Amendments of 1988. Laboratories must meet various requirements, including
requirements relating to quality assurance, quality control and personnel
standards. Our laboratory is also subject to regulation by the State of
California and various other states. We have received accreditation by the
College of American Pathologists and therefore are subject to their requirements
and evaluation. Our failure to comply with applicable requirements could result
in various penalties, including loss of certification or accreditation. We
believe that the FDA will not seek to fully regulate our PhenoSense products
under our current labeling and marketing plans. However, we cannot predict the
extent of future FDA regulation, and we might be subject in the future to
greater regulation, or different regulations, that could have a material effect
on our finances and operations. We also believe that the FDA will not require
that phenotypic testing conducted at a clinical laboratory be subject to
premarketing clearance. Although the FDA has stated in the past that it believes
that its jurisdiction extends to tests generated in a clinical laboratory, the
agency has said it will allow the home brewed tests to be run and the results
commercialized without FDA premarket approval. We cannot be sure, however, that
the FDA will not in the future require premarket clearance, and clinical data
demonstrating the sensitivity and specificity, of our PhenoSense




                                       19
<PAGE>   20

products. If we do not comply with existing or additional regulations, or if we
incur penalties, it could increase our expenses, prevent us from increasing
revenues, or hinder our ability to conduct our business. In addition, changes in
existing regulations or new regulations may delay or prevent us from marketing
our products.


OUR INFORMATION AND OTHER INTERNAL SYSTEMS MAY NOT WORK EFFECTIVELY AND AS A
RESULT WE MAY NOT BE ABLE TO PROCESS ORDERS, RECORD TRANSACTIONS AND MEET OUR
REPORTING OBLIGATIONS, WHICH IN TURN COULD AFFECT OUR ABILITY TO RUN OUR
BUSINESS EFFICIENTLY OR PROFITABLY.

        In 2000, we installed several new information systems, including
enterprise resource and laboratory information systems. If our new information
and internal systems do not work effectively, we may experience delays or
failures in our operations. These delays or failures could adversely impact the
promptness and accuracy of our transaction processing, financial accounting and
reporting and ability to properly forecast earnings and cash requirements. Our
current and planned systems, transaction processing, procedures and controls may
not be adequate to support future operations. To manage the expected growth of
our operations and personnel, we will need to continue to improve our
operational and financial systems, transaction processing, procedures and
controls.

CLINICIANS OR PATIENTS USING OUR PRODUCTS OR SERVICES MAY SUE US AND OUR
INSURANCE MAY NOT SUFFICIENTLY COVER ALL CLAIMS BROUGHT AGAINST US WHICH WILL
INCREASE OUR EXPENSES.

        Clinicians, patients and others may at times seek damages from us if
drugs are incorrectly prescribed for a patient based on testing errors or
similar claims. Although we have obtained liability insurance coverage, we
cannot guarantee that liability insurance will continue to be available to us on
acceptable terms or that our coverage will be sufficient to protect us against
all claims that may be brought against us. We may incur significant legal
defense expenses in connection with a liability claim, even one without merit or
for which we have coverage.


OUR LACK OF OPERATING EXPERIENCE MAY CAUSE US DIFFICULTY IN MANAGING OUR GROWTH
AND ATTRACTING AND RETAINING SKILLED PERSONNEL, WHICH COULD HINDER OUR
COMMERCIAL EFFORTS AND IMPAIR OUR ABILITY TO COMPETE.

        We have limited experience selling our products and processing patient
samples. If our management is unable to manage our growth effectively, it is
possible that our systems and our facilities may become inadequate. Our success
also depends on our continued ability to attract and retain highly qualified
management and scientific personnel. Competition for personnel is intense. We
believe stock options are a critical component of motivating and retaining our
key employees. As we mature as a public company, stock options may be less
attractive to potential candidates for our management and scientific positions,
and, therefore, it may be more difficult to fill those positions. If we cannot
successfully attract and retain qualified personnel, our research and
development efforts could be hindered and our ability to run our business
effectively and compete with others in our industry will be harmed.


WE MAY BE SUBJECT TO LITIGATION, WHICH WOULD BE TIME CONSUMING AND DIVERT OUR
RESOURCES AND THE ATTENTION OF OUR MANAGEMENT.

        We were involved in a dispute with a significant stockholder and former
officer. We settled the dispute in November 1999. In connection with the
settlement, we purchased shares of our common stock held by him for $225,000 in
cash, and allowed him to retain other shares that we had a right to repurchase.
In 1999, we recorded $1.9 million in legal fees and costs related to this
settlement, including a non-cash charge related to the common stock retained by
him. In the future, our stockholders or former employees may bring further
claims and we may have to spend significant additional resources and time. Even
if we are eventually successful in our defense of any such claim, the time and
money spent may prevent us from operating our business effectively or profitably
or may distract our management.




                                       20
<PAGE>   21

OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER, MAKING IT LIKELY
THAT, IN SOME FUTURE QUARTER OR QUARTERS, WE WILL FAIL TO MEET ANALYSTS'
ESTIMATES OF OPERATING RESULTS OR FINANCIAL PERFORMANCE, CAUSING OUR STOCK PRICE
TO FALL.

        If revenue declines in a quarter, our losses will likely increase or our
earnings will likely decline because many of our expenses are relatively fixed.
Though our revenues may fluctuate significantly as we continue to build the
market for our products, expenses such as research and development, sales and
marketing and general and administrative are not affected directly by variations
in revenue. In addition, our cost of revenue could also fluctuate significantly
due to variations in the demand for our product and the relatively fixed costs
to produce it. We cannot accurately predict how volatile our future operating
results will be because our past and present operating results, which reflect
moderate sales activity, are not indicative of what we might expect in the
future. It is likely that in some future quarter or quarters, our operating
results will be below the expectations of securities analysts or investors, as
they have been in the past. In this event, the market price of our common stock
may fall abruptly and significantly. Because our revenue and operating results
are difficult to predict, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance.


IF A NATURAL DISASTER STRIKES OUR CLINICAL LABORATORY FACILITY, WE WOULD BE
UNABLE TO PROCESS OUR CUSTOMERS' SAMPLES FOR A SUBSTANTIAL AMOUNT OF TIME AND WE
WOULD LOSE REVENUE.

        We rely on a single clinical laboratory facility to process patient
samples for our PhenoSense HIV test and have no alternative facilities. We will
also use this facility for conducting other tests we develop, and even if we
move into different or additional facilities they will likely be in close
proximity to our current clinical laboratory. Our clinical laboratory and some
pieces of processing equipment are difficult to replace and could require
substantial replacement lead-time. Our processing facility may be affected by
natural disasters such as earthquakes and floods. Earthquakes are of particular
significance since our clinical laboratory is located in South San Francisco,
California, an earthquake-prone area. In the event our existing clinical
laboratory facility or equipment is affected by man-made or natural disasters,
we would be unable to process patient samples and meet customer demands or sales
projections. If our patient sample processing operations were curtailed or
ceased, we would not be able to perform our tests and we would lose revenue.


CONCENTRATION OF OWNERSHIP AMONG OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS MAY PREVENT INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE
DECISIONS.

        At March 20, 2001, our directors, entities affiliated with our directors
and our executive officers own, in the aggregate, approximately 21% of our
outstanding common stock. These stockholders, as a group, are able to
substantially influence our management and affairs. If acting together, they
would be able to influence most matters requiring the approval by our
stockholders, including the election of directors, any merger, consolidation or
sale of all or substantially all of our assets and any other significant
corporate transaction. The concentration of ownership may also delay or prevent
a change in our control at a premium price if these stockholders oppose it.


OUR STOCK PRICE MAY BE VOLATILE, AND OUR STOCK COULD DECLINE IN VALUE.

        The market prices for securities of biotechnology companies in general
have been highly volatile and may continue to be highly volatile in the future.
Our stock price has fluctuated widely since we became a publicly traded company.
The following factors, in addition to other risk factors described in this
section, may have a significant adverse impact on the market price of our common
stock:

    -   Announcements of technological innovations or new commercial products by
        our competitors

    -   Results from clinical studies

    -   Developments concerning proprietary rights, including patents

    -   Publicity regarding actual or potential medical results relating to
        products under development by our competitors




                                       21
<PAGE>   22

    -   Regulatory developments in the United States and foreign countries

    -   Changes in payor reimbursement policies

    -   Litigation

    -   Economic and other external factors or other disaster or crisis

    -   Period-to-period fluctuations in financial results


IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK, THE MARKET
PRICE OF OUR COMMON STOCK MAY FALL.

        If our stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options and warrants,
the market price of our common stock may fall. These sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate. Sales of a substantial number of
shares could occur at any time. This may have an adverse effect on the price of
our common stock and may impair our ability to raise capital in the future.


PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR
OUR COMMON STOCK.

        Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing an acquisition, or merger in which we are not
the surviving company or changes in our management. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of
the Delaware General Corporation Law. These provisions could discourage
acquisitions or other changes in our control and otherwise limit the price that
investors might be willing to pay in the future for our common stock.


ITEM 2. PROPERTIES

        We currently lease 67,000 square feet of laboratory and office space in
South San Francisco, California. In July 2001, we will begin leasing an
additional 54,000 square feet in South San Francisco. Initially, the new
facility will provide more space than is required for our planned operations. As
a result, we intend to sublease approximately 40,000 square feet to a third
party for two years. In addition, we intend to sublease approximately 12,000
square feet of one of our existing facilities to another third party for two
years. We anticipate that income generated from each of these subleases will be
greater than our lease obligations for those spaces. Leases on our current and
future facilities expire in the years 2004 and 2011, respectively. All leases
provide options to extend.


ITEM 3. LEGAL PROCEEDINGS

        We are not a party to any legal proceedings.


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

        None.




                                       22
<PAGE>   23

                                     PART II

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

        (a) Market Data; Dividends

        Since May 2, 2000, our common stock has been traded on the Nasdaq
National Market under the symbol "VLGC." The following table sets forth, for the
periods indicated, the high and low sales prices per share of Common Stock on
the Nasdaq National Market:

<TABLE>
<CAPTION>
                         2000                                     HIGH              LOW
       ----------------------------------------------------      -------          -------
<S>                                                              <C>              <C>
       Fourth Quarter......................................      $17.375          $ 5.750
       Third Quarter.......................................      $26.750          $12.125
       Second Quarter (Beginning May 2)....................      $16.313           $5.125
       First Quarter.......................................          N/A              N/A
</TABLE>

        The last reported sale price of our common stock on the Nasdaq National
Market on March 20, 2001 was $1.563. As of March 20, 2001, there were
approximately 234 stockholders of record of our common stock.

        We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future.

Recent Sales of Unregistered Securities.

        In December 2000, we issued 16,478 shares of common stock with an
aggregate value of $150,349 as of such issuance, to the ViroLogic, Inc. 401(k)
Profit Sharing Plan as a matching contribution under the terms of the plan. For
these issuances, we relied on the exemptions provided by Section 4(2) of the
Securities Act and certain noaction letters promulgated by the Securities and
Exchange Commission.

        (b) Use of  Proceeds from Registered Securities

        The effective date of our registration statement on Form S-1 (No.
333-30896) relating to our initial public offering was May 1, 2000. A total of
5,000,000 shares of the Company's common stock in the aggregate were sold at a
price of $7.00 per share to an underwriting syndicate led by CIBC World Markets
Corp, ING Barings LLC and Prudential Securities Incorporated. The offering
commenced on May 1, 2000, and closed on May 5, 2000. The initial public offering
resulted in gross proceeds of approximately $35.0 million, of which $2.5 million
was applied toward the underwriting discount. Expenses related to the offering
totaled approximately $1.3 million. From the time of receipt through December
31, 2000, the net proceeds of $31.2 million have been used for general corporate
purposes, including working capital, or were invested in short-term,
interest-bearing, investment grade securities.




                                       23
<PAGE>   24

        ITEM 6. SELECTED FINANCIAL DATA

        This section presents our historical financial data. We derived the
statement of operations data for the years ended December 31, 2000, 1999 and
1998 and the balance sheet data as of December 31, 2000 and 1999 from the
audited financial statements which are included elsewhere in this Form 10-K.
Those financial statements were audited by Ernst & Young LLP, independent
auditors. We derived the statement of operations data for the year ended
December 31, 1997 and for the period from our inception to December 31, 1996 and
the balance sheet data as of December 31, 1998, 1997 and 1996 from audited
financial statements not included herein. The selected financial data set forth
below should be read in conjunction with the financial statements, the related
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                                                     PERIOD FROM
                                                                                                      INCEPTION
                                                                                                     (NOVEMBER 14,
                                                                YEAR ENDED DECEMBER 31,                1995) TO
                                                   ------------------------------------------------   DECEMBER 31,
                                                     2000          1999          1998        1997         1996
                                                   --------      --------      -------      -------      -------
                                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                <C>           <C>           <C>          <C>          <C>
Statement of Operations Data:
Revenue ......................................     $  7,466      $  1,069      $   102      $    --      $    --
Operating Costs and expenses:
  Cost of revenue ............................        5,457           627           17           --           --
  Research and development ...................       10,080         9,588        5,977        2,458          867
  General and administrative .................       10,841         6,804        1,782          858          510
  Sales and marketing ........................        5,890         1,196          484           --           --
                                                   --------      --------      -------      -------      -------
Total costs and operating expenses ...........       32,268        18,215        8,260        3,316        1,377
                                                   --------      --------      -------      -------      -------
Operating loss ...............................      (24,802)      (17,146)      (8,158)      (3,316)      (1,377)
Interest income ..............................        1,868           249          302          262          116
Interest expense .............................         (262)         (243)        (198)         (83)         (13)
                                                   --------      --------      -------      -------      -------
Net loss .....................................      (23,196)      (17,140)      (8,054)      (3,137)      (1,274)
Deemed dividend to preferred stockholders ....      (15,700)       (3,100)          --           --           --
                                                   --------      --------      -------      -------      -------
Net loss allocable to common stockholders ....     $(38,896)     $(20,240)     $(8,054)     $(3,137)     $(1,274)
                                                   ========      ========      =======      =======      =======
Basic and diluted net loss per common share ..     $  (2.62)     $  (4.24)     $ (1.71)     $ (1.21)     $ (0.74)
                                                   ========      ========      =======      =======      =======
Shares used in computing basic and diluted
  net loss per common share ..................       14,852         4,772        4,700        2,591        1,720
                                                   ========      ========      =======      =======      =======
Pro forma basic and diluted net loss per
  common share (unaudited) ...................     $ (2.21)      $  (2.53)
                                                   ========      ========
Shares used in computing basic and diluted
    pro forma net loss per common share ......       17,635         8,015
                                                   ========      ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                       --------------------------------------------------------------
                                                         2000          1999          1998          1997        1996
                                                       --------      --------      --------      -------      -------
                                                                   (IN THOUSANDS)
<S>                                                    <C>           <C>           <C>           <C>          <C>
Balance Sheet Data:
Cash, cash equivalents, and short-term investments ..  $ 23,794      $  2,208      $  9,564      $ 3,986      $ 3,141
Working capital .....................................    21,097           522         7,398        3,315        2,966
Restricted cash .....................................     2,029           950            --           --           --
Total assets ........................................    43,647         9,777        13,275        5,598        3,911
Long term portion of capital lease obligations ......       945            --            --           --           --
Long term portion of loans payable ..................     1,019         1,051         1,948          470          488
Accumulated deficit .................................   (52,801)      (29,605)      (12,465)      (4,411)      (1,274)
Total stockholders' equity ..........................    33,643         4,698         8,830        4,336        3,191
</TABLE>

See notes to the financial statements for a description of the number of shares
used in the computation of the basic and diluted and pro forma basic and diluted
net loss per common share.




                                       24
<PAGE>   25

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

        The following discussion of the financial condition and results of
operations should be read in conjunction with the financial statements and the
notes thereto included in this Form 10-K.


OVERVIEW

        We are a biotechnology company developing, marketing and selling
innovative products to guide and improve treatment of viral diseases. We
incorporated in the state of Delaware on November 14, 1995 and commenced
commercial operations in 1999. We developed a practical way of directly
measuring the impact of genetic mutations on drug resistance and using this
information to guide therapy. We have proprietary technology, called PhenoSense,
for testing drug resistance in viruses that cause serious viral diseases such as
AIDS, hepatitis B and hepatitis C. Our first product, PhenoSense HIV, is a test
that directly and quantitatively measures resistance of a patient's HIV to
anti-viral drugs. The results help physicians select appropriate drugs for their
HIV patients. We are also developing PhenoSense products for other serious viral
diseases and are collecting PhenoSense test results and related clinical data in
an interactive database that we plan to make available to physicians for use in
therapy guidance. We believe our products have the potential to revolutionize
the way physicians treat many serious viral diseases.


PUBLIC OFFERING

        On May 1, 2000, we completed our initial public offering and sold
5,000,000 shares of Common Stock at $7.00 per share. Total gross proceeds to
ViroLogic were approximately $35 million. See "Stockholders' Equity" note to the
financial statements for further discussion.


REVERSE STOCK SPLIT

        On February 21, 2000, our board of directors approved a one for two
reverse split of common stock which became effective on April 17, 2000. The
accompanying financial statements have been adjusted retroactively to reflect
the reverse split. The conversion ratios of the respective series of convertible
preferred stock were automatically adjusted to reflect the reverse split.


RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.

        Revenue. Revenue increased to $7.5 million in 2000 from $1.1 million in
1999, an increase of $6.4 million. This increase was primarily attributable to a
full year of sales of PhenoSense HIV and the result of increased sales and
marketing activities. PhenoSense HIV was launched commercially in November 1999.
We plan to continue to expand our PhenoSense patient testing business as
well as our pharmaceutical business, which is comprised of resistence testing
for industry, clinical studies, drug screening, characterization and basic
research.

        Cost of revenue. Cost of revenue increased to $5.5 million in 2000 from
$0.6 million in 1999, an increase of $4.8 million. The increase in cost of
revenue was due to the higher volume of testing performed in 2000 and continued
expansion of our clinical laboratory activities. Included in these costs are
materials, supplies, labor and overhead related to the tests. In addition, the
clinical reference laboratory moved into a new facility and implemented a new
laboratory information system in 2000.

        Research and development. Research and development costs increased to
$10.1 million in 2000 from $9.6 million in 1999, an increase of $0.5 million.
These expenses are primarily related to research and development efforts
relating to enhancing our PhenoSense HIV test. We expect research and
development spending to increase over the next several years as we expand our
research and product development and automation efforts for other viral
diseases.

        General and administrative. General and administrative expense increased
to $10.8 million in 2000 from $6.8 million in 1999, an increase of $4.0 million.
The increase was due to greater spending on salaries and benefits resulting from
increased headcount, implementation of a new enterprise resource planning system
and to a $1.8 million increase in noncash compensation expenses related
primarily to granting stock and options, as discussed




                                       25
<PAGE>   26
below. The increase was partially offset by the absence of any settlement or
related costs recorded in 2000 as compared with approximately $1.9 million of
settlement and other costs recorded in 1999 arising from a lawsuit with a former
officer and stockholder.

        Deferred compensation for options granted to employees is the difference
between the exercise price and the deemed fair value for financial reporting
purposes of our common stock on the date certain options were granted. This
amount is being amortized over the vesting period for the individual options. We
recorded deferred stock compensation, which is a component of stockholders'
equity, of approximately $1.6 million and $5.0 million in 2000 and 1999,
respectively. We recorded $3.6 million of related amortization in 2000 as
compared with $0.5 million in 1999. In 1999, we also granted a director a stock
award of 150,000 shares of fully vested common stock and recorded $0.6 million
of compensation expense.

        We determined compensation for options granted to non-employees in
accordance with Statement of Financial Accounting Standards No. 123 and the
Emerging Issues Task Force Consensus No. 96-18 as the fair value of the equity
instruments issued. We record compensation for options granted to non-employees
as the related services are rendered, and the value of the compensation may be
periodically remeasured and the expense adjusted accordingly as the underlying
options vest. We recorded $0.3 million of stock based compensation for
non-employees in 2000 as compared to $48,000 in 1999. The aggregate value of
$0.6 million, based on the deemed fair value of our common stock at December 31,
2000, will be recorded as a general and administrative expense over the period
of the related services, which is generally two to four years.

        Sales and marketing. Sales and marketing expense increased to $5.9
million in 2000 from $1.2 million in 1999, an increase of $4.7 million. This
increase was primarily attributable to the deployment of our sales force. In
addition, we increased spending on public relations, advertising and marketing
efforts related to the commercialization of PhenoSense HIV.

        Interest income. Interest income increased to $1.9 million in 2000 from
$0.3 million in 1999, an increase of $1.6 million. This increase was primarily
due to higher average cash and securities investment balances resulting from the
Company's Series C preferred stock financing in January and February 2000 and
its initial public offering in May 2000.

        Interest expense. Interest expense increased to $262,000 in 2000 from
$243,000 in 1999, an increase of $19,000. This increase was due to increased
equipment financing in 2000.

        Deemed dividend. In January and February 2000, we sold 8,461,645 shares
of Series C preferred stock, or 4,230,823 shares of common stock as converted,
for proceeds of approximately $15.6 million. After re-evaluating the fair value
of our common stock in contemplation of our initial public offering, we
determined that the issuance of the Series C preferred stock resulted in a
beneficial conversion feature of approximately $15.7 million in 2000, calculated
in accordance with Emerging Issues Task Force Consensus No. 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features." The beneficial
conversion feature was reflected as a deemed dividend in the Statement of
Operations of $15.7 million in the first quarter of 2000.


YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.

        Revenue. Revenue increased to $1.1 million in 1999 from $102,000 in
1998, an increase of $1.0 million. This increase was primarily attributable to
revenue recognized from sales in the second half of 1999 to major pharmaceutical
companies, with the balance attributable to revenue recognized from sales to
physicians. In 1998, revenue was solely attributable to sales to pharmaceutical
companies.

        Cost of revenue. Cost of revenue increased to $627,000 in 1999 from
$17,000 in 1998. The increase was due to the higher volume of test sales in
1999. Included in these costs are materials, supplies, labor and overhead
related to the tests.




                                       26
<PAGE>   27

        Research and development. Research and development expense increased to
$9.6 million in 1999 from $6.0 million in 1998, an increase of $3.6 million. The
increase was primarily the result of increasing capacity and automation for our
PhenoSense HIV test. We also increased our spending on clinical trials of
PhenoSense HIV.

        General and administrative. General and administrative expense increased
to $6.8 million in 1999 from $1.8 million in 1998, an increase of $5.0 million.
The increase was related primarily to expanding our executive team, as well as
consulting expense and the settlement of litigation. We recorded expenses in
1999 of approximately $1.9 million for settlement and other costs arising from a
lawsuit brought by a former officer and stockholder, which was settled in
November 1999. Non-cash compensation expense related to granting stock and
options increased to $1.1 million in 1999, as discussed below, from no charge in
1998.

        In connection with the grant of stock options to employees, we recorded
deferred stock compensation of approximately $5.0 million during the year ended
December 31, 1999, of which $0.5 million was amortized as a general and
administrative expense in 1999. We also granted a director a stock award of
150,000 shares of fully vested common stock in September 1999. We reflected the
deemed fair value of these shares, $0.6 million, as a compensation charge in
general and administrative expense in 1999.

        We recorded an aggregate of $48,000 as a general and administrative
expense in the year ended December 31, 1999 for non-employee stock-based
compensation. The aggregate value of $0.7 million, based on the deemed fair
value of our common stock at December 31, 1999, will be recorded as a general
and administrative expense over the period of the related services, which was
generally three months to four years.

         Sales and marketing. Sales and marketing expense increased to $1.2
million in 1999 from $0.5 million in 1998, an increase of $0.7 million. This
increase was primarily attributable to hiring our sales force and commencing
sales and marketing activities. In addition, we increased spending on public
relations and marketing materials.

        Interest income. Interest income decreased to $249,000 in 1999 from
$302,000 in 1998, a decrease of $53,000. This decrease was due to lower average
cash and investment balances in 1999.

        Interest expense. Interest expense increased to $243,000 in 1999 from
$198,000 in 1998, an increase of $45,000. This increase was due to additional
debt incurred in the second half of 1998 resulting in additional interest
expense for only six months of 1998 compared to the entire year in 1999.

        Deemed dividend. In November and December 1999, we sold 1,675,621 shares
of Series C preferred stock, or 837,810 shares of common stock as converted, for
proceeds of approximately $3.1 million. After re-evaluating the fair value of
our common stock in contemplation of our initial public offering, we determined
that the issuance of the Series C preferred stock resulted in a beneficial
conversion feature of approximately $3.1 million in 1999, calculated in
accordance with Emerging Issues Task Force Consensus No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features." The beneficial
conversion feature was reflected as a deemed dividend in the Statement of
Operations of $3.1 million in the fourth quarter of 1999.

LIQUIDITY AND CAPITAL RESOURCES

        We have financed our operations since inception primarily through public
and private sales of common and preferred stock and equipment financing
arrangements. As of December 31, 2000, ViroLogic had an accumulated deficit of
approximately $52.8 million. Management expects to continue to incur substantial
operating losses for the foreseeable future primarily as a result of expected
increases in expenses for:

        -- Expanding patient sample processing capabilities

        -- Research and product development costs

        -- Sales and marketing

        -- Additional clinical laboratory and research space and other necessary
           facilities

        -- General and administrative costs



                                       27
<PAGE>   28
        Net cash used in operating activities was $18.6 million, $13.4 million
and $6.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Cash used in operating activities primarily relates to ongoing
operating losses as previously discussed above.

        Net cash used in investing activities was $20.4 million and $3.9 million
and provided by investing activities was $1.3 million for the years ended
December 31, 2000, 1999 and 1998, respectively. The increase in cash used in
investing activities of $16.5 million in 2000 resulted primarily from investing
proceeds from our initial public offering in short-term investments, net of
proceeds from maturities and sales. Also contributing to the increase were
increased capital expenditures for leasehold improvements related to our new
laboratory facility of approximately $4.0 million, as well as equipment and
software purchases of approximately $3.7 million. The 1999 increase in cash used
in investing activities of $5.2 million when compared to 1998 resulted primarily
from the maturities and sales of short-term investments recorded in 1998.

        Net cash provided by financing activities was $49.4 million, $10.0
million and $14.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Net cash provided by financing activities in 2000 resulted
primarily from our initial public offering. We sold five million shares of
common stock at $7.00 per share for a total net proceeds to ViroLogic of
approximately $31.2 million. In January and February 2000, we sold Series C
preferred stock for approximately $15.6 million. Also, we obtained equipment
financing of approximately $3.1 million in 2000. Under one of our equipment
financing arrangements, we obtained a lease line of $3.5 million, of which
approximately $2.2 million was unused as of December 31, 2000 and is available
through at least March 2001. Net cash provided by financing activities in 1999
resulted primarily from proceeds from issuance of preferred stock of $10.7
million as compared with $12.5 million in 1998. In addition, $2.6 million was
borrowed under long term loans in 1998.

        We believe that our available cash, investments and short-term
restricted cash of $24.8 million as of December 31, 2000 and available borrowing
capacity under existing equipment financing arrangements will be adequate to
fund our operations through at least December 2001. In addition, in February
2001, our board of directors engaged UBS Warburg LLC and CIBC World Markets to
assist us in pursuing various strategic alternatives, including research and
development collaborations, international alliances, marketing partnerships, and
financing opportunities.

        To the extent operating and capital resources are insufficient to meet
future requirements, we will have to raise additional funds to continue the
development and commercialization of future technologies. These funds may not be
available on favorable terms, or at all. If adequate funds are not available on
attractive terms, we may be required to curtail operations significantly or to
obtain funds by entering into financing, supply or collaboration agreements on
unattractive terms. In addition, we may choose to raise additional capital due
to market conditions or strategic considerations even if we believe we have
sufficient funds for current or future operating plans.

        We currently lease 67,000 square feet of laboratory and office space in
South San Francisco, California. In July 2001, we will begin leasing an
additional 54,000 square feet. We have committed to pay for tenant improvements
to the new facility of at least $2 million. Initially, this facility will
provide more space than is required for our planned operations. As a result, we
intend to sublease approximately 40,000 square feet to a third party for two
years. In addition, we intend to sublease approximately 12,000 square feet of
one of our existing facilities to another third party for two years. We
anticipate that income generated from both subleases will be greater than our
lease obligations for those spaces. Leases on our current and future facilities
expire in the years 2004 and 2011, respectively. All leases provide options to
extend.

        Income taxes. We have incurred net operating losses since inception. At
December 31, 2000, we had federal and state net operating loss carryforwards of
approximately $48.2 million and $17.6 million, respectively. The federal net
operating loss and credit carryforwards will expire at various dates between the
years 2010 and 2020, if not utilized. The State of California net operating
losses will expire at various dates between the years 2003 and 2010, if not
utilized. Utilization of the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.

        The estimates described above under Management's Discussion and Analysis
of Financial Condition and Results of Operations are forward-looking statements
that involve risks and uncertainties. Our actual future capital




                                       28
<PAGE>   29

requirements and the adequacies of our available funds will depend on many
factors, including those under "Risk Factors."


RECENTLY ISSUED ACCOUNTING STANDARDS

        In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"). SFAS 133 requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through net
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative are either offset against the change
in fair value of assets, liabilities, or firm commitments through earnings or
recognized in the other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of the derivative's change in fair value
will be immediately recognized in earnings. SFAS 133 is effective for the
Company's year ending December 31, 2001. The Company does not currently hold any
derivatives and does not expect this pronouncement to materially impact the
Company's financial position or results of operations.

        In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the accounting for revenue recognition. As
required, the Company adopted SAB 101 effective January 1, 2000. Implementation
of this Bulletin did not materially impact the Company's financial position or
results of operations.

        On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation," which provides guidance
on several implementation issues related to Accounting Principles Board Opinion
No. 25. The most significant are clarification of the definition of employee for
purposes of applying Opinion 25 and the accounting for options that have been
repriced. Under the interpretation, the employer-employee relationship would be
based on case law and Internal Revenue Service regulations. The FASB granted an
exception to this definition for outside directors. Implementation of this
interpretation had no impact on the Company's financial statements.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. Due to the
relatively short-term nature of our investments, we believe we have no material
exposure to interest rate risk arising from our investments. Therefore we have
not included quantitative tabular disclosure in this Form 10-K.

        We do not enter into financial investments for speculation or trading
purposes and are not a party to financial or commodity derivatives.

        We have operated primarily in the United States and all sales to date
have been made in U.S. Dollars. Accordingly, we have not had any material
exposure to foreign currency rate fluctuations.




                                       29
<PAGE>   30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                                  ----
<S>                                                                               <C>
Report of Ernst & Young LLP, Independent Auditors..................................F-2
Balance Sheets as of December 31, 2000 and 1999....................................F-3
Statements of Operations for the years ended 2000, 1999 and 1998...................F-4
Statements of Stockholders' Equity for the years ended 2000, 1999 and 1998.........F-5
Statements of Cash Flows for the years ended 2000, 1999 and 1998...................F-6
Notes to Financial Statements......................................................F-7
</TABLE>




                                      F-1
<PAGE>   31


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



To the Board of Directors and Stockholders
ViroLogic, Inc.

        We have audited the accompanying balance sheets of ViroLogic, Inc. as of
December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ViroLogic, Inc. at
December 31, 2000 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.





                                              /s/ ERNST & YOUNG LLP



Palo Alto, California
February 9, 2001




                                      F-2
<PAGE>   32

                                 VIROLOGIC, INC.

                                 BALANCE SHEETS
                   (in thousands, except par value per share)


<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                   ----------------------
                                                                                     2000          1999
                                                                                   --------      --------
<S>                                                                                <C>           <C>
ASSETS
Current assets:
    Cash and cash equivalents ...................................................  $ 12,623      $  2,208
    Short-term investments ......................................................    11,171            --
    Accounts receivable, net of allowance for doubtful accounts of
        $175 in 2000 and $63 in 1999 ............................................     2,404           550
    Inventory ...................................................................       449           287
    Restricted cash .............................................................     1,050           950
    Other current assets ........................................................     1,152           310
                                                                                   --------      --------
      Total current assets ......................................................    28,849         4,305
Property and equipment, net .....................................................    13,234         5,028
Restricted cash .................................................................       979            --
Other assets ....................................................................       585           444
                                                                                   --------      --------
      Total assets ..............................................................  $ 43,647      $  9,777
                                                                                   ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable ............................................................  $  1,865      $  1,457
    Accrued compensation ........................................................     1,305           560
    Other accrued liabilities ...................................................     2,678           788
    Deferred revenue ............................................................       116            81
    Current portion of capital lease obligations ................................       398            --
    Current portion of loans payable ............................................     1,390           897
                                                                                   --------      --------
      Total current liabilities .................................................     7,752         3,783
Long term portion of capital lease obligations ..................................       945            --
Long term portion of loans payable ..............................................     1,019         1,051
Long term deferred rent .........................................................       288           245
Commitments and contingencies
Stockholders' equity:
    Preferred stock, $0.001 par value, 5,000 and 13,959 shares authorized at
        December 31, 2000 and 1999, respectively; issuable in series; none and
        9,749 shares issued and outstanding at December 31, 2000 and 1999,
        respectively ............................................................        --            10
    Common stock, $0.001 par value, 60,000 shares authorized; 19,870 and
        5,097 shares issued and outstanding at December 31, 2000 and
        1999, respectively ......................................................        20             5
    Additional paid-in capital ..................................................    88,772        38,812
    Notes receivable from officers and employees ................................       (31)          (46)
    Accumulated other comprehensive income ......................................       178            --
    Deferred compensation .......................................................    (2,495)       (4,478)
    Accumulated deficit .........................................................   (52,801)      (29,605)
                                                                                   --------      --------
      Total stockholders' equity ................................................    33,643         4,698
                                                                                   --------      --------
      Total liabilities and stockholders' equity ................................  $ 43,647      $  9,777
                                                                                   ========      ========
</TABLE>


---------------------------
See accompanying notes.




                                      F-3
<PAGE>   33

                                 VIROLOGIC, INC.

                            STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                        -----------------------------------
                                                          2000          1999          1998
                                                        --------      --------      -------
<S>                                                     <C>           <C>           <C>
Revenue ..............................................  $  7,466      $  1,069      $   102
Operating costs and expenses:
    Cost of revenue ..................................     5,457           627           17
    Research and development .........................    10,080         9,588        5,977
    General and administrative .......................    10,841         6,804        1,782
    Sales and marketing ..............................     5,890         1,196          484
                                                        --------      --------      -------
        Total costs and operating expenses ...........    32,268        18,215        8,260
                                                        --------      --------      -------
Operating loss .......................................   (24,802)      (17,146)      (8,158)
Interest income ......................................     1,868           249          302
Interest expense .....................................      (262)         (243)        (198)
                                                        --------      --------      -------
Net loss .............................................   (23,196)      (17,140)      (8,054)
Deemed dividend to preferred stockholders ............   (15,700)       (3,100)          --
                                                        --------      --------      -------
Net loss allocable to common stockholders ............  $(38,896)     $(20,240)     $(8,054)
                                                        ========      ========      =======

Basic and diluted net loss per common share ..........  $  (2.62)     $  (4.24)     $ (1.71)
                                                        ========      ========      =======

Weighted average shares used in computing basic and
    diluted net loss per common share ................    14,852         4,772        4,700
                                                        ========      ========      =======
</TABLE>


---------------------------
See accompanying notes.




                                      F-4
<PAGE>   34

                                 VIROLOGIC, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                   CONVERTIBLE
                                                 PREFERRED STOCK             COMMON STOCK        ADDITIONAL
                                                -----------------      ----------------------      PAID-IN
                                                SHARES     AMOUNT      SHARES          AMOUNT      CAPITAL
                                                ------     ------      ------          ------    ----------
<S>                                             <C>        <C>         <C>             <C>       <C>
Balance as of December 31, 1997 ...........        --      $ --         4,836          $   5       $  8,881
Issuance of Series B convertible
preferred stock ...........................     3,935         4            --             --         12,508
Repurchase of common stock ................        --        --            (7)            --             (2)
Exercise of common stock options ..........        --        --            15             --              5
Repurchase of restricted common shares ....        --        --           (34)            --            (11)
Repayment of note receivable ..............        --        --            --             --             --
Net loss ..................................        --        --            --             --             --
                                              -------       ---         -----       --------       --------
Balance as of December 31, 1998 ...........     3,935         4         4,810              5         21,381
Exercise of stock options,  net of
repurchases ...............................        --        --            25             --             44
Issuance of Series C convertible
preferred stock ...........................     5,814         6            --             --         10,729
Issuance of common stock ..................        --        --           112             --          1,087
Stock award to officer ....................        --        --           150             --            555
Repayment of note receivable ..............        --        --            --             --             --
Forgiveness of note receivable ............        --        --            --             --             --
Deferred compensation .....................        --        --            --             --          4,968
Amortization of deferred compensation .....        --        --            --             --             --
Stock-based compensation related to
consultant options ........................        --        --            --             --             48
Net loss ..................................        --        --            --             --             --
Deemed dividend to preferred
stockholders ..............................        --        --            --             --         (3,100)
                                                   --        --            --             --          3,100
                                              -------       ---         -----       --------       --------

Balance as of December 31, 1999 ...........     9,749        10         5,097              5         38,812
Comprehensive loss:
  Net loss ..................................      --        --            --             --             --
  Net unrealized gain on securities
  available-for-sale ........................      --        --            --             --             --
  Comprehensive loss ........................      --        --            --             --             --
Issuance of Series C preferred stock,
net of issuance costs .....................     8,462         8            --             --         15,626
Conversion of Series B and C preferred
stock to common ...........................   (18,211)      (18)        9,588             10              8
Issuance of common stock upon initial
public offering net of issuance costs .....        --        --         5,000              5         31,240
Exercise of warrants ......................        --        --            13             --             24
Issuance of warrants to lender ............        --        --            --             --            318
Repayment of note receivable ..............        --        --            --             --             --
Forgiveness of note receivable ............        --        --            --             --             --
Deferred compensation .....................        --        --            --             --          1,577
Amortization of deferred compensation .....        --        --            --             --             --
Issuance of common stock under 401K Plan ..        --        --            16             --            150
Exercise of employee and nonemployee
stock options .............................        --        --            88             --            274
Stock-based compensation related to
consultant options ........................        --        --            --             --            331
Issuance of stock under employee stock
purchase plan .............................        --        --            68             --            412
Deemed dividend to preferred
stockholders ..............................        --        --            --             --         15,700
                                                   --        --            --             --        (15,700)
                                              -------       ---        ------       --------       --------
Balance as of December 31, 2000 ...........        --       $--        19,870       $     20       $ 88,772
                                              =======       ===        ======       ========       ========
</TABLE>


<TABLE>
<CAPTION>
                                                  NOTES       ACCUMULATED
                                               RECEIVABLE        OTHER                                                TOTAL
                                             FROM OFFICERS   COMPREHENSIVE     DEFERRED          ACCUMULATED       STOCKHOLDERS'
                                              & EMPLOYEES        INCOME      COMPENSATION          DEFICIT            EQUITY
                                             -------------   -------------   ------------        -----------        ------------
<S>                                          <C>             <C>             <C>                 <C>                <C>
Balance as of December 31, 1997 ...............   $(139)           $--              $--           $ (4,411)          $  4,336
Issuance of Series B convertible
preferred stock ...............................      --             --               --                 --             12,512
Repurchase of common stock ....................      --             --               --                 --                 (2)
Exercise of common stock options ..............      (4)            --               --                 --                  1
Repurchase of restricted common shares ........      11             --               --                 --                 --
Repayment of note receivable ..................      37             --               --                 --                 37
Net loss ......................................      --             --               --             (8,054)            (8,054)
                                                  -----           ----          -------           --------           --------
Balance as of December 31, 1998 ...............     (95)            --               --            (12,465)             8,830
Exercise of stock options,  net of
repurchases ...................................      --             --               --                 --                 44
Issuance of Series C convertible
preferred stock ...............................      --             --               --                 --             10,735
Issuance of common stock ......................      --             --               --                 --              1,087
Stock award to officer ........................      --             --               --                 --                555
Repayment of note receivable ..................      16             --               --                 --                 16
Forgiveness of note receivable ................      33             --               --                 --                 33
Deferred compensation .........................      --             --           (4,968)                --                 --
Amortization of deferred compensation .........      --             --              490                 --                490
Stock-based compensation related to
consultant options ............................      --             --               --                 --                 48
Net loss ......................................      --             --               --            (17,140)           (17,140)
Deemed dividend to preferred
stockholders ..................................      --             --               --                 --             (3,100)
                                                     --             --               --                 --              3,100
                                                  -----           ----          -------           --------           --------
Balance as of December 31, 1999 ...............     (46)            --           (4,478)           (29,605)             4,698
Comprehensive loss:
  Net loss ..................................        --             --               --            (23,196)           (23,196)
  Net unrealized gain on securities
  available-for-sale ........................        --            178               --                 --                178
                                                                                                                     --------
  Comprehensive loss ........................        --             --               --                 --            (23,018)
Issuance of Series C preferred stock,
net of issuance costs .........................      --             --               --                 --             15,634
Conversion of Series B and C preferred
stock to common ...............................      --             --               --                 --                 --
Issuance of common stock upon initial
public offering net of
issuance costs ................................      --             --               --                 --             31,245
Exercise of warrants ..........................      --             --               --                 --                 24
Issuance of warrants to lender ................      --             --               --                 --                318
Repayment of note receivable ..................       9             --               --                 --                  9
Forgiveness of note receivable ................       6             --               --                 --                  6
Deferred compensation .........................      --             --           (1,577)                --                 --
Amortization of deferred compensation .........      --             --            3,560                 --              3,560
Issuance of common stock under 401K Plan ......      --             --               --                 --                150
Exercise of employee and nonemployee
stock options .................................      --             --               --                 --                274
Stock-based compensation related to
consultant options ............................      --             --               --                 --                331
Issuance of stock under employee stock
purchase plan .................................      --             --               --                 --                412
Deemed dividend to preferred
stockholders ..................................      --             --               --                 --             15,700
                                                     --             --               --                 --            (15,700)
                                                  -----           ----          -------           --------           --------
Balance as of December 31, 2000 ...............   $ (31)          $178          $(2,495)          $(52,801)          $ 33,643
                                                  =====           ====          =======           ========           ========
</TABLE>


---------------------------
See accompanying notes.




                                      F-5
<PAGE>   35

                                 VIROLOGIC, INC.

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                            ------------------------------------
                                                              2000          1999          1998
                                                            --------      --------      --------
<S>                                                         <C>           <C>           <C>
OPERATING ACTIVITIES
Net loss .................................................  $(23,196)     $(17,140)     $ (8,054)
Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization ........................     1,700         1,135           517
    Non-cash stock-based compensation ....................     4,047         2,227            --
    Expense related to issuance of warrants ..............        77            --            --
    Gain on short-term investments .......................       (72)           --            --
    Changes in assets and liabilities:
        Accounts receivable ..............................    (1,854)         (550)           --
        Inventory ........................................      (162)         (287)           --
        Other current assets .............................      (732)         (210)           21
        Accounts payable .................................       408           871           151
        Accrued compensation .............................       745           397            62
        Other accrued liabilities ........................       376           223           502
        Deferred rent ....................................        43            11           222
        Deferred revenue .................................        35           (67)          148
                                                            --------      --------      --------
           Net cash used in operating activities .........   (18,585)      (13,390)       (6,431)
                                                            --------      --------      --------
INVESTING ACTIVITIES
Purchases of short-term investments ......................   (35,702)           --       (14,500)
Maturities and sales of short-term investments ...........    24,781            --        18,423
Other assets .............................................       (10)         (371)          (52)
Restricted cash ..........................................    (1,079)         (950)           --
Capital expenditures .....................................    (8,391)       (2,625)       (2,585)
                                                            --------      --------      --------
           Net cash (used in) provided by investing
               activities ................................   (20,401)       (3,946)        1,286
                                                            --------      --------      --------
FINANCING ACTIVITIES
Proceeds from loans payable ..............................     1,664            --         2,639
Principal payments on loans payable ......................    (1,203)         (801)         (540)
Proceeds in connection with sale leaseback transactions ..     1,394            --
Principal payments on capital lease obligations ..........       (51)           --            --
Proceeds from issuance of common stock, net of
    common stock repurchases .............................    31,954            30            (1)
Repayments of notes receivable ...........................         9            16            37
Net proceeds from issuance of preferred stock ............    15,634        10,735        12,512
                                                            --------      --------      --------
           Net cash provided by financing
           activities ....................................    49,401         9,980        14,647
                                                            --------      --------      --------
Net increase (decrease) in cash and
    cash equivalents .....................................    10,415        (7,356)        9,502
Cash and cash equivalents at beginning of year ...........     2,208         9,564            62
                                                            --------      --------      --------
Cash and cash equivalents at end of year .................  $ 12,623      $  2,208      $  9,564
                                                            ========      ========      ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ...................................  $    262      $    243      $    198
                                                            ========      ========      ========
SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Deferred stock compensation ..............................  $  1,577      $  4,968      $     --
                                                            ========      ========      ========
Accrued capital expenditures .............................  $  1,514      $     --      $     --
                                                            ========      ========      ========
Warrants issued to lender ................................  $    318      $     --      $     --
                                                            ========      ========      ========
</TABLE>


---------------------------
See accompanying notes.




                                      F-6
<PAGE>   36
                                VIROLOGIC, INC.

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 2000


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

        ViroLogic, Inc. ("ViroLogic" or the "Company") is a biotechnology
company developing, marketing and selling innovative products to guide and
improve treatment of viral diseases. ViroLogic was incorporated in the state of
Delaware on November 14, 1995 and commenced commercial operations in 1999. We
developed a practical way of directly measuring the impact of genetic mutations
on drug resistance and using this information to guide therapy. We have
proprietary technology, called PhenoSense, for testing drug resistance in
viruses that cause serious viral diseases such as AIDS, hepatitis B and
hepatitis C. Our first product, PhenoSense HIV, is a test that directly and
quantitatively measures resistance of a patient's HIV to anti-viral drugs. The
results help physicians select appropriate drugs for their HIV patients. We are
also developing PhenoSense products for other serious viral diseases and are
collecting PhenoSense test results and related clinical data in an interactive
database that we plan to make available to physicians for use in therapy
guidance.


MANAGEMENT'S PLANS

        As of December 31, 2000, the Company had cash, investments and
short-term restricted cash on hand of $24.8 million and working capital of
$21.1 million. Since inception, the Company has an accumulated deficit of
approximately $52.8 million. Management expects to continue to incur additional
losses in the foreseeable future as the Company continues the development and
commercialization of future technologies. Management recognizes the need to
raise additional funds from outside sources and has engaged investment bankers
to assist in that effort. In February 2001, the Company's Board of Directors
engaged UBS Warburg LLC and CIBC World Markets to assist the Company in pursuing
various strategic alternatives, including research and development
collaborations, international alliances, marketing partnerships, and financing
opportunities.

        Management believes that cash and investment balances as of December 31,
2000 will be sufficient to fund planned expenditures through at least December
31, 2001. Management believes that the Company will be able to obtain additional
funds through either public, private equity or other arrangements with corporate
partners or other sources. These funds may not be available on favorable terms,
or at all. If adequate funds are not available on attractive terms, the Company
may be required to curtail operations significantly or to obtain funds by
entering into financing, supply or collaboration agreements on unattractive
terms. In addition, the Company may choose to raise additional capital due to
market conditions or strategic considerations even if it has sufficient funds
for current or future operating plans.


REVERSE STOCK SPLIT

        On February 21, 2000, the Company's board of directors approved a one
for two reverse split of common stock which became effective on April 17, 2000.
The accompanying financial statements have been adjusted retroactively to
reflect the reverse split. The conversion ratios of the respective series of
convertible preferred stock were automatically adjusted to reflect the reverse
split.


USE OF ESTIMATES

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.


CASH EQUIVALENTS

        ViroLogic considers all highly liquid investments with original
maturities of three months or less from the date of purchase to be cash
equivalents. Management determines the appropriate classification of its cash
equivalents and investment securities at the time of purchase and reevaluates
such determination as of each balance sheet date.




                                      F-7
<PAGE>   37

SHORT-TERM INVESTMENTS

        Management has classified ViroLogic's marketable securities as
available-for-sale securities in the accompanying financial statements.
Available-for-sale securities are carried at market value with unrealized gains
and losses included in accumulated other comprehensive income in stockholders'
equity. Realized gains and losses are included in interest income. The cost of
securities sold is based on the specific identification method.

        ViroLogic invests its excess cash in U.S. government and agency
securities, debt instruments of financial institutions and corporations, and
money market funds with strong credit ratings. The Company has established
guidelines regarding diversification of its investments and their maturities
which should maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.


INVENTORY

        Inventory is stated at the lower of standard cost, which approximates
actual cost or market. At December 31, 2000 and 1999, inventories consisted
mainly of raw materials used in the performance of tests.


PROPERTY AND EQUIPMENT

        Property and equipment are recorded at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets,
generally five years. Capitalized software includes software and external
consulting costs incurred to implement new information systems. Computer
hardware and capitalized software are depreciated over three to five years.
Leasehold improvements are amortized over the shorter of the estimated useful
life of the assets or the lease term.


IMPAIRMENT OF LONG-LIVED ASSETS

        In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews
long-lived assets, including property and equipment, for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. Under SFAS 121, an impairment loss
would be recognized when estimated undiscounted future cash flows expected to
result from the use of the asset and its eventual disposition are less than the
asset's carrying amount. Impairment, if any, is assessed using discounted cash
flows. Through December 31, 2000, there have been no such losses.


REVENUE RECOGNITION

        Revenue is recognized upon completion of tests made on samples provided
by customers and the shipment of test results to those customers. Services are
provided to certain patients covered by various third-party payor programs,
including Medicare. Billings for services under third-party payor programs are
included in revenues net of allowances for contractual discounts and allowances
for differences between the amounts billed and estimated payment amounts.
Deferred revenue relates to cash received in advance of delivery of test
results.


RESEARCH AND DEVELOPMENT

        The Company expenses research and development costs as incurred.
Research and development expenses consist primarily of salaries and related
personnel costs, material, supply costs for prototypes and expenses related to
clinical trials to validate the Company's testing processes and procedures and
related overhead expenses.


ROYALTY EXPENSE

        The Company pays royalties under a licensing agreement. These royalties
are directly related to revenue and are therefore classified in cost of revenue.
See "Equipment Financing and Commitments" note below for further discussion.




                                      F-8
<PAGE>   38

ADVERTISING EXPENSES

        The Company expenses the costs of advertising, which also include
promotional expenses, as incurred. Advertising expenses were $2.4 million for
the year ended December 31, 2000. Advertising expenses were minimal for the
years ended December 31, 1999 and 1998.


STOCK-BASED COMPENSATION

        The Company accounts for employee stock option grants using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25 ("APB 25"), which does not require the recognition of compensation
expense for options granted to employees with exercise prices equal to the fair
value of the common stock at the date of grant. Note 6 includes the fair value
disclosures required by Statement of Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 requires the disclosure of pro forma information regarding net loss and
net loss per share as if the Company had accounted for its stock options under
the fair value method.

        The Company accounts for stock option grants to non-employees in
accordance with the Emerging Issues Task Force Consensus No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services," which requires the options
subject to vesting to be periodically re-valued and expensed over their vesting
periods.


COMPREHENSIVE INCOME (LOSS)

        Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income includes certain changes
in equity that are excluded from net income (loss). Specifically, unrealized
gains and losses on our available-for-sale securities, which are reported
separately in stockholders' equity, are included in accumulated other
comprehensive income. Comprehensive income (loss) is included in the Statements
of Stockholders' Equity.


SEGMENT REPORTING

        Effective in January 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has determined that it operates in only one segment. Accordingly,
the adoption of SFAS 131 had no impact on the Company's financial statements.


NET LOSS PER SHARE

        Basic earnings (loss) per share is calculated based on the
weighted-average number of common shares outstanding during the periods
presented, less the weighted-average shares outstanding which are subject to the
Company's right of repurchase. Diluted earnings per share would give effect to
the dilutive effect of common stock equivalents consisting of convertible
preferred stock and stock options and warrants, calculated using the treasury
stock method. Potentially dilutive securities have been excluded from the
diluted earnings per share computations as they have an antidilutive effect due
to the Company's net loss.

        The computation of pro forma net loss per share includes shares issuable
upon the conversion of outstanding shares of convertible preferred stock, using
the as-if converted method, from the original date of issuance.




                                      F-9
<PAGE>   39

        A reconciliation of shares used in the calculations is as follows:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                           -----------------------------------
                                                             2000          1999         1998
                                                           --------      --------      -------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                        <C>           <C>           <C>
Actual:
Net loss allocable to common stockholders ...............  $(38,896)     $(20,240)     $(8,054)
                                                           ========      ========      =======
Weighted-average shares of common stock outstanding .....    14,891         4,856        4,826
Less: weighted-average shares subject to repurchase .....       (39)          (84)        (126)
                                                           --------      --------      -------
Weighted-average shares used in basic and diluted net
loss per common share ...................................    14,852         4,772        4,700
                                                           ========      ========      =======
Basic and diluted net loss per common share .............  $  (2.62)     $  (4.24)     $ (1.71)
                                                           ========      ========      =======
Pro forma (unaudited):
Net loss allocable to common stockholders ...............  $(38,896)     $(20,240)
                                                           ========      ========
Shares used above .......................................    14,852         4,772
Adjusted to reflect weighted-average effect of assumed
conversion of preferred stock ...........................     2,783         3,243
                                                           --------      --------
Weighted-average shares used in pro forma basic and
diluted net loss per common share .......................    17,635         8,015
                                                           --------      --------
Pro forma basic and diluted net loss per common share ...  $  (2.21)     $ (2.53)
                                                           ========      ========
</TABLE>

        The following outstanding options and warrants, prior to the application
of the treasury stock method, and convertible preferred stock, on an
as-converted basis, were excluded from the computation of diluted net loss per
share as they had an antidilutive effect:

<TABLE>
<CAPTION>

                                                                  YEAR ENDED DECEMBER 31,
                                                                 --------------------------
                                                                  2000      1999       1998
                                                                 -----     -----     ------
                                                                       (IN THOUSANDS)
<S>                                                              <C>       <C>       <C>
Convertible preferred stock (as-if converted basis) ...........     --     5,357     2,450
Stock options .................................................  1,665     1,241       357
Warrants to purchase common stock .............................    756       518       518
Warrants to purchase preferred stock (as-if converted basis) ..     --       227       227
</TABLE>


SIGNIFICANT CONCENTRATIONS

        Financial instruments that potentially subject ViroLogic to
concentrations of credit risk primarily consist of cash equivalents and
marketable securities. See "Short-Term Investments" note below for further
discussion.

        In 2000, two customers represented 19% and 18% of total revenues, in
1999, two customers represented 41% and 33% of total revenues, and in 1998, one
company represented 100% of total revenues. The accounts receivable balances
related to these customers as of December 31, 2000 and 1999 were $878,000 and
$356,000, respectively.

        The net change in the allowance for doubtful accounts balance was $0.1
million, $0.1 million and none in 2000, 1999 and 1998, respectively.

        ViroLogic relies on a few companies as the sole source of various
materials in its testing process. Any extended interruption in the supply of
these materials could result in the failure to meet customer demand.


RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"). SFAS 133 requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through net
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative are either offset against the change
in fair value of assets, liabilities, or firm commitments through earnings or
recognized in the other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of the derivative's change in fair value
will be immediately recognized in earnings. SFAS 133 is effective for the
Company's year ending December 31, 2001. The Company does not currently hold any
derivatives and does not expect this pronouncement to materially impact the
Company's financial position or results of operations.




                                      F-10
<PAGE>   40

        In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the accounting for revenue recognition. As
required, the Company adopted SAB 101 effective January 1, 2000. Implementation
of this Bulletin did not materially impact the Company's financial position or
results of operations.

        On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation," which provides guidance
on several implementation issues related to Accounting Principles Board Opinion
No. 25. The most significant are clarification of the definition of employee for
purposes of applying Opinion 25 and the accounting for options that have been
repriced. Under the interpretation, the employer-employee relationship would be
based on case law and Internal Revenue Service regulations. The FASB granted an
exception to this definition for outside directors. Implementation of this
interpretation had no impact on the Company's financial statements.


RECLASSIFICATIONS

        Certain reclassifications of prior year amounts have been made to
conform with the current year presentation.


2. SHORT-TERM INVESTMENTS

        The amortized cost, gross unrealized gains and losses, and estimated
fair value for available-for-sale securities by major security type and class of
security at December 31, 2000 are as follows (none at December 31, 1999):

<TABLE>
<CAPTION>
                                                             GROSS
                                                           UNREALIZED
                                               AMORTIZED     HOLDING    ESTIMATED
                                                  COST        GAIN      FAIR VALUE
                                               ---------   ----------   ----------
                                                         (IN THOUSANDS)
<S>                                            <C>         <C>          <C>
Maturing within one year:
       Certificate of deposit ..............    $   308       $ --       $   308
Maturing between one and two years:
    U.S. government obligations ............      1,985         42         2,027
    Corporate bonds and notes ..............      8,700        136         8,836
                                                -------       ----       -------
Total available-for-sale ...................    $10,993       $178       $11,171
                                                =======       ====       =======
</TABLE>




                                      F-11
<PAGE>   41

3. PROPERTY AND EQUIPMENT

        Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                         ---------------------
                                                           2000          1999
                                                         --------      -------
                                                            (IN THOUSANDS)
<S>                                                      <C>           <C>
        Machinery, equipment and furniture ............  $  8,099      $ 5,745
        Leasehold improvements ........................     6,124          447
        Capitalized software ..........................     2,618          744
                                                         --------      -------
                                                           16,841        6,936
        Accumulated depreciation and amortization .....    (3,607)      (1,908)
                                                         --------      -------
        Property and equipment, net ...................  $ 13,234      $ 5,028
                                                         ========      =======
</TABLE>

4. OTHER ACCRUED LIABILITIES

        Other accrued liabilities consists of the following:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                         ---------------
                                                          2000      1999
                                                         ------     ----
                                                          (IN THOUSANDS)
<S>                                                      <C>        <C>
        Accrued leasehold improvement costs ...........  $1,125     $ --
        Accrued software costs ........................     389       --
        Accrued accounting and legal fees .............     329      139
        Accrued marketing and promotion costs .........     169       75
        Property taxes payable ........................     141       71
        Other .........................................     525      503
                                                         ------     ----
        Total other accrued liabilities ...............  $2,678     $788
                                                         ======     ====
</TABLE>


5. EQUIPMENT FINANCING AND COMMITMENTS

        ViroLogic executed an operating lease agreement in December 1997 for its
laboratory and office space. The operating lease provides for two successive
extensions of three and four years, respectively. The lease term expires in
November 2004. In January 1998, ViroLogic executed a tenant improvement
agreement for the construction of laboratory and office improvements of up to
$1.0 million. An additional obligation of approximately $18,300 per month for 83
months commencing February 1998 has been added to the operating lease
commitment.

        In May and November 1999, ViroLogic entered into two operating lease
agreements for two additional facilities. Each lease has a term of 10 years from
the lease commencement date of March 2000 and July 2001, respectively. Each of
the leases provides for two additional successive five year extensions at the
then-prevailing rate. In connection with the lease commencing July 2001,
ViroLogic has committed to pay for tenant improvements to the facility of at
least $2 million.

        As of December 31, 2000, in connection with the facility leases executed
in May and November 1999, ViroLogic has two deposits totaling approximately $2.0
million which secure standby letters of credit. $1.1 million of these deposits
is expected to be released in 2001. As of December 31, 1999, in connection with
the facility lease executed in May 1999, ViroLogic had a $0.9 million deposit
which secured a standby letter of credit. These deposits have been recorded as
"restricted cash" in the balance sheet.




                                      F-12
<PAGE>   42

        In March 2000, ViroLogic established an equipment financing facility
with a total commitment of $1.3 million. ViroLogic used this entire facility to
fund machinery and equipment purchases. In August 2000, ViroLogic established an
equipment financing facility for $3.5 million. As of December 31, 2000, $1.3
million of the total commitment was utilized to purchase machinery, equipment
and furniture. Under the terms of the agreement, ViroLogic sold the purchased
assets and leased them back from the lender over a period of three years.
There was no material gain or loss on this transaction and the resulting leases
have been accounted for as capital leases. The unused $2.2 million of the lease
line is available through at least March 2001.

        As of December 31, 2000 and 1999, ViroLogic had $5.8 million and $3.5
million, respectively, of property and equipment financed through long term
equipment financing obligations. The obligations under the equipment financings
are secured by the equipment financed, bear interest at weighted-average fixed
rates of approximately 10.8% and 10.4%, for 2000 and 1999, respectively, and are
due in monthly installments through 2005. Some of these equipment financing
agreements require a balloon payment at the end of their respective terms. The
carrying amount of the equipment approximates the corresponding loan balance.

        As of December 31, 2000, future minimum lease payments under operating
and capital leases and principal payments on loans are as follows:

<TABLE>
<CAPTION>
                                                         OPERATING     LOANS       CAPITAL
                                                          LEASES      PAYABLE      LEASES
                                                         ---------    -------      -------
                                                                  (IN THOUSANDS)
<S>                                                      <C>          <C>          <C>
Year ending December 31:
    2001 ...............................................  $ 2,253     $ 1,598      $   576
    2002 ...............................................    2,967         931          576
    2003 ...............................................    3,046         120          520
    2004 ...............................................    3,068          --            5
    2005 ...............................................    2,360          --            3
    Thereafter .........................................   13,031          --           --
                                                          -------     -------      -------
        Total minimum lease and principal payments .....  $26,725       2,649        1,680
                                                          =======
Amount representing interest ...........................                 (240)        (337)
                                                                      -------      -------
Present value of future payments .......................                2,409        1,343
Current portion of loans and leases ....................               (1,390)        (398)
                                                                      -------      -------
Noncurrent portion .....................................              $ 1,019      $   945
                                                                      =======      =======
</TABLE>

        Rental expense was approximately $1.8 million, $0.9 million and $0.9
million in 2000, 1999, and 1998, respectively.


LICENSE AGREEMENT

        ViroLogic licenses technology for performing a step in the PhenoSense
test. The license is non-exclusive and lasts for the life of the patent term of
the licensor's last related patent. In general, newly-issued patents have a term
of twenty years. In exchange for the license, ViroLogic has agreed to pay a
royalty based on the net service revenues received from product sales. Royalty
expense recorded under this agreement was $0.2 million in 2000. Royalty expense
in 1999 and 1998 was minimal.


6. STOCKHOLDERS' EQUITY

INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK

        On May 1, 2000, ViroLogic completed its initial public offering in which
it sold 5,000,000 shares of Common Stock at $7.00 per share. Upon the closing of
the offering, all of ViroLogic's outstanding preferred stock automatically
converted into an aggregate of 9,587,769 shares of common stock. After the
offering, ViroLogic's authorized capital consisted of 60,000,000 shares of
common stock, of which 19,870,491 shares were outstanding as




                                      F-13
<PAGE>   43

of December 31, 2000, and 5,000,000 shares of preferred stock, none of which was
issued or outstanding as of December 31, 2000.


DEEMED DIVIDENDS

        In January and February 2000, ViroLogic consummated the sale of
8,461,645 shares of Series C convertible preferred stock, which converted into
4,230,823 shares of common stock effective with ViroLogic's initial public
offering in May 2000. ViroLogic received proceeds of approximately $15.6 million
or $1.85 per share, or $3.70 per converted common share. In November and
December 1999, ViroLogic consummated the sale of 1,675,621 shares of Series C
convertible preferred stock, which converted into 837,810 shares of common stock
effective with ViroLogic's initial public offering. ViroLogic received proceeds
of approximately $3.1 million or $1.85 per share, or $3.70 per converted common
share. At the dates of issuance, ViroLogic believed the per share price of
$1.85, or $3.70 per converted common share, represented the fair value of the
common stock. Subsequent to the commencement of ViroLogic's initial public
offering process, ViroLogic re-evaluated the fair value of its common stock and
for financial reporting purposes, deemed it to be $11.90 per share as of January
and February 2000 and $10.50 per share as of November and December 1999.
Accordingly, the increase in fair value has resulted in a beneficial conversion
feature of $15.7 million and $3.1 million in 2000 and 1999, respectively, that
have been recorded as deemed dividends to preferred stockholders in 2000 and
1999. ViroLogic recorded the deemed dividends at the dates of issuance by
offsetting charges and credits to additional paid-in-capital, without any effect
on total stockholders' equity. The preferred stock dividend increases the loss
applicable to common stockholders in the calculation of basic and diluted net
loss per common share. The amount of the deemed dividends are limited to the
amount of the proceeds of the related financing pursuant to the guidelines set
forth in the Emerging Issues Task Force Consensus No. 98-5.


PREFERRED STOCK

        As of December 31, 2000, there were 5,000,000 shares of preferred stock
authorized, of which none were issued or outstanding. By filing a certificate
pursuant to the Delaware General Corporation Law the Board of Directors is
authorized to fix or alter the designation, powers, preferences and rights of
the shares of each series of preferred stock and the qualifications, limitations
or restrictions of any wholly unissued series of preferred stock.


WARRANTS

        In connection with the May 1996 sale of Series A preferred stock,
ViroLogic issued to four investors warrants to purchase an aggregate of 792,188
shares of Series A preferred stock at a price of $1.84 per share. The warrants
expire on May 30, 2001. Pursuant to the conversion of all Series A preferred
stock in November 1997, these warrants are now exercisable for 396,093 shares of
common stock at an exercise price of $3.68 per share. The value of the warrant
was deemed to be insignificant, therefore, no value was recorded.

        In connection with the loan agreement signed in October 1996, ViroLogic
issued the lender a warrant to purchase an aggregate of 11,050 shares of
ViroLogic's common stock for $3.68 per share. The warrant expires on October 16,
2002. The value of the warrant was deemed to be insignificant and, therefore, no
value was recorded. These warrants were exercised in the second quarter of 2000.

        Pursuant to the operating lease signed in 1997, ViroLogic issued the
landlord a warrant to purchase an aggregate of 100,000 shares of Series A
preferred stock, which converted into 50,000 shares of common stock at $8.00 per
share. The warrant expires in August 2002. The value of the warrant was deemed
to be insignificant, therefore, no value was recorded. In 2000, there were 3,000
warrants exercised.

        In connection with the loan agreement signed in January 1998, ViroLogic
issued the lender a warrant to purchase an aggregate of 34,833 shares of common
stock at a price of $8.00 per share. The warrant expires on January 2008. The
value of the warrant was deemed to be insignificant and, therefore, no value was
recorded.




                                      F-14
<PAGE>   44

        In connection with tenant improvement financing entered into in August
1998, ViroLogic issued the landlord a warrant to purchase up to an aggregate of
10,000 shares of common stock at a price of $8.00 per share. The warrant term is
five years. The value of the warrant was deemed to be insignificant and,
therefore, no value was recorded.

        In connection with the Series B preferred stock issuance in August 1998,
ViroLogic issued to Series B investors warrants to purchase up to 15,890 shares
of common stock at a price of $0.02 per share. The warrant term is 10 years and
was valued at $85,000. ViroLogic issued warrants to purchase 365,000 shares of
Series B preferred stock, or as converted, 227,232 shares of common stock, at a
price of $3.68 per share, or $5.91 per converted common share. The warrant term
is 10 years and was valued at $383,000. The fair values of these warrants were
determined using the Black-Scholes option valuation model. Approximately 2,000
of the warrants issued to the Series B investors were exercised in 2000.

        In connection with loan agreements signed in first quarter 2000,
ViroLogic issued the lender warrants to purchase an aggregate of 26,792 shares
of ViroLogic's common stock for $4.24 per share. The warrant terms are 10 years
and were valued at $318,000. The fair values of these warrants were determined
using the Black-Scholes option valuation model.

STOCK OPTION AND STOCK AWARD TO CHIEF EXECUTIVE OFFICER

        Pursuant to the employment agreement with the chief executive officer,
ViroLogic granted in 1999:

        --  A stock award of 150,000 shares of fully-vested common stock.
            ViroLogic recorded compensation expense of $555,000 for this award
            in 1999, representing the fair value of the common stock on the
            grant date.

        --  An incentive stock option under the Plan covering 150,000 shares of
            common stock at an exercise price of $3.14. This option vested as to
            30,000 shares on December 31, 1999 and an additional 2,500 shares at
            the end of each month thereafter. Deferred compensation of $1.1
            million was recorded on the date of grant. The amount is being
            recognized over the vesting period using the graded vesting method.

        --  A non-statutory stock option, granted outside of the Plan, covering
            250,000 shares of common stock at an exercise price of $3.14 per
            share. This option vests 25% after the first year of employment and
            the remaining 75% in equal monthly installments over the next three
            years, and may be exercised prior to vesting. ViroLogic recorded
            deferred compensation of $1.8 million on the date of grant. The
            amount is being recognized over the vesting period using the graded
            vesting method.

        --  A non-statutory stock option, granted outside of the Plan, covering
            250,000 shares of common stock at an exercise price of $3.14 per
            share. ViroLogic recorded deferred compensation of $1.8 million on
            the date of grant and such amount is being amortized over the
            vesting period using the graded vesting method, unless the
            milestones below are achieved. This option vests 100% after five
            years of employment, unless either one of the following occurs
            before that date:

            --  A merger or acquisition or initial public offering where the per
                share valuation of common stock is imputed to be more than
                $18.50, in which case 125,000 shares shall immediately vest, or

            --  When revenue for any fiscal year exceeds $20.0 million, in which
                case 125,000 shares shall immediately vest

        The chief executive officer may exercise any of these options prior to
vesting by either cash or by delivery of a promissory note, and each of the
options immediately becomes fully vested if, within one year of a change in our
control or liquidation, the chief executive officer is terminated without cause
or resigns for good reason.




                                      F-15
<PAGE>   45

STOCK OPTION PLANS

        On May 20, 1996, ViroLogic's board of directors and stockholders adopted
the 1996 Stock Plan, which was amended and renamed the 2000 Equity Incentive
Plan in February 2000 (the "Plan"). The Plan provides for the granting of
options to purchase common stock and other stock awards to employees, officers,
directors and consultants of ViroLogic. ViroLogic generally grants shares of
common stock for issuance under the Plan at no less than the fair value of the
stock on the grant date; however, management is permitted to grant non-statutory
stock options at a price not lower than 85% of the fair value of common stock on
the date of grant. Options granted under the Plan generally vest over four years
at a rate of 25% one year from the grant date and ratably monthly thereafter.
When the Plan was amended in February 2000, the board of directors increased the
shares reserved for issuance by an additional 3,000,000 shares.

        A summary of activity under the Plan is as follows:

<TABLE>
<CAPTION>
                                         OUTSTANDING STOCK OPTIONS/STOCK RIGHTS
                                      --------------------------------------------
                                        SHARES        NUMBER OF    WEIGHTED-AVERAGE
                                      AVAILABLE        SHARES      PRICE PER SHARE
                                      ---------       ---------    ---------------
<S>                                   <C>             <C>          <C>
Balances at December 31, 1997 .....     261,701         215,300      $   1.62
    Options/rights granted ........    (170,880)        170,880          3.98
    Options/rights exercised ......          --         (15,000)         0.38
    Options/rights forfeited ......      14,250         (14,250)         0.98
    Options/rights repurchased ....      41,040              --          0.32
                                      ---------       ---------
Balances at December 31, 1998 .....     146,111         356,930          2.83
    Additional shares authorized ..     375,000              --            --
    Options/rights granted ........    (519,675)        519,675          3.98
    Options/rights exercised ......          --         (31,254)         2.04
    Options/rights forfeited ......     104,484        (104,484)         2.68
    Options/rights repurchased ....       6,250              --          3.20
                                      ---------       ---------
Balances at December 31, 1999 .....     112,170         740,867          3.69
    Additional shares authorized ..   3,000,000              --            --
    Options/rights granted ........    (636,141)        636,141          8.17
    Options/rights exercised ......          --         (88,475)         3.10
    Options/rights forfeited ......     123,894        (123,894)         6.81
                                      ---------       ---------
Balances at December 31, 2000 .....   2,599,923       1,164,639          5.85
                                      =========       =========
</TABLE>

        In connection with options granted in 2000 and 1999, ViroLogic recorded
deferred stock-based compensation of $1.6 million and $5.0 million,
respectively, representing the difference between the exercise price and the
deemed fair value of the Company's common stock at the date of grant. The amount
is being amortized over the vesting period using the graded vesting method for
the individual options. Amortization of deferred stock-based compensation of
$3.6 million and $0.5 million was recognized during 2000 and 1999, respectively.
In addition, ViroLogic recorded stock-based compensation of $0.3 million and
$48,000 in 2000 and 1999 for services rendered by non-employees.


                                      F-16
<PAGE>   46
        The following table summarizes information about the stock options
outstanding under the Plan at December 31, 2000:

<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                               -----------------------------------    ------------------------
                                             WEIGHTED
                                              AVERAGE     WEIGHTED                    WEIGHTED
                                             REMAINING     AVERAGE                    AVERAGE
                                 NUMBER     CONTRACTUAL   EXERCISE      NUMBER        EXERCISE
RANGE OF EXERCISE PRICE        OUTSTANDING     LIFE         PRICE     EXERCISABLE      PRICE
-----------------------        -----------  -----------   --------    -----------     --------
<S>                            <C>          <C>           <C>         <C>             <C>
$0.64-0.80................        30,915       6.34         $0.67        26,847         $0.67
3.14......................       324,550       8.83          3.14       106,839          3.14
3.20......................        86,067       7.22          3.20        46,686          3.20
3.70......................       219,327       9.11          3.70        29,907          3.70
5.40-7.00.................       232,180       8.50          5.88        71,636          5.40
7.75-11.31................       176,400       9.70          9.72         9,998          9.53
12.56-18.75...............        86,100       9.69         16.52         4,499         17.55
19.25-22.13...............         9,100       9.67         20.03            --            --
                               ---------                                -------
                               1,164,639                                296,412
                               =========                                =======
</TABLE>


COMMON STOCK SUBJECT TO REPURCHASE

        Certain stock options granted pursuant to the Plan may be exercised
prior to vesting, subject to ViroLogic's right to repurchase at the original
exercise price if the holder terminates employment. The right to repurchase
lapses over the original option vesting period, which is generally four years.
From inception through December 31, 2000, employees purchased 344,250 shares of
common stock, of which 14,635 shares are unvested and remain subject to
repurchase. ViroLogic has repurchased 41,040 shares in accordance with these
rights.


EMPLOYEE STOCK PURCHASE PLAN

        In February 2000, the board of directors adopted the 2000 Employee Stock
Purchase Plan (the "Stock Plan"). ViroLogic has reserved a total of 500,000
shares of common stock for issuance under the Stock Plan. The Stock Plan permits
eligible employees to acquire shares of ViroLogic's common stock through payroll
deductions of up to 15% of their eligible earnings. All full-time employees of
ViroLogic, except 5% stockholders, are eligible to participate in the Stock
Plan. The initial offering period began May 1, 2000, the effective date of the
initial public offering. The purchase price of the shares is the lesser of 85%
of the fair value of the shares at the offering date or purchase date, as
defined by the Stock Plan. Of the 500,000 shares of common stock reserved for
issuance under the Stock Plan, 68,278 shares were issued as of December 31,
2000.


401(k) PLAN

        ViroLogic's 401(k) Plan covers substantially all employees. Employees
may contribute up to 15% of their eligible compensation, subject to certain
Internal Revenue Service restrictions. ViroLogic matches employee contributions
in the form of ViroLogic common shares. In 2000, the 401(k) Plan was amended to
increase the matching percentage to 25% of the employee contribution. In 1999
and 1998 the matching percentage was 5% of the employee contribution. The match
is effective December 31 of each year and is fully vested when made. ViroLogic
recorded 401(k) matching expense of $0.2 million in 2000 and minimal expense in
1999 and 1998. As of December 31, 2000, ViroLogic had issued approximately
25,000 shares under the 401(k) Plan.


PRO FORMA INFORMATION

        SFAS 123 requires pro forma information regarding net loss, which has
been determined as if ViroLogic accounted for its employee stock options under
the fair value method of SFAS 123. ViroLogic estimates the fair value of these
options at the date of grant using the Black-Scholes option valuation model with
the following weighted-average assumptions for 2000, 1999 and 1998: risk-free
interest rate of 5.5%; a weighted-average expected life of the option from grant
date of four years; volatility factor of the expected market price of
ViroLogic's common stock of 65% from May through December 2000 and volatility
factor of zero for the period prior to May 2000 as required by the minimum
value method; and a dividend yield of zero. The weighted-average fair value of
stock options granted in 2000, 1999 and 1998 was $7.82, $6.90 and $1.17,
respectively.




                                      F-17
<PAGE>   47
        For pro forma purposes, the estimated fair value of ViroLogic's
stock-based awards to its employees is amortized over the options vesting
period. ViroLogic's pro forma information is as follows:

<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                     -----------------------------------
                                       2000          1999         1998
                                     --------      --------      -------
                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                  <C>           <C>           <C>
As reported:
    Net loss allocable to common
      stockholders ................  $(38,896)     $(20,240)     $(8,054)
                                     ========      ========      =======
    Net loss per share ............  $  (2.62)     $  (4.24)     $ (1.71)
                                     ========      ========      =======
Proforma:
    Net loss allocable to common
      stockholders ................  $(39,498)     $(20,491)     $(8,153)
                                     ========      ========      =======
    Net loss per share ............  $  (2.66)     $  (4.29)     $ (1.73)
                                     ========      ========      =======
</TABLE>

        The above pro forma effect may not be representative of the pro forma
effect to be expected in future years.


RESERVED SHARES

        As of December 31, 2000, ViroLogic had reserved shares of common stock
for future issuance as follows:

<TABLE>
<CAPTION>
                                                                        SHARES RESERVED
                                                                        ---------------
<S>                                                                     <C>
         Stock options..............................................       4,264,562
         Warrants...................................................         755,599
         Employee Stock Purchase Plan...............................         431,722
                                                                           ---------
                                                                           5,451,883
                                                                           =========
</TABLE>


7. INCOME TAXES

        At December 31, 2000, ViroLogic had federal and state net operating loss
carryforwards of approximately $48.2 million and $17.6 million, respectively. At
December 31, 2000 ViroLogic also had research and other tax credit carryforwards
of approximately $1.1 million. The federal net operating loss and credit
carryforwards will expire at various dates between the years 2010 and
2020, if not utilized. The State of California net operating losses will expire
at various dates between the years 2003 and 2010, if not utilized.

        Utilization of the federal and state net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.

        Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets for financial reporting
purposes and the amount used for income tax purposes. Significant components of
ViroLogic's deferred tax assets for federal and state income taxes are as
follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      -------------------------
                                                        2000             1999
                                                      --------         --------
                                                            (IN THOUSANDS)
<S>                                                   <C>              <C>
Deferred tax assets:
Net operating loss carryforwards                      $ 17,400         $ 10,100
Research and other credits                               1,100            1,000
Capitalized research and development                       600              400
Other                                                      500              200
                                                      --------         --------
Total deferred tax assets                               19,600           11,700
Valuation allowance                                    (19,600)         (11,700)
                                                      --------         --------
Net deferred taxes                                    $     --         $     --
                                                      ========         ========
</TABLE>

        Due to ViroLogic's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $7.9 million, $6.3 million and $3.4 million in 2000, 1999 and 1998,
respectively.




                                      F-18
<PAGE>   48

8. LEGAL MATTER

        On August 12, 1998, a former officer and stockholder filed a complaint
against ViroLogic. In November 1999, ViroLogic settled the claim. The settlement
included a cash payment of $225,000 and the right to retain 100,000 shares of
ViroLogic's common stock that ViroLogic previously had a right to repurchase.
The right to retain the shares triggered a new measurement date for accounting
purposes. In 1999, ViroLogic recorded $1.9 million of legal fees and settlement
related costs, including the non-cash charge related to the retained common
stock.

9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                              MARCH 31      JUNE 30   SEPTEMBER 30  DECEMBER 31     TOTAL
                                              --------      -------   ------------  -----------    --------
                                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                           <C>           <C>          <C>          <C>          <C>
2000
Total revenues............................... $    877      $ 1,947      $ 1,885      $ 2,757      $  7,466
Cost of revenue..............................      684        1,448        1,237        2,088         5,457
Net loss allocable to common stockholders....  (21,164)      (5,017)      (5,934)      (6,781)      (38,896)
Basic and diluted net loss per share.........    (4.19)       (0.34)       (0.30)       (0.34)        (2.62)
Pro forma net loss per share.................    (1.64)       (0.28)          --           --         (2.21)

1999
Total revenues............................... $     85      $   166      $   321      $   497      $  1,069
Cost of revenue..............................       80           65          160          322           627
Net loss allocable to common stockholders....   (2,412)      (3,638)      (5,044)      (9,146)      (20,240)
Basic and diluted net loss per share.........    (0.51)       (0.77)       (1.06)       (1.87)        (4.24)
Pro forma net loss per share.................    (0.33)       (0.51)       (0.62)       (0.95)        (2.53)
</TABLE>





                                      F-19
<PAGE>   49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        Not applicable.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information required by this item with respect to executive officers and
directors is incorporated by reference to the proxy statement to be filed with
the SEC pursuant to Regulation 14A in connection with ViroLogic Inc.'s 2001
annual meeting.

        Directors. The information with respect to directors required by this
item is incorporated herein by reference from the information under the caption
of "Election of Directors," contained in the proxy statement for its Annual
Meeting of Stockholders, scheduled to be held on May 24, 2001, which shall be
filed with the SEC within 120 days from the end of our fiscal year.

        Executive Officers. The information with respect to executive officers
required by this item is set forth in Part I of this report.


ITEM 11. EXECUTIVE COMPENSATION

        The information required by this item is incorporated by reference to
the information under the caption "Executive Compensation" contained in the
proxy statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" contained in the proxy statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated by reference to
the information under the caption contained in "Certain Transactions" contained
in the proxy statement.




                                       30
<PAGE>   50

                                     PART IV


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

(a)(1) Index to Financial Statements

        Reference is made to the Index to Financial Statements under Item 8 in
Part II hereof, where these documents are listed.

(a)(2) Financial Statement Schedules: All schedules have been omitted because
they are not applicable or required, or the information required to be set forth
therein is included in the Financial Statements or notes thereto included in
Item 8 ("Financial Statements and Supplementary Data").

(a)(3) Index to Exhibits - See (c) below.

(b) Reports on Form 8-K

    Not applicable.

(c) Exhibits

<TABLE>
<CAPTION>
EXHIBIT     EXHIBIT
FOOTNOTE    NUMBER
--------    ------
<S>         <C>      <C>
(1)         3.1      Amended and Restated Certificate of Incorporation, as currently in effect.
(1)         3.2      Bylaws, as currently in effect.
            4.1      Reference is made to Exhibits 3.1 and 3.2.
(1)         4.2      Specimen Stock Certificate.
(1)         4.3      Amended and Restated Investors Rights Agreement by and among the Company and
                     certain stockholders of the Company dated August 23, 1999.
(1)         4.4      Form of Indemnity Agreement between the Company and its directors and officers.
(1)         4.5      Warrant Agreement by and between ViroLogic and Lease Management Services, Inc.
                     dated as of October 16, 1996.
(1)         4.6      Warrant Agreement by and between ViroLogic and MMC/GATX Partnership No. 1 dated
                     as of January 30, 1998.(2)
(1)         4.7      Form of Warrant to purchase Common Stock.
(1)         4.8      Form of Warrant to purchase Common Stock.
(1)         4.9      Form of Warrant to Series A Preferred Stock.
(1)         4.10     Form of Warrant to Series A Preferred Stock.
(1)         4.11     Form of Warrant to Series B Preferred Stock.
(1) +       4.12     2000 Equity Incentive Plan, as amended.
(1) +       4.13     Form of Stock Option Agreement under the 2000 Equity Incentive Plan for options
                     granted prior to May 1, 2000.
(1) +       4.14     Form of Stock Option Agreement Pursuant to the 2000 Equity Incentive Plan for
                     options granted after May 1, 2000.
(1)         4.15     Form of Warrant to Purchase Series C Preferred Stock.
(2)*        10.1     Agreement with Roche Molecular Systems, Inc. dated July 29, 1997.
(1)         10.2     Office Lease by and between ViroLogic and Oyster Point Tech Center LLC dated as
                     of May 25, 1999.
(1)         10.3     Office Lease by and between ViroLogic and Trammell Crow Northern California
                     Development, Inc. dated as of November 23, 1999.
(1)         10.4     Equipment Financing Agreement by and between ViroLogic and Lease Management
                     Services, Inc. dated as of October 16, 1996.
(1)         10.5     Loan and Security Agreement by and between ViroLogic and MMC/GATX Partnership
                     No. 1 dated as of January 30, 1998.
(1) +       10.6     Employment Agreement by and between ViroLogic and William D. Young dated
                     September 29, 1999.
</TABLE>




                                       31
<PAGE>   51

<TABLE>
<CAPTION>
EXHIBIT     EXHIBIT
FOOTNOTE    NUMBER
--------    ------
<S>         <C>      <C>
(1) +       10.7     Employment Agreement by and between ViroLogic and Martin H. Goldstein dated
                     February 7, 1996.
(1)         10.8     Equipment Financing Agreement dated March 28, 2000 with Pentech Financial
                     Services, Inc.
(2)         10.9     ViroLogic, Inc. 2000 Equity Incentive Plan, as amended.
   +        10.10    Form of Executive Severance Benefits Agreement.
            10.11    Master Lease Agreement dated September 14, 2000 by and between ViroLogic, Inc. and
                     General Electric Capital Corporation.
            23.1     Consent of Ernst & Young LLP, Independent Auditors.
            24.1     Power of Attorney is contained on the signature page.
</TABLE>


 +   Indicates management or compensatory plan or arrangement required to be
     identified pursuant to Item 14(c).

(*)  Certain confidential portions deleted pursuant to Order Granting
     Application Under the Securities Act of 1933 and Rule 406 Thereunder
     Respecting Confidential Treatment dated May 1, 2000.

(1)  Filed as an exhibit to the Registrant's Registration Statement on Form S-1
     (No. 333-30896) or amendments thereto and incorporated herein by reference.

(2)  Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
     the quarter ended September 30, 2000.




                                       32

<PAGE>   52

                                   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.



                                                 ViroLogic, Inc.


                                                 By:  / S / William D. Young
                                                      -------------------------
                                                      William D. Young
                                                      Chief Executive Officer

Date:  March 26, 2001


                                POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William D. Young and Karen J. Wilson, and
each of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming that all said attorneys-in-fact and agents, or any of them or
their or his substitute or substituted, may lawfully do or cause to be done by
virtue hereof.

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

<TABLE>
<CAPTION>
                  SIGNATURES                                   TITLE                            DATE
                  ----------                                   -----                            ----


<S>                                            <C>                                         <C>
/ S / William D. Young                         Chairman, Chief Executive Officer and       March 26, 2001
--------------------------------------------                  Director
              William D. Young                     (Principal Executive Officer)


/ S / Karen J. Wilson                            Vice President and Chief Financial        March 26, 2001
--------------------------------------------                  Officer
              Karen J. Wilson                   (Principal Financial and Accounting
                                                              Officer)


/ S / Anders Hove, M.D.                                       Director                     March 26, 2001
--------------------------------------------
              Anders Hove, M.D.


/ S / William Jenkins                                         Director                     March 26, 2001
--------------------------------------------
               William Jenkins


/ S / Cristina H. Kepner                                      Director                     March 26, 2001
--------------------------------------------
              Cristina H. Kepner


/ S / David H. Persing, M.D., Ph.D.                           Director                     March 26, 2001
--------------------------------------------
              David H. Persing, M.D., Ph.D.
</TABLE>


                                       33
<PAGE>   53


                                 EXHIBIT INDEX



<TABLE>
<CAPTION>
EXHIBIT     EXHIBIT
FOOTNOTE    NUMBER
--------    ------
<S>         <C>      <C>
(1)         3.1      Amended and Restated Certificate of Incorporation, as currently in effect.
(1)         3.2      Bylaws, as currently in effect.
            4.1      Reference is made to Exhibits 3.1 and 3.2.
(1)         4.2      Specimen Stock Certificate.
(1)         4.3      Amended and Restated Investors Rights Agreement by and among the Company and
                     certain stockholders of the Company dated August 23, 1999.
(1)         4.4      Form of Indemnity Agreement between the Company and its directors and officers.
(1)         4.5      Warrant Agreement by and between ViroLogic and Lease Management Services, Inc.
                     dated as of October 16, 1996.
(1)         4.6      Warrant Agreement by and between ViroLogic and MMC/GATX Partnership No. 1 dated
                     as of January 30, 1998.(2)
(1)         4.7      Form of Warrant to purchase Common Stock.
(1)         4.8      Form of Warrant to purchase Common Stock.
(1)         4.9      Form of Warrant to Series A Preferred Stock.
(1)         4.10     Form of Warrant to Series A Preferred Stock.
(1)         4.11     Form of Warrant to Series B Preferred Stock.
(1) +       4.12     2000 Equity Incentive Plan, as amended.
(1) +       4.13     Form of Stock Option Agreement under the 2000 Equity Incentive Plan for options
                     granted prior to May 1, 2000.
(1) +       4.14     Form of Stock Option Agreement Pursuant to the 2000 Equity Incentive Plan for
                     options granted after May 1, 2000.
(1)         4.15     Form of Warrant to Purchase Series C Preferred Stock.
(2)*        10.1     Agreement with Roche Molecular Systems, Inc. dated July 29, 1997.
(1)         10.2     Office Lease by and between ViroLogic and Oyster Point Tech Center LLC dated as
                     of May 25, 1999.
(1)         10.3     Office Lease by and between ViroLogic and Trammell Crow Northern California
                     Development, Inc. dated as of November 23, 1999.
(1)         10.4     Equipment Financing Agreement by and between ViroLogic and Lease Management
                     Services, Inc. dated as of October 16, 1996.
(1)         10.5     Loan and Security Agreement by and between ViroLogic and MMC/GATX Partnership
                     No. 1 dated as of January 30, 1998.
(1) +       10.6     Employment Agreement by and between ViroLogic and William D. Young dated
                     September 29, 1999.
</TABLE>




<PAGE>   54

<TABLE>
<CAPTION>
EXHIBIT     EXHIBIT
FOOTNOTE    NUMBER
--------    ------
<S>         <C>      <C>
(1) +       10.7     Employment Agreement by and between ViroLogic and Martin H. Goldstein dated
                     February 7, 1996.
(1)         10.8     Equipment Financing Agreement dated March 28, 2000 with Pentech Financial
                     Services, Inc.
(2)         10.9     ViroLogic, Inc. 2000 Equity Incentive Plan, as amended.
   +        10.10    Form of Executive Severance Benefits Agreement
            10.11    Master Lease Agreement dated September 14, 2000 by and
                     between ViroLogic, Inc. and General Electric Capital
                     Corporation.
            23.1     Consent of Ernst & Young LLP, Independent Auditors.
            24.1     Power of Attorney is contained on the signature page.
</TABLE>


 +   Indicates management or compensatory plan or arrangement required to be
     identified pursuant to Item 14(c).

(*)  Certain confidential portions deleted pursuant to Order Granting
     Application Under the Securities Act of 1933 and Rule 406 Thereunder
     Respecting Confidential Treatment dated May 1, 2000.

(1)  Filed as an exhibit to the Registrant's Registration Statement on Form S-1
     (No. 333-30896) or amendments thereto and incorporated herein by reference.

(2)  Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
     the quarter ended September 30, 2000.