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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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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, 2002

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
(State or other jurisdiction of
incorporation or organization)                        |  | 94-3234479
(I.R.S. Employer
identification no.)
|                                                                                               |  |                                                
|345 Oyster Point Blvd
South San Francisco, California
(Address of principal executive offices) |  | 94080
(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 [X].

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [   ] No [X].

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 28, 2002 was $43,358,224.*

The number of shares outstanding of the Registrants Common Stock was
28,608,747 as of March 28, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

The registrants Definitive Proxy Statement, to be filed with the
Securities and Exchange Commission (the Commission) pursuant to Regulation
14A in connection with the 2003 Annual Meeting of Stockholders to be held on
May 21, 2003 (the 2003 Annual Meeting), is incorporated by reference into
Item 5 of Part II and Part III of this Report.

Certain exhibits filed with the Registrants (i) Registration Statement on
Form S-1 (Registration No. 333-30896), as amended, (ii) Quarterly Reports on
Form 10-Q for the three months ended September 30, 2000, March 31, 2001, June
30, 2001 and June 30, 2002, (iii) Annual Reports on
Form 10-K for the years ended
December 31, 2000 and 2001 and (iv) Current Reports on Form 8-K filed July 6, 2001,
March 26, 2002 and November 25, 2002 are incorporated by reference into part IV
of this Report.



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|* |  | Excludes 9,175,665 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 such
persons are affiliates for any other purpose.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                       
|              | Item 2. Properties                                                                                     
|              | Item 3. Legal Proceedings                                                                              
|              | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|              | Item 6. Selected Financial Data                                                                        
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|              | Item 8. Financial Statements and Supplementary Data                                                    
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|Part III     
|              | Item 10. Directors and Executive Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Controls and Procedures                                                                       
|Part IV      
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES   
|CERTIFICATION
|EXHIBIT INDEX
|EXHIBIT 23.1 
|EXHIBIT 99.1 



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TABLE OF CONTENTS

|               |  |                                                                                                |  |    
|-------------- |  | ---------------------------------------------------------------------------------------------- |  | ---
|PART I         |  |                                                                                                |  |    
|Item 1.        |  | Business                                                                                       |  | 3  
|Item 2.        |  | Properties                                                                                     |  | 28 
|Item 3.        |  | Legal Proceedings                                                                              |  | 28 
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                            |  | 28 
|PART II        |  |                                                                                                |  |    
|Item 5.        |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 29 
|Item 6.        |  | Selected Financial Data                                                                        |  | 30 
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 31 
|Item 7A        |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 39 
|Item 8.        |  | Financial Statements and Supplementary Data                                                    |  | F-1
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 40 
|PART III       |  |                                                                                                |  |    
|Item 10.       |  | Directors and Executive Officers of the Registrant                                             |  | 40 
|Item 11.       |  | Executive Compensation                                                                         |  | 40 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |  | 40 
|Item 13.       |  | Certain Relationships and Related Transactions                                                 |  | 40 
|Item 14.       |  | Controls and Procedures                                                                        |  | 40 
|PART IV        |  |                                                                                                |  |    
|Item 15.       |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 41 
|SIGNATURES     |  |                                                                                                |  | 44 
|CERTIFICATIONS |  |                                                                                                |  | 45 

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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 and GeneSeq testing products, the growth of
our pharmaceutical business, research and development expenditures, adequacy of
our capital resources, and other financial matters. 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 resistance testing products, the effectiveness of our
competitors existing products and new products, the ability to effectively
manage growth, the risks associated with our dependence on patents and
proprietary rights, and the outcome of investigations by the SEC and U.S.
Attorneys Office. These factors and others are more fully described in Risk
Factors Related to Our Business 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 HIV/AIDS, hepatitis B and hepatitis C. Our products are used
by physicians in selecting optimal treatments for their HIV patients and by
industry, academia and government for clinical studies, drug screening and
characterization, and basic research.

We currently market the following products:

  PhenoSense HIV. This phenotypic test directly and quantitatively
measures resistance of a patients HIV to anti-viral drugs. It is used by
physicians in patient testing and by pharmaceutical customers in their research
and development activities.

  GeneSeq HIV. This genotypic test examines and evaluates the genetic
sequences of a patients HIV. It is used by physicians in patient testing and
by pharmaceutical customers in their research and development activities.

  PhenoSense GT.This product combines our PhenoSense HIV and GeneSeq HIV
tests into one test on an integrated report to provide comprehensive drug resistance information to assist physicians
in selecting optimal treatments for their HIV patients.

  Replication Capacity HIV.This test measures viral fitness, which is a
measure of a virus ability to reproduce and infect new cells. We currently
offer this product free of charge when a pharmaceutical customer or physician
orders one of the reports generated by our PhenoSense products. In the future
we may offer this product on a stand-alone basis.

  PhenoScreen.This phenotypic product provides high-throughput screening
for potential clinical drug candidates for pharmaceutical customers.

  PhenoSense HIV Entry and GeneSeq HIV Entry.We currently market both a
phenotypic entry assay, which we call PhenoSense HIV Entry, and a genotypic
entry assay we call GeneSeq HIV Entry, to pharmaceutical customers for use
during drug development and clinical trials. Each is an entry assay to measure
HIV resistance to entry inhibitors. We intend to offer these tests to
physicians for patient testing after pharmaceutical drugs become available for
patient use. When this test becomes available for patient testing, it may be
incorporated into one of our existing products or offered as a stand-alone
product.

  PhenoSense
HIV Vaccine Entry.This entry assay is sold to pharmaceutical
customers to aid in the development of HIV vaccines.

  GeneSeq HBV.Like our GeneSeq HIV product, this genotypic test examines
and evaluates the genetic sequences of hepatitis B. We intend to offer this
test to physicians for patient testing after pharmaceutical drugs become
available for patient use.

We are also developing additional products. Like our other tests, we
anticipate that these tests will be used first by pharmaceutical companies in
their drug development activities, and later by physicians for patient testing
after drugs become available for patient use:

  PhenoSense HCV.This is a phenotypic test directed toward hepatitis C.

  GeneSeq HCV.This is a genotypic test directed toward hepatitis C.

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  PhenoSense HBV.This is a phenotypic test directed toward hepatitis B.

We are also collecting resistance test results and related clinical data
in a database that we use to assist pharmaceutical customers in drug marketing
and drug development. This database may be made available to physicians for use
in therapy guidance in the future.

The continued development of these
new products depends upon our being able to secure adequate funding.
Historically, such funding has come from internal sources and outside
sources such as grants from the National Institutes of Health. In the
future, however, we plan to increasingly rely on grants or other
outside support for research and development funding, and if we are
unable to obtain such support the development of these products may
be delayed or terminated.

2002 Highlights

During 2002, we launched three new products: Replication Capacity HIV for
use by physicians in patient testing; PhenoScreen and PhenoSense HIV Vaccine
Entry for use by pharmaceutical customers. Total revenue in 2002 was $25.3
million, a 38 percent increase from 2001. Net loss applicable to common
stockholders in 2002 was $33.3 million, resulting in an accumulated deficit of
$100.8 million at December 31, 2002. Cash used in operating activities in 2002
was $19.3 million, and we received approximately $20.1 million of gross proceeds
from two private placements and an equity investment from Pfizer Ireland
Pharmaceuticals. In November 2002, we implemented a restructuring plan to
reallocate resources to revenue maximizing activities and reduce cash
consumption. The restructuring plan included a reduction in work force of
approximately 17 percent or 35 employees, and resulted in a charge of $0.3
million for salaries, severance and other personnel related costs.

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 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 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 seventeen drugs approved by the U.S. Food and Drug Administration
(FDA) which are generally used in various combinations to treat HIV
infections. Combination therapy requires each drug in the combination to be
active (in other words, interfere with key viral functions) 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, or work for a shorter period
of time, and leaves the patient with fewer future treatment options.
Additionally, drug resistant viruses are transmitted to newly infected
individuals, increasing the risk that initial treatment for those individuals
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 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 a few years ago,
physicians chose drugs without drug resistance tests based on a patients
treatment history and assumptions regarding drug resistance of the patients
virus, without knowing to which drugs the patients virus was resistant, and
frequently changed all drugs in a treatment regimen even when some might have
still been effective. When physicians inadvertently select ineffective drugs,
patients become more seriously ill, suffer toxic side effects, and
unnecessarily bear the costs of the drugs.

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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 has been affirmed
in guidelines from panels led by the U.S. Department of Health and Human
Services, the International AIDS Society-USA and the EuroGuidelines Group,
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 direct 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 because the virus in culture might 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 of the virus, and attempt to correlate these mutations
with drug resistance.

Our Solution

We believe our PhenoSense technology has significantly improved viral drug
resistance testing. Our technology, which we believe to be the only currently
available method that completely eliminates all prolonged virus
culture steps, uses a genetically engineered virus that replicates only once. As a result, we
avoid the need to culture viruses during testing, which makes the tests more
consistent and accurate than competing phenotypic tests currently available 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
| | - |  | --------------------------------------

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| |  |  | 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.

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 administered 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 drugs
to inhibit replication. We produce curves for each commercially available drug.

Our Strategy

Our objective is to be the world leader in developing and commercializing
products and information systems to guide treatment of serious diseases. Our
first products are in the field of HIV/AIDS; future target therapeutic areas
may include hepatitis and oncology. Key elements of our strategy are to:



| |  |  | Establish ViroLogic As The World Leader In Drug Resistance.We
believe we have firmly established ourselves as a prominent force in the
medical and scientific community in the field of HIV drug resistance. We
present important new scientific discoveries at major meetings each year
and publish those findings in prominent peer-reviewed journals. Many of
the major pharmaceutical companies have partnered with ViroLogic in
training their organizations on the topic of HIV drug resistance and in
educating the physician community.                                                                                                                                                                                                                                                                                                          
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Successfully Commercialize our Product Portfolio.We are currently
marketing PhenoSense HIV, PhenoSense GT and GeneSeq HIV to physicians
directly and through scientific publications, clinical trials and
scientific meetings, and to patients through direct-to-patient
advertising. We market our products directly to physicians in the United
States through our own sales force, primarily focusing on the 1,000
leading HIV physicians who treat approximately 80% of the total HIV/AIDS
patient population. We also conduct educational symposia and programs on
HIV drug resistance and resistance testing for physicians, patients and
treatment educators throughout the country. We have collaborative
agreements with two major pharmaceutical companies and informally work
with many others to educate physicians about resistance testing.
|
| |  |  | Provide Broad, Easy Access to our Products.We have created broad
access to our current commercial products from both reimbursement and
distribution standpoints. We have advocated and achieved established
insurance coverage policies for our marketed products throughout the
country, with now over 75% of HIV/AIDS patients having access to
coverage. Our products are also available either directly from us or
through major national and regional reference labs.                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | Apply Our Technology to Drug Discovery and Development.We are
applying our technology to create tools for pharmaceutical companies to
help them determine how patients will respond to particular drugs, to
assist them in screening drug candidates and to use in 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. In the future we
may enter into additional partnerships to jointly discover and develop
drug candidates for the treatment of HIV and other viral diseases.                                                                                                                                    
|
| |  |  | Expand Our PhenoSense Technology to Other Serious Diseases.Using
our proprietary PhenoSense technology, we intend to develop phenotypic
drug resistance testing products for other diseases. We are currently
developing phenotypic and genotypic resistance tests for hepatitis
viruses. We also believe that as the next generation of cancer drugs
gain wide acceptance and use, they may provide a promising application
for ViroLogics platform therapy guidance technologies.                                                                                                                                                                                                                                                                                                                                                                     

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| |  |  | Maintain a Strong Intellectual Property Portfolio.We have patent
coverage for our PhenoSense HIV product and patent applications directed
to our other 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, launched commercially in 1999, is a phenotypic drug
resistance test that measures the resistance of HIV to all commercially
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.

HIV now affects nearly one million people in the United States and over 40
million people worldwide. Seventeen anti-viral drugs are FDA-approved for
treatment of HIV infection and more than 40 additional drugs are currently in
development. Despite the availability of anti-viral drugs, HIV is difficult to
treat effectively because it replicates rapidly and becomes resistant to
anti-viral drugs. Selecting the right combination of drugs for optimal
treatment of HIV patients is often difficult when physicians have limited
information about the susceptibility to specific anti-viral drugs of the HIV
infecting an individual patient.

Physicians are now routinely using resistance testing because drug
resistance in HIV/AIDS treatment has become a serious crisis. 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
each 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 is well 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 has been
expanded to incorporate the HIV envelope gene in order to test this new group
of drugs for pharmaceutical customers. 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 gene segments corresponding to the targets
of the new drugs, such as HIV integrase inhibitors or assembly inhibitors, into
our proprietary PhenoSense HIV technology, thereby allowing us to create
resistance tests for each of these targets.

More than five 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 one or more
standard combination therapy regimens. Patients in these trials who had their
therapy guided by resistance tests subsequently had, on average, significantly
lower amounts of virus in their blood, than patients who did not have their
therapy guided by resistance tests; and in the group of patients that had their
therapy guided by resistance testing, there were a significantly higher
percentage of patients with undetectable levels of virus in their blood after
therapy, than in the control groups who did not have their therapy guided by
resistance testing. Another 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 anti-viral treatment or viruses that are more highly drug
resistant; although this trial did not show a difference in primary endpoints.

We have, with our collaborators, performed over 25 retrospective clinical
trials that support the conclusion that resistance testing of HIV patients, and
specifically the use of PhenoSense HIV, could improve their treatment outcomes.
These studies have evaluated over 2,500 patients in many different clinical
settings, at various stages of HIV disease, and with various treatment
histories. The studies have assessed newly infected adult patients, adult
patients treated previously with one or more treatment regimens, pregnant
patients, and pediatric patients. These studies have demonstrated that the
results of PhenoSense HIV were significantly associated with better treatment
outcomes, generally as measured by greater reductions in viral load in the
patients. In addition, studies have shown that patients treated with a new
regimen that included a greater number of susceptible drugs, as determined by
PhenoSense HIV, had a significantly greater reduction in viral load than those
patients whose new regimen included fewer susceptible drugs. A landmark
clinical study that used PhenoSense HIV showed the rates of drug-resistant HIV
transmission in North America have nearly quadrupled over the past five years,
demonstrating the value of resistance tests for newly infected patients.
Another landmark study of drug resistance, as measured by PhenoSense HIV, that
was reflective of 209,000 HIV patients throughout the United States detected

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the presence of virus with reduced susceptibility to one or more drugs in
78% of patients with detectable levels of HIV in their blood. The data from
these clinical studies have dramatically increased the awareness of physicians
and public health groups to the importance of drug resistance tests in patient
management.

GeneSeq HIV

We have commercialized a genotypic test we call GeneSeq HIV. Genotypic
tests identify gene sequence mutations that may be associated with resistance
to commercially available drugs. We have developed GeneSeq HIV as a tool to
examine and evaluate the genetic sequences of patients HIV. We also frequently
update the rules correlating genotypic and phenotypic results to improve
genotypic interpretation and our understanding of drug resistance and have
incorporated many of those rules into our genotypic algorithm. We sell GeneSeq
HIV to physicians who request genotypic testing and pharmaceutical companies
that are developing new drugs. We may use the genetic sequence information and
the rules as a component of the database described below.

PhenoSense GT

PhenoSense GT is the first and only available drug resistance test using
phenotypic test results supplemented by genotypic information to provide
physicians with comprehensive resistance information on one integrated,
easy-to-interpret report. Launched in November 2001, it helps physicians and
patients individualize treatment regimens to fight HIV. PhenoSense GT was
designed in response to an increasing number of physicians ordering both
phenotypic and genotypic tests for their patients.

Replication Capacity HIV

We have developed an enhancement of our PhenoSense technology to measure
replication capacity of a patients virus  a critical component of a broader
concept known as viral fitness. Replication capacity 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 may be numerous clinical
applications for our Replication Capacity test. We currently offer this
product free of charge when a pharmaceutical customer or physician orders one
of the reports generated by our PhenoSense products. In the future we may
offer this product on a stand-alone basis.

PhenoScreen

This phenotypic product is intended as a secondary screening assay that
can be used to determine relative potency of a larger number of compounds.
This assay was designed to help drug companies screen clinical drug candidates
for HIV by providing an initial drug susceptibility assessment at a very high
testing capacity and throughput in order to identify lead compounds that will
require subsequently more intensive characterization.

PhenoSense HIV Entry and GeneSeq HIV Entry

We have developed tests to measure phenotypic and genotypic susceptibility
of HIV-1 to a new class of anti-retroviral drugs called viral entry inhibitors.
One entry inhibitor drug is approved for the treatment of HIV infection and
approximately 20 drugs designed to block virus attachment or entry are being
evaluated in preclinical and clinical studies. Several pharmaceutical
companies have already used our tests to determine the anti-viral activity of
their drugs in early or late stages of preclinical and clinical development.

Our PhenoSense HIV Entry technology is being used by
pharmaceutical companies to develop new entry inhibitors that block HIV from
binding to one of two critical HIV co-receptors, CCR5 and CXCR4. HIV must
attach to a cellular receptor (CD4) and one of the two co-receptors to enter
and infect cells. In this case, PhenoSense HIV Entry assay is used to not only assess
the anti-viral activity of these co-receptor blocking drugs but also to
determine which co-receptor the patients virus uses to enter the cell. Data
exist that suggest the co-receptor status of HIV is an important prognostic
factor in HIV-infected patients. The co-receptor tropism assay is also being
used to define patient eligibility for treatment with these new HIV co-receptor
inhibitor drugs.

PhenoSense HIV Vaccine Entry (also referred to as PhenoSense HIV Antibody
Neutralization)

We are currently applying our PhenoSense HIV Entry technology to test
patient blood samples for the presence of antibodies that neutralize the HIV
virus (i.e., prevent the virus from infecting cells). This test is especially
important for the development of an effective prophylactic or therapeutic HIV
vaccine. Currently, numerous companies have HIV vaccine candidates in various
stages of development and require a rapid high-throughput assay for accurate
assessment of neutralizing antibodies. We are currently providing neutralizing
antibody testing for several pharmaceutical companies and academic research
groups.

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GeneSeq HBV

We have
applied our GeneSeq technology to develop a test 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 (CDC) 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. Based on research that shows
that half of patients with chronic HBV have evidence of active disease, and
assuming that anti-viral drug treatment is indicated for patients with active
disease, 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 three (alpha interferon, lamivudine, and adefovir)
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.

As the number and use of HBV drugs increases, we expect the demand for
GeneSeq HBV by physicians making treatment decisions to grow. Prior to that
time, we expect our HBV resistance tests will continue to be used by pharmaceutical
customers in the discovery and development of new HBV drugs.

Products in Development

PhenoSense HCV and GeneSeq HCV

We are currently applying our PhenoSense and GeneSeq technologies to
develop tests to analyze drug resistance of hepatitis C virus, or HCV. HCV
infection causes liver disease and liver cancer. The CDC estimates that four
million people in the United States and more than 170 million people worldwide
are infected with HCV. Based on studies that show that 60% to 85% of persons
infected with HCV develop chronic infection, and assuming that all such persons would
benefit from anti-viral drug therapy, we estimate that 60% to 85% 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. 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.

As the number and use of HCV drugs increase, we expect the demand for
PhenoSense HCV and GeneSeq HCV by physicians making treatment decisions to
grow. Prior to that time, we expect our HCV resistance tests will be used by
pharmaceutical customers in the discovery and development of new HCV drugs.

PhenoSense HBV

We plan to apply our PhenoSense technology to develop a test to analyze
drug resistance of hepatitis B virus, or HBV. As discussed above, HBV infection
is a leading cause of liver disease and liver cancer, and we believe drug
resistance testing will play a significant role in guiding HBV treatment. 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 number and use of HBV drugs increases, we expect the demand for
PhenoSense HBV by physicians making treatment decisions to grow.
Prior to that time, we expect our HBV resistance tests will be used by
pharmaceutical customers in the discovery and development of new HBV drugs.

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Pharmaceutical Customers

We perform resistance testing and research for 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, hepatitis and other viral diseases, our pharmaceutical product and service
offerings have become a significant aspect of our business.

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 most pharmaceutical
companies involved in HIV/AIDS drug development, including: Abbott
Laboratories, Bristol-Myers Squibb, Chiron Corporation, Gilead Sciences,
GlaxoSmithKline, Hoffmann-La Roche Ltd., Merck and Co., Pfizer Pharmaceuticals,
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.

Database.We are collecting resistance test results and related clinical
data in an interactive database to assist our pharmaceutical customers in drug
marketing and drug development. Two important components of our database
include viral resistance, replication, and co-receptor tropism data and a
specimen library comprised of resistance test vectors, virus clones and
site-directed mutants. We have entered into direct contractual relationships
with pharmaceutical companies to provide defined data queries that can enhance
efforts to develop and market their drugs. We have also entered into a
contract with a database product company to commercialize this asset. Our
database may be made available to physicians for use in therapy guidance in the
future.

Drug and Vaccine Discovery.Our database of viral resistance information
and our specimen library which is comprised of resistance test vectors, virus
clones and site-directed mutants is the foundation of our pharmacogenomics
capability for use in screening potential drugs or vaccines. We believe our
drug resistance technology can provide more extensive supplemental and enhanced
information about the activity of chemical compounds than conventional assays.

Sales and Marketing

We currently have 18 experienced sales representatives promoting our
resistance tests in the primary U.S. markets for drugs targeted at HIV/AIDS.
Within these major markets, 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.

Our marketing strategies focus on physician, patient and payor education
in order to increase market awareness of our resistance testing products. 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 an active reimbursement strategy, and educate both private and
public payors concerning drug resistance testing in an effort to maximize
reimbursement. Over 75 percent of HIV/AIDS patients in the United States now
have access to coverage for resistance testing. At the end of 2002, 47 state
Medicaid programs, including California, Florida and New York, the states with
the largest HIV/AIDS patient populations, had favorable coverage policies for
drug resistance testing. Positive HIV resistance testing coverage legislation
has been introduced in those key remaining Medicaid states that have yet to
provide coverage. Medicare and nearly all private payors, including Aetna U.S.
Healthcare, the Blue Cross Blue Shield Organizations, Humana and
UnitedHealthCare pay for resistance testing.

In addition, we have made PhenoSense HIV broadly available through
numerous national and regional reference laboratories and hospitals. We
currently have distribution arrangements with nearly all major national
reference laboratories including Quest Diagnostics, Laboratory Corporation of
America, American Medical Laboratories and ARUP, Mayo Clinic, 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.

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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 currently
have nine issued patents, five allowed patent applications, and pending
applications for seventy-three additional patents, including international
counterparts to our US patents. We have licensed seven patents under the Roche
Molecular Systems, Inc. (Roche) license discussed below. These patents cover
a broad range of technology applicable across our entire current and planned
product line. 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, 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 B and C and other viruses. Unless we are able to
expand our existing license and obtain additional licenses, patents covering
these technologies may adversely impact our ability to commercialize one or
more of our PhenoSense products.

Roche License

We license polymerase chain reaction (PCR) technology from Roche for
performing a step in our PhenoSense and GeneSeq tests. This license is
non-exclusive and lasts for the life of the patent term of the last to expire
licensed Roche patent. Currently, the last Roche patent expires in 2005. 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, which may extend the term of the
license. 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. Roche has the right to
terminate this license if we fail to pay royalties, make a semi-annual royalty
report or participate in proficiency testing. We believe we are in compliance
with these requirements. The license allows us to use technology covered by
the licensed Roche patents within a broad field that includes all of our
currently planned products. If we were to expand our product line beyond the
licensed field, however, we would need to negotiate an expansion of the
license. Royalty expense recorded under this agreement was $1.0 million, $0.7
million and $0.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

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 Tibotec-Virco (division of Johnson &
Johnson) and Specialty Laboratory. We also compete with makers of genotypic
tests such as Applied Biosystems Group, Visible Genetics Inc. (division of
Bayer Diagnostics) 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 among
opinion leaders. However, we believe that ViroLogic is well positioned in this
market as the only company focused on HIV drug resistance with:



| |  |  | Multiple testing platforms (phenotype, genotype and combination)                        
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | Rapid turnaround time (2 weeks or less)                                                 
|
| |  |  | Clinical cutoffs derived using our assay                                                
|
| |  |  | Technologies developed to provide additional resistance information for new drug targets

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

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



| |  |  | 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. 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 phenotypic products
have not been subject to FDA regulation, although we are aware of increasing
activity by the FDA in regards to regulating homebrew HIV genotypic resistance
testing such as ours. 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.

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.

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 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. Although we believe that we are

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currently in compliance in all material respects with such federal, state
and local laws, failure to comply could subject us to denial of the right to
conduct business, fines, criminal penalties and other enforcement actions.

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 issued coverage policies and payment guidelines for resistance testing,
including phenotypic and genotypic testing. Currently, nearly all public and a
majority of private payors have approved the reimbursement of our existing
products. However, the majority of our payors are currently reimbursing our
products at varying levels from 70% to 100% of our list prices. 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.

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 some 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.

Significant uncertainty exists as to the reimbursement status of new
medical products like the products we are currently developing, particularly if
these products fail to show demonstrable value in clinical studies. If
government and other third-party payors do not provide adequate coverage and
reimbursement for our planned products, our revenues will be reduced.

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.

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, but have not received any response to our request.

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

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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.

Patient Privacy

The US Department of Health and Human Services pursuant to the Health
Insurance Portability and Accountability Act of 1996 (HIPPA) has enacted
regulations to prohibit the use or disclosure of protected health information
except for certain purposes or unless specific conditions are met. Protected
health information is information transmitted or maintained in any form  by
electronic means, on paper, or through oral communications that: (1) relates to
the past, present, or future physical or mental health or condition of an
individual, the provision of health care to an individual, or the past,
present, or future payment for the provision of health care to an individual;
and (2) identifies the individual or with respect to which there is a
reasonable basis to believe the information can be used to identify the
individual. Data that have been de-identified in accordance with the Privacy
regulations stringent de-identification standard are not considered protected
health information and are not subject to the regulation. Compliance with HIPPA
is required by October 2003.

Employees

In November 2002, we implemented a restructuring plan to reduce the rate
of our cash consumption. The restructuring plan included a reduction in force
by approximately 17 percent, or 35 employees, with reductions occurring in all
functional areas. We also reduced officers salaries and consolidated certain
operations, including sales and marketing. Our reduction in force included
three executive officers: Frank Barker, Vice President and Chief of
Information Technology, Karen E. Hartwig, Vice President of Marketing, and
Patricia A. Wray, Vice President of Human Resources.

As of March 24, 2003, we had 170 employees, of whom 9 hold PhD or MD
degrees and 25 hold other advanced degrees. Approximately 77 employees are
engaged in clinical laboratory operations, including 32 licensed healthcare
professionals. There are 26 employees in research and development, and 67 in
sales, marketing, information systems, finance and other administrative
functions.

Executive Officers

In 2003, we adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer,
controller, and persons performing similar functions. We intend to post the
text of our code of ethics on our website at www. virologic.com in the section
titled Investor Relations. In addition, we intend to promptly disclose (i)
the nature of any amendment to our code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer,
controller, or persons performing similar functions and (ii) the nature of any
waiver, including an implicit waiver, from a provision of our code of ethics
that is granted to one of these specified individuals, the name of such person
who is granted the waiver and the date of the waiver on our website in the
future.

The following table sets forth, as of March 24, 2003, certain information
concerning our executive officers:

|                             |  |     |    |          |  |                                               
|---------------------------- |  | --- | -- | -------- |  | ----------------------------------------------
|Name                         |  | Age |    | Position
|                             |  |     |    |         
|William D. Young             |  |     | 58 |          |  | Chairman, Chief Executive Officer and Director
|Karen J. Wilson              |  |     | 39 |          |  | Vice President, Chief Financial Officer       
|Tien T. Bui                  |  |     | 38 |          |  | Vice President, Sales and Marketing           
|Nicholas S. Hellmann, MD     |  |     | 44 |          |  | Vice President, Clinical Research             
|Kathy L. Hibbs               |  |     | 39 |          |  | Vice President, General Counsel               
|Christos J. Petropoulos, PhD |  |     | 49 |          |  | Vice President, Research and Development      

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 of directors of IDEC Pharmaceuticals, Inc. and VaxGen, Inc. He
received his bachelors degree 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. 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

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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 bachelors degree in business from the University of
California at Berkeley.

TIEN T. BUI joined ViroLogic as National Sales Director in November 2000
and was named Vice President of Sales in September 2001. Before joining
ViroLogic, Ms. Bui was the Virology Field Director for DuPont Pharmaceuticals
Western Business Unit, where she was responsible for $60 million in product
sales. In addition to her most recent sales management position at Dupont, she
served that company for over 10 years, from 1990 to 2000, in various sales and
marketing roles, including: physician and hospital sales; clinical development
and education; healthcare policy and government affairs; and strategic market
development. Ms. Bui received her bachelors degree in international business
from San Francisco State University and also studied abroad at The University
of Liege, Belgium.

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.

KATHY L. HIBBS joined ViroLogic as Vice President, General Counsel in
April 2001. Prior to joining ViroLogic, Ms. Hibbs was Vice President and
General Counsel for Multitude, Inc., an Internet telecommunications company.
Prior to that, from 1996 to 2000, she served as Senior Corporate Counsel at
Varian Medical Systems, Inc., a leading manufacturer of integrated cancer
therapy systems. At Varian, she was responsible for numerous legal matters,
including regulatory compliance, employment law, litigation, and SEC reporting.
Before her employment with Varian, Ms. Hibbs worked as a litigator for two
California law firms and dealt with various legal issues, including civil
rights and securities law. She received her JD degree from the University of
California, Hastings College of Law, and her bachelors degree in political
science from the University of California, Riverside.

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.

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 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.

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 of the Retroviral Replication Laboratory,
HIV Drug Resistance Program at the National Cancer Institute  Frederick in
Maryland.

DOUGLAS D. RICHMAN, MD Professor of Pathology and Medicine at the
University of California, San Diego School of Medicine and Director of the
Research Center for AIDS and HIV Infection at the San Diego VA Medical Center.

ROBERT T. SCHOOLEY, MD Tim Gill Professor of Medicine and Head of the
Infectious Disease Division at the University of Colorado Health Sciences
Center and Chairman of the Executive Committee of the AIDS Clinical Trials
Group (ACTG), National Institute of Allergy and Infectious Diseases (NIAID).

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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.

In the event that we need to raise additional capital, our stockholders could
experience substantial additional dilution. If such financing is not available
on commercially reasonable terms, we may have to significantly curtail our
operations or sell significant assets and may be unable to continue as a going
concern.

As of
December 31, 2002, we had available cash, investments and
short-term restricted cash of $11.4 million. We anticipate that
our existing capital resources together with funds from the sale of
our products, grant revenue and borrowing under existing equipment
financing arrangements will enable us to
maintain currently planned operations through December 31, 2003. However, we
may need additional funding sooner than that. 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. Our inability to raise capital would seriously harm our business
and product development efforts. 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 our current or future operating plans. However, we
cannot guarantee that additional financing, in any form, will be available at
all, or on terms acceptable to us. Our ability to raise additional capital also
may be dependent upon our common stock being quoted on the Nasdaq Stock Market.
We cannot guarantee that we will be able to satisfy the criteria for continued
listing on the Nasdaq Stock Market or any other market. If we sell equity or
convertible debt securities to raise additional funds, our existing
stockholders may incur substantial dilution and any shares so issued will
likely have rights, preferences and privileges superior to the rights,
preferences and privileges of our outstanding common and preferred stock. In
the event financing is not available in the time frame required, we will be
forced to reduce our operating expenses, curtail sales and marketing
activities, reschedule research and development projects or delay, scale back
or eliminate some or all of our activities. Further, we might be required to
sell certain of our assets or obtain funds through arrangements with third
parties that require us to relinquish rights to certain of our technologies or
products that we would seek to develop or commercialize ourselves. These
actions, while necessary for the continuance of operations during a time of
cash constraints and a shortage of working capital, could make it difficult or
impossible to implement our long-term business plans or could affect our
ability to continue as a going concern.

We expect to incur future losses and may not achieve profitability as
soon as expected, which may cause our stock price to fall.

We have experienced significant losses each year since our
inception and expect to incur substantial additional losses. We
experienced net losses applicable to common stockholders of approximately $33.3
million, $28.8 million and $38.9 million in 2002, 2001 and 2000, respectively.
As of December 31, 2002, we had an accumulated deficit of approximately $100.8
million. We expect to continue to incur substantial losses primarily
as a result of spending related to:



| |  |  | Expanding patient sample processing capabilities                                
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | Research and product development costs                                          
|
| |  |  | Sales and marketing activities                                                  
|
| |  |  | Additional clinical laboratory and research space and other necessary facilities
|
| |  |  | General and administrative costs                                                

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

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Our stockholders will experience
substantial dilution if our shares of preferred stock or their
related warrants are converted into or exercised for shares of common
stock. Our outstanding shares of preferred stock and related warrants
are currently convertible into or exercisable for up to an aggregate
of 39,141,240 shares of common stock, or approximately 138% of the
number of shares of currently outstanding common stock.

As of February 28, 2003, we had approximately 28,316,707 shares of common
stock outstanding. However, as of February 28, 2003, we also had outstanding
the following shares of preferred stock and related warrants:



| |  |  | 589 shares of Series A Redeemable Convertible Preferred Stock
(Series A Preferred Stock), convertible into 5,306,306 shares of
common stock (not including the conversion of accrued but unpaid
premiums)
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 1,910.6 shares of Series C Convertible Preferred Stock (Series C
Preferred Stock), convertible into 15,790,066 shares of common stock                                                                    
|
| |  |  | warrants issued to the purchasers of our preferred stock in
connection with our preferred stock financings to purchase 18,044,868
shares of common stock                                                   

Together, the common shares reserved for issuance upon conversion of the
Series A Preferred Stock and Series C Preferred Stock, and upon exercise of the
warrants referenced above, represent approximately 39,141,240 shares of common
stock, or 138% of the outstanding shares of our common stock at February 28,
2003, all of which are issuable for an approximate weighted-average effective price of $1.17 per
share.

The number of shares of common stock that we may be required to issue upon
conversion of the Series A Preferred Stock, and exercise of the warrants
granted to purchasers of our Series A Preferred Stock in connection with the
issuance thereof, can increase substantially upon the occurrence of several
events, including if:



| |  |  | We issue shares of stock (with certain exceptions) for an effective
price less than the conversion price of the Series A Preferred Stock or
the related warrants (each $1.11 as of March 7, 2003). This could be
likely given that this sort of adjustment has already occurred, our
stock price has been below $1.11, the historical volatility of our stock
price and the recent volatility of stocks of companies in our industry
and of the stock market in general
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We fail to have sufficient shares of common stock reserved to satisfy
conversions, exercises and other issuances                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | We fail to honor requests for conversion, or notify any holder of
Series A Preferred Stock of our intention not to honor requests for
conversion                                                                                                                                                                                                                                                                                                                       
|
| |  |  | We fail to issue shares upon exercise of the warrants                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | We fail to redeem any shares of Series A Preferred Stock when required                                                                                                                                                                                                                                                                                                                                                                                                 

We are also obligated to issue additional shares of common stock every six
months to the holders of the Series A Preferred Stock as premium payments. As
of March 7, 2003, these issuances equaled about 337 shares of common stock for
every share of Series A Preferred Stock outstanding at the time the issuance is
made. This number of shares will increase every six months, starting with the
fourth such issuance (to be made in the second half of 2003), by about 112
shares of common stock for each share of Series A Preferred Stock, up to a
maximum of about 786 shares of common stock for every share of Series A
Preferred Stock. All of the previous share totals are based upon an assumed
stock price of $0.89, which was the closing price of our stock on the Nasdaq
National Market on March 7, 2003, but the actual number of shares will be based
upon our stock price from time to time as of the payment dates. To date, we
have issued 376,661 shares of common stock to holders of Series A Preferred
Stock as premium payments on those shares. If the 589 shares of the Series A
Preferred Stock outstanding as of February 28, 2003 remain outstanding for five
years following such date, we will issue as premium payments an additional
4,064,719 shares of common stock (again based on an assumed stock price of
$0.89) to holders of the Series A Preferred Stock, which is 14.35% of the
shares of common stock outstanding as of February 28, 2003. We do not receive
payment or other consideration for these issuances.

We
amended the rights of the Series C Preferred Stock to (i) provide
that any premium payments due thereunder may be paid in either cash or shares
of common stock at our option, and (ii) include anti-dilution provisions
substantially identical to those applicable with respect to our Series A
Preferred Stock. As a result, the number of shares of common stock that we may
be required to issue upon conversion of the Series C Preferred Stock will
increase substantially in the event that we issue shares of stock for an
effective price less than the then conversion price of the Series C Preferred
Stock ($1.21 as of March 7, 2003). The premium payment due on each share of
Series C Preferred Stock each quarter is currently equal to $200, but will
increase beginning with the payment due on June 30, 2004 by $25 per share up to
a maximum of $350 per share. If all 1,910.6 shares of Series C Preferred Stock
outstanding as of February 28, 2003 remain outstanding for five years following
such date, and we choose to pay all premium amounts due on those shares in
common stock instead of cash, we will issue an additional 12,612,106 shares of
common stock (again based on

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an assumed stock price of $0.89) to holders of the Series C Preferred Stock,
which is 44.54% of the shares of common stock outstanding as of February 28,
2003. We do not receive payment or other consideration for these issuances.

All of the foregoing issuances of common stock would be substantially
dilutive to the outstanding shares of common stock, especially where, as
described above, the shares of common stock are issued without additional
consideration. We cannot predict whether or how many additional shares of our
common stock will become issuable due to these provisions.

Any dilution or potential dilution may cause our stockholders to sell
their shares, which would contribute to a downward movement in the stock price
of our common stock. This could prevent us from sustaining a per share price
sufficient to enable us to maintain an active trading market on, or meet the
continued listing requests of, the Nasdaq National Market. In addition, any
downward pressure on the trading price of our common stock could encourage
investors to engage in short sales, which could further contribute to a
downward trend in the price of our common stock.

We may be obligated to redeem our Series A and Series C Preferred Stock at a
premium to the purchase price.

Holders of our Series A Preferred Stock and Series C Preferred Stock have
the right, under certain circumstances, to require us to redeem for cash all of
the preferred stock that they own. The redemption price for the Series A
Preferred Stock is the greater of (i) 115% of the original purchase price plus
115% of any accrued premium payment thereon and (ii) the aggregate fair market
value of the shares of common stock into which such shares of Series A
Preferred Stock are then convertible. The redemption price for the Series C
Preferred Stock is the greater of (i) 120% of the original purchase price plus
120% of any accrued premium payment thereon and (ii) the aggregate fair market
value of the shares of common stock into which such shares of Series C
Preferred Stock are then convertible. As of February 28, 2003, there were 589
shares of Series A Preferred Stock and 1,910.6 shares of Series C Preferred
Stock outstanding, with an aggregate redemption price equal to approximately
$6.9 million and $23.3 million, respectively.

The Series A Preferred Stock and Series C Preferred Stock are each
redeemable by the holders of the respective series in any of the following
situations:



| |  |  | If we fail to remove a restrictive legend on any certificate
representing any common stock that was issued to any holder of such
series upon conversion of their preferred stock or exercise of their
warrants and that may be sold pursuant to an effective registration
statement or an exemption from the registration requirements of the
federal securities laws
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If we fail to have sufficient shares of common stock reserved to
satisfy conversions of the series                                                                                                                                                                                                                                                                   
|
| |  |  | If we fail to honor requests for conversion, or if we notify any
holder of such series of our intention not to honor future requests for
conversion                                                                                                                                                                                                                  
|
| |  |  | If we institute voluntary bankruptcy or similar proceedings                                                                                                                                                                                                                                                                                                          
|
| |  |  | If we make an assignment for the benefit of creditors, or apply for
or consent to the appointment of a receiver or trustee for us or for a
substantial part of our property or business, or such a receiver or
trustee shall otherwise be appointed                                                                                                                  
|
| |  |  | If we sell all or substantially all of our assets                                                                                                                                                                                                                                                                                                                    
|
| |  |  | If we merge, consolidate or engage in any other business combination
(with some exceptions), provided that such transaction is required to be
reported pursuant to Item 1 of Form 8-K                                                                                                                                                                                
|
| |  |  | If we commit a material breach under, or otherwise materially violate
the terms of, the transaction documents entered into in connection with
the issuance of such series                                                                                                                                                                                            

In addition to the situations already mentioned, the Series A Preferred
Stock is redeemable by its holders in either of the following circumstances:



| |  |  | If the registration statements covering shares of common stock underlying the Series A Preferred Stock and
 related warrants cannot be used by the respective selling security holders for the resale of all the underlying shares of common stock for an
 aggregate of more than 30 days. Our Series C Preferred Stock financing resulted in a reduction of the conversion price of the Series A
 Preferred Stock and the exercise price of the related warrants, which in turn caused a substantial increase in the number of shares of
 common stock issuable upon conversion or exercise of the Series A Preferred Stock or related warrants. Consequently, we believe that
 the holders of Series A Preferred Stock currently may not be able to use these registration statements to resell all of their underlying
 shares of common stock, and may not have been able to do so for more than 30 days. This means that the holders of Series A Preferred
 Stock will have the right to redeem their shares of Series A Preferred Stock until we are able to register their additional shares
 of common stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | If our common stock is not tradable on the NYSE, the AMEX, the Nasdaq
National Market or the Nasdaq SmallCap market for an aggregate of twenty
trading days in any nine month period. In order for our common stock to
continue to be quoted on the National Market, we must satisfy various
listing maintenance standards established by Nasdaq, including, among
other things, a requirement that we have stockholders equity of at
least $10 million and that our stock price consistently trades at or
above $1.00 per share. We have had, and may continue to have, challenges
meeting these requirements to maintain a listing on the Nasdaq National Market. For example, in November 2002, we received a letter
from Nasdaq indicating that we were not then in compliance with the
requirement to have stockholders equity of at least $10 million. In
response to the letter, we submitted to Nasdaq a plan to regain compliance
with this requirement, which involved increasing the number of shares of
common stock authorized in our Certificate of Incorporation and converting
our Series B Redeemable Convertible Preferred Stock to Series C Preferred Stock. On February 4, 2003, the last step of
this plan was completed, however Nasdaq has recently informed us that we
must file, prior to April 15, 2003, a satisfactory pro forma balance sheet
as of a recent date before they will consider us to be in compliance with
this requirement. Our stock price has recently traded below $1.00 for over
one month and we have received a letter from Nasdaq indicating that if we
fail to regain compliance with the minimum trading price rule by September
2, 2003 we may receive a notice of delisting from the National Market. If
we receive a notice of delisting, we will be required to pursue one of a
number of alternatives, including an appeal process with Nasdaq, a possible
reverse split of our common stock or a move to an alternative market
(including possibly the Nasdaq SmallCap Market), which may be less
efficient and less broad-based.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If 35% or more of our voting power is held by any one person, entity
or group                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | If we fail to pay any indebtedness in excess of $350,000 when due, or
if there is any event of default under any agreement that is likely to
have a material adverse effect on us                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Upon the institution of involuntary bankruptcy proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

In addition, the Series C Preferred Stock is redeemable by its holders if,
on or prior to November 19, 2004, the two year anniversary of the initial
issuance of the Series C Preferred Stock, we issue equity, equity-linked
securities, or debt which is convertible into equity, other than (i) upon the
exercise of warrants, options or convertible securities issued and outstanding
as of the issuance of the Series C Preferred Stock, (ii) upon the grant or
exercise of stock options under any stock option plan, (iii) upon issuance or
conversion of the Series C Preferred Stock or exercise of the warrants issued
in connection with the Series C Preferred Stock, (iv) the issuance of
securities in connection with strategic business partnerships, (v) pursuant to
an equipment financing from a financial or lending institution and (vi) common
stock issued as premium payments on Series A Preferred Stock or Series C
Preferred Stock.

Upon the occurrence of any of the events described above, individual
holders of the relevant series of preferred stock (or both series in those
cases where the right of redemption is triggered for both the Series A
Preferred Stock and the Series C Preferred Stock) would have the option, while
such event continues, to require us to purchase some or all of the then
outstanding shares of Series A Preferred Stock and/or Series C Preferred Stock,
as applicable, held by such holder. If we receive any notice of redemption, we
are required to immediately (no later than one business day following such
receipt) deliver a written notice to all holders of the same series of
preferred stock stating the date when we received the redemption notice and the
amount of preferred stock covered by the notice.

Redemption of the Series A Preferred Stock or Series C Preferred Stock in
any event described above would require us to expend a significant amount of
cash that would exceed our total available cash and cash
equivalents and our ability to make such payments or raise additional capital.
In addition, if holders of Series C Preferred Stock were to exercise their
rights to have redeemed a material number of their shares as a result of any of
the events described above, and such a redemption were to have a material
adverse effect on the Company, all holders of our Series A Preferred Stock may
be able to redeem their shares as well, further endangering our financial
position. See the notes to the financial statement for further details.

Our 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 still relatively 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. 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 competing products. We have
introduced two products using our proprietary PhenoSense technology, PhenoSense
HIV and PhenoSense GT, which we began actively marketing in November 1999 and
November 2001, respectively. We are still in the early stages of development of
new products applying our PhenoSense technology to other viral diseases. If
PhenoSense HIV or PhenoSense GT 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
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | 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 government and third-party payors limit the
amounts that they will reimburse for our current products, or do not authorize
reimbursement for our planned 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 and are challenging the prices charged for medical products and
services. In addition, increasing emphasis on managed care in the United States
will continue to put pressure on the pricing of healthcare products. This could
in the future limit the price that we can charge for our products. This could
also hurt our ability to generate revenues. Significant uncertainty exists as
to the reimbursement status of new medical products like the products we are
currently developing, particularly if these products fail to show demonstrable
value in clinical studies. Currently, nearly all public and a majority of
private payors have approved the reimbursement of our existing products.
However, the majority of our payors are currently reimbursing our products at
varying levels from 70% to 100% of our list prices. If government and other
third-party payors do not continue to provide adequate coverage and
reimbursement for our testing products or do not authorize reimbursement for
our planned products, our revenues will be reduced.

Billing complexities associated with health care payors may result in increased
bad debt expense, which could impair our cash flow and limit our ability to
reach profitability.

Billing for laboratory services is complex. Laboratories must bill various
payors, such as patients, insurance companies, Medicare, Medicaid, doctors and
employer groups, all of whom have different requirements. Billing difficulties
often result in bad debt expense which impairs cash flow and ultimately reduces
profitability. Most of the bad debt expense is the result of several noncredit
related issues, primarily missing or incorrect billing information on
requisitions. We perform the requested tests and report test results regardless
of incorrect or missing billing information. We subsequently attempt to obtain
any missing information and rectify incorrect billing information received from
the healthcare provider. Missing or incorrect information on requisitions slows
the billing process, creates backlogs of unbilled requisitions and generally
increases the aging of accounts receivable. Among many other factors
complicating billing are:



| |  |  | Pricing differences between our fee schedules and those of the payors                                  
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | Disputes between payors as to which party is responsible for payment                                   
|
| |  |  | Disparity in coverage among various payors                                                             
|
| |  |  | Difficulties of adherence to specific compliance requirements and procedures mandated by various payors

Ultimately, if all issues are not resolved in a timely manner, the related
receivables are charged to the allowance for doubtful accounts.

If we are unable to expand our sales and marketing capabilities, we may not be
able to effectively commercialize our products.

We currently have 18 sales people and limited marketing resources. In
order to commercialize our products effectively and to expand into additional
markets, we must effectively utilize our sales and marketing capabilities or
arrange with a third party to perform these services. We are currently taking
steps in this direction, but 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.

As a result of our reduction in
force, we may incur substantial costs related to the defense of
employment claims. We do not have any insurance coverage for such
claims.

In November 2002, we implemented a restructuring plan to reduce the rate
of our cash consumption and better align our operating structure with current
and expected future economic conditions. The restructuring plan included an
immediate reduction in force by approximately 17 percent, or 35 employees, to
176 employees, with reductions occurring in all functional areas. We also
reduced officers salaries and consolidated certain operations, including sales
and marketing. We recorded a charge of approximately $0.3 million in the fourth
quarter of 2002 associated with these actions. The reduction in force could
result in a temporary reduction in productivity by our employees, and could
affect our ability to attract and maintain qualified personnel in the future.
In addition, we have received correspondence from former employees terminated
pursuant to the reduction in force who threaten to bring claims

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against us that stem from their termination. We do not have employee
practices liability insurance to cover any potential claims by employees
terminated in the reduction of force.

We have limited experience processing patient samples for our resistance tests
and may encounter problems or delays in processing tests, or in expanding our
automated testing systems, which could result in lost revenue.

In 2002, we processed approximately 28,000 tests. In order to meet future
projected demand for our products and fully utilize our current clinical
laboratory facilities, we estimate that we will have to approximately double
the volume of patient samples that we process. We are also continuing to
develop our quality-control procedures and 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, and may not be able to, develop or purchase more
sophisticated software to support the automated tests, analyze the data
generated by our tests, and report the results. 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 have experienced periods
during which our test results were delayed, which in turn delayed delivery of
results to our customers. While we take steps to minimize the likelihood of
delays, future delays may nevertheless occur.

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, our phenotypic and/or genotypic resistance
testing products we develop using our proprietary 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 Tibotec-Virco (division of Johnson & Johnson)
and Specialty Laboratory. We also compete with makers of genotypic tests such
as Applied Biosystems Group, Visible Genetics Inc. (division of Bayer
Diagnostics) 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. Tibotec-Vircos
(division of Johnson & Johnson) phenotypic test and genotypic tests have been
commercially available for a longer time than has PhenoSense HIV or GeneSeq
HIV. Genotypic tests are cheaper and generally faster than 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.

We derive a significant portion of our revenues from a small number of
customers and our revenues may decline significantly if any major customer
cancels or delays a purchase of our products.

Our revenues to date and for the foreseeable future consist largely of
sales of our PhenoSense products. Sales to our largest customer, Quest
Laboratories, accounted for approximately 10% of our total revenues in 2002.
Unless and until we diversify and expand our customer base, our future success
will significantly depend upon the timing and size of future sales to Quest
Laboratories and our other large customers.

It is likely that we will continue to have significant customer
concentration. Our customers are not typically required to purchase tests from
us under long-term contracts, and may stop ordering tests from us at any time.
The loss of any major customer, a slowdown in the pace of increasing physician
and physician group sales as a percentage of sales, or the delay of significant
orders from any significant customer, even if only temporary, could have a
significant negative impact on our revenues and our ability to fund operations
from revenues, generate cash from operations or achieve profitability.

Various testing materials that we use are purchased from single qualified
suppliers, which could result in our inability to secure sufficient materials
to conduct our business.

We purchase some of the testing materials used in our laboratory
operations from single qualified suppliers. Although these materials could be
purchased from other suppliers, we would need to qualify the suppliers prior to
using their materials in our commercial operations. Although we believe we have
ample inventory stock to allow validation of another source, in the event of a
material interruption of these supplies, the quantity of our stock may not be
adequate. Any extended interruption, delay or decreased availability of the
supply of these materials could prevent us from running our business as
contemplated and result in our failure to meet our customers demands. If
significant customer relationships were harmed by our failure to meet customer
demands, our revenues may decrease. We might also face significant additional
expenses if we are forced to find alternate sources of supplies, or change
materials we use. Such expenses could make it more difficult for us to attain
profitability, offer our tests at competitive prices and continue our business
as currently conducted or at all.

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We are dependent on a license for technology we use in our resistance testing,
and our business would suffer if the license was terminated.

We license technology that we use in our PhenoSense and GeneSeq tests from
Roche. We hold a non-exclusive license for the life of the patent term of the
last licensed Roche patent. Currently, the last Roche patent expires in 2005.
However, if additional patents are identified that would be necessary or useful
for our operations, such patents could be added to the license at our option,
which may extend the term of the license. We believe that many of our
competitors, including Tibotec-Virco (division of Johnson & Johnson) and other
resistance testing companies, also license this technology on non-exclusive
terms. Roche has the right to terminate this license if we fail to pay
royalties, make a semi-annual royalty report or participate in proficiency
testing. We believe we are in compliance with these requirements. The license
allows us to use technology covered by the licensed Roche patents within a
broad field that includes all of our currently planned products. If we were to
expand our product line beyond the licensed field, however, we would need to
negotiate an expansion of the license. If the license were to be terminated by
Roche, 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 technology and trade secrets may not
be adequate, allowing third parties to use our 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.

We currently have nine issued patents, five allowed patent applications,
and pending applications for seventy-three additional patents, including
international counterparts to our US patents. We have licensed seven patents
under the Roche license discussed above. These patents cover a broad range of
technology applicable across our entire current and planned product line. 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 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 lawsuits regarding the
enforcement of patent rights 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 offensive 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
defending any such litigation or we cannot obtain necessary licenses, could
cause us to pay substantial damages and prohibit us from selling our products.

Companies in our industry typically receive a higher than average number
of claims and threatened claims of infringement of intellectual property
rights. Third parties have from time to time threatened to assert infringement
or other intellectual property claims against us based on their patents or
other intellectual property rights. For instance, we have been informed by the
National Institutes of Health (NIH) that they believe we require a license in
order to perform certain of our tests. Although we do not believe we need a license from
the NIH, we are in negotiations with the NIH concerning the possibility of
entering into a license, and believe that if necessary, a license would be
available on commercial terms. To date, we believe that such threatened claims
have been immaterial and without merit, and we have not had to incur and do not
expect to incur significant costs to defend against or settle such threatened
claims. However, in the future we may have to pay substantial damages, possibly
including treble damages, for 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.

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If we do not successfully introduce new products using our technology, we may
not achieve profitability.

We may not be able to develop and market new resistance testing products
for HIV and other serious diseases, 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
currently 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
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, and we may be prevented from conducting our business as we do
now or as we may wish to in the future.

The FDA may impose medical device regulatory requirements on our tests,
including possibly premarket approval requirements, which could be expensive
and time-consuming and could prevent us from marketing these tests.

In the past, the FDA has not required that genotypic or phenotypic testing
conducted at a clinical laboratory be subject to premarketing clearance or
approval, although the FDA has stated that it believes its jurisdiction extends
to tests generated in a clinical laboratory. We received a letter from the FDA
in September 2001 that asserted such jurisdiction over in-house tests like
ours, but which also stated the FDA is not currently requiring premarket
approval for HIV monitoring tests such as ours provided that the promotional
claims for such tests are limited to its analytical capabilities and do not
mention the benefit of making treatment decisions on the basis of test results.
The FDA letter also asserted that our GeneSeq test had been misbranded due to
the use of purchased analyte specific reagents (ASRs), if test reports do not
include a statement disclosing that the test has not been cleared or approved
by the FDA. We now utilize in-house prepared ASRs in our products. The FDA has
indicated in discussions that the focus of the letter was our genotypic tests
and not our phenotypic tests, but there is no certainty its focus will remain
narrow.

We have had several discussions with the FDA related to its positions set
forth in the letter. We do not at this point believe the FDA will require us to
take steps that materially affect our business or financial performance, but we
cannot guarantee this will remain the case.

We cannot be sure that the FDA will accept the steps we take, or that the
FDA will not require us to alter our promotional claims or undertake the
expensive and time-consuming process of seeking premarket approval with
clinical data demonstrating the sensitivity and specificity of our tests. If
premarket approval is required, we cannot be sure that we will be able to
obtain it in a timely fashion or at all; and in such event the FDA would have
authority to require us to cease marketing tests until such approval is
granted.

In general, we cannot predict the extent of future FDA regulation of our
business. We might be subject in the future to greater regulation, or different
regulations, that could have a material effect on our finances and operations.
If we fail to comply with existing or additional FDA regulations, it could
cause us to incur civil or criminal fines and penalties, increase our expenses,
prevent us from increasing revenues, or hinder our ability to conduct our
business.

If we do not comply with laws and regulations governing the confidentiality of
medical information, we may lose the state licensure we need to operate our
business, and may be subject to civil, criminal or other penalties. Compliance
with such laws and regulations could be expensive.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
includes the following provisions:



| |  |  | Transactions and Code Sets: Covered entities must adopt a
standardized format for all electronic claims processing maintained by a
health plan, health care provider or health care data clearinghouse. The
compliance date for this provision was October 16, 2002. However,
Congress approved a twelve-month extension for covered entities wishing
to file a formal compliance extension plan. We have filed a formal
compliance extension plan due to vendor supplied code not being
available until the first quarter of 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Privacy: Covered entities must provide for standardized protections
for certain types of health-related information and its receipt,
delivery and storage and establish a formal privacy program and
designate a privacy officer. The compliance date for this provision is
April 14, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our HIPAA project plans have two phases: 1) assessment of current systems,
applications, processes and procedure testing and validation for HIPAA
compliance; and 2) remediation of affected systems, applications, processes and
procedure testing and validation for HIPAA compliance.

We have completed the assessment phase of the Privacy provision and have
initiated remediation. We expect to meet the April 2003 required date.

We have completed the assessment phase of the Transactions and Code Sets
provision. Remediation is currently in progress and we expect to meet the
October 2003 extension date. We believe that this project will add new
functionality to existing systems and plan to capitalize these expenditures as
incurred.

In addition to the HIPAA provisions described above, which have not yet
been implemented, there are a number of state laws regarding the
confidentiality of medical information, some of which apply to clinical
laboratories. These laws vary widely, and new laws in this area are pending,
but they most commonly restrict the use and disclosure of medical information
without patient consent. Penalties for violation of these laws include
sanctions against a laboratorys state licensure, as well as civil and/or
criminal penalties. Because laboratory orders and reports fall within the scope
of HIPAA, the costs of HIPAA compliance will impact us and others in the
clinical laboratory industry. Compliance with the HIPAA rules could require us
to spend substantial sums, which could negatively impact our profitability. At
this time, we cannot assess the total financial or other impact of the HIPAA
regulations on us.

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.

We have installed several information systems, including enterprise
resource and laboratory information systems. If our 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.

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, PhenoSense GT, PhenoScreen and GeneSeq 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.

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 been operating since 1995, and began processing patient samples
and selling products commercially in 1999. 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. With the exception of Bill Young,
our CEO, we do not have employment agreements with any of our employees, and we
do not maintain key man insurance for any employee. If any of our key

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employees were to leave, we may incur significant costs searching for a
replacement. In addition, we have entered into severance agreements with our
officers that would, in some instances, require us to pay severance to such
officers upon the termination of their employment. 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. Although in the recent past, we
have not experienced significant difficulty attracting and retaining key
employees, there can be no assurance that we will not encounter difficulty in
the future. We are not aware that any key employee has plans to retire or leave
in the near future.

We may be subject to litigation, which would be time consuming and divert our
resources and the attention of our management.

We have received correspondence from former employees terminated pursuant
to the reduction in force who threaten to bring claims against us that stem
from their termination. In addition, we may in the future be subject to other
claims and may have to spend significant additional resources and time
responding to such claims. 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.

Preliminary investigations by the U.S. Attorneys Office and the Securities and
Exchange Commission may be expensive and divert the time and attention of our
management.

Allegations of improper conduct concerning our 2001 and 2002 public
revenue guidance were raised by one of our former employees, and similar
allegations have been made in internet chat room postings, email and anonymous
letter communications. Because these unsubstantiated allegations were repeated
in communications to governmental agencies, they have necessarily precipitated
preliminary investigations by the U.S. Attorneys Office, Northern District of
California, and the Securities and Exchange Commission. Although we are
cooperating fully with these investigations, these preliminary investigations
may continue for a prolonged period and may not be concluded in the manner we
expect. If these preliminary investigations are prolonged, or are not concluded
in the manner we expect, we could incur substantial additional costs and our
managements attention and resources could be increasingly diverted, which
generally may prevent management from focusing on the operation of our business
and therefore delay our ability to operate profitably.

Our operating results may fluctuate from quarter to quarter, making it likely
that, in some future quarter or quarters, we will fail to meet 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 product 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. As a result it is very difficult for us to forecast
our revenues accurately. 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 receive and or 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 tests, which are received via delivery service or mail, 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. Our laboratory and equipment are insured up to $15.3 million against loss
or damage in the event of a fire but not in the event of a flood or an
earthquake. We also have business interruption insurance that provides coverage
up to $25 million for business losses related to fire. Our insurance coverage
may not be adequate to cover total losses incurred in a fire. However, even if
covered by insurance, in the event our existing clinical laboratory facility or
equipment is affected by 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, which would reduce our revenues, and may cause us to lose
the trust of our customers or market share.

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Terrorist acts and acts of war may seriously harm our business and financial
condition.

Terrorists acts or acts of war (wherever located around the world) may
cause damage or disruption to our company, its employees, facilities, partners,
suppliers, distributors and resellers, and customers, which could significantly
impact our revenues, costs and expenses and financial condition. The terrorist
attacks that took place in the United States on September 11, 2001 and the
potential for future attacks have created many economic and political
uncertainties, some of which may materially harm our business and results of
operations in ways that cannot presently be predicted. In addition, as our
headquarters and our significant patient populations are located in major
metropolitan areas of the United States, we may be impacted by actions against
the United States. Depending on severity and location, such acts could impact
our ability to receive shipments of patient samples or result in a substantial
reduction in the number of ordered tests due to the inability of patients to
get to their physicians. We will be predominantly uninsured for losses and
interruptions caused by terrorist acts and acts of war.

Concentration of ownership among some of our stockholders may prevent other
stockholders from influencing significant corporate decisions.

At
February 12, 2003, approximately 38% of our common stock was beneficially
held by a small number of stockholders including our directors, entities
affiliated with our directors and former directors, and our executive officers.
In addition, our Series A Preferred Stock and Series C Preferred Stock,
described elsewhere, are held by a small number of stockholders, some of whom
also own shares of our common stock. Consequently, a small number of our
stockholders may be 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. There are also certain approval rights of the Series A
Preferred Stock and Series C Preferred Stock, and the few holders of those
shares could prevent certain important corporate actions by not approving those
actions.

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, from a high of $26.75 per share in July 2000 to a low of $0.72 per
share in September
2002. The following factors, in addition to other risk factors described in
this section, may have a significant negative impact on the market price of our
common stock:



| |  |  | Period-to-period fluctuations in financial results                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------
|
| |  |  | Financing activities                                                                                             
|
| |  |  | Litigation                                                                                                       
|
| |  |  | 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
|
| |  |  | Regulatory developments in the United States and foreign countries                                               
|
| |  |  | Changes in payor reimbursement policies                                                                          
|
| |  |  | Economic and other external factors or other disaster or crisis                                                  

In addition, should the market price of our common stock remain below
$1.00 per share for an extended period and/or our stockholders equity falls
below $10 million, we risk having our shares delisted from the Nasdaq National
Market, which may have a negative effect on our business and our stockholders
liquidity and may trigger the redemption of our Series A Preferred Stock. These
risks are discussed in greater detail in the sections captioned We may be
obligated to redeem our Series A and Series C Preferred Stock at a premium to
the purchase price and If we fail to meet Nasdaqs continued listing
requirements, our shares may be delisted from the Nasdaq National
Market. This could reduce our stockholders liquidity, make it
more difficult for us to raise capital and, in certain instances,
require us to redeem our outstanding shares of Series A
Preferred Stock.

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If we fail to meet Nasdaqs
continued listing requirements, our shares may be delisted from the
Nasdaq National Market. This could reduce our stockholders
liquidity, make it more difficult for us to raise capital and, in
certain instances, require us to redeem our outstanding shares of
Series A Preferred Stock.

In order for our common stock to continue to be quoted on the National
Market, we must satisfy various listing maintenance standards established by
Nasdaq, including, among other things, a requirement that we have stockholders
equity of at least $10 million and that our stock price consistently trades at
or above $1.00 per share. We have had, and may continue to have, challenges
meeting these requirements to maintain a listing on the Nasdaq National Market.
For example, in November 2002, we received a letter from Nasdaq indicating that
we were not then in compliance with this requirement. In response to the
letter, we submitted to Nasdaq a plan to regain compliance with this
requirement, which involved increasing the number of shares of common stock
authorized in our Certificate of Incorporation and converting our Series B
Preferred Stock to Series C Preferred Stock. On February 4, 2003, the last step
of this plan was completed, however Nasdaq has recently informed us that we
must file, prior to April 15, 2003, a satisfactory pro forma balance sheet as
of a recent date before they will consider us to be in compliance with this
requirement. If our stockholders equity is later reduced below $10 million as
a result of operating losses or for other reasons, we will fail to meet
Nasdaqs stockholder equity requirement. If that occurs, or if we are unable to
demonstrate to Nasdaqs satisfaction that we will be able to sustain compliance
with this requirement, Nasdaq may delist our common stock from trading on the
Nasdaq National Market.

Our stock price has recently traded below $1.00 for over one month and we
have received a letter from Nasdaq indicating that if we fail to
regain compliance with the minimum trading price rule by September 2, 2003 we
may receive a notice of delisting from the National Market. If we receive a
notice of delisting, we will be required to pursue one of a number of
alternatives, including an appeal process with Nasdaq, a possible reverse split
of our common stock or a move to an alternative market (including possibly the
Nasdaq SmallCap Market), which may be less efficient and less broad-based. As
a result, if we were to be delisted from the National Market we may have a
harder time accessing capital markets for additional funding, and our
stockholders may experience reduced liquidity. In addition, if at any time we
are not listed on the National Market, the SmallCap Market, the American Stock
Exchange or the New York Stock Exchange, our outstanding shares of Series A
Preferred Stock are subject to redemption, which could drain our financial
resources and make it difficult or impossible to continue as a going concern.

We may be required to obtain the consent of the holders of our preferred stock
before taking corporate actions, which could harm our business.

Our charter documents require us to obtain the consent of the holders of
the Series A and Series C Preferred Stock, each voting as a separate series,
before we may issue securities that have senior or equal rights to the
respective series, or if we incur unsecured indebtedness for borrowed money, or
take other actions with respect to the respective series or other securities.
We are also required to obtain the consent of the holders of the Series A and
Series C Preferred Stock, again each voting as a separate series, before we
amend or modify our certificate of incorporation or bylaws to change any of the
rights of such series. To obtain these consents, we would need to get consent
from holders of a majority of the outstanding shares of the Series A and Series
C Preferred Stock.

These obligations, and our complicated capitalization structure in
general, might frustrate attempts to remove our board or management by making
it difficult to find suitable replacements willing to spend substantial amounts
of time and efforts on Company matters. Moreover, these obligations may deter a
potential acquirer from completing a transaction with us. They may also prevent
us from taking corporate actions that would be beneficial to our stockholders
and us, such as raising capital. Even if we are not prevented from taking such
actions, they might be more expensive to us. This was the case when we issued
our Series B Preferred Stock in March 2002, because we had to grant additional
warrants to holders of Series A Preferred Stock as consideration in order to
secure their consent and waiver concerning the financing and the resulting
impact on the Series A Preferred Stock. This was also the case when we issued
our Series C Preferred Stock in November 2002, because we had to agree to
exchange the shares of Series B Preferred Stock for notes that were convertible
into Series C Preferred Stock, and to exchange the warrants associated with
shares of Series B Preferred Stock for new warrants as consideration to secure
the consent and waiver of the Series B Preferred Stock holders concerning the
financing and the resulting impact on their respective preferred stock.

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
and upon the conversion of the Series A and Series C Preferred Stock, 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 decrease the price of our common stock
and may impair our ability to raise capital in the future.

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Provisions of our charter documents and Delaware law may make it difficult for
our stockholders to replace our management and may inhibit a takeover, either
of 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 make it
difficult for our stockholders to replace or remove our current management, and
may delay or prevent an acquisition or merger in which we are not the surviving
company. In particular:



| |  |  | our Board of Directors is classified into three classes, with only
one of the three classes elected each year, so that it would take at
least two years to replace a majority of our directors
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our bylaws contain advance notice provisions that limit the business
that may be brought at an annual meeting and place procedural
restrictions on the ability to nominate directors          
|
| |  |  | our stockholders are not permitted to call special meetings or act by
written consent                                                                                                         

The Series A Preferred Stock and Series C Preferred Stock also have voting
rights relating to many types of transactions, such as the creation or issuance
of senior or pari passu equity or debt securities and the payment of dividends
or distributions, and are subject to redemption at the option of the holder
upon certain mergers, consolidations or other business combinations. 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 changes of our management and 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 two buildings and sublease one building, totaling
approximately 80,000 square feet of laboratory and office space in South San
Francisco, California. Our leases expire in the years 2004 and 2010 and provide
us with options to extend the terms for an additional seven and ten years,
respectively. Our sublease, which covers approximately 14,000 square feet,
expires on September 30, 2003, and provides us with the option to extend for an
additional three months.




Item 3.Legal Proceedings

Allegations of improper conduct concerning our 2001 and 2002 public
revenue guidance were raised by one of our former employees, and similar
allegations have been made in internet chat room postings, email and anonymous
letter communications. Because these unsubstantiated allegations were repeated
in communications to governmental agencies, they have necessarily precipitated
preliminary investigations by the U.S. Attorneys Office, Northern District of
California, and the Securities and Exchange Commission. As of the date of this
Annual Report, no legal action has been filed against us, or any of our
officers, directors or employees, and we do not expect that any such action
will be filed.




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

None.

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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:

|               |  |      |      |     |  |   |      | 
|-------------- |  | ---- | ---- | --- |  | - | ---- | 
|               |  | High |      | Low
|               |  |      |      |    
|2002           |  |      |      |     |  |   |      | 
|Fourth Quarter |  | $    | 1.70 |     |  | $ | 0.75 | 
|Third Quarter  |  | $    | 2.90 |     |  | $ | 0.72 | 
|Second Quarter |  | $    | 3.40 |     |  | $ | 1.95 | 
|First Quarter  |  | $    | 2.96 |     |  | $ | 1.78 | 
|2001           |  |      |      |     |  |   |      | 
|Fourth Quarter |  | $    | 3.93 |     |  | $ | 2.25 | 
|Third Quarter  |  | $    | 4.26 |     |  | $ | 1.30 | 
|Second Quarter |  | $    | 4.35 |     |  | $ | 1.13 | 
|First Quarter  |  | $    | 9.50 |     |  | $ | 1.00 | 

The last reported sale price of our common stock on the Nasdaq National
Market on March 28, 2003 was $1.10. As of March 28, 2003, there were
approximately 5,000 stockholders of record of our common stock.

We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future. Any future determination to pay cash dividends on our
common stock will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements and other such factors as the board of directors deems relevant.
In addition, as long as any Series A or Series C Preferred Stock are
outstanding, we may not, without first obtaining the written approval of the
holders of such stock, declare or pay any cash dividends to common
stockholders.

In addition, we are obligated to pay dividends to the Series A and C
preferred stockholders. See Series A Redeemable Convertible Preferred Stock
and Series C Convertible Preferred Stock below for further discussion.

Recent Sales of Unregistered Securities.

The following sets forth the number of shares of our common and
preferred stock issued in the fourth quarter of 2002. For these issuances, we relied on the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended
(the Securities Act):

In November 2002, we issued 100,018 shares of our common stock to two
holders of our Series A Preferred Stock upon such holders conversion of
certain shares of Series A Preferred Stock held by such holders. For this
issuance, we relied on the exemption provided by Section 4(2) of the Securities
Act.

In November 2002, we sold 2,608,695 shares of our common stock to Pfizer
Ireland Pharmaceuticals at a price per share of $1.15 for a total purchase
price of $3.0 million. For this issuance, we relied on the exemption provided
by Section 4(2) of the Securities Act.

In November 2002, we issued 706 shares of our Series C Preferred Stock and
warrants to purchase 4,751,074 shares of our common stock for an aggregate
purchase price of $7.06 million to certain accredited investors. For this
issuance, we relied on the exemption provided by Section 4(2) of the Securities
Act. Each share of Series C Preferred Stock is currently convertible into
approximately 8,264 shares of our common stock, although that ratio could
change. The warrants have an exercise price of $1.11 per share. The rights of
the Series C Preferred Stock and the warrants are discussed in more detail in
the notes to our financial statements located elsewhere this Annual Report.

In December 2002, we issued 462,001 shares of our common stock to two
holders of our Series A Preferred Stock upon such holders conversion of
certain shares of Series A Preferred Stock held by such holders. For this
issuance, we relied on the exemption provided by Section 4(2) of the Securities
Act.

Information about our equity compensation plans is included in Item 12 of
Part III of this Annual Report.

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Item 6.Selected Financial Data

The following selected financial information has been derived from the
audited financial statements. The information below is not necessarily
indicative of results of future operations, and should be read in conjunction
with Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and related notes thereto
included in Item 8 of this Form 10-K in order to fully understand factors that
may affect the comparability of the information presented below.

|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |       |       |     | 
|--------------------------------------------------------------------- | -------------------------- | ---------------------------------- | ------------- | ------ | ---------------------------------------- | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ----- | ------- | ----- | ------ | ----- | ------ | ----- | ----- | --- | 
|                                                                      |                            |                                    |               |        | Year Ended December 31,                 
|                                                                      |                            |                                    |               |        |                                         
|                                                                      |                            |                                    |               |        | 2002                                     |        | 2001    |        | 2000   |        | 1999    |        | 1998  
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |       
|                                                                      |                            |                                    |               |        | (In thousands, except per share amounts)
|Statement of Operations Data:                                         |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|Revenue:                                                              |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|                                                                      | Product revenue            |                                    | $             | 24,530 |                                          |        | $       | 17,815 |        |        | $       | 7,466  |        |       | $       | 1,069 |        |       | $      | 102   |      
|                                                                      | NIH grant revenue          |                                    |               | 731    |                                          |        |         | 458    |        |        |         |       |        |       |         |      |        |       |        |      |      
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|                                                                      |                            |                                    | Total revenue |        |                                          | 25,261 |         |        |        | 18,273 |         |        |        | 7,466 |         |       |        | 1,069 |        |       |       | 102 | 
|Operating costs and expenses:                                         |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|                                                                      | Cost of product revenue    |                                    |               | 14,589 |                                          |        |         | 11,845 |        |        |         | 5,457  |        |       |         | 627   |        |       |        | 17    |      
|                                                                      | Research and development   |                                    |               | 10,406 |                                          |        |         | 11,693 |        |        |         | 10,080 |        |       |         | 9,588 |        |       |        | 5,977 |      
|                                                                      | General and administrative |                                    |               | 10,550 |                                          |        |         | 11,376 |        |        |         | 10,841 |        |       |         | 6,804 |        |       |        | 1,782 |      
|                                                                      | Sales and marketing        |                                    |               | 11,716 |                                          |        |         | 10,336 |        |        |         | 5,890  |        |       |         | 1,196 |        |       |        | 484   |      
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|                                                                      |                            | Total operating costs and expenses |               |        | 47,261                                   |        |         |        | 45,250 |        |         |        | 32,268 |       |         |       | 18,215 |       |        |       | 8,260 |    
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|Operating loss                                                        |                            |                                    | (22,000       | )      |                                          |        | (26,977 | )      |        |        | (24,802 | )      |        |       | (17,146 | )     |        |       | (8,158 | )    
|Interest income                                                       |                            |                                    | 307           |        |                                          |        | 1,143   |        |        |        | 1,868   |        |        |       | 249     |       |        |       | 302    |      
|Interest expense                                                      |                            |                                    | (423          | )      |                                          |        | (466    | )      |        |        | (262    | )      |        |       | (243    | )     |        |       | (198   | )    
|Other income                                                          |                            |                                    | 347           |        |                                          |        | 106     |        |        |        |        |        |        |       |        |       |        |       |       |      
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|Net loss                                                              |                            |                                    | (21,769       | )      |                                          |        | (26,194 | )      |        |        | (23,196 | )      |        |       | (17,140 | )     |        |       | (8,054 | )    
|Deemed dividend to preferred stockholders                             |                            |                                    | (10,551       | )      |                                          |        | (2,269  | )      |        |        | (15,700 | )      |        |       | (3,100  | )     |        |       |       |      
|Preferred stock dividend                                              |                            |                                    | (977          | )      |                                          |        | (334    | )      |        |        |        |        |        |       |        |       |        |       |       |      
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|Net loss applicable to common stockholders                            |                            | $                                  | (33,297       | )      |                                          | $      | (28,797 | )      |        | $      | (38,896 | )      |        | $     | (20,240 | )     |        | $     | (8,054 | )    
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|Basic and diluted net loss per common share                           |                            | $                                  | (1.38         | )      |                                          | $      | (1.43   | )      |        | $      | (2.62   | )      |        | $     | (4.24   | )     |        | $     | (1.71  | )    
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      
|Shares used in computing basic and diluted
 net loss per common share |                            |                                    | 24,157        |        |                                          |        | 20,072  |        |        |        | 14,852  |        |        |       | 4,772   |       |        |       | 4,700  |      
|                                                                      |                            |                                    |               |        |                                          |        |         |        |        |        |         |        |        |       |         |       |        |       |        |      

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

|                                                   |  |                |          |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | -------------- | -------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                   |  | December 31,  
|                                                   |  |               
|                                                   |  | 2002           |          | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                   |  |                |          |      |  |      |         |      |  |     
|                                                   |  | (In thousands)
|Balance Sheet Data:                                |  |                |          |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents, and short-term
investments |  | $              | 11,145   |      |  | $    | 8,962   |      |  | $    | 23,794  |   |  | $ | 2,208   |   |  | $ | 9,564   |  
|Accounts receivable, net                           |  |                | 4,924    |      |  |      | 4,562   |      |  |      | 2,404   |   |  |   | 550     |   |  |   |        |  
|Working capital (a)                                |  |                | (239     | )    |  |      | 7,508   |      |  |      | 21,097  |   |  |   | 522     |   |  |   | 7,398   |  
|Restricted cash                                    |  |                | 707      |      |  |      | 1,000   |      |  |      | 2,029   |   |  |   | 950     |   |  |   |        |  
|Total assets                                       |  |                | 30,486   |      |  |      | 37,851  |      |  |      | 43,647  |   |  |   | 9,777   |   |  |   | 13,275  |  
|Long-term portion of capital lease obligations     |  |                | 419      |      |  |      | 1,341   |      |  |      | 945     |   |  |   |        |   |  |   |        |  
|Long-term portion of loans payable                 |  |                |         |      |  |      | 174     |      |  |      | 1,019   |   |  |   | 1,051   |   |  |   | 1,948   |  
|Long-term advance from subtenant                   |  |                |         |      |  |      | 975     |      |  |      |        |   |  |   |        |   |  |   |        |  
|Redeemable convertible preferred stock             |  |                | 4,249    |      |  |      | 11,228  |      |  |      |        |   |  |   |        |   |  |   |        |  
|Accumulated deficit                                |  |                | (100,764 | )    |  |      | (78,995 | )    |  |      | (52,801 | ) |  |   | (29,605 | ) |  |   | (12,465 | )
|Total stockholders equity (a)                     |  |                | 7,014    |      |  |      | 13,471  |      |  |      | 33,643  |   |  |   | 4,698   |   |  |   | 8,830   |  



---

|(a) |  | At December 31, 2002, short-term liabilities include $12.05 million of
Series C Convertible Secured Promissory Notes. On February 4, 2003, our
stockholders ratified the Series C Private Placement resulting in the
conversion of the Notes into stockholders equity. See notes to financial
statements for further details.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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. The estimates and certain other
statements below are forward-looking statements that involve risks and
uncertainties. Our actual future capital requirements and the adequacies of our
available funds will depend on many factors, including those under Risk
Factors Related to Our Business.

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 HIV/AIDS, hepatitis B and hepatitis C. Our products are used
by physicians in selecting optimal treatments for their HIV patients and by
industry, academia and government for clinical studies, drug screening and
characterization, and basic research.

Equity Investment by Pfizer

In November 2002, we entered into a Stock Purchase Agreement with Pfizer
Ireland Pharmaceuticals (an affiliate of Pfizer, Inc.) in which we agreed to
issue and sell an aggregate of 2.6 million shares of our common stock for gross
proceeds of $3.0 million. Concurrently, we entered into a master services
agreement and a non-exclusive license agreement with Pfizer, Inc. for our HIV
drug resistance tests and services.

Series A Redeemable Convertible Preferred Stock

On June 29, 2001, we entered into a securities purchase agreement with
several investors to issue and sell, in a private placement, an aggregate of
1,625 shares of Series A Redeemable Convertible Preferred Stock (Series A
Preferred Stock) with warrants to purchase an aggregate of 3.2 million shares
of common stock, for an aggregate purchase price of $16.25 million. The
securities purchase agreement contemplated two closings, each for a portion of
the Series A Preferred Stock and the warrants. The first closing occurred on
July 2, 2001, and we received gross proceeds of $6.65 million. The second and
final closing occurred on September 27, 2001, and we received gross proceeds of
$9.6 million.

Of the 1,625 shares issued in the financing, 589 shares remain outstanding
as of February 28, 2003, and the others were converted into an aggregate of 4.6 million
shares of our common stock. As a result of the sales of Series B Preferred
Stock and Series C Preferred Stock financings, which are described below, the
conversion price of the Series A Preferred Stock and the exercise price of the
warrants issued to the purchasers of the Series A Preferred Stock has each been
reduced to $1.11. Accordingly, the 589 shares of Series A Preferred Stock
currently outstanding are now convertible into approximately 5.3 million shares
of common stock, and the warrants are now exercisable for approximately 8.1
million shares of common stock.

The Series A Preferred Stock bears an initial 6% annual dividend rate
which increases to an 8% annual rate on the fourth such payment, then increases
by two percentage points every six months up to a maximum annual rate of 14%.
This dividend is paid as a stock dividend semi-annually. The holders of Series
A Preferred Stock may elect to convert their shares into our common stock at
any time, just as they may choose to exercise their warrants at any time. We
may, at our option, convert the Series A Preferred Stock into common stock at
any time after June 21, 2002 for Series A Preferred Stock issued at the first
closing and after July 9, 2002 for Series A Preferred Stock issued at the
second closing, but only if our stock price exceeds $5.10 for 20 consecutive
trading days. We may also, at our option, convert the Series A Preferred Stock
into common stock upon a sale of common stock in a firm commitment underwritten
offering to the public if the public offering price exceeds $5.10, the
aggregate gross proceeds exceed $40 million and the registration statements
referenced above are effective.

The holders are not subject to any limitations on the number of
conversions of Series A Preferred Stock or subsequent sales of the
corresponding common stock, that they can effect, other than a prohibition on
any holder acquiring beneficial ownership of more than 4.99% of the outstanding
shares of our common stock.

We recorded a deemed dividend of $2.3 million in the third quarter of
2001, relating to the beneficial conversion feature of the Series A Preferred
Stock. The deemed dividend increased the loss applicable to common
stockholders in the calculation of basic and diluted net loss per common share
and is included in stockholders equity as offsetting charges and credits to
additional paid-in capital. The net proceeds of $2.8 million attributable to
the fair value of warrants are included in additional paid-in capital.

The holders of Series A Preferred Stock have the right to require us to
redeem all of the Series A Preferred Stock for cash equal to the greater of (i)
115% of their original purchase price plus 115% of any accrued and unpaid
dividend or (ii) the aggregate fair market

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value of the shares of common stock into which such shares of Series A
Preferred Stock are then convertible, upon certain triggering events, as
defined in the Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock. In addition, we may redeem the Series A Preferred
Stock at any time after June 29, 2003, for Series A Preferred Stock issued at
the first closing and after September 27, 2003 for Series A Preferred Stock
issued at the second closing. The Series A Preferred Stock is non-voting,
except with respect to certain extraordinary transactions. Due to the nature
of the redemption features of the Series A Preferred Stock, we excluded the
Series A Preferred Stock from equity in our financial statements.

Series B Redeemable Convertible Preferred Stock

On March 22, 2002, we entered into a securities purchase agreement with
several investors to issue and sell, in a private placement, an aggregate of
1,005 shares of Series B Redeemable Convertible Preferred Stock (Series B
Preferred Stock) with warrants to purchase an aggregate of 2.2 million shares
of common stock, for an aggregate purchase price of $10.05 million. In
connection with this financing, we also granted warrants to purchase an
aggregate of 637,261 shares of common stock to holders of Series A Preferred
Stock, as a payment in order to secure their consent and waiver concerning the
financing and the resulting impact on the Series A Preferred Stock. The
transaction closed on March 25, 2002.

We recorded a deemed dividend of $2.9 million in the first quarter of 2002
relating to the beneficial conversion feature of the Series B Preferred Stock
and the additional warrants issued to the holders of the Series A Preferred
Stock in connection with the Series B Preferred Stock financing. The net
proceeds of $2.6 million attributable to the fair value of warrants are
included in additional paid-in capital.

In connection with our sale of Series C Preferred Stock, we also agreed to
exchange all of the outstanding Series B Preferred Stock into Convertible
Promissory Notes, which were subsequently converted into Series C Preferred
Stock. We also exchanged all of the warrants issued to the purchasers of the
Series B Preferred Stock in connection with their purchase of Series B
Preferred Stock for new warrants. These transactions are discussed further
below.

Series C Convertible Preferred Stock

On November 14, 2002, we entered into a securities purchase agreement with
several investors to issue and sell, in a private placement, an aggregate of
706 shares of Series C Convertible Preferred Stock (Series C Preferred Stock)
and warrants to purchase an aggregate of 4.4 million shares of common stock,
for an aggregate purchase price of $7.06 million. The transaction closed on
November 19, 2002.

The Series C Preferred Stock bears an initial 8% annual dividend rate
which increases to a 9% annual dividend rate on June 30, 2004, then increases
by one percentage point every quarter thereafter up to a maximum annual rate of
14%, subject to an additional increase to an annual rate of 15% under certain
circumstances. Subject to the limitations described below, the holders of
Series C Preferred Stock may elect to convert their shares into common stock at
any time. Upon conversion, each share of Series C Preferred Stock is
convertible into approximately 8,264 shares of common stock. Subject to the
limitations described below, we may, at our option, convert the Series C
Preferred Stock into common stock (i) at any time after the first anniversary
of the issuance of the Series C Preferred Stock, but only if our stock price
exceeds $2.42 for 20 consecutive trading days or (ii) with the consent of a
majority of the holders of the Series C Preferred Stock. The Warrants are
exercisable beginning May 20, 2003 and expire November 19, 2007. The exercise
price of the Warrants is $1.11 per share.

The holders of Series C Preferred Stock are not subject to any limitations
on the number of conversions of Series C Preferred Stock or subsequent sales of
the corresponding common stock that they can effect, other than a prohibition
on any holder acquiring, upon conversion, beneficial ownership of more than
4.99% of the outstanding shares of our common stock, or, in the case of Biotech
Target NV and its affiliates, more than 19.99% of the outstanding shares of our
common stock. This limitation also applies to our ability to convert Series C
Preferred Stock to common stock.

We recorded a deemed dividend of $7.7 million in the fourth quarter of
2002 relating to the issuance of the Series C Preferred Stock. The charge
includes deemed dividends associated with an automatic adjustment of the
conversion price of our Series A Preferred Stock, which was triggered as a
result of the issuance of the Series C Preferred Stock. The charge also
includes deemed dividends associated with the exchange of the Series B
Preferred Stock described below, and the sale of the Series C Preferred Stock
together with the Warrants described above.

The investors of Series C Preferred Stock have the right to require us to
redeem all of the Series C Preferred Stock for cash equal to the greater of (i)
120% of their original purchase price plus 120% of any accrued and unpaid
dividend or (ii) the aggregate fair market value of the shares of common stock
into which such shares of Series C Preferred Stock are then convertible, upon
certain triggering events. The Series C Preferred Stock is non-voting, except
with respect to certain extraordinary transactions. In addition, until November
19, 2004, in the event that we propose to issue any equity securities or debt
which is convertible into equity securities,

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each holder of Series C Preferred Stock will have the right to purchase a
certain amount of such securities or debt based upon its holdings of Series C
Preferred Stock.

Exchange of Series B Preferred Stock; Issuance of Notes; Exchange of Warrants

On November 14, 2002, we entered into an exchange agreement with all of
the holders of Series B Preferred Stock in order to secure their consent to the
Series C Preferred Stock financing and the resulting impact on the Series B
Preferred Stock, and to increase the number of shares of our common stock
available for issuance upon conversion of the Series C Preferred Stock. Of the
1,005 shares issued in the original Series B Preferred Stock financing, 995
shares remained outstanding as of November 14, 2002, and the others had been
converted into an aggregate of 43,858 shares of our common stock. Pursuant to
the exchange agreement, on November 19, 2002, we repurchased all of the
outstanding Series B Preferred Stock in exchange for convertible secured
promissory notes (Notes). The aggregate principal amount of the Notes was
$12.05 million. In addition, the Notes bore an interest rate of 8%, had a
maturity date of March 19, 2003 and were secured by substantially all of our
assets. Following the approval of our stockholders in February 2003, (i) the
principal amount of the Notes was automatically converted into an aggregate of
1,204.6 shares of Series C Preferred Stock, and (ii) an amount equal to the
accrued interest on the Notes from November 19, 2002 through December 31, 2002
was paid to the holders of the Notes in cash, and (iii) all other accrued and
unpaid interest was forgiven. In addition, pursuant to the exchange agreement,
following approval of our stockholders, the Series B holders received warrants
to purchase common stock in exchange for the warrants originally issued to the
Series B holders in connection with their purchase of Series B Preferred Stock
(the Replacement Warrants).

Subsequent Events

On February 4, 2003, we held a Special Meeting of Stockholders, at which
our stockholders (i) approved an amendment to our Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of our
common stock from 60,000,000 shares to 100,000,000 shares; (ii) ratified and
approved the terms of our Series C Preferred Stock financing, including,
without limitation, the conversion of certain secured convertible promissory
notes issued to prior Series B Preferred stockholders into an aggregate of
1,204.6 shares of our Series C Convertible Preferred Stock and the issuance of
warrants to purchase 5.0 million shares of our common stock in exchange for
outstanding warrants to purchase 2.2 million shares of our common stock; and
(iii) approved an amendment to our Amended and Restated Certificate of
Incorporation to amend the Certificate of Designations, Rights and Preferences
for the Series C Convertible Preferred Stock to (a) provide that any dividend
payments due thereunder may be paid in either cash or shares of common stock at
our option, and (b) include anti-dilution provisions substantially identical to
those applicable with respect to our Series A Convertible Preferred Stock.

We expect to record a deemed dividend of approximately $2.2 million in the
first quarter of 2003, relating to the beneficial conversion feature of the
warrant exchange. The deemed dividend will increase the loss applicable to
common stockholders in the calculation of basic and diluted net loss per common
share and will be included in stockholders equity as offsetting charges and
credits to additional paid-in capital.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes. Actual results could differ materially from
those estimates. See Note 1 to the financial statements for further discussion.
Items in our financial statements requiring significant estimates and judgments
are as follows:

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 an allowance for contractual discounts and an
allowance for differences between the amounts billed and estimated payment
amounts. We estimate these allowances based on historical payment information
and current sales data. If the government and other third-party payors
significantly change their reimbursement policies or the relative mix of
third-party payors changes, an adjustment to the allowance may be necessary.
Revenue generated from our database of resistance test results is recognized
when earned under the terms of the related agreements, generally at the
shipment of the requested reports. National Institutes of Health (NIH) grant
revenue is recorded on a reimbursement basis as grant costs are incurred. Costs
associated with NIH grant revenue are included in research and development
expenses. Deferred revenue relates to cash received in advance of delivery.

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Deferred Tax Assets

We record a valuation allowance to reduce our deferred tax assets to the
amount that we believe is more likely than not to be realized. Due to our lack
of earnings history, the net deferred tax assets at December 31, 2002 have been
fully offset by a valuation allowance.

Deemed Dividends

We estimate a beneficial conversion feature for our convertible preferred
stock in accordance with Emerging Issues Task Force Consensus No. 98-5,
Accounting for Convertible Securities with Beneficial Conversion Features and
No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments
based on the difference between the estimated conversion price and common stock
fair market value at the date of issuance. We record the beneficial conversion
feature as a deemed dividend on the Statement of Operations, resulting in an
increase to the loss applicable to common stockholders in the calculation of
basic and diluted net loss per common share.

Stock Based Compensation

We have elected to continue to follow Accounting Principles Board Opinion
No. 25 Accounting for Stock-Based Compensation (APB 25) to account for
employee stock options. Under APB 25, no compensation expense is recognized
because the exercise price of our employee stock options equals the market
price of the underlying stock on the date of grant. Deferred compensation, if
recorded, is amortized using the graded vesting method. Statement of Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123) as amended by Statement of Financial Accounting
Standards Board Statement No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of FASB Statement No. 123
(SFAS 148) requires the disclosure of pro forma information regarding net
loss and net loss per share as if we had accounted for its stock options under
the fair value method. See Summary of Significant Accounting Policies note to
the financial statements for further discussion.

We account 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.

RESULTS OF OPERATIONS

Year Ended December 31, 2002 Compared to Years Ended December 31, 2001 and
2000.

|                       |                 |   |                |        |      |   |        |        |  |   |       |       | 
|---------------------- | --------------- | - | -------------- | ------ | ---- | - | ------ | ------ |  | - | ----- | ----- | 
|                       |                 |   | 2002           |        | 2001 |   | 2000  
|                       |                 |   |                |        |      |   |       
|                       |                 |   | (In thousands)
|Patient testing        |                 | $ | 17,845         |        |      | $ | 12,041 |        |  | $ | 5,298 |      
|Pharmaceutical testing |                 |   | 6,685          |        |      |   | 5,774  |        |  |   | 2,168 |      
|                       |                 |   |                |        |      |   |        |        |  |   |       |      
|                       | Product revenue |   |                | 24,530 |      |   |        | 17,815 |  |   |       | 7,466 | 
|NIH grant revenue      |                 |   | 731            |        |      |   | 458    |        |  |   |      |      
|                       |                 |   |                |        |      |   |        |        |  |   |       |      
|Total revenue          |                 | $ | 25,261         |        |      | $ | 18,273 |        |  | $ | 7,466 |      
|                       |                 |   |                |        |      |   |        |        |  |   |       |      

Revenue.Revenue was $25.3 million, $18.3 million and $7.5 million in
2002, 2001 and 2000, respectively. The increase of $7.0 million in 2002 as
compared to 2001 and $10.8 million in 2001 as compared to 2000 was primarily
attributable to greater sales of PhenoSense HIV, GeneSeq HIV and the
introduction of PhenoSense GT in the fourth quarter of 2001. In addition, in
2001, we were awarded NIH research grants to develop new technologies to
measure HIV resistance to entry inhibitors and viral replication capacity or
fitness. We believe increased demand for existing products and new product
launches will be the primary factors contributing to an increased level of
sales in 2003 as compared to 2002. We anticipate quarterly differences in the
revenue growth rate due to timing of various clinical studies and the seasonal
effects observed in patient testing, which is most noticeable in the first and
third quarters.

Cost of product revenue.Cost of product revenue was $14.6 million, $11.8
million and $5.5 million in 2002, 2001 and 2000, respectively. The increases of
$2.7 million in 2002 as compared to 2001 and $6.4 million in 2001 as compared
to 2000, were due to the higher volume of testing and continued expansion of
our clinical laboratory activities. Included in these costs are materials,
supplies, labor and overhead related to the tests. In addition, in 2002, we
recorded a charge of $61,000 related to the implementation of the business
restructuring plan as discussed below. Gross margins increased to 41% in 2002
from 34% in 2001 and 27% in 2000 primarily due to improved operational
efficiency and economies of scale. We anticipate that the total cost of product
revenue in the future will increase as we increase the volume of our testing
but at a lower growth rate than the anticipated revenue growth rate.

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Research and development.Research and development costs were $10.4
million, $11.7 million and $10.1 million in 2002, 2001 and 2000, respectively.
The decrease of $1.3 million in 2002 as compared to 2001 was primarily the
result of reallocating certain clinical research and research and development
resources to revenue generating activities, partially offset by a charge of $54,000
related to the implementation of the business restructuring plan as discussed
below. The increase of $1.6 million in 2001 as compared to 2000 was primarily
related to research and development efforts for new products and to enhance our
PhenoSense HIV test.

Total research and development expenses included certain costs reimbursed
by the NIH for the development of the PhenoSense HIV Entry, GeneSeq HIV Entry
and Replication Capacity HIV assays.

The development costs reimbursed by the NIH were as follows:

|                                                  |       |   |                |     |      |   |     |     | 
|------------------------------------------------- | ----- | - | -------------- | --- | ---- | - | --- | --- | 
|                                                  |       |   | Year Ended    
|                                                  |       |   | December 31,  
|                                                  |       |   |               
|                                                  |       |   | 2002           |     | 2001
|                                                  |       |   |                |     |     
|                                                  |       |   | (In thousands)
|PhenoSense HIV Entry and GeneSeq HIV Entry assays |       | $ | 300            |     |      | $ | 300 |    
|Replication Capacity HIV assay                    |       |   | 431            |     |      |   | 158 |    
|                                                  |       |   |                |     |      |   |     |    
|                                                  | Total |   | $              | 731 |      |   | $   | 458 | 
|                                                  |       |   |                |     |      |   |     |    

Because our resistance tests target viral diseases and our product lines
overlap, most of our core research and development activities are advancing
multiple potential product lines. Due to this substantial overlap, we do not
track costs on a project by project basis, except for the costs reimbursed by
the NIH as discussed above. We expect research and development spending in the
future to trend with the level of NIH grants and/or other research and
development cost reimbursement arrangements under contract.

Below is a summary of products and products in development. The
information in the column labeled Estimated Completion contains
forward-looking statements regarding completion of products in development and is dependent on securing NIH grants
and/or other research and development funding as well as demand for
the products. The
actual timing of completion of those products could differ materially from the
estimates provided in the table. For a discussion of the risks and
uncertainties associated with the completion of our products, see Risk Factors
Related to Our Business.

The following summarizes our products and products in development:

|                                                                              |                                    |  |                     
|----------------------------------------------------------------------------- | ---------------------------------- |  | --------------------
|                                                                              |                                    |  | Estimated Completion
|                                                                              |                                    |  |                     
|PhenoSense HIV, a phenotypic HIV test                                         |                                    | 
|                                                                              | Pharmaceutical and patient testing |  | Completed           
|                                                                             
|                                                                             
|                                                                             
|GeneSeq HIV, a genotypic HIV test                                             |                                    | 
|                                                                              | Pharmaceutical and patient testing |  | Completed           
|                                                                             
|                                                                             
|                                                                             
|PhenoSense GT, a combination phenotype/genotype HIV test                      |                                    | 
|                                                                              | Patient testing                    |  | Completed           
|                                                                             
|                                                                             
|                                                                             
|Replication Capacity HIV, a measurement of fitness (1)                        |                                    | 
|                                                                              | Pharmaceutical testing             |  | Completed           
|                                                                              | Patient testing                    |  | Completed           
|                                                                             
|                                                                             
|                                                                             
|PhenoScreen, a high-throughput screening assay                                |                                    | 
|                                                                              | Pharmaceutical testing             |  | Completed           
|                                                                             
|                                                                             
|                                                                             
|PhenoSense HIV Entry and GeneSeq HIV Entry Assays, entry inhibitor assays (2) |                                    | 
|                                                                              | Pharmaceutical testing             |  | Completed           
|                                                                              | Patient testing (3)                |  | 2004                
|                                                                             
|                                                                             
|                                                                             
|PhenoSense HIV Vaccine Entry, an entry neutralization assay                   |                                    | 
|                                                                              | Pharmaceutical testing             |  | Completed           
|                                                                             
|                                                                             
|                                                                             
|GeneSeq HBV, a genotypic hepatitis B test                                     |                                    | 
|                                                                              | Pharmaceutical testing             |  | Completed           
|                                                                              | Patient testing(3)                 |  | 2005                
|                                                                             
|                                                                             
|                                                                             
|PhenoSense HBV, a phenotypic hepatitis B test                                 |                                    | 
|                                                                              | Pharmaceutical testing             |  | 2004                
|                                                                              | Patient testing (3)                |  | 2006                
|                                                                             
|                                                                             
|                                                                             
|PhenoSense HCV, a phenotypic hepatitis C test                                 |                                    | 
|                                                                              | Pharmaceutical testing             |  | 2004                
|                                                                              | Patient testing(3)                 |  | 2006                
|                                                                             
|                                                                             
|                                                                             
|GeneSeq HCV, a genotypic hepatitis C test                                     |                                    | 
|                                                                              | Pharmaceutical testing             |  | 2003                
|                                                                              | Patient testing(3)                 |  | 2005                



---

|(1) |  | Currently offered free of charge on phenotypic reports; in the future may
be offered as a stand-alone product.
|--- |  | --------------------------------------------------------------------------------------------------------------
|   
|(2) |  | This test may be incorporated into one of our existing products or
possibly offered as a stand-alone product. 
|   
|(3) |  | This test is expected to be offered after pharmaceutical drugs are
available for patient use.                 

General and administrative.General and administrative expenses were $10.6
million, $11.4 million and $10.8 million in 2002, 2001 and 2000, respectively.
The decrease of $0.8 million in 2002 as compared to 2001 was primarily due to a
reduction in noncash compensation expenses related to granting stock and
options prior to our initial public offering, offset by a charge of $96,000
related to the implementation of the business restructuring plan as discussed
below. The increase of $0.5 million in 2001 as compared to 2000 was due to
greater spending on salaries and benefits resulting from increased employee
headcount and additional corporate infrastructure to support revenue growth,
partially offset by a $2.2 million reduction in non-cash compensation expenses
primarily related to granting stock and options prior to our initial public
offering in 2000. In 2003, we expect general and administrative expenses to
decrease primarily due to continued leveraging of existing infrastructure and
the implementation of the business restructuring plan as discussed below.

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Stock Based Compensation.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 and is a component of stockholders equity. In 2002 and
2001, all options were granted at fair value and no deferred compensation was
recorded. In connection with the grant of stock options to employees, prior to
our initial public offering, we recorded deferred stock compensation of
approximately $1.6 million in 2000. Stock based compensation is being amortized
over the vesting period for the individual options. We recorded related
amortization of $0.7 million, $1.5 million and $3.6 million in 2002, 2001 and
2000, respectively.

We determined compensation for options granted to non-employees in
accordance with 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 $0.2 million, $0.2
million and $0.3 million of stock based compensation for non-employees in 2002,
2001 and 2000, respectively. The aggregate value of these options is $0.3
million, calculated based on the deemed fair value of our common stock at
December 31, 2002 and will be recorded over the period of the related services,
which is generally one to four years.

Sales and marketing.Sales and marketing expenses were $11.7 million,
$10.3 million and $5.9 million in 2002, 2001 and 2000, respectively. The
increases of $1.4 million in 2002 as compared to 2001 and $4.4 million in 2001
as compared to 2000, were primarily attributable to the expansion of our sales
force and increased marketing programs related to the commercialization of our
existing and new products, including PhenoSense GT. In addition, in 2002, we
recorded a charge of $75,000 related to the implementation of the business
restructuring plan as discussed below. In 2003, we expect sales and marketing
expenses to decrease primarily due to continued effective utilization of our
sales and marketing capabilities and the implementation of the business
restructuring plan as discussed below.

Interest income.Interest income was $0.3 million, $1.1 million and $1.9
million in 2002, 2001 and 2000, respectively. The decrease of $0.8 million in
2002 as compared to 2001 and $0.7 million in 2001 as compared to 2000 were
primarily due to lower average cash balances resulting from expenditures made
to support growth in company operations and lower interest rates.

Interest expense.Interest expense was $0.4 million, $0.5 million and $0.3
million in 2002, 2001 and 2000, respectively. The decrease of $43,000 in 2002
as compared to 2001 was primarily due to the payoff of several equipment loans
which ended. The increase of $0.2 million in 2001 as compared to 2000 was due
to increased equipment financing.

Other income.Other income was $0.3 million and $0.1 million in 2002 and
2001, respectively, which represents residual income from one of our subleases.
For further discussion, see Liquidity and Capital Resources below.

Deemed dividend.In 2000, we sold 8.5 million shares of Series C Preferred
Stock for 4.2 million shares of common stock as converted. We received proceeds
of approximately $15.6 million in 2000. 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.

In 2001, we sold 1,625 shares of Series A Preferred Stock with warrants to
purchase an aggregate of 3.2 million shares of common stock, for an aggregate
purchase price of $16.25 million. We determined that the issuance of the Series
A Preferred Stock resulted in a beneficial conversion feature of $2.3 million
in 2001.

In the first quarter of 2002, we sold 1,005 shares of Series B Preferred
Stock with warrants to purchase an aggregate of 2.2 million shares of common
stock, for an aggregate purchase price of $10.05 million. In connection with
this financing, we also granted warrants to purchase an aggregate of 637,261
shares of common stock to holders of Series A Preferred Stock as a payment in
order to secure their consent and waiver concerning the financing and the
resulting impact on the Series A Preferred Stock. In the fourth quarter of
2002, we sold 706 shares of Series C Preferred Stock with warrants to purchase
an aggregate of 4.4 million shares of common stock, for an aggregate purchase
price of $7.06 million. We determined that the issuance of the Series B and
Series C Preferred Stock resulted in a beneficial conversion feature of $2.9
million and $7.7 million, respectively, for a total of $10.6 million in 2002.

The beneficial conversion features were calculated in accordance with
Emerging Issues Task Force Consensus No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features and Emerging Issues Task Force
Consensus No. 00-27 Application of Issue No. 98-5 to Certain Convertible
Instruments. The beneficial conversion features were reflected as deemed
dividends in the Statement of Operations of $10.6 million, $2.3 million and
$15.7 million in 2002, 2001 and 2000, respectively, and are included in
stockholders equity as offsetting charges and credits to additional paid-in
capital.

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Preferred stock dividend.We recorded a preferred stock dividend of $1.0
million and $0.3 million in 2002 and 2001, respectively. The Series A Preferred
Stock issued in 2001 bears an initial 6% annual dividend rate, payable twice a
year in shares of common stock, which increases to an 8% annual rate on the
fourth such payment,and then increases by 2 percentage points every six months
thereafter up to a maximum annual rate of 14%. The Series B Preferred Stock
issued in 2002 received cash dividends based on a 6% annual dividend rate until
November 2002 when the Series B Preferred Stock was exchanged for secured
convertible promissory notes. The Series C Preferred Stock bears an initial 8%
annual dividend rate, payable quarterly, which increases to a 9% annual
dividend rate on June 30, 2004, then increases by one percentage point every
quarter thereafter up to a maximum annual rate of 14%. In 2002, the Series C
Preferred Stock dividend was paid in cash.

LIQUIDITY AND CAPITAL RESOURCES

We expect our available cash, investments and short-term restricted cash
of $11.4 million at December 31, 2002, funds provided by the sale of our
products, grant revenue, and borrowing under equipment financing arrangements
will be adequate to fund our operations through December 2003, assuming
revenues reach projected levels and cost containment measures are effective.
In addition, we plan to continue to evaluate various strategic opportunities,
including among others, research and development collaborations, international
alliances and marketing partnerships.

We have funded our operations since inception primarily through public and
private sales of common and preferred stock, equipment financing arrangements
and product sales. In particular, we have completed three private financings
since our initial public offering in May 2000. Although we expect our
operating and capital resources will be sufficient to meet future requirements
through December 2003, we may have to raise additional funds to continue the
development and commercialization of future technologies and our business
operations in general. These funds may not be available on favorable terms, or
at all. If adequate funds are not available on commercially reasonable terms,
we may be required to curtail operations significantly or sell significant
assets and may not be able to continue as a going concern. In addition, we may
choose to raise additional capital due to market conditions or strategic
considerations even if we believe that we have sufficient funds for current or
future operating plans.

In addition, we have had, and may continue to have, challenges meeting the
requirements to maintain a listing on the Nasdaq National Market including,
among other things, requirements that we have stockholders equity of at least
$10 million and that our stock price consistently trades at or above $1.00 per
share. If we fail to meet the listing maintenance standards established by
Nasdaq, we may receive a notice of delisting from the Nasdaq National Market.
If we receive a notice of delisting, we will be required to pursue one of a
number of alternatives, including an appeal process with Nasdaq, a possible
reverse split of our common stock or a move to an alternative market (including
possibly the Nasdaq SmallCap Market), which may be less efficient and less
broad-based. As a result, if we were to be delisted from the National Market we
may have a harder time accessing capital markets for additional funding, and
our stockholders may experience reduced liquidity. Also, if at any time we are
not listed on the National Market, the Nasdaq SmallCap Market, the American
Stock Exchange or the New York Stock Exchange, our outstanding shares of Series
A Preferred Stock would be subject to redemption.

Net cash used in operating activities was $19.3 million, $24.1 million and
$18.5 million in 2002, 2001 and 2000, respectively. Cash used in operating
activities primarily relates to ongoing operating losses as discussed above.

Net cash provided by investing activities was $10.7 million in 2002. Net
cash used in investing activities was $2.2 million and $20.5 million in 2001
and 2000, respectively. The increase of $12.9 million in 2002 as compared to
2001 is primarily from maturities and sales of short-term investments, receipt
of $3.8 million for the lease assignment of excess facilities, a tenant
improvement reimbursement of $1.3 million and lower capital expenditures in
2002, partially offset by purchases of short-term investments. The decrease in
cash used in investing activities of $18.3 million in 2001 as compared to 2000
is primarily due to net proceeds from the sale of short-term investments in
2001 as compared to net purchases of short-term investment in 2000. We also
received $2.6 million in 2001 as an advance from one of our subtenants.

Net cash provided by financing activities was $17.8 million, $15.1 million
and $49.4 million in 2002, 2001 and 2000, respectively. The net cash provided
by financing activities in 2002 resulted primarily from our issuance of Series
B and Series C Preferred Stock and an equity investment from Pfizer Ireland
Pharmaceuticals for net proceeds of approximately $19.0 million. Net cash
provided by financing activities in 2001 resulted primarily from our issuance
of Series A Preferred Stock for net proceeds of approximately $14.7 million and
equipment financing of approximately $1.3 million. Net cash provided by
financing activities in 2000 resulted primarily from our initial public
offering. We sold 5.0 million shares of common stock at $7.00 per share for net
proceeds of approximately $31.2 million. In addition, we sold Series C
Preferred Stock for approximately $15.6 million in 2000.

We currently lease two buildings and sublease one building, totaling
approximately 80,000 square feet of laboratory and office space in South San
Francisco, California. The leases expire in the years 2004 and 2010 and provide
us with options to extend the terms for an additional seven and ten years,
respectively. The sublease, which covers approximately 14,000 square feet,
expires on September 30, 2003, and provides us with the option to extend for an
additional three months.

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In June 2002, we assigned a lease of excess laboratory and office space
and transferred ownership through the sale of related leasehold improvements
and equipment to a third party. We received net proceeds from the lease
assignment of $3.8 million, resulting in a net gain of $0.3 million which is
included in accrued liabilities and other long-term liabilities and is
recognized as other income over the sublease term. In the event of default by
the assignee, we would be contractually obligated for payments under the lease
of: $1.0 million in 2003; $1.4 million in 2004; $1.4 million in 2005; and $8.5
million from 2006 through 2011.

In July 2001, we sublet approximately 12,000 square feet of one of our
existing facilities to a third party for a term of 18 months, which ended in
January 2003. The rental income generated from this sublease was $0.6 million
and $0.3 million in 2002 and 2001, respectively, and is recorded as a partial
offset to rental expense.

At December 31, 2002, our contractual obligations for the next five years
and thereafter, excluding the lease assignment guarantee and sublease rental
income, are as follows:

|                                |       |   |                        |       |           |   |           |       |            |   |       |       |  |  |       |       |  |   |       |        | 
|------------------------------- | ----- | - | ---------------------- | ----- | --------- | - | --------- | ----- | ---------- | - | ----- | ----- |  |  | ----- | ----- |  | - | ----- | ------ | 
|                                |       |   | Payments Due By Period
|                                |       |   |                       
|                                |       |   | Less Than              |       |           |   |           |       |            |   |       |       |  |  |       |       |  |   |      
|                                |       |   | 1 Year                 |       | 2-3 Years |   | 4-5 Years |       | Thereafter |   | Total
|                                |       |   |                        |       |           |   |           |       |            |   |      
|                                |       |   | (In thousands)        
|Operating leases                |       | $ | 1,849                  |       |           | $ | 2,442     |       |            | $ | 1,993 |       |  |  | 2,464 |       |  | $ | 8,748 |       
|Capital leases                  |       |   | 1,271                  |       |           |   | 449       |       |            |   |      |       |  |  |      |       |  |   | 1,720 |       
|Equipment loans                 |       |   | 423                    |       |           |   |          |       |            |   |      |       |  |  |      |       |  |   | 423   |       
|Materials and service contracts |       |   | 600                    |       |           |   |          |       |            |   |      |       |  |  |      |       |  |   | 600   |       
|                                |       |   |                        |       |           |   |           |       |            |   |       |       |  |  |       |       |  |   |       |       
|                                | Total |   | $                      | 4,143 |           |   | $         | 2,891 |            |   | $     | 1,993 |  |  | $     | 2,464 |  |   | $     | 11,491 | 
|                                |       |   |                        |       |           |   |           |       |            |   |       |       |  |  |       |       |  |   |       |       

In addition, the Company is obligated to pay dividends to the Series A and
C preferred stockholders. See Capital Stock note to the financial statements
for further discussion.

The contractual obligations discussed above are fixed costs. If we are
unable to generate sufficient cash from operations to meet these contractual
obligations, we may have to raise additional funds. These funds may not be
available on favorable terms or at all.

Income taxes.We have incurred net operating losses since inception. At
December 31, 2002, we had federal and state net operating loss carryforwards of
approximately $91.0 million and $36.0 million, respectively. The federal net
operating loss and credit carryforwards will expire at various dates between
the years 2010 and 2022, if not utilized. The state of California net operating
losses will expire at various dates between the years 2005 and 2013, 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.

Business restructuring.In November 2002, we implemented a business
restructuring plan to reallocate certain resources to revenue maximizing
activities and reduce cash consumption. The plan included a reduction in force
of approximately 17% or 35 employees: 8 employees in laboratory operations; 6
employees in research and development; 8 employees in sales and marketing; and
13 employees in administration. In the fourth quarter of 2002, we recorded a
charge for salaries, severance and other personnel related costs to the
respective departments totaling $0.3 million.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). SFAS 148 amends Statement of Financial Accounting
Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123) to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The additional disclosure
requirements of SFAS 148 are effective for fiscal years ending after December
15, 2002. We have elected to continue to follow the intrinsic value method of
accounting as prescribed by Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees, to account for employee stock
options.

In November 2002, the FASB issued Interpretation 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a guarantor
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. FIN 45 also expands the
disclosures required to be made by a guarantor about its obligations under
certain guarantees that it has issued. Initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified. The disclosure requirements

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are effective immediately. The adoption of the recognition and
measurement provisions of FIN 45 did not have a material effect on our results
of operations or financial position.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value when the liability is incurred, rather than at the date of an entitys
commitment to an exit plan. The provisions SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of
SFAS 146 is not expected to have a material effect on our results of operations
or financial position.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145). SFAS 145 rescinds
SFAS 4 Reporting Gains and Losses from Extinguishment of Debt and an
amendment of that Statement, SFAS 64 Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS 145 also rescinds SFAS 44 Accounting for
Intangible Assets of Motor Carriers. SFAS 145 amends SFAS 13 Accounting for
Leases to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS 145 also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of SFAS 145
generally are
effective for financial statements issued on or after May 15, 2002. The
adoption of SFAS 145 did not have a material effect on our results of
operations or financial position.




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.

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Item 8.Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

|                                                                           |  |     
|-------------------------------------------------------------------------- |  | ----
|                                                                           |  | Page
|                                                                           |  |     
|Report of Ernst & Young LLP, Independent Auditors                          |  | F-2 
|Balance Sheets as of December 31, 2002 and 2001.                           |  | F-3 
|Statements of Operations for the years ended 2002, 2001 and 2000.          |  | F-4 
|Statements of Stockholders Equity for the years ended 2002, 2001 and 2000 |  | F-5 
|Statements of Cash Flows for the years ended 2002, 2001 and 2000.          |  | F-6 
|Notes to Financial Statements                                              |  | F-7 

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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, 2002 and 2001, and the related statements of operations,
stockholders equity, and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also include the financial statement
schedule listed in the index at Item 15(a)(2). These financial statements and
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and schedule 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, 2002 and 2001 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth herein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Palo Alto, California
February 7, 2003

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VIROLOGIC, INC.

BALANCE SHEETS
(In thousands, except share data)

|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |         |        |  | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------------ |  | ------ | ------- | ------ |  | 
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          | December 31,
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |             
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          | 2002         |  | 2001  
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |       
|ASSETS                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |        
|Current assets:                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |        
|                                                                                                                                                                                                                                                                                       | Cash and cash equivalents                                                                                                                                                                                                                            |                                            | $      | 10,559   |              |  | $      | 1,399   |       
|                                                                                                                                                                                                                                                                                       | Short-term investments                                                                                                                                                                                                                               |                                            |        | 586      |              |  |        | 7,563   |       
|                                                                                                                                                                                                                                                                                       | Accounts receivable, net of allowance for
doubtful accounts of $989 and $588 in 2002 and
2001, respectively                                                                                                                                          |                                            |        | 4,924    |              |  |        | 4,562   |       
|                                                                                                                                                                                                                                                                                       | Prepaid expenses                                                                                                                                                                                                                                     |                                            |        | 811      |              |  |        | 1,464   |       
|                                                                                                                                                                                                                                                                                       | Tenant improvement reimbursement                                                                                                                                                                                                                     |                                            |        |         |              |  |        | 1,286   |       
|                                                                                                                                                                                                                                                                                       | Inventory                                                                                                                                                                                                                                            |                                            |        | 958      |              |  |        | 956     |       
|                                                                                                                                                                                                                                                                                       | Restricted cash                                                                                                                                                                                                                                      |                                            |        | 257      |              |  |        | 100     |       
|                                                                                                                                                                                                                                                                                       | Other current assets                                                                                                                                                                                                                                 |                                            |        | 125      |              |  |        | 385     |       
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |         |       
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      | Total current assets                       |        |          | 18,220       |  |        |         | 17,715 | 
|Property and equipment, net                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                      |                                            | 10,961 |          |              |  | 18,381 |        
|Restricted cash                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                      |                                            | 450    |          |              |  | 900    |        
|Other assets                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                      |                                            | 855    |          |              |  | 855    |        
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |         |       
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      | Total assets                               |        | $        | 30,486       |  |        | $       | 37,851 | 
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |        
|Current liabilities:                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |        
|                                                                                                                                                                                                                                                                                       | Accounts payable                                                                                                                                                                                                                                     |                                            | $      | 831      |              |  | $      | 2,304   |       
|                                                                                                                                                                                                                                                                                       | Accrued compensation                                                                                                                                                                                                                                 |                                            |        | 863      |              |  |        | 2,036   |       
|                                                                                                                                                                                                                                                                                       | Accrued liabilities                                                                                                                                                                                                                                  |                                            |        | 2,456    |              |  |        | 2,386   |       
|                                                                                                                                                                                                                                                                                       | Advance from subtenant                                                                                                                                                                                                                               |                                            |        |         |              |  |        | 1,300   |       
|                                                                                                                                                                                                                                                                                       | Deferred revenue                                                                                                                                                                                                                                     |                                            |        | 674      |              |  |        | 314     |       
|                                                                                                                                                                                                                                                                                       | Convertible promissory notes                                                                                                                                                                                                                         |                                            |        | 12,046   |              |  |        |        |       
|                                                                                                                                                                                                                                                                                       | Current portion of capital lease obligations                                                                                                                                                                                                         |                                            |        | 1,173    |              |  |        | 977     |       
|                                                                                                                                                                                                                                                                                       | Current portion of loans payable                                                                                                                                                                                                                     |                                            |        | 416      |              |  |        | 890     |       
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |         |       
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      | Total current liabilities                  |        |          | 18,459       |  |        |         | 10,207 | 
|Long-term portion of capital lease obligations                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                      |                                            | 419    |          |              |  | 1,341  |        
|Long-term portion of loans payable                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                      |                                            |       |          |              |  | 174    |        
|Long-term deferred rent                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                      |                                            | 345    |          |              |  | 455    |        
|Long-term advance from subtenant                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |       |          |              |  | 975    |        
|Redeemable convertible preferred stock, $0.001 par
value, 606 and 1,523 shares authorized, designated
by series, 589 and 1,523 shares issued and
outstanding at December 31, 2002 and December 31,
2001, respectively; aggregate liquidation
preference of $6,013 at December 31, 2002 |                                                                                                                                                                                                                                                      |                                            | 4,249  |          |              |  | 11,228 |        
|Commitments                                                                                                                                                                                                                                                                           
|Stockholders equity:                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |        
|                                                                                                                                                                                                                                                                                       | Preferred stock, $0.001 par value, 4,999,394 and
4,998,477 shares authorized, designated by
series, 706 and none issued and outstanding at
December 31, 2002 and 2001, respectively;
aggregate liquidation preference of $7,060 at
December 31, 2002 |                                            |        |         |              |  |        |        |       
|                                                                                                                                                                                                                                                                                       | Common stock, $0.001 par value, 60,000,000 shares
authorized; 28,263,255 and 20,650,012 shares
issued and outstanding at December 31, 2002 and
2001, respectively                                                                                    |                                            |        | 28       |              |  |        | 21      |       
|                                                                                                                                                                                                                                                                                       | Additional paid-in capital                                                                                                                                                                                                                           |                                            |        | 107,925  |              |  |        | 93,226  |       
|                                                                                                                                                                                                                                                                                       | Accumulated other comprehensive income                                                                                                                                                                                                               |                                            |        | 7        |              |  |        | 94      |       
|                                                                                                                                                                                                                                                                                       | Deferred compensation                                                                                                                                                                                                                                |                                            |        | (182     | )            |  |        | (875    | )     
|                                                                                                                                                                                                                                                                                       | Accumulated deficit                                                                                                                                                                                                                                  |                                            |        | (100,764 | )            |  |        | (78,995 | )     
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |         |       
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      | Total stockholders equity                 |        |          | 7,014        |  |        |         | 13,471 | 
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |         |       
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      | Total liabilities and stockholders equity |        | $        | 30,486       |  |        | $       | 37,851 | 
|                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                      |                                            |        |          |              |  |        |         |       

See accompanying notes.

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VIROLOGIC, INC.

STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |        | 
|------------------------------------------------------------------------------------- | -------------------------- | ---------------------------------- | ------- | ----------------------- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                      |                            |                                    |         | Year Ended December 31,
|                                                                                      |                            |                                    |         |                        
|                                                                                      |                            |                                    |         | 2002                    |        | 2001 |         | 2000  
|                                                                                      |                            |                                    |         |                         |        |      |         |       
|Revenue:                                                                              |                            |                                    |         |                         |        |      |         |        |        |   |         |       
|                                                                                      | Product revenue            |                                    | $       | 24,530                  |        |      | $       | 17,815 |        |   | $       | 7,466  |       
|                                                                                      | NIH grant revenue          |                                    |         | 731                     |        |      |         | 458    |        |   |         |       |       
|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |       
|                                                                                      |                            | Total revenue                      |         |                         | 25,261 |      |         |        | 18,273 |   |         |        | 7,466  | 
|Operating costs and expenses:                                                         |                            |                                    |         |                         |        |      |         |        |        |   |         |       
|                                                                                      | Cost of product revenue    |                                    |         | 14,589                  |        |      |         | 11,845 |        |   |         | 5,457  |       
|                                                                                      | Research and development   |                                    |         | 10,406                  |        |      |         | 11,693 |        |   |         | 10,080 |       
|                                                                                      | General and administrative |                                    |         | 10,550                  |        |      |         | 11,376 |        |   |         | 10,841 |       
|                                                                                      | Sales and marketing        |                                    |         | 11,716                  |        |      |         | 10,336 |        |   |         | 5,890  |       
|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |       
|                                                                                      |                            | Total operating costs and expenses |         |                         | 47,261 |      |         |        | 45,250 |   |         |        | 32,268 | 
|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |       
|Operating loss                                                                        |                            |                                    | (22,000 | )                       |        |      | (26,977 | )      |        |   | (24,802 | )     
|Interest income                                                                       |                            |                                    | 307     |                         |        |      | 1,143   |        |        |   | 1,868   |       
|Interest expense                                                                      |                            |                                    | (423    | )                       |        |      | (466    | )      |        |   | (262    | )     
|Other income                                                                          |                            |                                    | 347     |                         |        |      | 106     |        |        |   |        |       
|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |       
|Net loss                                                                              |                            |                                    | (21,769 | )                       |        |      | (26,194 | )      |        |   | (23,196 | )     
|Deemed dividend to preferred stockholders                                             |                            |                                    | (10,551 | )                       |        |      | (2,269  | )      |        |   | (15,700 | )     
|Preferred stock dividend                                                              |                            |                                    | (977    | )                       |        |      | (334    | )      |        |   |        |       
|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |       
|Net loss applicable to common stockholders                                            |                            | $                                  | (33,297 | )                       |        | $    | (28,797 | )      |        | $ | (38,896 | )     
|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |       
|Basic and diluted net loss per common share                                           |                            | $                                  | (1.38   | )                       |        | $    | (1.43   | )      |        | $ | (2.62   | )     
|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |       
|Weighted average shares used in computing basic and diluted
net loss per common share |                            |                                    | 24,157  |                         |        |      | 20,072  |        |        |   | 14,852  |       
|                                                                                      |                            |                                    |         |                         |        |      |         |        |        |   |         |        |       

See accompanying notes.

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VIROLOGIC, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)

|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |         |  
|--------------------------------------------------------------------------------------- | ---------------------------------------------------- |  | --------------- | - | ------ | - | ---------- | - | ------------- |  | ------------- | - | ----------- | - | ----------- | - | ------------- | - | ----------- | - | ------ | - | --- | - |  | - | --- | --- | - | - | ------ | - |  | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  | Common        |   |             |   |             |   | Notes         |   | Accumulated |   |        |   |     |   |  |   |     |     |   |   |       
|                                                                                        |                                                      |  | Preferred Stock |   | Stock  |   | Additional |   | Receivable    |  | Other         |   |             |   |             |   |               |   |             |   | Total 
|                                                                                        |                                                      |  |                 |   |        |   | Paid-in    |   | from Officers |  | Comprehensive |   | Deferred    |   | Accumulated |   | Stockholders'
|                                                                                        |                                                      |  | Shares          |   | Amount |   | Shares     |   | Amount        |  | Capital       |   | & Employees |   | Income      |   | Compensation  |   | Deficit     |   | Equity
|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |       
|Balance as of December 31, 1999                                                         |                                                      |  | 9,749           |   |        | $ | 10         |   |               |  | 5,097         |   |             | $ | 5           |   |               | $ | 38,812      |   |        | $ | (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                             |                                                      |  | 8,462           |   |        |   | 8          |   |               |  |              |   |             |   |            |   |               |   | 15,626      |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 15,634  |        
|Conversion of Series B and C Preferred Stock to common stock                            |                                                      |  | (18,211         | ) |        |   | (18        | ) |               |  | 9,588         |   |             |   | 10          |   |               |   | 8           |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   |        |        
|Issuance of common stock upon initial public offering net of
issuance costs             |                                                      |  |                |   |        |   |           |   |               |  | 5,000         |   |             |   | 5           |   |               |   | 31,240      |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 31,245  |        
|Exercise of warrants                                                                    |                                                      |  |                |   |        |   |           |   |               |  | 13            |   |             |   |            |   |               |   | 24          |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 24      |        
|Issuance of warrants to lender                                                          |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 318         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 318     |        
|Repayment of note receivable                                                            |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   |            |   |        |   | 9   |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 9       |        
|Forgiveness of note receivable                                                          |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   |            |   |        |   | 6   |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 6       |        
|Deferred compensation                                                                   |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 1,577       |   |        |   |    |   |  |   |    |     |   |   | (1,577 | ) |  |   |         |         |   |   |        |        
|Amortization of deferred compensation                                                   |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   |            |   |        |   |    |   |  |   |    |     |   |   | 3,560  |   |  |   |         |         |   |   | 3,560   |        
|Issuance of common stock under 401K plan                                                |                                                      |  |                |   |        |   |           |   |               |  | 16            |   |             |   |            |   |               |   | 150         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 150     |        
|Exercise of employee and nonemployee stock options                                      |                                                      |  |                |   |        |   |           |   |               |  | 88            |   |             |   |            |   |               |   | 274         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 274     |        
|Stock-based compensation related to consultant options                                  |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 331         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 331     |        
|Issuance of common stock under employee stock purchase plan                             |                                                      |  |                |   |        |   |           |   |               |  | 68            |   |             |   |            |   |               |   | 412         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 412     |        
|Deemed dividend to preferred stockholders                                               |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 15,700      |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 15,700  |        
|                                                                                        |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | (15,700     | ) |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (15,700 | )      
|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|Balance as of December 31, 2000                                                         |                                                      |  |                |   |        |   |           |   |               |  | 19,870        |   |             |   | 20          |   |               |   | 88,772      |   |        |   | (31 | ) |  |   | 178 |     |   |   | (2,495 | ) |  |   | (52,801  | )       |   |   | 33,643  |        
|Comprehensive loss:                                                                     |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                        | Net loss                                             |  |                 |  |        |   |            |  |               |  |               |  |             |   |             |  |               |   |             |  |        |   |     |  |  |   |     |    |   |   |        |  |  |   |          | (26,194 | ) |   |         | (26,194 | )
|                                                                                        | Net unrealized loss on securities available-for-sale |  |                 |  |        |   |            |  |               |  |               |  |             |   |             |  |               |   |             |  |        |   |     |  |  |   |     | (84 | ) |   |        |  |  |   |          |        |   |   |         | (84     | )
|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                        | Comprehensive loss                                   |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         | (26,278 | )
|Issuance of warrants under Series A Preferred Stock, net of
issuance costs              |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 2,775       |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,775   |        
|Conversion of Series A Preferred Stock to common stock                                  |                                                      |  |                |   |        |   |           |   |               |  | 402           |   |             |   | 1           |   |               |   | 744         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 745     |        
|Exercise of warrants                                                                    |                                                      |  |                |   |        |   |           |   |               |  | 10            |   |             |   |            |   |               |   |            |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   |        |        
|Forgiveness of note receivable                                                          |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   |            |   |        |   | 31  |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 31      |        
|Reversal of deferred compensation for terminated employees                              |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | (121        | ) |        |   |    |   |  |   |    |     |   |   | 121    |   |  |   |         |         |   |   |        |        
|Amortization of deferred compensation                                                   |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   |            |   |        |   |    |   |  |   |    |     |   |   | 1,499  |   |  |   |         |         |   |   | 1,499   |        
|Issuance of common stock under 401K plan                                                |                                                      |  |                |   |        |   |           |   |               |  | 79            |   |             |   |            |   |               |   | 228         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 228     |        
|Exercise of employee and nonemployee stock options                                      |                                                      |  |                |   |        |   |           |   |               |  | 33            |   |             |   |            |   |               |   | 78          |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 78      |        
|Stock-based compensation related to consultant options                                  |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 384         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 384     |        
|Issuance of common stock under employee stock purchase plan                             |                                                      |  |                |   |        |   |           |   |               |  | 256           |   |             |   |            |   |               |   | 700         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 700     |        
|Preferred stock dividends                                                               |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | (334        | ) |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (334    | )      
|Deemed dividend to preferred stockholders                                               |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 2,269       |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,269   |        
|                                                                                        |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | (2,269      | ) |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (2,269  | )      
|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|Balance as of December 31, 2001                                                         |                                                      |  |                |   |        |   |           |   |               |  | 20,650        |   |             |   | 21          |   |               |   | 93,226      |   |        |   |    |   |  |   | 94  |     |   |   | (875   | ) |  |   | (78,995  | )       |   |   | 13,471  |        
|Comprehensive loss:                                                                     |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                        | Net loss                                             |  |                 |  |        |   |            |  |               |  |               |  |             |   |             |  |               |   |             |  |        |   |     |  |  |   |     |    |   |   |        |  |  |   |          | (21,769 | ) |   |         | (21,769 | )
|                                                                                        | Net unrealized loss on securities available-for-sale |  |                 |  |        |   |            |  |               |  |               |  |             |   |             |  |               |   |             |  |        |   |     |  |  |   |     | (87 | ) |   |        |  |  |   |          |        |   |   |         | (87     | )
|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|                                                                                        | Comprehensive loss                                   |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         | (21,856 | )
|Issuance of Series C Preferred Stock, net of issuance costs                             |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 6,224       |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 6,224   |        
|Issuance of warrants in connection with Series B Preferred Stock,
net of issuance costs |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 2,596       |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,596   |        
|Conversion of Series A and B Preferred Stock to common stock                            |                                                      |  |                |   |        |   |           |   |               |  | 4,289         |   |             |   | 4           |   |               |   | 6,817       |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 6,821   |        
|Exchange of Series B Preferred Stock for convertible promissory
notes                   |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | (4,556      | ) |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (4,556  | )      
|Reversal of deferred compensation for terminated employees                              |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | (31         | ) |        |   |    |   |  |   |    |     |   |   | 31     |   |  |   |         |         |   |   |        |        
|Amortization of deferred compensation                                                   |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   |            |   |        |   |    |   |  |   |    |     |   |   | 662    |   |  |   |         |         |   |   | 662     |        
|Issuance of common stock to Pfizer Inc, net of issuance costs                           |                                                      |  |                |   |        |   |           |   |               |  | 2,609         |   |             |   | 3           |   |               |   | 2,924       |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 2,927   |        
|Issuance of common stock under 401K plan                                                |                                                      |  |                |   |        |   |           |   |               |  | 179           |   |             |   |            |   |               |   | 239         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 239     |        
|Exercise of employee and nonemployee stock options                                      |                                                      |  |                |   |        |   |           |   |               |  | 7             |   |             |   |            |   |               |   | 5           |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 5       |        
|Stock-based compensation related to consultant options                                  |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 292         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 292     |        
|Issuance of common stock under employee stock purchase plan                             |                                                      |  |                |   |        |   |           |   |               |  | 220           |   |             |   |            |   |               |   | 433         |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 433     |        
|Preferred stock dividends                                                               |                                                      |  |                |   |        |   |           |   |               |  | 309           |   |             |   |            |   |               |   | (244        | ) |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (244    | )      
|Deemed dividend to preferred stockholders                                               |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | 10,551      |   |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | 10,551  |        
|                                                                                        |                                                      |  |                |   |        |   |           |   |               |  |              |   |             |   |            |   |               |   | (10,551     | ) |        |   |    |   |  |   |    |     |   |   |       |   |  |   |         |         |   |   | (10,551 | )      
|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        
|Balance as of December 31, 2002                                                         |                                                      |  |                |   |        | $ |           |   |               |  | 28,263        |   |             | $ | 28          |   |               | $ | 107,925     |   |        | $ |    |   |  | $ | 7   |     |   | $ | (182   | ) |  | $ | (100,764 | )       |   | $ | 7,014   |        
|                                                                                        |                                                      |  |                 |   |        |   |            |   |               |  |               |   |             |   |             |   |               |   |             |   |        |   |     |   |  |   |     |     |   |   |        |   |  |   |          |         |   |   |         |        

See accompanying notes.

F-5



---



##### Table of Contents



VIROLOGIC, INC.

STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |       |        |         |  
|--------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------- | --------------------------------------------------- | ----- | ----------------------- | ------- | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                            |                                                   |                         |                                                     |       | Year Ended December 31,
|                                                                            |                                                   |                         |                                                     |       |                        
|                                                                            |                                                   |                         |                                                     |       | 2002                    |         | 2001    |       | 2000  
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |       
|OPERATING ACTIVITIES                                                        |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Net loss                                                                    |                                                   | $                       | (21,769                                             | )     |                         | $       | (26,194 | )     |        | $       | (23,196 | )    
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|                                                                            | Depreciation and amortization                     |                         |                                                     | 3,811 |                         |         |         | 3,276 |        |         |         | 1,700 |       
|                                                                            | Non-cash stock-based compensation                 |                         |                                                     | 955   |                         |         |         | 1,914 |        |         |         | 4,124 |       
|                                                                            | Provision for doubtful accounts                   |                         |                                                     | 593   |                         |         |         | 606   |        |         |         | 241   |       
|                                                                            | Amortization of subtenant advance                 |                         |                                                     | (327  | )                       |         |         | (325  | )      |         |         |      |       
|                                                                            | Amortization of deferred gain on lease assignment |                         |                                                     | (121  | )                       |         |         |      |        |         |         |      |       
|                                                                            | Changes in assets and liabilities:                |                         |                                                     |       |                         |         |         |       |        |         |         |       |       
|                                                                            |                                                   | Accounts receivable     |                                                     |       | (955                    | )       |         |       | (2,764 | )       |         |       | (2,095 | )      
|                                                                            |                                                   | Prepaid expenses        |                                                     |       | 653                     |         |         |       | (801   | )       |         |       | (358   | )      
|                                                                            |                                                   | Inventory               |                                                     |       | (2                      | )       |         |       | (507   | )       |         |       | (162   | )      
|                                                                            |                                                   | Other current assets    |                                                     |       | 171                     |         |         |       | 104    |         |         |       | (374   | )      
|                                                                            |                                                   | Accounts payable        |                                                     |       | (1,473                  | )       |         |       | 439    |         |         |       | 408    |        
|                                                                            |                                                   | Accrued compensation    |                                                     |       | (1,173                  | )       |         |       | 731    |         |         |       | 745    |        
|                                                                            |                                                   | Accrued liabilities     |                                                     |       | (191                    | )       |         |       | (981   | )       |         |       | 376    |        
|                                                                            |                                                   | Deferred revenue        |                                                     |       | 360                     |         |         |       | 198    |         |         |       | 35     |        
|                                                                            |                                                   | Long-term deferred rent |                                                     |       | 146                     |         |         |       | 167    |         |         |       | 43     |        
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|                                                                            |                                                   |                         | Net cash used in operating activities               |       |                         | (19,322 | )       |       |        | (24,137 | )       |       |        | (18,513 | )
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|INVESTING ACTIVITIES                                                        |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Purchases of short-term investments                                         |                                                   |                         | (13,415                                             | )     |                         |         | (7,324  | )     |        |         | (35,774 | )    
|Maturities and sales of short-term investments                              |                                                   |                         | 20,305                                              |       |                         |         | 10,848  |       |        |         | 24,781  |      
|Restricted cash                                                             |                                                   |                         | 350                                                 |       |                         |         | 1,029   |       |        |         | (1,079  | )    
|Capital expenditures                                                        |                                                   |                         | (1,437                                              | )     |                         |         | (7,777  | )     |        |         | (8,391  | )    
|Advance from subtenant                                                      |                                                   |                         |                                                    |       |                         |         | 2,600   |       |        |         |        |      
|Lease assignment                                                            |                                                   |                         | 3,793                                               |       |                         |         |        |       |        |         |        |      
|Reimbursable tenant improvements                                            |                                                   |                         | 1,286                                               |       |                         |         | (1,286  | )     |        |         |        |      
|Other assets                                                                |                                                   |                         | (187                                                | )     |                         |         | (270    | )     |        |         | (10     | )    
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|                                                                            |                                                   |                         | Net cash provided by (used in) investing activities |       |                         | 10,695  |         |       |        | (2,180  | )       |       |        | (20,473 | )
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|FINANCING ACTIVITIES                                                        |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Proceeds from loans payable                                                 |                                                   |                         | 295                                                 |       |                         |         |        |       |        |         | 1,664   |      
|Principal payments on loans payable                                         |                                                   |                         | (1,166                                              | )     |                         |         | (1,345  | )     |        |         | (1,203  | )    
|Proceeds in connection with sale leaseback transactions                     |                                                   |                         |                                                    |       |                         |         | 1,303   |       |        |         | 1,394   |      
|Principal payments on capital lease obligations                             |                                                   |                         | (958                                                | )     |                         |         | (619    | )     |        |         | (51     | )    
|Dividends paid on preferred stock                                           |                                                   |                         | (367                                                | )     |                         |         |        |       |        |         |        |      
|Proceeds from issuance of common stock, net of common stock repurchases     |                                                   |                         | 3,603                                               |       |                         |         | 1,006   |       |        |         | 31,954  |      
|Repayments of notes receivable                                              |                                                   |                         |                                                    |       |                         |         |        |       |        |         | 9       |      
|Net proceeds from issuance of preferred stock                               |                                                   |                         | 16,380                                              |       |                         |         | 14,748  |       |        |         | 15,634  |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|                                                                            |                                                   |                         | Net cash provided by financing activities           |       |                         | 17,787  |         |       |        | 15,093  |         |       |        | 49,401  |  
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Net increase (decrease) in cash and cash equivalents                        |                                                   |                         | 9,160                                               |       |                         |         | (11,224 | )     |        |         | 10,415  |      
|Cash and cash equivalents at beginning of year                              |                                                   |                         | 1,399                                               |       |                         |         | 12,623  |       |        |         | 2,208   |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Cash and cash equivalents at end of year                                    |                                                   | $                       | 10,559                                              |       |                         | $       | 1,399   |       |        | $       | 12,623  |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Cash paid for interest                                                      |                                                   | $                       | 423                                                 |       |                         | $       | 466     |       |        | $       | 262     |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES                      |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Warrants issued to preferred stockholders                                   |                                                   | $                       | 5,151                                               |       |                         | $       | 2,775   |       |        | $       |        |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Preferred stock converted to convertible promissory notes                   |                                                   | $                       | 12,046                                              |       |                         | $       |        |       |        | $       |        |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Deemed dividend to preferred stockholders                                   |                                                   | $                       | 10,551                                              |       |                         | $       | 2,269   |       |        | $       | 15,700  |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Preferred stock converted into common shares                                |                                                   | $                       | 6,821                                               |       |                         | $       | 745     |       |        | $       |        |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Assets acquired under capital leases                                        |                                                   | $                       | 455                                                 |       |                         | $       | 291     |       |        | $       |        |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Accrued financing costs                                                     |                                                   | $                       | 316                                                 |       |                         | $       |        |       |        | $       |        |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Stock dividend to preferred stockholders                                    |                                                   | $                       | 123                                                 |       |                         | $       | 334     |       |        | $       |        |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Accrued capital expenditures                                                |                                                   | $                       |                                                    |       |                         | $       | 355     |       |        | $       | 1,514   |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Deferred stock compensation                                                 |                                                   | $                       |                                                    |       |                         | $       |        |       |        | $       | 1,577   |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      
|Warrants issued to lender                                                   |                                                   | $                       |                                                    |       |                         | $       |        |       |        | $       | 318     |      
|                                                                            |                                                   |                         |                                                     |       |                         |         |         |       |        |         |         |      

See accompanying notes.

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VIROLOGIC, INC.

NOTES TO FINANCIAL STATEMENTS
December 31, 2002

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. The Company incorporated in the state of Delaware
on November 14, 1995 and commenced commercial operations in 1999. The Company
developed a practical way of directly measuring the impact of genetic mutations
on drug resistance and using this information to guide therapy. The Company has
proprietary technology, called PhenoSense, for testing drug resistance in
viruses that cause serious viral diseases such as HIV/AIDS, hepatitis B and
hepatitis C. The Companys products are used by physicians in selecting optimal
treatments for their HIV patients and by industry, academia and government for
clinical studies, drug screening and characterization, and basic research.

Managements Plans

The Company expects available cash, investments and short-term restricted
cash of $11.4 million at December 31, 2002, funds provided by the sale of
products, grant revenue and borrowing under equipment financing arrangements
will be adequate to fund operations through December 2003 assuming revenues
reach projected levels and cost containment measures are effective. In
addition, management plans to continue to evaluate various strategic
opportunities, including among others, research and development collaborations,
international alliances and marketing partnerships.

The Company has funded operations since inception primarily through public
and private sales of common and preferred stock, product sales and equipment
financing arrangements. Although management expects operating and capital
resources will be sufficient to meet future requirements through December 31,
2003, the Company may have to raise additional funds to continue the
development and commercialization of future technologies and business
operations in general. These funds may not be available on favorable terms, or
at all. If adequate funds are not available on commercially reasonable terms,
the Company may be required to curtail operations significantly or sell
significant assets and may not be able to continue as a going concern. In
addition, management may choose to raise additional capital due to market
conditions or strategic considerations even if management believes that the
Company has sufficient funds for current or future operating plans.

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.

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 within
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. ViroLogic 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
while maintaining adequate safety and liquidity.

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Inventory

Inventory is stated at the lower of standard cost, which approximates
actual cost, or market. Inventory consists of the following:

|                |  |                |     |      |  |   |     | 
|--------------- |  | -------------- | --- | ---- |  | - | --- | 
|                |  | December 31,  
|                |  |               
|                |  | 2002           |     | 2001
|                |  |                |     |     
|                |  | (In thousands)
|Raw materials   |  | $              | 712 |      |  | $ | 663 | 
|Work in process |  |                | 246 |      |  |   | 293 | 
|                |  |                |     |      |  |   |     | 
|Total           |  | $              | 958 |      |  | $ | 956 | 
|                |  |                |     |      |  |   |     | 

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

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). SFAS 144 addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of. The primary objectives of SFAS 144 are to
develop one accounting model based on the framework established in SFAS 121 for
long-lived assets to be disposed of by sale, and to address significant
implementation issues. The adoption of SFAS 144 did not have an impact on the
Companys results of operations or financial position.

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 an allowance for contractual discounts and an
allowance for differences between the amounts billed and estimated payment
amounts. The Company estimates these allowances based on historical payment
information and current sales data. If the government and other third-party
payors significantly change their reimbursement policies or the relative mix of
third-party payors changes, an adjustment to the allowance may be necessary.
Revenue generated from the Companys database of resistance test results is
recognized when earned under the terms of the related agreements, generally at
the shipment of the requested reports. National Institutes of Health (NIH)
grant revenue is recorded on a reimbursement basis as grant costs are incurred.
Costs associated with NIH grant revenue are included in research and
development expenses. Deferred revenue relates to cash received in advance of
delivery.

Research and Development

The Company expenses research and development costs as incurred. Research
and development expenses consist primarily of salaries and related personnel
costs, materials, supply costs for prototypes, and include costs associated
with NIH grant revenue. In addition, research and development expenses include
costs related to clinical trials and validation of 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 expensed to cost of product revenue at
the time revenue is recognized. For further discussion, see Equipment
Financing and Commitments note below.

Advertising Expenses

The Company expenses the costs of advertising, which include promotional
expenses, as incurred. Advertising expenses were $4.2 million, $4.5 million and
$2.4 million for the years ended December 31, 2002, 2001 and 2000,
respectively, and were recorded as sales and marketing expenses.

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Deemed Dividends

The Company estimates a beneficial conversion feature for its convertible
preferred stock in accordance with Emerging Issues Task Force Consensus No.
98-5, Accounting for Convertible Securities with Beneficial Conversion
Features and No. 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments based on the difference between the estimated conversion price and
underlying common stock fair market value at the date of issuance. The Company
records the beneficial conversion feature as a deemed dividend on the Statement
of Operations, resulting in an increase to the loss applicable to common
stockholders in the calculation of basic and diluted net loss per common share.

Net Loss Per Share

Basic 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 impact
of common stock equivalents which consists of convertible preferred stock
(using the as-if converted method), and stock options and warrants (using the
treasury stock method). Potentially dilutive securities have been excluded from
the diluted earnings per share computations in all years presented as such
securities have an anti-dilutive effect on loss per share due to the Companys
net loss.

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

|                                                                            |  |                                       |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                            |  | Year Ended December 31,              
|                                                                            |  |                                      
|                                                                            |  | 2002                                  |         | 2001 |  | 2000
|                                                                            |  |                                       |         |      |  |     
|                                                                            |  | (In thousands, except per share data)
|Net loss applicable to common stockholders                                  |  | $                                     | (33,297 | )    |  | $    | (28,797 | ) |  | $ | (38,896 | )
|                                                                            |  |                                       |         |      |  |      |         |   |  |   |         |  
|Weighted-average shares of common stock outstanding                         |  |                                       | 24,157  |      |  |      | 20,078  |   |  |   | 14,891  |  
|Less: weighted-average shares subject to repurchase                         |  |                                       |        |      |  |      | (6      | ) |  |   | (39     | )
|                                                                            |  |                                       |         |      |  |      |         |   |  |   |         |  
|Weighted-average shares used in basic and diluted
net loss per common share |  |                                       | 24,157  |      |  |      | 20,072  |   |  |   | 14,852  |  
|                                                                            |  |                                       |         |      |  |      |         |   |  |   |         |  
|Basic and diluted net loss per common share                                 |  | $                                     | (1.38   | )    |  | $    | (1.43   | ) |  | $ | (2.62   | )
|                                                                            |  |                                       |         |      |  |      |         |   |  |   |         |  

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 these potentially dilutive securities had an anti-dilutive effect:

|                                                                        |  |              |        |                |  |      |       |  |  |  |       | 
|----------------------------------------------------------------------- |  | ------------ | ------ | -------------- |  | ---- | ----- |  |  |  | ----- | 
|                                                                        |  | December 31,
|                                                                        |  |             
|                                                                        |  | 2002         |        | 2001           |  | 2000
|                                                                        |  |              |        |                |  |     
|                                                                        |  |              |        | (In thousands) |  |     
|Series A redeemable convertible preferred stock (as-if converted
basis) |  |              | 5,306  |                |  |      | 5,973 |  |  |  |      | 
|Series C convertible preferred stock (as-if converted basis)            |  |              | 5,835  |                |  |      |      |  |  |  |      | 
|Stock options                                                           |  |              | 3,965  |                |  |      | 3,079 |  |  |  | 1,665 | 
|Warrants to purchase common stock                                       |  |              | 16,056 |                |  |      | 3,575 |  |  |  | 756   | 

In addition to the securities listed above, at December 31, 2002 the
Company had convertible promissory notes (Notes) outstanding with an
aggregate principal amount of $12.05 million. On February 4, 2003, the
Companys stockholders ratified and approved the conversion of the Notes into
an aggregate of 1,204.6 shares of Series C Convertible Preferred Stock, which
on an as-if converted basis, is equivalent to 9,955,359 shares of common stock.
The Notes also included warrants which are in the table above. See the
Convertible Promissory Notes and Subsequent Events notes below for further
discussion.

Stock-Based Compensation

The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 Accounting for Stock-Based Compensation (APB 25) to account
for employee stock options. Under APB 25, no compensation expense is recognized
because the exercise price of the Companys employee stock options equals the
market price of the underlying stock on the date of grant. Deferred
compensation, if recorded, is amortized using the graded vesting method.
Statement of Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation (SFAS 123) as amended by Statement
of Financial Accounting Standards Board Statement No. 148, Accounting for
Stock-Based CompensationTransition and Disclosurean amendment of FASB
Statement No. 123 (SFAS 148) 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 information regarding net loss applicable to common stockholders and
net loss per share prepared in accordance with SFAS 123 has been determined as
if the Company had accounted for its employee stock option and employee stock
purchase plans using the

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fair value method prescribed by SFAS 123 and the net loss per share method
under SFAS 148. The resulting effect on net loss applicable to common
stockholders and net loss per share pursuant to SFAS 123 as amended by SFAS 148
is not likely to be representative of the effects in future years, due to
subsequent years including additional grants and years of vesting.

At December 31, 2002, the Company had two stock-based employee
compensation plans: the 2000 Equity Incentive Plan and the 2000 Employee Stock
Purchase Plan. The Company estimates the fair value of these stock options and
stock purchases at the date of grant using the Black-Scholes option valuation
model with the following weighted-average assumptions in 2002, 2001 and 2000:
risk-free interest rate of 2.9%, 4.0% and 5.5% in 2002, 2001 and 2000,
respectively; a weighted-average expected life of stock options from grant date
of four years; a weighted-average expected stock purchase right of six months;
volatility factor of the expected market price of ViroLogics common stock of
100% for 2002, 65% from May 2000 through December 2001 and volatility factor of
zero for the period prior to May 2000, when the Company went public, as
prescribed by the minimum value method; and a dividend yield of zero. The
weighted-average fair value of stock options granted in 2002, 2001 and 2000 was
$1.83, $2.89 and $7.82, respectively.

For purposes of disclosures pursuant to SFAS 123 as amended by SFAS 148,
the estimated fair value of the stock options and stock purchase rights are
amortized to expense over the vesting period. ViroLogics pro forma information
is as follows:

|                                                         |                                                          |                                                            |         |                         |        |      |         |                |        |   |         |       |        |  
|-------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------------------------- | ------- | ----------------------- | ------ | ---- | ------- | -------------- | ------ | - | ------- | ----- | ------ | -
|                                                         |                                                          |                                                            |         | Year
Ended December 31,
|                                                         |                                                          |                                                            |         |                        
|                                                         |                                                          |                                                            |         | 2002                    |        | 2001 |         | 2000          
|                                                         |                                                          |                                                            |         |                         |        |      |         |               
|                                                         |                                                          |                                                            |         |                         |        |      |         | (In thousands, |        |   |         |      
|                                                         |                                                          |                                                            |         | except per share data) 
|Net loss applicable to common stockholders  as reported |                                                          | $                                                          | (33,297 | )                       |        | $    | (28,797 | )              |        | $ | (38,896 | )    
|Add back:                                                |                                                          |                                                            |         |                         |        |      |         |                |        |   |         |      
|                                                         |                                                          | Amortization of deferred compensation                      |         |                         | 662    |      |         |                | 1,499  |   |         |       | 3,560  |  
|Deduct:                                                  |                                                          |                                                            |         |                         |        |      |         |                |        |   |         |      
|                                                         |                                                          | Stock-based compensation expense determined under SFAS 123 |         |                         | (4,151 | )    |         |                | (4,582 | ) |         |       | (4,381 | )
|                                                         |                                                          |                                                            |         |                         |        |      |         |                |        |   |         |      
|Pro forma net loss applicable to common stockholders     |                                                          | $                                                          | (36,786 | )                       |        | $    | (31,880 | )              |        | $ | (39,717 | )    
|                                                         |                                                          |                                                            |         |                         |        |      |         |                |        |   |         |      
|Net loss per share:                                      |                                                          |                                                            |         |                         |        |      |         |                |        |   |         |      
|                                                         | Net loss applicable to common stockholders  as reported |                                                            | $       | (1.38                   | )      |      | $       | (1.43          | )      |   | $       | (2.62 | )     
|                                                         |                                                          |                                                            |         |                         |        |      |         |                |        |   |         |      
|                                                         | Net loss applicable to common stockholders  pro forma   |                                                            | $       | (1.52                   | )      |      | $       | (1.59          | )      |   | $       | (2.67 | )     
|                                                         |                                                          |                                                            |         |                         |        |      |         |                |        |   |         |      

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 loss and other
comprehensive income (loss). Other comprehensive income (loss) 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) and its components are as
follows:

|                                                                               |  |                         |         |      |  |                |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ----------------------- | ------- | ---- |  | -------------- | ------- | - |  | - | ------- | -
|                                                                               |  | Year Ended December 31,
|                                                                               |  |                        
|                                                                               |  | 2002                    |         | 2001 |  | 2000          
|                                                                               |  |                         |         |      |  |               
|                                                                               |  |                         |         |      |  | (In thousands) |         |   |  |  
|Net loss                                                                       |  | $                       | (21,769 | )    |  | $              | (26,194 | ) |  | $ | (23,196 | )
|Changes in unrealized (loss) gain on securities
available-for-sale, net of
tax |  |                         | (87     | )    |  |                | (84     | ) |  |   | 178     |  
|                                                                               |  |                         |         |      |  |                |         |   |  |   |         |  
|Comprehensive loss                                                             |  | $                       | (21,856 | )    |  | $              | (26,278 | ) |  | $ | (23,018 | )
|                                                                               |  |                         |         |      |  |                |         |   |  |   |         |  

Significant Concentrations

Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash equivalents and
marketable securities. For further discussion, see Short-Term Investments
note below.

In 2002, one customer represented 10% of total revenues. In 2001, two
customers represented 15% and 14% of total revenues, and in 2000, two customers
represented 19% and 18% of total revenues, respectively.

The Company purchases various testing materials from single qualified
suppliers. Any extended interruption in the supply of these materials could
result in the Companys inability to secure sufficient materials to conduct
business and meet customer demand.

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Segment Reporting

The Company has determined that it operates in only one segment under
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.

Recent Accounting Pronouncements

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). SFAS 148 amends Statement of Financial Accounting
Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123) to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
more prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The additional disclosure
requirements of SFAS 148 are effective for fiscal years ending after December
15, 2002. The Company has elected to continue to follow the intrinsic value
method of accounting as prescribed by Accounting Principles Board Opinion No.
25 Accounting for Stock Issued to Employees, to account for employee stock
options.

In November 2002, the FASB issued Interpretation 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a guarantor
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. FIN 45 also expands the
disclosures required to be made by a guarantor about its obligations under
certain guarantees that it has issued. Initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified. The disclosure requirements are effective immediately. The
adoption of the recognition and measurement provisions of FIN 45 did not have a
material effect on the Companys results of operations or financial position.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 Accounting for Costs Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value when the liability is incurred, rather than at the date of an entitys
commitment to an exit plan. The provisions of SFAS 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. The adoption
of SFAS 146 is not expected to have a material effect on the Companys results
of operations or financial position.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145). SFAS 145 rescinds
SFAS 4 Reporting Gains and Losses from Extinguishment of Debt and an
amendment of that Statement, SFAS 64 Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS 145 also rescinds SFAS 44 Accounting for
Intangible Assets of Motor Carriers. SFAS 145 amends SFAS 13 Accounting for
Leases to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS 145 generally also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of SFAS 145
are generally effective for financial statements issued on or after May 15, 2002. The
adoption of SFAS 145 did not have a material effect on the Companys results of
operations or financial position.

Reclassifications

Reclassifications have been made to certain 2001 and 2000 amounts to
conform to the 2002 presentation.

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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 are as follows:

|                                    |                             |   |                |     |         |   |            |   |           |   |         |     |            |   |       |       |            |   |    |    |  |   |       |       | 
|----------------------------------- | --------------------------- | - | -------------- | --- | ------- | - | ---------- | - | --------- | - | ------- | --- | ---------- | - | ----- | ----- | ---------- | - | -- | -- |  | - | ----- | ----- | 
|                                    |                             |   | December 31,  
|                                    |                             |   |               
|                                    |                             |   | 2002           |     | 2001   
|                                    |                             |   |                |     |        
|                                    |                             |   |                |     |         |   | Gross      |   |           |   |         |     |            |   |       |       | Gross      |   |    |    | 
|                                    |                             |   |                |     |         |   | Unrealized |   |           |   |         |     |            |   |       |       | Unrealized |   |    |    | 
|                                    |                             |   | Amortized      |     | Holding |   | Estimated  |   | Amortized |   | Holding |     | Estimated 
|                                    |                             |   | Cost           |     | Gain    |   | Fair Value |   | Cost      |   | Gain    |     | Fair Value
|                                    |                             |   |                |     |         |   |            |   |           |   |         |     |           
|                                    |                             |   | (In thousands)
|Maturing between one and two years: |                             |   |                |     |         |   |            |   |           |   |         |     |            |   |       |       |            |   |    |    |  |   |       |      
|                                    | U.S. government obligations |   | $              |    |         |   | $          |  |           |   | $       |    |            |   | $     | 3,013 |            |   | $  | 51 |  |   | $     | 3,064 | 
|                                    | Corporate bonds and notes   |   |                | 579 |         |   |            | 7 |           |   |         | 586 |            |   |       | 4,456 |            |   |    | 43 |  |   |       | 4,499 | 
|                                    |                             |   |                |     |         |   |            |   |           |   |         |     |            |   |       |       |            |   |    |    |  |   |       |       | 
|Total available-for-sale securities |                             | $ | 579            |     |         | $ | 7          |   |           | $ | 586     |     |            | $ | 7,469 |       |            | $ | 94 |    |  | $ | 7,563 |      
|                                    |                             |   |                |     |         |   |            |   |           |   |         |     |            |   |       |       |            |   |    |    |  |   |       |       | 

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

|                                          |  |                |         |      |  |   |        |  
|----------------------------------------- |  | -------------- | ------- | ---- |  | - | ------ | -
|                                          |  | December 31,  
|                                          |  |               
|                                          |  | 2002           |         | 2001
|                                          |  |                |         |     
|                                          |  | (In thousands)
|Machinery, equipment and furniture        |  | $              | 10,369  |      |  | $ | 9,425  |  
|Leasehold improvements                    |  |                | 6,892   |      |  |   | 12,479 |  
|Capitalized software                      |  |                | 4,193   |      |  |   | 3,346  |  
|                                          |  |                |         |      |  |   |        |  
|                                          |  |                | 21,454  |      |  |   | 25,250 |  
|Accumulated depreciation and amortization |  |                | (10,493 | )    |  |   | (6,869 | )
|                                          |  |                |         |      |  |   |        |  
|Property and equipment, net               |  | $              | 10,961  |      |  | $ | 18,381 |  
|                                          |  |                |         |      |  |   |        |  

Depreciation and amortization expense was $3.8 million, $3.3 million and
$1.7 million in 2002, 2001 and 2000, respectively.

4. ACCRUED LIABILITIES

Accrued liabilities consists of the following:

|                                           |  |                |       |      |  |   |       | 
|------------------------------------------ |  | -------------- | ----- | ---- |  | - | ----- | 
|                                           |  | December 31,  
|                                           |  |               
|                                           |  | 2002           |       | 2001
|                                           |  |                |       |     
|                                           |  | (In thousands)
|Accrued royalty fee                        |  | $              | 648   |      |  | $ | 417   | 
|Accrued capital expenditures               |  |                |      |      |  |   | 355   | 
|Accrued clinical research costs            |  |                |      |      |  |   | 261   | 
|Accrued professional fees                  |  |                | 742   |      |  |   | 196   | 
|Property taxes payable                     |  |                | 149   |      |  |   | 177   | 
|Accrued marketing and promotional expenses |  |                | 55    |      |  |   | 101   | 
|Accrued interest payable                   |  |                | 113   |      |  |   |      | 
|Other                                      |  |                | 749   |      |  |   | 879   | 
|                                           |  |                |       |      |  |   |       | 
|Total accrued liabilities                  |  | $              | 2,456 |      |  | $ | 2,386 | 
|                                           |  |                |       |      |  |   |       | 

5. CONVERTIBLE PROMISSORY NOTES

On November 14, 2002, the Company entered into an exchange agreement with
all of the holders of Series B Redeemable Convertible Preferred Stock (Series
B Preferred Stock) in order to secure their consent to the sale of Series C
Convertible Preferred Stock (the Financing), and the resulting impact on the
Series B Preferred Stock, and to increase the number of shares of common stock
available for issuance upon conversion of the Series C Convertible Preferred
Stock (Series C Preferred Stock) and the exercise of the warrants included in
the Financing. Pursuant to the exchange agreement, on November 19, 2002, the
Company repurchased all of the outstanding Series B Preferred Stock
in exchange for convertible secured promissory notes (Notes). The aggregate
principal amount of the Notes was $12.05 million. In addition, the Notes bore
an interest rate of 8%, had a maturity date of March 19, 2003 and were secured
by substantially all of the Companys assets. Promptly following the approval by its
stockholders in February
2003, (i) the principal amount of the Notes was automatically converted into an aggregate

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of 1,204.6 shares of Series C
Preferred Stock, (ii) an amount equal to the accrued interest on
the Notes from November 19, 2002 through December 31, 2002 was paid to the holders of the
Notes in cash, and (iii) all other accrued and
unpaid interest was forgiven.

On February 4, 2003, the Companys stockholders ratified and approved the
conversion of the Notes into Series C Preferred Stock and the issuance of
warrants to purchase shares of the Companys common stock. Therefore, pursuant
to agreements, the Notes were converted to Series C Preferred Stock and the
warrants attached to such preferred stock were issued. See the Capital Stock
and Subsequent Events notes below for further details.

6. EQUIPMENT FINANCING AND COMMITMENTS

The Company currently leases two buildings and subleases one building,
totaling approximately 80,000 square feet of laboratory and office space in
South San Francisco, California. The leases expire in the years 2004 and 2010
and provide the Company with options to extend the terms for an additional
seven and ten years, respectively. The sublease, which covers approximately
14,000 square feet, expires on September 30, 2003, and provides the Company
with the option to extend for an additional three months.

In June 2002, the Company assigned a lease of excess laboratory and office
space and transferred ownership through the sale of related leasehold
improvements and equipment to a third party. The Company received net proceeds
from the lease assignment of $3.8 million, resulting in a net gain of $0.3
million which is included in accrued liabilities and other long-term
liabilities and is recognized as other income over the sublease term. In the
event of default by the assignee, the Company would be contractually obligated
for payments under the lease of: $1.0 million in 2003; $1.4 million in 2004;
$1.4 million in 2005 and $8.5 million from 2006 to 2011.

In July 2001, the Company sublet approximately 12,000 square feet of one
of its existing facilities to a third party for a term of 18 months, which
ended in January 2003. The rental income generated from this sublease was $0.6
million and $0.3 million in 2002 and 2001, respectively, and is recorded as a
partial offset to rental expense.

As of December 31, 2002 and 2001, the Company had $4.5 million and $7.3
million, respectively, of property and equipment financed through long-term
equipment financing obligations. The obligations under these financings are
secured by the property and equipment financed, bear interest at
weighted-average fixed rates of approximately 11.6% and 10.9% for 2002 and
2001, respectively, and are due in monthly installments through July 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, 2002, future minimum lease payments excluding lease
assignment guarantee and sublease rental income, are as follows:

|                                    |            |                                            |   |                |       |         |      |         |     |   |        |       |       | 
|----------------------------------- | ---------- | ------------------------------------------ | - | -------------- | ----- | ------- | ---- | ------- | --- | - | ------ | ----- | ----- | 
|                                    |            |                                            |   | Operating      |       | Loans   |      | Capital
|                                    |            |                                            |   | Leases         |       | Payable |      | Leases 
|                                    |            |                                            |   |                |       |         |      |        
|                                    |            |                                            |   | (In thousands)
|Year ending December 31:            |            |                                            |   |                |       |         |      |         |     |   |        |      
|                                    | 2003       |                                            | $ | 1,849          |       |         | $    | 423     |     |   | $      | 1,271 |      
|                                    | 2004       |                                            |   | 1,493          |       |         |      |        |     |   |        | 411   |      
|                                    | 2005       |                                            |   | 949            |       |         |      |        |     |   |        | 38    |      
|                                    | 2006       |                                            |   | 987            |       |         |      |        |     |   |        |      |      
|                                    | 2007       |                                            |   | 1,006          |       |         |      |        |     |   |        |      |      
|                                    | Thereafter |                                            |   | 2,464          |       |         |      |        |     |   |        |      |      
|                                    |            |                                            |   |                |       |         |      |         |     |   |        |      
|                                    |            | Total minimum lease and principal payments |   | $              | 8,748 |         |      |         | 423 |   |        |       | 1,720 | 
|                                    |            |                                            |   |                |       |         |      |         |     |   |        |      
|Amount representing interest        |            |                                            |   |                |       |         | (7   | )       |     |   | (128   | )    
|                                    |            |                                            |   |                |       |         |      |         |     |   |        |      
|Present value of future payments    |            |                                            |   |                |       |         | 416  |         |     |   | 1,592  |      
|Current portion of loans and leases |            |                                            |   |                |       |         | (416 | )       |     |   | (1,173 | )    
|                                    |            |                                            |   |                |       |         |      |         |     |   |        |      
|Noncurrent portion                  |            |                                            |   |                |       | $       |     |         |     | $ | 419    |      
|                                    |            |                                            |   |                |       |         |      |         |     |   |        |      

Rental expense, net of sublease rental income, was approximately $1.7
million, $2.4 million and $1.8 million in 2002, 2001 and 2000, respectively.

As of December 31, 2002, the Company had purchase commitments for material
and service contracts totaling approximately $0.6 million. In addition, the
Company is obligated to pay dividends to the Series A and C preferred
stockholders as discussed in the Capital Stock note below.

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License Agreement

The Company licenses polymerase chain reaction (PCR) technology from
Roche Molecular Systems, Inc. (Roche) for performing a step in its PhenoSense
and GeneSeq tests. This license is non-exclusive and lasts for the life of the
patent term of the last to expire licensed Roche patent. Currently, the last
Roche patent expires in 2005. If Roche develops or acquires additional patents
covering technology related to the licensed technology, the Company has the
option of licensing that additional technology under the terms of this
agreement which may extend the term of the license. In exchange for the
license, the Company has agreed to pay Roche a royalty based on the net service
revenues the Company receives from its products. Roche has the right to
terminate this license if the Company fails to pay royalties, make a
semi-annual royalty report or participate in proficiency testing. The Company
believes it is currently in compliance with these requirements. The license
allows the Company to use technology covered by the licensed Roche patents
within a broad field that includes all of the Companys currently planned
products. If the Company was to expand its product line beyond the licensed
field, however, the Company would need to negotiate an expansion of the
license. Royalty expense recorded under this agreement was $1.0 million, $0.7
million and $0.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

7. CAPITAL STOCK

Initial Public Offering

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 and 5,000,000 shares of preferred stock. 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.
On February 4, 2003, ViroLogics stockholders approved an increase to the
number of authorized shares of the Companys common stock from 60,000,000
shares to 100,000,000 shares. See Subsequent Event note below for further
details.

Equity Investment by Pfizer

In November 2002, the Company entered into a Stock Purchase Agreement with
Pfizer Ireland Pharmaceuticals (an affiliate of Pfizer, Inc.) in which the
Company agreed to issue and sell an aggregate of 2.6 million shares of its
common stock for gross proceeds of $3.0 million. Concurrently, the Company and
Pfizer, Inc. entered into a master services agreement and a non-exclusive
license agreement for the Companys HIV drug resistance tests and services.

Preferred Stock

Series A Redeemable Convertible Preferred Stock

In 2001, the board of directors approved 1,625 shares of the authorized
preferred stock to be designated and issued as Series A Redeemable Convertible
Preferred Stock (Series A Preferred Stock). On June 29, 2001, the Company
entered into a securities purchase agreement with several investors to issue
and sell, in a private placement, an aggregate of 1,625 shares of Series A
Preferred Stock with warrants to purchase an aggregate of 3.2 million shares of
common stock, for an aggregate purchase price of $16.25 million. The securities
purchase agreement contemplated two closings, each for a portion of the Series
A Preferred Stock and the warrants. The first closing occurred on July 2, 2001,
and the Company received gross proceeds of $6.65 million. The second and final
closing occurred on September 27, 2001, and the Company received gross proceeds
of $9.6 million.

Of the 1,625 shares issued in the financing, 589 shares remain outstanding
as of December 31, 2002, and the others were converted into an aggregate of 4.6
million shares of the Companys common stock. As a result of the Companys
sales of Series B Preferred Stock and Series C Preferred Stock, which are
described below, the conversion price of the Series A Preferred Stock and the
exercise price of the warrants issued to the purchasers of the Series A
Preferred Stock has each been reduced to $1.11. Accordingly, the 589 shares of
Series A Preferred Stock outstanding are convertible into
approximately 5.3 million shares of common stock, and the warrants are exercisable for approximately 8.1 million shares of common stock.

The Series A Preferred Stock bears an initial 6% annual dividend rate
which increases to an 8% annual rate on the fourth such payment, then increases
by 2 percentage points every six months up to a maximum annual rate of 14%.
This dividend is paid as a stock dividend semi-annually. The holders of Series
A Preferred Stock may elect to convert their shares into our common stock at
any time, just as they may choose to exercise their warrants at any time. The
Company may, at its option, convert the Series A Preferred Stock into common
stock at any time after June 21, 2002 for Series A Preferred Stock issued at
the first closing and after July 9, 2002 for Series A Preferred Stock issued at
the second closing, but only if the Companys stock price exceeds $5.10 for 20
consecutive

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trading days. The Company may also, at its option, convert the Series A
Preferred Stock into common stock upon a sale of common stock in a firm
commitment underwritten offering to the public if the public offering price
exceeds $5.10, the aggregate gross proceeds exceed $40 million and the
registration statements referenced above are effective.

The holders are not subject to any limitations on the number of
conversions of Series A Preferred Stock or subsequent sales of the
corresponding common stock, that they can effect, other than a prohibition on
any holder acquiring beneficial ownership of more than 4.99% of the outstanding
shares of the Companys common stock.

The Company recorded a deemed dividend of $2.3 million in the third
quarter of 2001, relating to the beneficial conversion feature of the Series A
Preferred stock. The deemed dividend increased the loss applicable to common
stockholders in the calculation of basic and diluted net loss per common share
and is included in stockholders equity as offsetting charges and credits to
additional paid-in capital. The net proceeds of $2.8 million attributable to
the fair value of warrants are included in additional paid-in capital.

The holders of Series A Preferred Stock have the right to require the
Company to redeem all of the Series A Preferred Stock for cash equal to the
greater of (i) 115% of their original purchase price plus 115% of any accrued
and unpaid dividend or (ii) the aggregate fair market value of the shares of
common stock into which such shares of Series A Preferred Stock are then
convertible. Series A Preferred Stock is redeemable by the holders in any of
the following situations:



| |  |  | If the Company fails to remove a restrictive legend on any
certificate representing any common stock that was issued to any holder
of such series upon conversion of their preferred stock or exercise of
their warrant and that may be sold pursuant to an effective registration
statement or an exemption from the registration requirements of the
federal securities laws                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If the Company fails to have sufficient shares of common stock
reserved to satisfy conversions of the series                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | If the Company fails to honor requests for conversion, or if the
Company notifies any holder of such series of its intention not to honor
future requests for conversion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | If the Company institutes voluntary bankruptcy or similar proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | If the Company makes an assignment for the benefit of creditors, or
applies for or consents to the appointment of a receiver or trustee for the
Company or for a substantial part of the Companys property or business,
or such a receiver or trustee shall otherwise be appointed                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | If the Company sells all or substantially all of its assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | If the Company merges, consolidates or engages in any other business
combination (with some exceptions), provided that such transaction is
required to be reported pursuant to Item 1 of Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | If the Company commits a material breach under, or otherwise
materially violate the terms of, the transaction documents entered into
in connection with the issuance of such series                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | If the registration statements covering shares of common stock underlying the Series A Preferred Stock and
 related warrants cannot be used by the respective selling security holders for the resale of all the underlying shares of common stock for an
 aggregate of more than 30 days. Our Series C Preferred Stock financing resulted in a reduction of the conversion price of the Series A
 Preferred Stock and the exercise price of the related warrants, which in turn caused a substantial increase in the number of shares of
 common stock issuable upon conversion or exercise of the Series A Preferred Stock or related warrants. Consequently, we believe that
 the holders of Series A Preferred Stock currently may not be able to use these registration statements to resell all of their underlying
 shares of common stock, and may not have been able to do so for more than 30 days. This means that the holders of Series A Preferred
 Stock will have the right to redeem their shares of Series A Preferred Stock until we are able to register their additional shares
 of common stock.
|
| |  |  | If the Companys common stock is not tradable on the NYSE, the AMEX,
the Nasdaq National Market or the Nasdaq SmallCap market for an
aggregate of twenty trading days in any nine month period. In order for
the Companys common stock to continue to be quoted on the National
Market, the Company must satisfy various listing maintenance standards
established by Nasdaq, including, among other things, a requirement that
the Company has stockholders equity of at least $10 million and that
the Companys stock price consistently trades at or above $1.00 per
share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | If 35% or more of the Companys voting power is held by any one
person, entity or group                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | If the Company fails to pay any indebtedness in excess of $350,000
when due, or if there is any event of default under any agreement that
is likely to have a material adverse effect on the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Upon the institution of involuntary bankruptcy proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Upon the occurrence of any of the redemption events described above,
individual holders of the Series A Preferred Stock would have the option, while
such event continues, to require the Company to purchase some or all of the
then outstanding shares of Series A Preferred Stock, held by such holder. If
the Company receives any notice of redemption, the Company is required to
immediately (no

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later than one business day following such receipt) deliver a written
notice to all holders of the same series of preferred stock stating the date
when the Company received the redemption notice and the amount of preferred
stock covered by the notice. If holders of the Series A Preferred Stock were
to exercise their rights to redeem a material number of their shares as a
result of any of the events described above, such a redemption could have a
material adverse effect on the Company.

The Company may redeem the Series A Preferred Stock at any time after June
29, 2003, for Series A Preferred Stock issued at the first closing and after
September 27, 2003 for Series A Preferred Stock issued at the second closing.
Due to the nature of the redemption features of the Series A Preferred Stock,
such stock has been excluded from permanent equity in our financial statements.

The Company initially recorded the Series A Preferred Stock at its fair
value on the date of issuance. In accordance with EITF Topic D-98:
Classification and Measurement of Redeemable Securities (EITF Topic D-98),
the Company has elected not to adjust the carrying value of the Series A
Preferred Stock to the redemption value of such shares, since it is uncertain
whether or when the redemption events described above will occur. Subsequent
adjustments to increase the carrying value to the redemption value will be made
when it becomes probable that such redemption will occur. As of December 31,
2002, the redemption value of the Series A Preferred stock was $6.9 million.

Series B Redeemable Convertible Preferred Stock

In 2002, the board of directors approved 1,022 shares of the authorized
preferred stock to be designated and issued as Series B Redeemable Convertible
Preferred Stock (Series B Preferred Stock). On March 22, 2002, the Company
entered into a securities purchase agreement with several investors to issue
and sell, in a private placement, an aggregate of 1,005 shares of Series B
Preferred Stock with warrants to purchase an aggregate of 2.2 million shares of
common stock, for an aggregate purchase price of $10.05 million. In connection
with this financing, the Company also granted warrants to purchase an aggregate
of 637,261 shares of common stock to holders of Series A Preferred Stock as a
payment in order to secure their consent and waiver concerning the financing
and the resulting impact on the Series A Preferred Stock. The transaction
closed on March 25, 2002.

The Company recorded a deemed dividend of $2.9 million in the first
quarter of 2002 relating to the beneficial conversion feature of the Series B
Preferred Stock and the additional warrants issued to the holders of the Series
A Preferred Stock in connection with the Series B Preferred Stock financing.
The net proceeds of $2.6 million attributable to the fair value of warrants are
included in additional paid-in capital.

In connection with the Companys sale of Series C Preferred Stock, the
Company also agreed to exchange all of the outstanding Series B Preferred Stock
into Convertible Promissory Notes, which were subsequently converted into
Series C Preferred Stock. The Company also exchanged all of the warrants
issued to the purchasers of the Series B Preferred Stock in connection with
their purchase of Series B Preferred Stock for new warrants. These
transactions are discussed further below.

Series C Convertible Preferred Stock

In 2002, the board of directors approved 1,911 shares of the authorized
preferred stock to be designated and issued as Series C Convertible Preferred
Stock (Series C Preferred Stock). On November 14, 2002, the Company entered
into a securities purchase agreement with several investors to issue and sell,
in a private placement, an aggregate of 706 shares of Series C Preferred Stock
and warrants to purchase an aggregate of 4.4 million shares of common stock,
for an aggregate purchase price of $7.06 million. The transaction closed on
November 19, 2002. The rights, preferences and privileges of the Series C
Preferred Stock are set forth in the Certificate of Designations, Preferences
and Rights of Series C Preferred Stock (Certificate), as filed with the
Delaware Secretary of State. The warrants are subject to the terms and
conditions of the stock purchase warrants issued by the Company and evidencing
the warrants.

The Series C Preferred Stock bears an initial 8% annual dividend rate
which increases to a 9% annual dividend rate on June 30, 2004, then increases
by 1 percentage point every quarter thereafter up to a maximum annual rate of
14%, subject to an additional increase to an annual rate of 15% under certain
circumstances. In 2002, this dividend was paid in cash. Subject to the
limitations described below, the holders of Series C Preferred Stock may elect
to convert their shares into common stock at any time. Upon conversion, each
share of Series C Preferred Stock is convertible into approximately 8,264
shares of common stock. Subject to the limitations described below, the Company
may, at its option, convert the Series C Preferred Stock into common stock (i)
at any time after the first anniversary of the issuance of the Series C
Preferred Stock, but only if the Companys stock price exceeds $2.42 for 20
consecutive trading days or (ii) with the consent of a majority of the holders
of the Series C Preferred Stock. The warrants are exercisable beginning May 20,
2003 and expire November 19, 2007. The exercise price of the warrants is $1.11
per share.

The holders of Series C Preferred Stock are not subject to any limitations
on the number of conversions of Series C Preferred Stock or subsequent sales of
the corresponding common stock that they can effect, other than a prohibition
on any holder acquiring, upon conversion, beneficial ownership of more than
4.99% of the outstanding shares of our common stock, or, in the case of Biotech

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##### Table of Contents



Target NV and its affiliates, more than 19.99% of the outstanding shares
of the Companys common stock. This limitation also applies to the Companys
ability to convert Series C Preferred Stock to common stock.

The Company recorded a deemed dividend of $7.7 million in the fourth
quarter of 2002 relating to the issuance of the Series C Preferred Stock. The
charge includes deemed dividends associated with an automatic adjustment of the
conversion price of the Companys Series A Preferred Stock, which was triggered
as a result of the issuance of the Series C Preferred Stock. The charge also
includes deemed dividends associated with the exchange of the Series B
Preferred Stock for Notes and the sale of the Series C Preferred Stock together
with the warrants described above.

The Series C Preferred Stock is non-voting, except with respect to certain
extraordinary transactions as set forth in the Certificate. In addition, until
November 19, 2004, in the event that the Company proposes to issue any equity
securities or debt which is convertible into equity securities, each holder of
Series C Preferred Stock will have the right to purchase a certain amount of
such securities or debt based upon its holdings of Series C Preferred Stock.

The investors of Series C Preferred Stock have the right to require the
Company to redeem all of the Series C Preferred Stock for cash equal to the
greater of (i) 120% of their original purchase price plus 120% of any accrued
and unpaid dividend or (ii) the aggregate fair market value of the shares of
common stock into which such shares of Series C Preferred Stock are then
convertible. The Series C Preferred Stock is redeemable by the holders in any
of the following situations:



| |  |  | If the Company fails to remove a restrictive legend on any
certificate representing any common stock that was issued to any holder
of such series upon conversion of their preferred stock or exercise of
their warrant and that may be sold pursuant to an effective registration
statement or an exemption from the registration requirements of the
federal securities laws
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If the Company fails to have sufficient shares of common stock
reserved to satisfy conversions of the series                                                                                                                                                                                                                                                                  
|
| |  |  | If the Company fails to honor requests for conversion, or if the
Company notifies any holder of such series of its intention not to honor
future requests for conversion                                                                                                                                                                                                      
|
| |  |  | If the Company institutes voluntary bankruptcy or similar proceedings                                                                                                                                                                                                                                                                                                         
|
| |  |  | If the Company makes an assignment for the benefit of creditors, or
apply for or consent to the appointment of a receiver or trustee for the
Company or for a substantial part of the Companys property or business,
or such a receiver or trustee shall otherwise be appointed                                                                                              
|
| |  |  | If the Company sells all or substantially all of its assets                                                                                                                                                                                                                                                                                                                   
|
| |  |  | If the Company merges, consolidates or engages in any other business
combination (with some exceptions), provided that such transaction is
required to be reported pursuant to Item 1 of Form 8-K                                                                                                                                                                             
|
| |  |  | If the Company commits a material breach under, or otherwise
materially violates the terms of, the transaction documents entered into
in connection with the issuance of such series                                                                                                                                                                                          

In addition, the Series C Preferred Stock is redeemable by its holders if,
on or prior to November 19, 2004, the two year anniversary of the initial
issuance of the Series C Preferred Stock, the Company issues equity,
equity-linked securities, or debt which is convertible into equity, other than
(i) upon the exercise of warrants, options or convertible securities issued and
outstanding as of the issuance of the Series C Preferred Stock, (ii) upon the
grant or exercise of stock options under any stock option plan, (iii) upon
issuance or conversion of the Series C Preferred Stock or exercise of the
warrants issued in connection with the Series C Preferred Stock, (iv) the
issuance of securities in connection with strategic business partnerships, (v)
pursuant to an equipment financing from a financial or lending institution and
(vi) common stock issued as premium payments on Series A or Series C Preferred
Stock.

Upon the occurrence of any of the redemption events described above,
individual holders of the Series C Preferred Stock would have the option, while
such event continues, to require the Company to purchase some or all of the
then outstanding shares of Series C Preferred Stock, held by such holder. If
the Company receives any notice of redemption, the Company is required to
immediately (no later than one business day following such receipt) deliver a
written notice to all holders of the same series of preferred stock stating the
date when the Company received the redemption notice and the amount of
preferred stock covered by the notice.

If holders of Series C Preferred Stock were to exercise their rights to
have redeemed a material number of their shares as a result of any of the
events described above, and such a redemption were to have a material adverse
effect on the Company, all holders of the Companys Series A Preferred Stock
may be able to redeem their shares as well, further endangering the Companys
financial position.

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The redemption events described above are all within the control of the
Company. Therefore, in accordance with EITF Topic D-98, the Company has
classified the Series C Preferred Stock in permanent equity. In addition, the
Company initially recorded the Series C Preferred Stock at its fair value on
the date of issuance. It has elected not to adjust the carrying value of the
Series C Preferred Stock to the redemption value of such shares, since it is
uncertain whether or when the redemption events described above will occur. Subsequent
adjustments to increase the carrying value to the redemption value will be made
when it becomes probable that such redemption will occur. As of December 31,
2002, the redemption value of the Series C Preferred stock was $8.5 million.

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the Company,
or the sale of substantially all of the Companys assets, the holders of the
Series C Preferred Stock are entitled to receive, prior to any distribution to
the holders of any other capital stock of the Company, an amount equal to the
greater of:



| |  |  | $10,000 per share plus all accrued and unpaid premiums thereon, and                                                                                                                           
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an amount equal to the amount that such holder would have received
had the holder converted such holders shares of Series C Preferred
Stock into common stock immediately prior to the event.

After payment of the liquidation preference of the Series C Preferred
Stock set forth above, the holders of the Series A Preferred Stock are entitled
to receive an amount equal to $10,000 per share of Series A Preferred Stock
plus all accrued and unpaid premiums thereon. Any assets remaining for
distribution following the payment of the preferences to the holders of the
Series C Preferred Stock and Series A Preferred Stock set forth above shall be
distributed to the holders of the common stock.

In the event funds are not sufficient to make a complete distribution to
either the holders of Series C Preferred Stock or Series A Preferred Stock as
described above, the assets of the Company available for distribution will be
distributed ratably among the holders of Series C Preferred Stock or Series A
Preferred Stock, respectively.

Deemed Dividends

In January and February 2000, ViroLogic consummated the sale of 8.5
million shares of Series C convertible preferred stock, which converted into
4.2 million 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. 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.
Accordingly, the increase in fair value has resulted in a beneficial conversion
feature of $15.7 million, that has been recorded as a deemed dividend to
preferred stockholders in 2000. ViroLogic recorded a deemed dividend at the
dates of issuance by offsetting charges and credits to additional paid-in
capital, without any effect on total stockholders equity. The deemed dividend
increases the loss applicable to common stockholders in the calculation of
basic and diluted net loss per common share and is 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, Accounting for Convertible
Securities with Beneficial Conversion Features, and No. 00-27, Application of
Issue No. 98-5 to Certain Convertible Instruments.

In 2001, ViroLogic sold 1,625 shares of Series A Preferred Stock, or 6.4
million shares of common stock as converted, for net proceeds of approximately
$14.7 million. In accordance with Emerging Issues Task Force Consensus No. 98-5
and No. 00-27, ViroLogic determined that the issuance of the Series A Preferred
Stock resulted in a beneficial conversion feature of approximately $2.3 million
in 2001.

In the first quarter of 2002, ViroLogic sold 1,005 shares of Series B
Preferred Stock, or 4.4 million shares of common stock as converted, for an
aggregate purchase price of $10.05 million. In connection with this financing,
ViroLogic also granted warrants to purchase an aggregate of 637,261 shares of
common stock to holders of Series A Preferred Stock as a payment in order to
secure their consent and waiver concerning the financing and the resulting
impact on the Series A Preferred Stock. In the fourth quarter of 2002,
ViroLogic sold 706 shares of Series C Preferred Stock, or 5.8 million shares of
common stock as converted, for an aggregate purchase price of $7.06 million.
In accordance with Emerging Issues Task Force Consensus No. 98-5 and No. 00-27,
ViroLogic determined that the issuance of the Series B and Series C Preferred
Stock resulted in a beneficial conversion feature of approximately $2.9 million
and $7.7 million, respectively, for a total of $10.6 million in 2002.

Warrants

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 value of the warrant was

F-18



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##### Table of Contents



deemed to be insignificant, therefore, no value was recorded. In 2000,
there were 3,000 warrants exercised and the remainder expired in August 2002.

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 in January 2008. The
value of the warrant was deemed to be insignificant and, therefore, no value
was recorded.

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 and expires in August 2003. 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. There are 14,993
warrants outstanding as of December 31, 2002.

In connection with loan agreements signed in 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.

In connection with the July 2001 sale of Series A Preferred Stock,
ViroLogic issued warrants to purchase 11,800 and 1.3 million shares of common
stock at a price of $2.66 and $2.805, respectively, per share. As a result of
our sale of Series C Preferred Stock, the exercise price of the warrants with
an exercise price of $2.805 is now $1.11, and such warrants are exercisable to
purchase 3.3 million shares of our common stock. The warrant term is four
years expiring July 2005 and was valued at $1.3 million using the Black-Scholes
option valuation model. The fair value of the warrants is included in
additional paid-in capital.

In connection with the September 2001 sale of Series A Preferred Stock,
ViroLogic issued warrants to purchase 18,200 and 1.9 million shares of common
stock at a price of $2.178 and $2.805, respectively, per share. As a result of
our sale of Series C Preferred Stock, the exercise price of the warrants with
an exercise price of $2.805 is now $1.11, and such warrants are exercisable to
purchase 4.8 million shares of our common stock. The warrant term is four
years expiring September 2005 and the warrants were valued at $1.5 million
using the Black-Scholes option valuation model. The fair value of the warrants
is included in additional paid-in capital.

In connection with the March 2002 sale of Series B Preferred Stock,
ViroLogic issued warrants to purchase 0.7 million and 2.2 million shares of
common stock at a price of $2.28 and $2.508, respectively, per share. The
warrant term is 4.5 years expiring September 2006 and the warrants were valued
at $2.6 million using the Black-Scholes option valuation model. The fair value
of the warrants is included in additional paid-in capital. On February 4,
2003, ViroLogic, Inc. held a Special Meeting of Stockholders, at which
ViroLogic stockholders approved the terms of the Companys Series C Preferred
Stock financing including the issuance of warrants to purchase 5.0 million
shares of the Companys common stock (at an exercise price of $1.11 per share)
in exchange for the foregoing warrants to purchase 2.2 million
shares of common stock. See Series B Redeemable Convertible
Preferred Stock discussion above and Subsequent Events note below for
further discussion.

In connection with a service agreement signed in 2002, ViroLogic issued
warrants to purchase an aggregate of 100,000 shares of ViroLogics common stock
for $2.03 per share. The warrant term is five years and was valued at $117,000.
The fair values of these warrants were determined using the Black-Scholes
option valuation model.

In connection with the November 2002 sale of Series C Preferred Stock,
ViroLogic issued warrants to purchase 4.8 million shares of common stock at a
price of $1.11 per share. The warrant term is five years expiring November 2007
and was valued at $2.5 million using the Black-Scholes option valuation model.
The fair value of the warrants is included in additional paid-in capital.

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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | 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.                                                                                                                                                                                                                                                                   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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
compensation amount is being recognized over the vesting period.                                                                                                                                                                     
|
| |  |  | 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. This option vests 100% after five years of employment or at
the completion of a
merger or acquisition where the common stock is imputed to be
more than $18.50 per share, then 125,000 of such shares shall vest
immediately. The Company is amortizing the deferred compensation over
the earlier of vesting period or, with respect to 125,000 shares of
the compensation of the aforementioned merger or acquisition.

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.

Stock Option Plan

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. The Plan was amended in February 2000 and May 2002,
increasing the shares reserved for issuance by an additional 3,000,000 and
2,000,000 shares, respectively, for total authorized shares of 6,200,000.

A summary of activity under the Plan is as follows:

|                              |                              |  |                                        |            |           |  |                  |           |   |  |      |      | 
|----------------------------- | ---------------------------- |  | -------------------------------------- | ---------- | --------- |  | ---------------- | --------- | - |  | ---- | ---- | 
|                              |                              |  | Outstanding Stock Options/Stock Rights
|                              |                              |  |                                       
|                              |                              |  | Shares                                 |            | Number of |  | Weighted-Average
|                              |                              |  | Available                              |            | Shares    |  | Price Per Share 
|                              |                              |  |                                        |            |           |  |                 
|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 |     
|                              | Options/rights granted       |  |                                        | (1,707,644 | )         |  |                  | 1,707,644 |   |  |      | 4.44 | 
|                              | Options/rights exercised     |  |                                        |           |           |  |                  | (33,005   | ) |  |      | 2.38 | 
|                              | Options/rights forfeited     |  |                                        | 260,497    |           |  |                  | (260,497  | ) |  |      | 5.50 | 
|                              |                              |  |                                        |            |           |  |                  |           |   |  |      |     
|Balances at December 31, 2001 |                              |  | 1,152,776                              |            |           |  | 2,578,781        |           |   |  | 5.00 |     
|                              | Additional shares authorized |  |                                        | 2,000,000  |           |  |                  |          |   |  |      |     | 
|                              | Options/rights granted       |  |                                        | (1,288,924 | )         |  |                  | 1,288,924 |   |  |      | 2.32 | 
|                              | Options/rights exercised     |  |                                        |           |           |  |                  | (2,865    | ) |  |      | 1.66 | 
|                              | Options/rights forfeited     |  |                                        | 399,872    |           |  |                  | (399,872  | ) |  |      | 4.10 | 
|                              |                              |  |                                        |            |           |  |                  |           |   |  |      |     
|Balances at December 31, 2002 |                              |  | 2,263,724                              |            |           |  | 3,464,968        |           |   |  | 4.11 |     
|                              |                              |  |                                        |            |           |  |                  |           |   |  |      |     

In 2002 and 2001, all options were granted at fair value on the date of
grant, therefore no deferred stock-based compensation was recorded. In
connection with options granted in 2000, ViroLogic recorded deferred
stock-based compensation of $1.6 million, 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 $0.7 million, $1.5 million and $3.6 million was
recognized during 2002, 2001 and 2000, respectively. In addition, ViroLogic
recorded stock-based compensation for services rendered by non-employees of
$0.2 million, $0.2 million and $0.3 million in 2002, 2001 and 2000,
respectively.

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##### Table of Contents



The following table summarizes information about the stock options
outstanding under the Plan at December 31, 2002:

|               |  |             |                     |                  |                     |                  |                  |             |  |                  |   |       |  |  |  |           |  |  |   |       | 
|-------------- |  | ----------- | ------------------- | ---------------- | ------------------- | ---------------- | ---------------- | ----------- |  | ---------------- | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|               |  |             | Options Outstanding |                  | Options Exercisable
|               |  |             |                     |                  |                    
|               |  |             |                     |                  |                     |                  | Weighted Average |             |  |                  |   |       |  |  |  |           |  |  |  
|Range of       |  | Number      |                     | Remaining        |                     | Weighted Average |                  | Number      |  | Weighted Average
|Exercise Price |  | Outstanding |                     | Contractual Life |                     | Exercise Price   |                  | Exercisable |  | Exercise Price  
|               |  |             |                     |                  |                     |                  |                  |             |  |                 
|$ 0.64         |  |             |                     | 15,000           |                     |                  |                  | 4.30        |  |                  | $ | 0.64  |  |  |  | 15,000    |  |  | $ | 0.64  | 
|$ 0.80  1.05  |  |             |                     | 204,000          |                     |                  |                  | 9.76        |  |                  |   | 1.02  |  |  |  | 40,000    |  |  |   | 0.91  | 
|1.22  2.40    |  |             |                     | 404,027          |                     |                  |                  | 8.53        |  |                  |   | 2.05  |  |  |  | 234,811   |  |  |   | 2.04  | 
|2.47  2.57    |  |             |                     | 862,844          |                     |                  |                  | 9.15        |  |                  |   | 2.57  |  |  |  | 249,851   |  |  |   | 2.56  | 
|2.59  3.14    |  |             |                     | 377,951          |                     |                  |                  | 7.36        |  |                  |   | 3.05  |  |  |  | 256,833   |  |  |   | 3.11  | 
|3.15  3.22    |  |             |                     | 357,610          |                     |                  |                  | 8.18        |  |                  |   | 3.22  |  |  |  | 173,087   |  |  |   | 3.22  | 
|3.26  5.75    |  |             |                     | 350,297          |                     |                  |                  | 7.02        |  |                  |   | 4.32  |  |  |  | 278,503   |  |  |   | 4.42  | 
|6.00           |  |             |                     | 444,709          |                     |                  |                  | 8.08        |  |                  |   | 6.00  |  |  |  | 241,506   |  |  |   | 6.00  | 
|6.78  9.00    |  |             |                     | 267,088          |                     |                  |                  | 7.90        |  |                  |   | 8.09  |  |  |  | 166,287   |  |  |   | 8.06  | 
|9.53  22.13   |  |             |                     | 181,442          |                     |                  |                  | 7.64        |  |                  |   | 12.87 |  |  |  | 126,505   |  |  |   | 12.74 | 
|               |  |             |                     |                  |                     |                  |                  |             |  |                  |   |       |  |  |  |           |  |  |   |       | 
|               |  |             |                     | 3,464,968        |                     |                  |                  |             |  |                  |   |       |  |  |  | 1,782,383 |  |  |   |       | 
|               |  |             |                     |                  |                     |                  |                  |             |  |                  |   |       |  |  |  |           |  |  |   |       | 

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, 2002, employees purchased 344,250 shares of
common stock subject to repurchase. ViroLogic has repurchased 47,290 shares in
accordance with these rights. As of December 31, 2002, there were no remaining
shares subject to repurchase.

Employee Stock Purchase Plan

In February 2000, the board of directors adopted the 2000 Employee Stock
Purchase Plan (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. In 2002, the Companys shareholders ratified an additional 500,000
shares to be reserved for issuance under the Stock Plan. Of the 1,000,000
shares of common stock reserved for issuance under the Stock Plan, 544,332
shares were issued as of December 31, 2002.

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. 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 each of 2002, 2001 and
2000. As of December 31, 2002, ViroLogic had issued
approximately 283,000
shares under the 401(k) Plan.

Reserved Shares

As of December 31, 2002, ViroLogic had reserved shares of common stock for
future issuance as follows:

|                                                 |  |                |        | 
|------------------------------------------------ |  | -------------- | ------ | 
|                                                 |  | Shares        
|                                                 |  | Reserved      
|                                                 |  |               
|                                                 |  | (In thousands)
|Series A Preferred Stock (as if converted basis) |  |                | 5,306  | 
|Series C Preferred Stock (as if converted basis) |  |                | 5,835  | 
|Stock options                                    |  |                | 6,229  | 
|Warrants                                         |  |                | 16,056 | 
|Employee Stock Purchase Plan                     |  |                | 456    | 
|                                                 |  |                |        | 
|                                                 |  |                | 33,882 | 
|                                                 |  |                |        | 

The reserved shares shown above do not include additional indeterminate
amounts reserved for issuance pursuant to penalty, anti-dilution, dividend
payments and other provisions relating to the Companys Series A and Series C
Preferred Stock and the related warrants.

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##### Table of Contents



8. INCOME TAXES

At December 31, 2002, ViroLogic had federal and state net operating loss
carryforwards of approximately $91.0 million and $36.0 million, respectively.
At December 31, 2002, ViroLogic also had federal and state research and
development tax credits of approximately $0.8 million and $0.8 million,
respectively. The federal net operating loss and credit carryforwards will
expire at various dates between the years 2010 and 2022, if not utilized. The
state of California net operating losses will expire at various dates between
the years 2005 and 2013, if not utilized. The California research and
development tax credits can be carried forward indefinitely.

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:

|                                     |  |                |         |      |  |   |         |  
|------------------------------------ |  | -------------- | ------- | ---- |  | - | ------- | -
|                                     |  | December 31,  
|                                     |  |               
|                                     |  | 2002           |         | 2001
|                                     |  |                |         |     
|                                     |  | (In thousands)
|Deferred tax assets:                 |  |                |         |      |  |   |         |  
|Net operating loss carryforwards     |  | $              | 33,400  |      |  | $ | 24,600  |  
|Research and other credits           |  |                | 1,300   |      |  |   | 1,200   |  
|Capitalized research and development |  |                | 1,800   |      |  |   | 1,500   |  
|Other                                |  |                | 1,000   |      |  |   | 2,100   |  
|                                     |  |                |         |      |  |   |         |  
|Total deferred tax assets            |  |                | 37,500  |      |  |   | 29,400  |  
|Valuation allowance                  |  |                | (37,500 | )    |  |   | (29,400 | )
|                                     |  |                |         |      |  |   |         |  
|Net deferred taxes                   |  | $              |        |      |  | $ |        |  
|                                     |  |                |         |      |  |   |         |  

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 $8.1 million, $9.8 million and $7.9 million in 2002, 2001 and
2000, respectively.

9. RESTRUCTURING

In November 2002, the Company implemented a business restructuring plan to
reallocate certain resources to revenue maximizing activities and reduce cash
consumption. The plan included a reduction in force of approximately 17% or 35
employees: 8 employees in laboratory operations; 6 employees in research and
development; 8 employees in sales and marketing; and 13 employees in
administration. In the fourth quarter of 2002, the Company recorded a charge
for salaries, severance and other personnel related costs to the respective
departments totaling $0.3 million. All amounts related to this
restructuring have been paid as of December 31, 2002.

10. SUBSEQUENT EVENTS

On February 4, 2003, ViroLogic, Inc. held a Special Meeting of
Stockholders, at which its stockholders (i) approved an amendment to the
Companys Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of the Companys common stock from 60,000,000
shares to 100,000,000 shares; (ii) ratified and approved the terms of the
Companys Series C Preferred Stock financing, including, without limitation,
the conversion of certain secured convertible promissory notes issued by the
Company to prior Series B Preferred stockholders into an aggregate of 1,204.6
shares of the Companys Series C Preferred Stock, and the issuance of warrants
to purchase shares of the Companys common stock in exchange for currently
outstanding warrants to purchase shares of the Companys common stock; and
(iii) approved an amendment to the Companys Amended and Restated Certificate
of Incorporation to amend the Certificate of Designations, Rights and
Preferences for the Series C Preferred Stock to (a) provide that any dividend
payments due thereunder may be paid in either cash or shares of common stock at
the option of the Company, and (b) include anti-dilution provisions
substantially identical to those applicable with respect to the Companys
Series A Preferred Stock.

Promptly
following the stockholders approval, the principal amount of the
Notes was automatically converted into
1,204.6 shares of Series C Preferred Stock, convertible into
9,955,359 shares
of common stock. In addition, the note holders received warrants to purchase
4,979,742 shares of common stock at an exercise price of $1.11 per
share in exchange for the warrants originally issued
in connection with their purchase of Series B Preferred Stock.

The Company expects to record a deemed dividend of approximately $2.2
million (unaudited) in the first quarter of 2003, relating to the warrant
exchange. The deemed dividend will increase the loss applicable to common
stockholders in the calculation of basic

F-22



---



##### Table of Contents



and diluted net loss per common share and will be included in
stockholders equity as offsetting charges and credits to additional paid-in
capital.

11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

|                                           |  |                                          |        |          |  |               |        |              |  |   |        |   |  |   |         |  
|------------------------------------------ |  | ---------------------------------------- | ------ | -------- |  | ------------- | ------ | ------------ |  | - | ------ | - |  | - | ------- | -
|                                           |  | Quarter
ended                           
|                                           |  |                                         
|                                           |  | March 31,                                |        | June 30, |  | September
30, |        | December
31,
|                                           |  |                                          |        |          |  |               |        |             
|                                           |  | (In thousands, except per share amounts)
|2002                                       |  |                                          |        |          |  |               |        |              |  |   |        |   |  |   |         |  
|Total revenue                              |  | $                                        | 5,708  |          |  | $             | 6,657  |              |  | $ | 5,927  |   |  | $ | 6,969   |  
|Cost of product revenue                    |  |                                          | 3,425  |          |  |               | 3,761  |              |  |   | 3,463  |   |  |   | 3,940   |  
|Net loss                                   |  |                                          | (6,138 | )        |  |               | (5,460 | )            |  |   | (5,586 | ) |  |   | (4,585  | )
|Net loss applicable to common
stockholders |  |                                          | (9,206 | )        |  |               | (5,718 | )            |  |   | (5,835 | ) |  |   | (12,538 | )
|Basic and diluted net loss per share       |  |                                          | (0.43  | )        |  |               | (0.24  | )            |  |   | (0.24  | ) |  |   | (0.48   | )
|                                          
|2001                                       |  |                                          |        |          |  |               |        |              |  |   |        |   |  |   |         |  
|Total revenue                              |  | $                                        | 3,088  |          |  | $             | 4,769  |              |  | $ | 4,403  |   |  | $ | 6,013   |  
|Cost of product revenue                    |  |                                          | 2,288  |          |  |               | 3,124  |              |  |   | 2,760  |   |  |   | 3,673   |  
|Net loss                                   |  |                                          | (7,017 | )        |  |               | (5,881 | )            |  |   | (6,556 | ) |  |   | (6,740  | )
|Net loss applicable to common
stockholders |  |                                          | (7,017 | )        |  |               | (5,881 | )            |  |   | (8,928 | ) |  |   | (6,971  | )
|Basic and diluted net loss per share       |  |                                          | (0.35  | )        |  |               | (0.29  | )            |  |   | (0.45  | ) |  |   | (0.34   | )

|                       |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |       | 
|---------------------- | --------------- | -------------- | ----- | -------- |  | ------------- | ----- | ------------ |  | - | ----- | ----- |  | - | ----- | ----- | 
|                       |                 | Quarter
ended 
|                       |                 |                |      
|                       |                 | March 31,      |       | June 30, |  | September
30, |       | December
31,
|                       |                 |                |       |          |  |               |       |             
|                       |                 | (In thousands)
|2002                   |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |      
|Patient testing        |                 | $              | 3,640 |          |  | $             | 4,666 |              |  | $ | 4,577 |       |  | $ | 4,963 |      
|Pharmaceutical testing |                 |                | 1,853 |          |  |               | 1,764 |              |  |   | 1,095 |       |  |   | 1,972 |      
|                       |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |      
|                       | Product revenue |                |       | 5,493    |  |               |       | 6,430        |  |   |       | 5,672 |  |   |       | 6,935 | 
|NIH grant revenue      |                 |                | 215   |          |  |               | 227   |              |  |   | 255   |       |  |   | 34    |      
|                       |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |      
|Total revenue          |                 | $              | 5,708 |          |  | $             | 6,657 |              |  | $ | 5,927 |       |  | $ | 6,969 |      
|                       |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |      
|2001                   |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |      
|Patient testing        |                 | $              | 2,116 |          |  | $             | 2,923 |              |  | $ | 3,485 |       |  | $ | 3,517 |      
|Pharmaceutical testing |                 |                | 972   |          |  |               | 1,628 |              |  |   | 798   |       |  |   | 2,376 |      
|                       |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |      
|                       | Product revenue |                |       | 3,088    |  |               |       | 4,551        |  |   |       | 4,283 |  |   |       | 5,893 | 
|NIH grant revenue      |                 |                |      |          |  |               | 218   |              |  |   | 120   |       |  |   | 120   |      
|                       |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |      
|Total revenue          |                 | $              | 3,088 |          |  | $             | 4,769 |              |  | $ | 4,403 |       |  | $ | 6,013 |      
|                       |                 |                |       |          |  |               |       |              |  |   |       |       |  |   |       |      

F-23



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##### Table of Contents






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

The information with respect to executive officers required by this item
is set forth in Part I of this report. The information required by this item
with respect to 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 2003 annual meeting.

As of March 25, 2003, our board of directors consisted of: William D.
Young, Edmon Jennings, William Jenkins, Cristina H. Kepner and David H.
Persing, M.D., PhD. During 2002, we had a sixth director, Anders Hove M.D., who
resigned in March 2002.




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 and Related Stockholder Matters

The information required by this item is incorporated by reference to the
information under the caption Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 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.




Item 14.Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to management,
including the Chief Executive Officer and the Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and the Chief Financial Officer, with the
assistance of other members of our management, have evaluated our disclosure
controls and procedures as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934, within 90 days of the filing date of this report, and
have concluded based on that evaluation that those disclosure controls and
procedures are effective. Since the date of that evaluation, there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls.

40



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##### Table of Contents






Part IV




Item 15.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:The following schedule is filed as part
of this Form 10-K:



| |  | Schedule II  Valuation and Qualifying Accounts and Reserves for the years ended December
31, 2002, 2001 and 2000                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | All other 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



| |  | On November 25, 2002, we filed a report on Form 8-K announcing agreements to
sell $7.06 million of Series C Preferred Stock in a private placement and
related transactions.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(c)  Exhibits

|         |     |         |  |  |      |  |  |                                                                                                                                        
|-------- | --- | ------- |  |  | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |     | Exhibit |  | 
|Footnote |     | Number  |  | 
|         |     |         |  | 
|         | (10 | )       |  |  | 3.1  |  |  | Amended and Restated Certificate of Incorporation, as currently in effect.                                                             
|        
|        
|        
|         | (4  | )       |  |  | 3.2  |  |  | Bylaws, as currently in effect.                                                                                                        
|        
|        
|        
|         | (3  | )       |  |  | 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.                                
|        
|        
|        
|         | (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 purchase Series A Preferred Stock (automatically converted to warrants to purchase Common Stock in May 2000).       
|        
|        
|        
|         | (1  | )       |  |  | 4.10 |  |  | Form of Warrant to purchase Series A Preferred Stock (automatically converted to warrants to purchase Common Stock in May 2000).       
|        
|        
|        
|         | (1  | )       |  |  | 4.11 |  |  | Form of Warrant to purchase Series B Preferred Stock (automatically converted to warrants to purchase Common Stock in May 2000).       
|        
|        
|        
|         | (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 (automatically converted to warrants to purchase Common Stock in May 2000).       
|        
|        
|        
|         | (6  | )       |  |  | 4.16 |  |  | Form of (Common) Stock Purchase Warrant issued to holders of Series A Redeemable Convertible Preferred Stock.                          

41



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##### Table of Contents



|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|-------- | --- | ------- |  |  | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |     | Exhibit |  | 
|Footnote |     | Number  |  | 
|         |     |         |  | 
|         | (7  | )       |  |  | 4.17  |  |  | Form of (Common) Stock Purchase Warrant issued to holders of Series B Redeemable Convertible Preferred Stock.                                                                  
|        
|        
|        
|         | (7  | )       |  |  | 4.18  |  |  | Form of (Common) Stock Purchase Warrant issued to holders of Series A Redeemable Convertible Preferred Stock.                                                                  
|        
|        
|        
|         | (9  | )       |  |  | 4.19  |  |  | Form of Stock Purchase Warrant issued to purchasers of Series C Preferred Stock.                                                                                               
|        
|        
|        
|         | (9  | )       |  |  | 4.20  |  |  | Form of Stock Purchase Warrant issued to purchasers of Series B 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  | )       |  |  | 10.5  |  |  | 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.                                                                                   
|        
|        
|        
|         | (1  | )      |  |  | 10.7  |  |  | 2000 Employee Stock Purchase Plan and related offering documents.                                                                                                              
|        
|        
|        
|         | (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.                                                                                                                        
|        
|        
|        
|         | (3  | )      |  |  | 10.10 |  |  | Form of Executive Severance Benefits Agreement.                                                                                                                                
|        
|        
|        
|         | (3  | )       |  |  | 10.11 |  |  | Master Lease Agreement dated September 14, 2000 by and between ViroLogic, Inc. and General Electric Capital Corporation.                                                       
|        
|        
|        
|         | (4  | )       |  |  | 10.12 |  |  | Equipment Financing Agreement by and between ViroLogic and De Lage Landen Financial Services, Inc. dated as of January 29, 2001.                                               
|        
|        
|        
|         | (5  | )       |  |  | 10.13 |  |  | Equipment Schedule No. 4 to Master Lease Agreement dated as of August 14, 2000 by and between ViroLogic and General Electric Capital Corporation.                              
|        
|        
|        
|         | (5  | )       |  |  | 10.14 |  |  | Sublease by and between ViroLogic, Inc. and DiaDexus, Inc.                                                                                                                     
|        
|        
|        
|         | (5  | )       |  |  | 10.15 |  |  | Sublease by and between ViroLogic, Inc. and Raven Biotechnologies, Inc.                                                                                                        
|        
|        
|        
|         | (6  | )       |  |  | 10.16 |  |  | Securities Purchase Agreement, dated as of June 29, 2001, by and among ViroLogic, Inc. and each of the Purchasers.                                                             
|        
|        
|        
|         | (6  | )       |  |  | 10.17 |  |  | First Registration Rights Agreement, dated as of June 29, 2001, by and between ViroLogic, Inc. and each of the Purchasers.                                                     
|        
|        
|        
|         | (6  | )       |  |  | 10.18 |  |  | Second Registration Rights Agreement, dated as of June 29, 2001 by and between ViroLogic, Inc. and each of the Purchasers.                                                     
|        
|        
|        
|         | (11 | )       |  |  | 10.19 |  |  | Equipment Schedule No. 5 to Master Lease Agreement dated as of August 14, 2000 by and between ViroLogic and General Electric Capital Corporation.                              
|        
|        
|        
|         | (8  | )       |  |  | 10.20 |  |  | Equipment Lease, dated as of April 21, 2002, by and between ViroLogic and Citicapital                                                                                          
|        
|        
|        
|         | (8  | )       |  |  | 10.21 |  |  | Sublease, dated as of June 1, 2002, by and between ViroLogic, Inc. and diaDexus, Inc.                                                                                          
|        
|        
|        
|         | (8  | )       |  |  | 10.22 |  |  | Sublease Termination agreement, dated as of June 1, 2002, by and between ViroLogic, Inc. and diaDexus, Inc.                                                                    
|        
|        
|        
|         | (9  | )       |  |  | 10.23 |  |  | Securities Purchase Agreement, dated as of November 14, 2002, by and among ViroLogic, Inc. and each of the Purchasers.                                                         
|        
|        
|        
|         | (9  | )       |  |  | 10.24 |  |  | Exchange Agreement, dated as of November 14, 2002, by and among ViroLogic, Inc. and the Series B Holders.                                                                      
|        
|        
|        
|         | (9  | )       |  |  | 10.25 |  |  | Stock Purchase Agreement, dated as of November 19, 2002, by and among ViroLogic, Inc. and Pfizer Ireland Pharmaceuticals.                                                      
|        
|        
|        
|         | (9  | )       |  |  | 10.26 |  |  | Registration Rights Agreement, dated as of November 19, 2002, by and between ViroLogic, Inc. and each of the Purchasers.                                                       
|        
|        
|        
|         |     |         |  |  | 23.1  |  |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                            
|        
|        
|        
|         |     |         |  |  | 24.1  |  |  | Power of Attorney is contained on the signature page.                                                                                                                          
|        
|        
|        
|         |     |         |  |  | 99.1  |  |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

42



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---

|    |  | 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 our Registration Statement on Form S-1 (No.
333-30896) or amendments thereto and incorporated herein by reference.                                                 
|    
|(2)  |  | Filed as an exhibit to our Registrants Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000 and incorporated herein by reference.                                      
|    
|(3)  |  | Filed as an exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2000 filed with the Commission and incorporated herein by
reference.                                
|    
|(4)  |  | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001 and incorporated herein by reference.                                                       
|    
|(5)  |  | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001 and incorporated herein by reference.                                                        
|    
|(6)  |  | Filed as an exhibit to our Current Report on Form 8-K filed on July 6,
2001 and incorporated herein by reference.                                                                         
|    
|(7)  |  | Filed as an exhibit to our Current Report on Form 8-K filed on March 26,
2002 and incorporated herein by reference.                                                                       
|    
|(8)  |  | Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 and incorporated herein by reference.                                                        
|    
|(9)  |  | Filed as an exhibit to our Current Report on Form 8-K filed on November
25, 2002 and incorporated herein by reference.                                                                    
|    
|(10) |  | Filed as an exhibit to our Registration Statement on Form S-3 (No.
333-102995) and incorporated herein by reference.                                                                      
|    
|(11) |  | Filed as an exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Commission and incorporated herein by
reference.                                

43



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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. YoungChief Executive Officer
|                     |  |                 |  |                                        
|Date: March 31, 2003 |  |                 |  |                                        

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William D. Young, Kathy L. Hibbs 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.

|                                                                |  |                                                                                         |  |               
|--------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------
|Signatures                                                      |  | Title                                                                                   |  | Date          
|                                                                |  |                                                                                         |  |               
|                                                                |  |                                                                                         |  |               
|/s/ WILLIAM D. YOUNG
William D. Young                           |  | Chairman, Chief Executive Officer and Director
(Principal Executive Officer)            |  | March 31, 2003
|                                                                |  |                                                                                         |  |               
|/s/ KAREN J. WILSON
Karen J. Wilson                             |  | Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |  | March 31, 2003
|                                                                |  |                                                                                         |  |               
|/s/ EDMON JENNINGS
Edmon Jennings                               |  | Director                                                                                |  | March 31, 2003
|                                                                |  |                                                                                         |  |               
|/s/ WILLIAM JENKINS
William Jenkins                             |  | Director                                                                                |  | March 31, 2003
|                                                                |  |                                                                                         |  |               
|/s/ CRISTINA H. KEPNER
Cristina H. Kepner                       |  | Director                                                                                |  | March 31, 2003
|                                                                |  |                                                                                         |  |               
|/s/ DAVID H. PERSING, M.D., PH.D.
David H. Persing, M.D., Ph.D. |  | Director                                                                                |  | March 31, 2003

44



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CERTIFICATION

I, William D. Young, certify that:

1.     I have reviewed this annual report on Form 10-K of ViroLogic, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and l5d-14) for the registrant and we have:



| |  | a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date ); and                                                                                                 
|
| |  | c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                       

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                                               |  | 
|-------------------------------------------------------------- |  | 
|Date: March 31, 2003                                           |  | 
|                                                               |  | 
|/s/ William D. Young

William D. Young
Chief Executive Officer |  | 

45



---



##### Table of Contents



CERTIFICATION

I, Karen J. Wilson, certify that:

1.     I have reviewed this annual report on Form 10-K of ViroLogic, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and l5d-14) for the registrant and we have:



| |  | a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date ); and                                                                                                 
|
| |  | c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                       

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                                                                |  | 
|------------------------------------------------------------------------------- |  | 
|Date: March 31, 2003                                                            |  | 
|                                                                                |  | 
|/s/ Karen J. Wilson

Karen J. Wilson
Vice President and Chief Financial Officer |  | 

46



---



##### Table of Contents






EXHIBIT INDEX

|         |     |         |  |  |       |  |  |                                                                                                                                        
|-------- | --- | ------- |  |  | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |     | Exhibit |  | 
|Footnote |     | Number  |  | 
|         |     |         |  | 
|         | (10 | )       |  |  | 3.1   |  |  | Amended and Restated Certificate of Incorporation, as currently in effect.                                                             
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (4  | )       |  |  | 3.2   |  |  | Bylaws, as currently in effect.                                                                                                        
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (3  | )       |  |  | 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.                                
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (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 purchase Series A Preferred Stock (automatically converted to warrants to purchase Common Stock in May 2000).       
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (1  | )       |  |  | 4.10  |  |  | Form of Warrant to purchase Series A Preferred Stock (automatically converted to warrants to purchase Common Stock in May 2000).       
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (1  | )       |  |  | 4.11  |  |  | Form of Warrant to purchase Series B Preferred Stock (automatically converted to warrants to purchase Common Stock in May 2000).       
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (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 (automatically converted to warrants to purchase Common Stock in May 2000).       
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (6  | )       |  |  | 4.16  |  |  | Form of (Common) Stock Purchase Warrant issued to holders of Series A Redeemable Convertible Preferred Stock.                          
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (7  | )       |  |  | 4.17  |  |  | Form of (Common) Stock Purchase Warrant issued to holders of Series B Redeemable Convertible Preferred Stock.                          
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (7  | )       |  |  | 4.18  |  |  | Form of (Common) Stock Purchase Warrant issued to holders of Series A Redeemable Convertible Preferred Stock.                          
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (9  | )       |  |  | 4.19  |  |  | Form of Stock Purchase Warrant issued to purchasers of Series C Preferred Stock.                                                       
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (9  | )       |  |  | 4.20  |  |  | Form of Stock Purchase Warrant issued to purchasers of Series B 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  | )       |  |  | 10.5  |  |  | 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.                                           
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (1  | )      |  |  | 10.7  |  |  | 2000 Employee Stock Purchase Plan and related offering documents.                                                                      
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (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.                                                                                
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (3  | )      |  |  | 10.10 |  |  | Form of Executive Severance Benefits Agreement.                                                                                        
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (3  | )       |  |  | 10.11 |  |  | Master Lease Agreement dated September 14, 2000 by and between ViroLogic, Inc. and General Electric Capital Corporation.               
|         |     |         |  |  |       |  |  |                                                                                                                                        
|         | (4  | )       |  |  | 10.12 |  |  | Equipment Financing Agreement by and between ViroLogic and De Lage Landen Financial Services, Inc. dated as of January 29, 2001.       

47



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##### Table of Contents



|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|-------- | --- | ------- |  |  | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |     | Exhibit |  | 
|Footnote |     | Number  |  | 
|         |     |         |  | 
|         | (5  | )       |  |  | 10.13 |  |  | Equipment Schedule No. 4 to Master Lease Agreement dated as of August 14, 2000 by and between ViroLogic and General Electric Capital Corporation.                              
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (5  | )       |  |  | 10.14 |  |  | Sublease by and between ViroLogic, Inc. and DiaDexus, Inc.                                                                                                                     
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (5  | )       |  |  | 10.15 |  |  | Sublease by and between ViroLogic, Inc. and Raven Biotechnologies, Inc.                                                                                                        
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (6  | )       |  |  | 10.16 |  |  | Securities Purchase Agreement, dated as of June 29, 2001, by and among ViroLogic, Inc. and each of the Purchasers.                                                             
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (6  | )       |  |  | 10.17 |  |  | First Registration Rights Agreement, dated as of June 29, 2001, by and between ViroLogic, Inc. and each of the Purchasers.                                                     
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (6  | )       |  |  | 10.18 |  |  | Second Registration Rights Agreement, dated as of June 29, 2001 by and between ViroLogic, Inc. and each of the Purchasers.                                                     
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (11 | )       |  |  | 10.19 |  |  | Equipment Schedule No. 5 to Master Lease Agreement dated as of August 14, 2000 by and between ViroLogic and General Electric Capital Corporation.                              
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (8  | )       |  |  | 10.20 |  |  | Equipment Lease, dated as of April 21, 2002, by and between ViroLogic and Citicapital                                                                                          
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (8  | )       |  |  | 10.21 |  |  | Sublease, dated as of June 1, 2002, by and between ViroLogic, Inc. and diaDexus, Inc.                                                                                          
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (8  | )       |  |  | 10.22 |  |  | Sublease Termination agreement, dated as of June 1, 2002, by and between ViroLogic, Inc. and diaDexus, Inc.                                                                    
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (9  | )       |  |  | 10.23 |  |  | Securities Purchase Agreement, dated as of November 14, 2002, by and among ViroLogic, Inc. and each of the Purchasers.                                                         
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (9  | )       |  |  | 10.24 |  |  | Exchange Agreement, dated as of November 14, 2002, by and among ViroLogic, Inc. and the Series B Holders.                                                                      
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (9  | )       |  |  | 10.25 |  |  | Stock Purchase Agreement, dated as of November 19, 2002, by and among ViroLogic, Inc. and Pfizer Ireland Pharmaceuticals.                                                      
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         | (9  | )       |  |  | 10.26 |  |  | Registration Rights Agreement, dated as of November 19, 2002, by and between ViroLogic, Inc. and each of the Purchasers.                                                       
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         |     |         |  |  | 23.1  |  |  | Consent of Ernst & Young LLP, Independent Auditors.                                                                                                                            
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         |     |         |  |  | 24.1  |  |  | Power of Attorney is contained on the signature page.                                                                                                                          
|         |     |         |  |  |       |  |  |                                                                                                                                                                                
|         |     |         |  |  | 99.1  |  |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.



---

|   |  | 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 and incorporated herein by reference.                                      
|   
|(3) |  | Filed as an exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2000 filed with the Commission and incorporated herein by
reference.                                
|   
|(4) |  | Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001 and incorporated herein by reference.                                          
|   
|(5) |  | Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 and incorporated herein by reference.                                           
|   
|(6) |  | Filed as an exhibit to our Current Report on Form 8-K filed on July 6,
2001 and incorporated herein by reference.                                                                         

48



---



##### Table of Contents



|(7)  |  | Filed as an exhibit to our Current Report on Form 8-K filed on March 26,
2002 and incorporated herein by reference.                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(8)  |  | Filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002 and incorporated herein by reference.           
|    
|(9)  |  | Filed as an exhibit to our Current Report on Form 8-K filed on November
25, 2002 and incorporated herein by reference.                                    
|    
|(10) |  | Filed as an exhibit to our Registration Statement on Form S-3 (No.
333-102995) and incorporated herein by reference.                                      
|    
|(11) |  | Filed as an exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2001 filed with the Commission and incorporated herein by
reference.
|    
|     |  | 49Table of Contents                                                                                                                                       

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(IN THOUSANDS)

|                                 |                              |        |              |              |                    |            |   |        |  |  |            |      |   |  |   |     | 
|-------------------------------- | ---------------------------- | ------ | ------------ | ------------ | ------------------ | ---------- | - | ------ |  |  | ---------- | ---- | - |  | - | --- | 
|                                 |                              |        | Balance at   |              | Additions charged  |            |   |        |  |  | Balance at
|                                 |                              |        | Beginning of |              | to operating costs |            |   |        |  |  | End of    
|Classification                   |                              | Period |              | and expenses |                    | Deductions |   | Period
|                                 |                              |        |              |              |                    |            |   |       
|Allowance for doubtful accounts: |                              |        |              |              |                    |            |   |        |  |  |            |      |   |  |   |    
|                                 | Year ended December 31, 2002 |        | $            | 588          |                    |            | $ | 593    |  |  | $          | (192 | ) |  | $ | 989 | 
|                                 | Year ended December 31, 2001 |        | $            | 175          |                    |            | $ | 606    |  |  | $          | (193 | ) |  | $ | 588 | 
|                                 | Year ended December 31, 2000 |        | $            | 63           |                    |            | $ | 241    |  |  | $          | (129 | ) |  | $ | 175 | 

S-1