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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 20-F

       |_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                                       OR
                |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED MARCH 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 NUMBER: 000-30850
                       LION BIOSCIENCE AKTIENGESELLSCHAFT
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                           FEDERAL REPUBLIC OF GERMANY
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)
                                WALDHOFER STR. 98
                               D-69123 HEIDELBERG
                           FEDERAL REPUBLIC OF GERMANY
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

  TITLE OF EACH CLASS                              NAME OF EACH EXCHANGE
                                                    ON WHICH REGISTERED
        NONE                                                N/A

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

Ordinary shares, no par value, but with a notional value of (euro) 1.00 per
share.
                            -------------------------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
                            -------------------------
The number of outstanding shares of each of the issuer's classes of capital or
common stock as of March 31, 2002: 19,870,175 ordinary shares, no par value but
with a notional value of (euro) 1.00 per share.

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 which financial statement item the registrant has elected
to follow: Item 17 |_| Item 18 |X|

<PAGE>

                                TABLE OF CONTENTS
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                                                                            PAGE
PART I

Item 1:   Identity of Directors, Senior Management and Advisers...............1

Item 2:   Offer Statistics and Expected Timetable.............................1

Item 3:   Key Information on the Company......................................1

Item 4:   Information on the Company..........................................17

Item 5:   Operating and Financial Review and Prospects........................39

Item 6:   Directors, Senior Management and Employees..........................54

Item 7:   Major Shareholders and Related Party Transactions...................60

Item 8:   Financial Information...............................................62

Item 9:   The Offer and Listing...............................................62

Item 10: Additional Information...............................................64

Item 11: Quantitative and Qualitative Disclosure About Market Risk............74

Item 12: Description of Securities other than Equity Securities...............74

PART II  .....................................................................74

PART III

Item 17: Financial Statements.................................................74

Item 18: Financial Statements.................................................75

Item 19. Exhibits.............................................................75


     In this Form 20-F, references to "our company" are to LION bioscience AG,
and references to "our", "we", or "us" are to LION bioscience AG and, unless the
context otherwise requires, to its subsidiaries. References to "Trega" are to
Trega Biosciences Inc., a corporation having its principal place of business in
San Diego, CA, USA, and, unless the context otherwise requires, to its
subsidiaries. We acquired Trega effective March 14, 2001. References to
"NetGenics" are to NetGenics, Inc., a corporation having its principal place of
business in Cleveland, OH, USA, and, unless the context otherwise requires, to
its subsidiaries. We acquired NetGenics effective January 30, 2002. Our
consolidated financial statements are prepared in accordance with U.S. GAAP. Our
consolidated financial statements are expressed in euro, the currency of the
European Economic and Monetary Union, which was introduced on January 1, 1999.
In this annual report, references to "euro" or "(euro)" are to euro, references
to "DM" are to Deutsche Mark and references to "U.S. dollars", "U.S.$" or "$"
are to United States dollars. Our financial year ends on March 31 of each year.
References to any financial year or to " FY" refer to the year ended March 31 of
the calendar year specified.

     All share and related information in this annual report regarding shares of
our company has been adjusted to give effect, retroactively, to a share split
effected by our company on June 28, 2000.

<PAGE>

FORWARD LOOKING STATEMENTS

     This annual report contains certain forward-looking statements and
information relating to us that are based on beliefs of our management as well
as assumptions made by and information currently available to us. When used in
this document, the words "anticipate", "believe", "estimate", "expect",
"intend", "plan", and "project", and similar expressions, as they relate to us
or our management, are intended to identify forward-looking statements. Such
statements reflect our current views with respect to future events and are
subject to risks, uncertainties and assumptions. Many factors could cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements that may be expressed or implied by
these forward-looking statements, including, among others, changes in general
economic and business conditions, delays in R&D efforts and product releases,
introduction of competing products or services by other companies, lack of
acceptance of new products, solutions or services by our targeted customers,
changes in business strategy and various other factors, both referenced and not
referenced in this annual report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected, intended, planned or projected. We do not intend,
and do not assume any obligation, to update these forward-looking statements.

<PAGE>

PART I

ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3: KEY INFORMATION ON THE COMPANY

SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA

     The table below presents our selected historical consolidated financial
data derived from our historical consolidated financial statements for the
periods indicated. You should read this selected consolidated financial data in
conjunction with our audited consolidated financial statements, the related
notes and "Item 5: Operating and Financial Review and Prospects", all of which
appear elsewhere in this annual report.

     The selected historical financial data for the financial years ended March
31, 1998, 1999, 2000, 2001, and 2002 were derived from our audited consolidated
financial statements for these periods. Our audited consolidated financial
statements for these periods have been prepared in accordance with U.S. GAAP and
audited by Ernst & Young Deutsche Allgemeine Treuhand AG,
Wirtschaftsprufungsgesellschaft, independent auditors.

     Our consolidated financial statements are expressed in euros, the currency
of the European Economic and Monetary Union. The euro was introduced on January
1, 1999. Before March 31, 2000, our financial statements were prepared in
Deutsche Mark. After that date, our consolidated financial statements have been
prepared in euros. All Deutsche Mark amounts appearing in or derived from our
consolidated financial statements have been translated into euros at the
official fixed exchange rate of (euro) 1.00 = DM 1.95583.

     For convenience, this annual report contains translations of euro amounts
into U.S. dollars at the rate of (euro) 1.00 = $0.8717, the noon buying rate
published by the Federal Reserve Bank of New York for euros on March 29, 2002.
The noon buying rate for euros on June 14, 2002 was (euro) 1.00 = $ 0.9448. For
more information regarding exchange rates, see the section entitled "- Exchange
Rate Information" below.

     For all periods, we have presented our consolidated financial statements
and selected consolidated financial data including the accounts of us and all of
our wholly-owned subsidiaries. Our consolidated balance sheet as of March 31,
2002 was prepared by translating dollar amounts into euro amounts at the rate of
(euro) 1.00 = $0.8724, the exchange rate published by the European Central Bank
on March 29, 2002. Note II to our audited consolidated financial statements
explain the methods used to prepare this financial data.

     On March 14, 2001, our company acquired Trega Biosciences Inc., a
corporation located in San Diego, California, whose common stock was listed on
the Nasdaq National Market. We consolidated Trega's accounts commencing on March
31, 2001 under the purchase method. Trega's most recent fiscal year prior to the
acquisition ended on December 31, 2001. Trega's operations for the interim
period from March 14 through March 31 were not included in our statement of
operations for FY 2001 but were fully included in our statement of operations
for FY 2002.

     On January 30, 2002, our company acquired NetGenics Inc., a corporation
having its principle place of business in Cleveland, Ohio. We consolidated
NetGenics' accounts commencing on January 31, 2002 under the purchase method.
NetGenics' operations for the period from January 31, 2002 through March 31,
2002 were included in our statement of operations for FY 2002.

                                     - 1 -

<PAGE>

<TABLE>
                           CONSOLIDATED FINANCIAL DATA

<CAPTION>
                                                          AS OF AND FOR THE FISCAL YEAR ENDED MARCH 31(1)

                                                     1998      1999      2000       2001       2002    2002(2)
                                                     ----      ----      ----       ----       ----    -------
                                                   ((EURO))  ((EURO))  ((EURO))   ((EURO))   ((EURO))    ($)
                                                              (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<S>                                                    <C>     <C>        <C>      <C>        <C>      <C>
SELECTED CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
     Research and development fees............         109     3,730      6,509    14,495     21,182   18,465
     Licensing fees...........................         818       889      3,678     8,780     19,198   16,734
                                                    ------    ------     ------    -------    ------   ------
          Total revenues......................         927     4,619     10,187    23,275     40,380   35,199
Costs and expenses:
     Research and development.................         989     4,872     12,394    26,872     53,947   47,025
     Selling                                           125       445      1,795     5,719     12,874   11,222
     General and administrative...............         874     2,363      4,967     7,501     18,737   16,333
     Other operating income and expenses......          --       (84)       542      (727)    (1,104)    (962)
     Depreciation and amortization............         459     1,333      3,061     4,218     13,160   11,471
     Conversion of preferred into common
        shares................................         --         --         --     8,743       --       --
                                                    ------    ------     ------    -------    ------   ------
          Total costs and expenses............       2,446     8,929     22,759    52,326     97,614   85,089
                                                    ------    ------     ------    -------    ------   ------
Loss from operations..........................     (1,519)    (4,310)   (12,572)  (29,051)   (57,234) (49,890)
Interest income/(expense), net................        (28)      (200)         8     5,234      6,302     5,493
     Results from marketable securities
        and other long-term investments.......         --         --         --        --     (3,493)  (3,045)
Tax expense...................................         --         --        (21)     (127)      (261)    (227)
                                                    ------    ------     ------    -------    ------   ------
Net loss .....................................     (1,547)    (4,510)   (12,585)  (23,944)   (54,686) (47,669)
                                                    ======    ======     ======    =======    ======   ======
Preferred share dividends.....................        (19)       (55)       (99)      (25)       --       --
Deemed preferred stock dividend...............         --         --         --   (14,410)       --       --
                                                    ------    ------     ------    -------    ------   ------
Net loss attributable to ordinary
   shareholders after deemed preferred
   stock dividend.............................     (1,566)    (4,565)   (12,684)  (38,379)  (54,686) (47,699)
                                                    ======    ======     ======    =======    ======   ======
Basic and diluted net loss per
   ordinary share after preferred and
   deemed preferred stock dividend(3).........      (0.37)     (1.01)     (1.97)    (2.52)    (2.89)   (2.52)
                                                    ======    ======     ======    =======    ======   ======

SELECTED CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents.....................        516        685      6,648    67,197     19,184   16,722
Property, plant and equipment, net............      2,128      4,518      7,398    16,896     18,138   15,811
Marketable securities.........................        --         --         --    114,139    104,839   91,387
Long-term investments, at cost................        --         --      13,080    19,695     10,760    9,379
Total assets .................................      3,199      9,071     31,495   277,871    237,990  207,453
Short-term borrowings.........................        243      1,753        --        --        --       --
Deferred income...............................        --         757      3,503     6,877      4,644    4,048
Long-term debt................................        --       3,334      4,641     3,129      2,560    2,232
Shareholders' equity/(deficit)................        754     (2,380)    16,616   241,978    217,106  189,249
SELECTED CONSOLIDATED CASH FLOW STATEMENT DATA
Net cash (used in) operating activities.......     (1,221)    (3,083)    (4,687)  (13,381)   (51,500) (44,892)
Net cash (used in) provided by investing
  activities..................................     (2,456)    (4,643)   (20,033) (127,917)     5,044    4,397
Net cash (used in) provided by financing
  activities..................................      4,193      7,947     30,509   201,522     (1,586)  (1,382)

                                                                            - 2 -
<PAGE>

     (1) Columns may not add due to rounding.
     (2) Converted from euro into dollars at an exchange rate of (euro) 1.00 =
     $0.8717 which was the noon buying rate on March 29, 2002. (3) Net loss per
     share data for FY 1998, FY 1999 and FY 2000 assume that 4,200,000, 4,487672
     and 6,433,882 shares, the weighted number of shares outstanding immediately
     prior to our initial public offering in August 2000, after giving effect to
     the stock-split, were outstanding for the respective periods presented.
     During FY 2001, the weighted average number of our company's shares
     outstanding was 15,247,146 (non-diluted and fully diluted). During FY 2002,
     the weighted average number of our company's shares outstanding was
     18,940,029 (non-diluted and fully diluted). At March 31, 2002, the number
     of our company's shares outstanding was 19,870,175.

</TABLE>

EXCHANGE RATE INFORMATION

     Fluctuations in the exchange rate between the euro and the U.S. dollar will
affect the U.S. dollar amounts received by owners of our company's ordinary
shares or American Depositary Shares traded in the United States, each
representing one ordinary share ("ADSs"), on conversion of dividends, if any,
paid in euro on the shares and will affect the U.S. dollar price of the ADSs on
the Nasdaq National Market.

     Since the euro did not exist prior to January 1, 1999, we cannot present
actual exchange rates between the euro and the U.S. dollar for earlier periods
in our audited consolidated financial statements and in the other financial
information discussed in this annual report. To enable you to ascertain how the
trends in our financial results might have appeared had they been expressed in
U.S. dollars, the table below shows the average exchange rates of U.S. dollars
per euro for the periods shown. For all periods prior to the creation of the
euro on January 1, 1999, this information has been calculated using the Federal
Reserve Bank of New York's noon buying rates for the Deutsche Mark per $1.00 for
each period, as translated into euro at the official fixed rate of (euro) 1.00 =
DM 1.95583. The average is computed using the Federal Reserve Bank of New York's
noon buying rate for the Deutsche Mark, for periods prior to January 1, 1999,
and for the euro, for periods after January 1, 1999, on the last business day of
each month during the period indicated.

                 AVERAGE EXCHANGE RATES OF U.S. DOLLARS PER EURO

                                     AVERAGE

     Financial year ended March 31, 1998 ............................... 0.9100
     Financial year ended March 31, 1999 ............................... 0.8915
     Financial year ended March 31, 2000 ............................... 1.0235
     Financial year ended March 31, 2001 ............................... 0.9114
     Financial year ended March 31, 2002 ............................... 0.8800

     The table below shows the high and low exchange rate of U.S. dollars per
euro for each of the six months from December 2001 to May 2002:

                 RECENT EXCHANGE RATES OF U.S. DOLLARS PER EURO

                                                              HIGH        LOW

December 2001...........................................     0.9044      0.8873
January 2002............................................     0.9031      0.8605
February 2002...........................................     0.8778      0.8613
March 2002..............................................     0.8836      0.8652
April 2002..............................................     0.9028      0.8750
May 2002................................................     0.9387      0.9032

                                     - 3 -


<PAGE>

The noon buying rate on June 0, 2002 was (euro) 1.00 = $0.9446.

RISK FACTORS

     You should carefully consider the risks described below before making an
investment decision. The occurrence of any of the following events could harm
us. If these events occur, the market price of our company's shares or ADSs
could decline, and you may lose all or part of your investment. Additional risks
not currently known to us or that we currently deem immaterial may also harm us
and affect your investment.

RISKS RELATING TO OUR BUSINESS

     WE HAVE INCURRED NET LOSSES TO DATE AND MAY NOT BECOME PROFITABLE.

     Our company was formed on March 4, 1997 and has a limited operating
history. Our consolidated net losses amounted to (euro) 54.69 million in our
fiscal year ended March 31, 2002, (euro) 23.94 million in our fisCAL year ended
March 31, 2001, and (euro) 12.59 million in our fiscal year ended March 31,
2000. We expect that we will continue to incur net losses for the foreseeable
future. These losses may increase as we expand our investments in new product
and solution development and in our sales and marketing operation. As an early
stage business, we face significant and potentially costly challenges in
simultaneously expanding our operations, pursuing key R&D goals and attracting
customers for our products and services. As a result, we may not become
profitable in the future. Even if we become profitable, we may not be able to
maintain profitability, as our results of operations are, and will continue to
be, difficult to predict and may vary from quarter to quarter.

     THE GOODWILL THAT WE HAVE RECORDED AS A RESULT OF OUR ACQUISITIONS OF TREGA
AND NETGENICS MAY BECOME IMPAIRED. AS A RESULT, WE MAY HAVE TO RECORD AN
AMORTIZATION EXPENSE CORRESPONDING TO THIS IMPAIRMENT.

     In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". This standard changes the accounting for goodwill and
other intangible assets by, among other things, requiring companies to cease
amortizing goodwill and certain intangible assets with an indefinite useful life
created by business combinations accounted for using the purchase method of
accounting. In lieu of amortization, we are required to perform an impairment
review of our goodwill during each financial year and at other times during the
financial year when indicators of impairment exist. In accordance with SFAS No.
142, we have adopted this statement effective April 1, 2001 and have not
amortized the goodwill created by our acquisitions of Trega and NetGenics. As of
March 31, 2002, we have recorded goodwill in the aggregate amount of (euro) 58.6
million.

     We assess the impairment of this goodwill whenever events or changes in
circumstances indicate that this carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review include the
following:

     o   a significant decline in our share price for a sustained period;
     o   our market capitalization relative to our net book value;
     o   a significant underperformance by us relative to expected historical or
         projected future operating results;
     o   significant changes in the manner of our use of the acquired assets or
         the strategy for our overall business;
     o   significant negative industry or economic trends.

     If we determine, based on a future review of these factors, that this
goodwill is impaired, we will have to record an amortization expense
corresponding to this impairment, which could have a material adverse effect on
our results of operations. We expect to conduct our next impairment review in
connection with the preparation of our results of operations for the first
quarter of FY 2003.

     WE MUST RETAIN EXISTING CUSTOMERS, ADD NEW CUSTOMERS AND ACHIEVE MILESTONES
UNDER EXISTING CUSTOMER CONTRACTS IF WE ARE TO ACHIEVE OUR GOALS.

                                     - 4 -

     We have a small number of customers, the revenues from which offset only a
portion of our expenses. In order to generate significant additional revenues,
we must retain our existing customers and add additional customers. Our ability
to do so depends upon our customers' continued belief that our products,
solutions and services can help accelerate their life science research and
development, or R&D, activities, particularly in the areas of drug discovery and
development. We must also expand our existing customer relationships to include
new products, solutions and services. Although many of our customer agreements
have multi-year terms, we cannot assure you that any of them will be renewed
upon expiration or that our customers will not terminate them on short notice.
Nor can we assure you that our existing customers will enter into new agreements
with us for additional products, solutions or services.

     In addition, future revenues under our customer agreements may depend in
whole or in part upon our ability to meet milestones set out in those
agreements. We may not meet these milestones on a timely basis or at all. We
will not receive milestone payments if we fail to meet any of these milestones
and this failure could result in the termination of one or more of these
agreements. The failure to receive milestone payments or the termination of an
agreement with a customer could adversely affect our business.

     For example, pursuant to our development agreement as amended with Bayer AG
we are required to achieve certain milestones in developing an integrated
pharmacophore and informatics technology platform for Bayer. Bayer did not
accept the deliverables under the first milestone. As a result, we agreed with
Bayer to amend the development agreement by revising the original milestone
requirements and dates as well as the original payment schedule. Under this
agreement, as amended, we were required to achieve a new milestone by April 1,
2002. Thereafter a new milestone is due every six months except that the final
milestone will be due on December 1, 2003. Bayer will make future milestone
payments under the development agreement, as amended, subject to its acceptance
of the key milestone deliverables. Bayer is entitled to withhold milestone
payments, except for payment of our management fee, and to terminate the
development agreement if we do not achieve the deliverables due under the
development agreement as amended.

     We did not achieve certain deliverables due under the April 1, 2002
milestone. As a result, Bayer is entitled to withhold the corresponding
milestone payment in the amount of $2 million. Bayer has agreed in principle to
extend the due dates for these and other deliverables under the April 1, 2002
milestone based on a schedule of consecutive due dates, with delivery of a
critical set of deliverables due in August 2002 and the final deliverables under
the April 1, 2002 milestone now due in October 2002. If we do not make
satisfactory progress in achieving the deliverables when due under this schedule
Bayer may terminate the development agreement as a result of our failure to
achieve the April 1, 2002 milestone. The failure to receive milestone payments
or the termination of our development agreement with Bayer would have a material
adverse effect on our business.

     OUR BUSINESS REQUIRES THE FORMATION AND MAINTENANCE OF ALLIANCES WITH OTHER
COMPANIES. IF WE ARE UNABLE TO FORM AND MAINTAIN THESE ALLIANCES, OUR ABILITY TO
COMPETE WILL SUFFER AND OUR BUSINESS WOULD BE HARMED.

     Our success depends on our ability to establish and maintain existing and
new alliances and licensing arrangements with customers, strategic partners and
academic collaborators. We may not be able to establish additional alliances or
licensing arrangements on terms acceptable to us or at all. If we do establish
these relationships, we cannot assure you that we will be successful. We cannot
control the amount and timing of resources our partners or collaborators devote
to our programs, products or services.

     For example, we have entered into relationships with various companies,
including in particular IBM, Paradigm Genetics, GeneProt and Tripos, to jointly
develop and market new software products or solutions. Under our collaboration
with Tripos, we have outsourced certain projects of our development agreement as
amended with Bayer to Tripos' United Kingdom subsidiary, Tripos UK. In order to
perform our obligations under the development agreement, as amended, including
achieving the deliverables and milestones thereunder, such as certain of the
deliverables under the April 1, 2002 milestone, we require the cooperation of
Tripos UK in accordance with the terms of our project agreement, as amended,
with Tripos UK.

     Our joint development and marketing relationships can be difficult to
implement and may not succeed for various reasons, including:

     o   operating differences between the companies or between their respective
         employees;

     o   financial difficulties experienced by the partners;

                                     - 5 -

<PAGE>

     o   difficulties in coordinating product or solution development, sales and
         marketing efforts;

     o   technical obstacles to combining existing software products or
         solutions or developing new compatible products or solutions; and

     o   the need to divert significant management attention, technical and
         sales personnel and capital to these relationships.

     There can be no assurance that these joint development and marketing
relationships will lead to successful new products, greater market penetration
or increased revenue for us. Should these joint developments efforts fail,
amounts we have invested, including equity investments, may not be recoverable,
and we may not be able to deliver products or solutions to our customers, which
may result in adverse effects on our financial position and results of
operations. The failure of any of our partners or collaborators to assist in
continuing to develop and commercialize our products or services would likely
result in a reduction of our net sales and would harm our business and results
of operations.

     WE DEPEND ON A FEW KEY CUSTOMERS, AND OUR REVENUE COULD BE NEGATIVELY
AFFECTED BY THE LOSS OR EARLY TERMINATION OF A CONTRACT WITH ONE OF THESE
CUSTOMERS.

     We derive a significant portion of our revenue from a small number of
customers. For example, Bayer accounted for approximately 46% of our revenues in
FY 2002 and approximately 60% of our revenues in FY 2001. Although we generally
have multi-year contracts with our customers, our customers may cancel their
contracts on short notice, including in circumstances where we fail to
accomplish contractual milestones. Our operating results would be adversely
affected if one or more of our key customers were to unexpectedly discontinue or
significantly reduce the use of our products, solutions or services.

     IF WE CANNOT FIND A COLLABORATOR FOR OUR INTERNAL DRUG DISCOVERY
ACTIVITIES, WE MAY NOT BE ABLE TO RECOVER OUR EXPENSES, INCLUDING IN PARTICULAR
OUR R&D EXPENSES, RELATED TO THESE ACTIVITIES AND MAY NOT REALIZE ANY FUTURE
REVENUES OR ROYALTIES FROM R&D EFFORTS RELATED TO THESE ACTIVITIES.

     We have invested substantial efforts in our internal IT driven drug
discovery activities, which we call iD3(TM), both at our San Diego, California,
and our Heidelberg, Germany, facilities, in particular related to nuclear
receptor research. As a result, we have incurred substantial expenses related to
this R&D effort. In addition, prior to our acquisition of Trega, Trega invested
substantial efforts into researching and developing melanocortin related
compounds as part of Trega's internal drug discovery activities. As a result,
Trega incurred substantial expenses related to this R&D effort.

     We have made the strategic decision to seek a collaborator or investor for
our internal drug discovery efforts. We intend to collaborate with one or more
life sciences companies on value-added research projects that would utilize the
IT driven drug discovery approach of our iD3(TM) activities. We may contribute
the resources, know-how and intellectual property of our iD3(TM) activities to
this collaboration. If we are unsuccessful in finding a collaborator or in
entering into such a collaboration, we will seek to license or sell the
intellectual property created through our internal drug discovery activities. If
we cannot find such a collaborator or investor or reach mutually acceptable
license or sales terms, including royalty and license fees with respect to our
own R&D efforts to be paid by this collaborator, we may not be able to recover
the R&D expenses we incurred with respect to these internal R&D activities and
we may not realize any future revenues or royalties from these R&D efforts.

     OUR BUSINESS MODEL AND STRATEGY IS NOVEL AND LARGELY UNPROVEN. IF OUR
BUSINESS MODEL PROVES UNSUCCESSFUL, OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION WILL SUFFER.

     We have only recently introduced our IT products, solutions and
professional services and commenced our drug discovery efforts. In addition, we
recently refined our strategy and business model. The success of our business
model and strategy will depend on:

                                     - 6 -

<PAGE>

     o   our ability to develop and market IT solutions based on our
         technologies, in particular a modular data and application integration
         platform and to create a knowledge management and decision support
         environment for the R&D processes of life sciences companies;

     o   the degree to which the life sciences industry adopts our Life Science
         Informatics products, solutions and services in its R&D process; and

     o   the performance of our technologies, solutions, products and services
         in accelerating the drug discovery process and the acceptance of these
         technologies, solutions, products and services.

     We may also pursue unpromising technologies at the expense of more
promising ones. The addition of new products, solutions and services will add
further complexity to our organization and thus require additional management
attention and resources as new markets are addressed.

     TERRORIST ATTACKS COULD ADVERSELY IMPACT OUR BUSINESS.

     Further terrorist attacks like those of September 11, 2001 could damage the
world economy and adversely affect our customers' investment and purchase
decisions over an extended period of time. As a vendor of software solutions,
which are effectively capital goods, we operate in a sector of the economy that
may be impacted by the effects of any such attack.

     REVENUE RECOGNITION ACCOUNTING PRONOUNCEMENTS MAY AFFECT OUR POLICIES ON
RECOGNITION OF REVENUE.

     In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 97-2, as amended by Statement of Position
No. 98-4 and Statement of Position No. 98-9 (together, "SOP 97-2"), which
provides guidance on applying U.S. generally accepted accounting principles for
software revenue recognition transactions. In December 1999, the SEC issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provides the SEC's interpretations of existing revenue
recognition rules. In addition, the SEC issued a Frequently Asked Questions and
Answers document in October 2000 to provide additional details. We believe that
our accounting policies are in accordance with SOP 97-2 and SAB 101. However,
the accounting profession continues to review certain provisions of SOP 97-2 and
SAB 101, with the objective of providing additional guidance on implementing
these provisions. Depending upon the outcome of these reviews and the issuance
of implementation guidelines and interpretations, we may be required to modify
our revenue recognition policies and business practices. Our existing revenue
recognition policies are described under "Item 5: Operating and Financial Review
and Prospects - Overview" and in note II of our consolidated financial
statements included in "Item 18: Financial Statements" of this Annual Report.

     OUR MANAGEMENT'S USE OF ASSUMPTIONS AND ESTIMATES MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND FINANCIAL POSITION.

     Our financial statements are based upon the accounting policies as
described in note II of our consolidated financial statements and included in
"Item 18. Financial Statements" in this Annual Report on Form 20-F. Such
policies may require management to make significant estimates and assumptions.
Facts and circumstances which management uses in making estimates and judgments
may change from time to time and may result in significant variations, including
adverse effects on our results of operations or financial condition. For a
description of these critical accounting policies, see "Item 5. Operating and
Financial Review and Prospects - Critical Accounting Policies".

     OUR INTERNAL RISK MANAGEMENT POLICIES AND PROCEDURES MAY NOT BE SUFFICIENT
FOR US TO IDENTIFY, ANALYZE AND RESPOND APPROPRIATELY IN A TIMELY MANNER.

     We have established a risk management process to recognize and analyze
risks early and respond appropriately. These mechanisms include recording,
monitoring and controlling internal enterprise processes using internal
reporting functions, an internal controlling system and a planning process.
Further elements of these processes include comprehensive published reports and
the work of our company's supervisory board in monitoring and controlling our

                                     - 7 -

<PAGE>

company's management board. We cannot assure you that all risks will be
identified, analyzed or responded to appropriately in a timely manner,
especially those which are outside of our control.

     OUR COMPETITIVE POSITION MAY DEPEND ON PATENT, COPYRIGHT, AND LICENSE
PROTECTION. IF THIS PROTECTION IS NOT SUFFICIENTLY AVAILABLE, OUR BUSINESS WILL
BE HARMED.

     Our ability to compete and achieve profitability may be affected by our
ability to protect our proprietary technology and other intellectual property.
While we currently depend primarily on revenues from our Life Science
Informatics, or LSI(TM), business, obtaining patent protection may also be
important for our iD3(TM) activities. We currently pursue copyright and patent
protection for improvements of our SRS data integration technology, our
DiscoveryCenter(TM) data and application integration technology as well as our
iDEA(TM) predictive ADME simulation system, and compounds and our other efforts
relating to nuclear receptor research and development.

     Patent law affecting our business is uncertain and, as a result, we may not
be able to prevent competitors from developing similar subject matter. Any
issued patents that cover our proprietary technologies may not provide us with
substantial protection or be commercially beneficial to us. Issuance of a patent
is not conclusive as to its validity, enforceability or its scope. In addition,
disputes may arise between us and our collaborators over ownership rights to
intellectual property, know-how or technologies developed jointly with these
collaborators or arrangements with collaborators may require us to provide
identical technologies, compounds or information to multiple parties.

     Patents may not issue from our pending or future patent applications. In
addition, because patent applications in some jurisdictions, including the
United States, are maintained in secrecy until patents issue, third parties may
have filed patent applications for technology that we use or that is covered by
our pending patent applications without us being aware of these applications.

     We are also dependent on protecting, through copyright law and contractual
licensing agreements, our products and services, such as our LSI(TM) systems,
including our SRS data integration technology, our DiscoveryCenter(TM) data and
application integration technology and our iDEA(TM) predictive ADME simulation
systems, to prevent other organizations from copying and reselling them.
Copyright law and licensing law currently provides uncertain protections for
some of our products and technologies. We are therefore uncertain whether it can
prevent copying or resale of them. Changes in copyright law, licensing law or
patent law could reduce the extent to which we are able to protect our
intellectual property, which could harm our business.

     We are also the licensee or exclusive licensee of proprietary technology
and other intellectual property of third parties that we rely on for our
business. We have only limited control over these licensors and cannot assure
you that these licensors have complied with and continue to comply with their
contractual obligations and the license restrictions under these licensing
arrangements. In the absence of this compliance, our commercial opportunities
may be reduced and we may incur substantial costs in seeking to enforce or
protect our rights under these licenses.

     The protection of our intellectual property and licenses may require us to
pursue others, such as our licensees or licensors or other third parties,
including through costly infringement or breach of license litigation or similar
proceedings, to enforce our intellectual property rights or to invalidate
intellectual property rights or licenses claimed by others. We cannot predict
the outcome and effectiveness of this litigation in protecting our intellectual
property and licenses due to the uncertainty surrounding the applicable
copyright, licensing and other intellectual property law. In addition, the cost
to us of this litigation could be substantial, could be protracted and may
absorb significant management time. Moreover, pursuing this litigation may not
be an effective deterrent against the unauthorized use of our intellectual
property or breach of our licenses.

     The pendency of any infringement litigation and our failure or inability to
enforce or protect our intellectual property rights and licenses would have a
material adverse effect on our business.

     OUR BUSINESS REQUIRES PERSONNEL WITH SUBSTANTIAL SCIENTIFIC AND MANAGEMENT
EXPERTISE. IF WE ARE UNABLE TO HIRE OR RETAIN PERSONNEL WITH THE REQUISITE
EXPERTISE, OUR BUSINESS COULD SUFFER.

                                     - 8 -

<PAGE>

     Our products and services are highly technical. As a result, our key
personnel must have specialized training or advanced degrees in order to develop
and refine these products and services. There is a shortage of qualified
scientific, management and software and IT development personnel who possess the
technical background necessary to adequately understand and improve our
products, solutions and services.

     We are highly dependent on the principal members of our scientific and
management staff, particularly Dr. Friedrich von Bohlen und Halbach, our
company's chief executive officer, and Dr. Thure Etzold, the chief executive
officer of our subsidiary LION bioscience Ltd. Dr. Etzold developed and
optimized the original SRS data integration system and has been in charge of our
improvements of this system. Dr. von Bohlen und Halbach has entered into an
employment agreement with our company that currently extends to 2007. Dr. Etzold
has entered into an employment agreement with our company of indefinite
duration, which may be terminated by either party upon one year's prior notice.
Other members of our staff are also important to the development of the
products, solutions and services required to implement our business plan. The
loss of any of these persons' expertise would be difficult to replace.

     Competition for the highly qualified personnel we require is intense,
particularly in the areas of information technologies and life sciences. We
compete for these persons with pharmaceutical and other biotechnology companies,
software firms, academic institutions and government entities. The process of
hiring suitably qualified personnel is often lengthy. We have in the past
experienced, and may in the future experience, difficulties in recruiting the
personnel our business requires on a timely basis. Any loss of the services of
key personnel, or any inability to attract and retain the additional employees
with the necessary expertise, could have a material adverse effect on our
business.

     THE LENGTH OF TIME BETWEEN OUR INITIAL CONTACT WITH A CUSTOMER AND
CONCLUSION OF A SIGNED AGREEMENT CAN BE LENGTHY. AS A RESULT, WE MAY SPEND
CONSIDERABLE RESOURCES ON UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO MAKE
SALES ON THE SCHEDULE ANTICIPATED. IF WE DEVOTE EXTENSIVE RESOURCES TO GENERATE
SALES THAT DO NOT MATERIALIZE, OUR REVENUES COULD FALL BELOW EXPECTATIONS,
CAUSING OUR COMPANY'S ADS OR SHARE PRICE TO SUFFER.

     Our ability to obtain new customers for our products and services depends
on our customer's belief that we can help accelerate their life science R&D
efforts, particularly in the area of drug discovery and development. The length
of time between our initial contact with a customer and conclusion of a signed
agreement can be lengthy because our solutions, products and services are
complex and cut across many aspects of a potential customer's organization. We
therefore need to educate a variety of constituencies within potential customers
about the benefits of our products and services in order to make a sale. In
addition, many of the agreements that we enter into involve the negotiation of
individual terms. We may therefore expend substantial funds and management
effort with no assurance that an agreement will result.

     WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR PLANNED EXPANSION, WHICH COULD
ADVERSELY AFFECT OUR BUSINESS AND STRAIN OUR EXISTING RESOURCES.

     Since our formation, we have experienced significant growth in the scope of
our operations and the number of our employees. Our ability to further manage
our growth effectively will depend on our ability to further strengthen our
management team and our ability to attract and retain skilled employees. Our
success will also depend on the ability of our management and key employees to
continue to implement and improve our operations, management information and
financial control systems and to expand, train and manage our work force. In
addition, we must continue to take steps to provide resources to support our
customers as their numbers increase. For example, we continue to organize and
expand our LSI(TM) development, sales and marketing organization, particularly
in the United States, and our customer support resources. This organization and
expansion will require the employment of additional personnel with the requisite
skills, particularly technical skills, to develop, market and sell our products,
solutions and services, provide customer support and negotiate agreements with
customers. Furthermore, our business partners typically have worldwide
operations and may require support at multiple sites in different countries. The
expansion of our LSI(TM) development, sales and marketing organization and the
provision of additional customer support could result in additional burdens on
our systems and resources. If we are unable to manage our growth effectively,
our financial condition and results of operations could be materially and
adversely affected.

                                     - 9 -

<PAGE>

     OUR STRATEGY CONTEMPLATES FUTURE INVESTMENTS, WHICH MAY ABSORB SIGNIFICANT
RESOURCES. IF THESE INVESTMENTS ARE UNSUCCESSFUL, OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION WILL SUFFER.

     As part of our strategy, we expect to pursue investments and other
relationships and alliances. Transactions of this sort may involve significant
cash expenditures, debt incurrence, additional operating losses, dilutive
issuances of equity securities and expenses that could have a material adverse
effect on our financial condition and results of operations. In addition, we
have limited experience in concluding investments and similar transactions, and
it may be difficult for us to complete such transactions quickly and to
integrate these businesses efficiently into our current business. We may face
difficulties in the assimilation of new technologies, the diversion of resources
from our existing business, the maintenance of uniform standards, controls and
procedures, and the impairment of relationships with our customers and
employees. Any of these difficulties may ultimately have a negative impact on
our business, financial condition and results of operations.

     SOME OF OUR LSI(TM) PRODUCTS OR SOLUTIONS REQUIRE THIRD PARTY SOFTWARE AND
DATABASES COMPONENTS. IF WE ARE UNABLE TO PROCURE LICENSES FOR THE USE OF THESE
THIRD PARTY SOFTWARE AND DATABASE COMPONENTS FOR OUR CUSTOMERS OR IF OUR
CUSTOMERS CANNOT OBTAIN THESE LICENSES DIRECTLY FROM THESE THIRD PARTIES, OUR
BUSINESS COULD SUFFER.

     Some of our LSI(TM) products, including our iDEA(TM) predictive ADME
simulation system, our DiscoveryCenter(TM) data and application integration
system and our bioSCOUT(R) software, require third parTY software or databases
components. If we are unable to continue licensing the use of these third party
software and database components to our customers or if our customers cannot
obtain these licenses directly from these third parties, we may be required to
develop these software or database components by ourselves, which would delay
our marketing and selling efforts with respect to these products, which would
have a material adverse effect on our business.

     BECAUSE OUR PRODUCTS AND SOLUTIONS ARE IMPORTANT TO THE R&D PROCESSES OF
OUR CUSTOMERS, WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF WARRANTY OR
PRODUCT LIABILITY CLAIMS.

     The use of our LSI(TM) products and solutions by customers in
business-critical R&D applications and processes creates the risk that customers
or other third parties may pursue warranty or other claims against us in the
event of actual or alleged failures of our products, solutions or services
provided by us. Any claim, regardless of its merits, could entail substantial
expense and require the devotion of significant time and attention by key
management personnel. In addition, certain of our Internet browser-enabled
products include security features that are intended to protect the privacy and
integrity of customer data. Despite these security features, our products may be
vulnerable to break-ins and similar problems caused by Internet users, such as
hackers bypassing firewalls and misappropriating confidential information. Such
break-ins or other disruptions could jeopardize the security of information
stored in and transmitted through the computer systems of our customers.
Addressing problems and claims associated with such actual or alleged failures
could have a material adverse effect on our business, financial position,
results of operations or cash flows

     UNDETECTED ERRORS OR DELAYS IN NEW SOFTWARE PRODUCTS OR SOLUTIONS MAY
RESULT IN INCREASED COSTS TO US AND DELAYED MARKET ACCEPTANCE OF OUR PRODUCTS.

     To achieve market acceptance, new LSI(TM) products or solutions and product
or solution enhancements can require long development and testing periods, which
may result in delays in scheduled introduction. Generally, new LSI(TM) products
or solutions and enhancements may contain a number of undetected errors or
"bugs" when they are first released. As a result, in the first year following
the introduction of certain releases, we generally devote significant resources,
primarily consulting and development services, to work with early customers to
correct these errors. There can be no assurance, however, that all of these
errors can be corrected to the customer's satisfaction, with the result that
certain customers may bring claims for cash refunds, damages, or replacement
software. Although we test each new product and solution and enhancement release
before introducing it to the market, there can be no assurance that significant
errors will not be found in existing or future releases of our LSI(TM) products
or solutions, with the possible result that significant resources and
expenditures may be required in order to correct such errors or otherwise

                                     - 10 -

<PAGE>

satisfy customer demands. Significant undetected errors or delays in new LSI(TM)
products or solutions or enhancements may affect market acceptance of our
LSI(TM) products and solutions.

     COMPETITION FOR OUR PRODUCTS, SOLUTIONS AND SERVICES IS INTENSE. IF
COMPETITORS DEVELOP PRODUCTS OR SOLUTIONS THAT ARE MORE COMPETITIVE THAN OURS,
WE MAY LOSE SALES, AND OUR COMMERCIAL OPPORTUNITY MAY BE REDUCED OR ELIMINATED.

     The industry in which we operate is highly competitive and is characterized
by extensive research efforts and rapid technological progress. We face and will
continue to face, intense competition from the in-house software development
teams of pharmaceutical and other life science companies as well as from a wide
range of other competitors, such as third-party commercial software developers,
bioinformatics, cheminformatics and genomics companies, universities and other
academic research institutions, governmental agencies, as well as other life
science companies, including some of our customers. Our competitors may develop
products or solutions that are more effective and/or less costly than any of our
current or future products and solutions.

     Many of our competitors have substantially greater capital resources,
larger and more experienced R&D and other staffs, superior R&D facilities,
greater experience in software development as well as drug development and in
obtaining regulatory approvals, and greater marketing capabilities than we have.

     To remain competitive, we must expand and enhance the capabilities of our
LSI(TM) products, solutions and professional services so that they remain more
advanced than those of our competitors. We must also introduce enhancements and
new systems, products and solutions faster than the potentially competing
products, solutions and technologies of our competitors. If we are unable to do
any of these things, our ability to obtain and retain revenues from customers
would be adversely affected, and our commercial opportunity could be reduced or
eliminated.

     OUR COMPETITIVE POSITION MAY DEPEND ON OUR ABILITY TO PROTECT TRADE
SECRETS. IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS, OTHER COMPANIES MAY BE
ABLE TO COMPETE MORE EFFECTIVELY AGAINST US, AND OUR BUSINESS COULD SUFFER.

     We rely on trade secret protection for our confidential and proprietary
information and procedures. We currently protect such information and procedures
as trade secrets through recognized practices, including confidentiality
agreements with employees, consultants, collaborators and customers. These
confidentiality agreements may be breached, however, and we may not have
adequate remedies for any breach. In addition, these trade secrets may otherwise
become known to or be independently discovered by competitors, through the
defection of employees to competitors or otherwise. If our trade secrets were to
become known to, or be independently discovered by competitors, we could face
more intense competition and our business could suffer.

     WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES AND MAY
BECOME INVOLVED IN EXPENSIVE INTELLECTUAL PROPERTY LITIGATION. ANY INTELLECTUAL
PROPERTY LITIGATION COULD IMPOSE A SIGNIFICANT STRAIN ON OUR RESOURCES, AND A
FINDING THAT WE HAVE INFRINGED THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES
COULD REQUIRE US TO LIMIT OUR BUSINESS ACTIVITIES OR PAY DAMAGES OR LICENSE
FEES. IN EITHER CASE, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION COULD SUFFER.

     The intellectual property rights of companies operating in the life
sciences industry are generally uncertain and involve complex legal, scientific
and factual questions. Our success in the markets in which we operate may depend
on our ability to operate without infringing the intellectual property rights of
others and to prevent others from infringing our intellectual property rights.

     There has been substantial litigation regarding patents and other
intellectual property rights in the life sciences industry. We may become a
party to patent litigation or proceedings to determine our patent, copyright or
other intellectual property rights with respect to third parties, including
potentially our customers. Infringement proceedings may be necessary to
establish which party was the first to discover such intellectual property. We
may also become involved in patent copyright or other intellectual property
right litigation against third parties to enforce our intellectual property
rights, to invalidate intellectual property rights held by third parties, or to
defend against similar claims by others. The cost to us of intellectual property
rights litigation or similar proceeding could be substantial, and it may absorb
significant management time. The pendency of any such intellectual property
rights litigation may also adversely affect our company's ADS or share price. If

                                     - 11 -

<PAGE>

infringement litigation against us is resolved unfavorably, we may be enjoined
from providing some of our products or services without a license from a third
party. We may not be able to obtain the requisite license on commercially
acceptable terms or at all. Any of these outcomes could harm our business,
financial condition and results of operations.

     WE RECEIVE GOVERNMENT SUBSIDIES AND GRANTS THAT DECREASE THE AMOUNT OF OUR
REPORTED RESEARCH AND DEVELOPMENT EXPENSES. ANY FUTURE REDUCTION IN THE AMOUNT
OF SUBSIDIES AND GRANTS WE RECEIVE WOULD HAVE THE EFFECT OF INCREASING THESE
EXPENSES.

     As is the case with many other companies operating in the life sciences
industry, our reported research and development expenses have been, and may be
reduced, by the recognition of various existing or future subsidies and grants
received or to be received from third parties, including governmental entities.
The programs governing these subsidies and grants are subject to periodic
review. If the relevant third parties were unable to provide anticipated funding
on a timely basis or if existing government-funded programs were curtailed or
discontinued, this occurrence could have a material adverse effect on our
business, financial condition and results of operations. As the availability of
this funding is outside our control, we cannot assure you that we will continue
to benefit from this third party support, that sufficient alternative funding
would be available if necessary or that any such alternative funding would be
provided on terms as favorable to us as those we currently receive.

     WE OPERATE IN RAPIDLY EVOLVING MARKETS AND WE MAY HAVE TO CHANGE OUR
BUSINESS MODE OR STRATEGY, PERHAPS MATERIALLY, TO ADAPT TO THE CHANGING NEEDS OF
OUR CUSTOMERS. IF WE ARE UNABLE TO CHANGE OUR BUSINESS MODEL OR STRATEGY AS
REQUIRED IN A TIMELY MANNER, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION WILL SUFFER.

     We operate in rapidly evolving markets and we may have to change our
business model or strategy, perhaps materially, to adapt to the changing needs
of our customers. These changes may be rapid and significant and could
materially affect how we operate. We cannot foresee these changes and may not be
successful in changing our business model or strategy to meet the needs of our
customers or markets. If we fail to modify our business model or strategy in
response to these changes, our business could suffer. Changes in our business
model or strategy may intensify the risks described in this annual report or
subject us to new risks.

     WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE. IF SUCH FUNDS ARE NOT
AVAILABLE TO US, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION
COULD SUFFER.

     We believe that the net proceeds of our initial public offering, together
with existing cash and marketable securities, will be sufficient to fund our
current plans to expand our business. Nevertheless, we may be required to raise
additional capital to accelerate our expansion plans, in response to competitive
pressures or otherwise, to invest in new technologies or to develop and
commercialize our products, solutions and services.

     This additional financing may not be available when needed or, if
available, may not be available on favorable or even commercially reasonable
terms. If adequate financing is not available, we may be required to
significantly reduce or refocus our operations. We may also choose to raise
additional capital due to market conditions or strategic considerations, even if
we have sufficient funds for our current business plan. If additional financing
is obtained through additional public or private equity offerings, existing
shareholders may suffer dilution.

     OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT TO AVOID NEGATIVE IMPACTS ON
OUR FINANCIAL POSITION OR RESULTS OF OPERATIONS RESULTING FROM CLAIMS OR
LIABILITIES AGAINST US.

     We maintain insurance coverage for protection against many risks of
liability. The extent of our insurance coverage is under continuous review and
is modified if we deem it necessary. Despite this insurance, it is possible that
claims or liabilities against us may have a significant adverse impact on our
financial position or results of operations.

                                     - 12 -

<PAGE>

     OUR SALES MAY BE SUBJECT TO QUARTERLY FLUCTUATIONS.

     Our revenue and operating results can vary, sometimes substantially, from
quarter to quarter. Orders may increase in the fourth quarter of each calendar
year, as business customers attempt to make full use of their IT purchase
budgets before year end, and to a somewhat lesser degree in the first quarter of
each calendar year, as business customer attempt to make first use of their IT
purchase budgets. Our revenue in general, and in particular the revenue from our
LSI(TM) products, solutions and services, is difficult to forecast for a number
of reasons, including the relatively long sales cycles for our products and
solutions, the size and timing of individual license and consulting
transactions, and the timing of the introduction of new products or product
enhancements by us or our competitors.

     OUR BUSINESS USES POTENTIALLY HARMFUL BIOLOGICAL, CHEMICAL AND OTHER
HAZARDOUS MATERIALS. IF WE WERE TO USE THESE MATERIALS IN A MANNER THAT CAUSES
INJURY, OR IN VIOLATION OF APPLICABLE REGULATIONS, WE COULD INCUR LIABILITIES,
WHICH COULD HARM OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. THE COST OF
COMPLIANCE WITH APPLICABLE REGULATIONS GOVERNING THE USE OF THESE MATERIALS,
INCLUDING CONTROLLED SUBSTANCES AND WASTE MATERIALS, COULD BE SIGNIFICANT. OUR
FAILURE TO COMPLY WITH THESE REGULATIONS COULD HURT OUR R&D EFFORTS AND HARM OUR
BUSINESS.

     Our research and development activities, which we call iD3(TM), currently
involve the controlled use oF potentially harmful biological, chemical or other
hazardous or potentially hazardous materials and various radioactive compounds.
We cannot completely eliminate the risk of accidental contamination or injury
from the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we could be held liable for damages that result, and
any liability could exceed our resources. We are, and will continue to be,
subject to the laws and regulations of numerous jurisdictions governing the use,
storage, handling and disposal of these materials, certain controlled
substances, and specified waste products. The cost of compliance with these laws
and regulations could be significant. Failure by us to comply with the
applicable regulations may result in revocation of the licenses or permits
necessary for us to pursue, license or sell our R&D efforts, which could harm
our business.

     THE LIFE SCIENCES INDUSTRY IS CONSOLIDATING, LEADING TO GREATER COMPETITION
TO SELL PRODUCTS, SOLUTIONS AND SERVICES TO A REDUCED NUMBER OF POTENTIAL
CUSTOMERS. THIS PROCESS COULD HARM OUR EFFORTS TO MARKET OR SELL OUR PRODUCTS
AND SERVICES.

     Consolidation within the life sciences industry, particularly within the
pharmaceutical and biotechnology industries, has heightened competition for
products, solutions and services of the type we provide. If this trend toward
consolidation continues, it may result in fewer customers for our products,
solutions and services, price erosion and greater competition between us and our
competitors. Any consolidation could shrink the available market for our
products, solutions and services and adversely affect its ability to market our
products, solutions and services.

     USE OF INFORMATION DERIVED FROM GENOMICS TO DEVELOP OR COMMERCIALIZE
PRODUCTS IS UNPROVEN. IF GENOMICS-DERIVED INFORMATION PROVES UNSUITABLE TO
DEVELOP OR COMMERCIALIZE PRODUCTS, DEMAND FOR OUR PRODUCTS, SOLUTIONS AND
SERVICES WILL DECLINE.

     The development of new drugs based on information derived from genomics is
unproven. Few therapeutic products based on discoveries in genomics have been
developed and commercialized, and to date, no one has developed or
commercialized any therapeutic product based on our technologies. Development of
new products by our customers may be subject to risks of failure, including that
products will:

     o   be found to be ineffective;

     o   be found to be toxic;

     o   fail to receive regulatory approvals;

     o   fail to be developed prior to the successful marketing of similar
         products by competitors; or

     o   infringe the proprietary rights of others.

                                     - 13 -

<PAGE>

     If our customers are unsuccessful in developing and commercializing
products based on our products, solutions or services, we and our customers may
be unable to generate sufficient revenues to meet our respective expenses. Our
business may suffer as a result.

     THE USE OF OUR PRODUCTS, SOLUTIONS OR SERVICES BY CUSTOMERS MAY BE OR
BECOME SUBJECT TO GOVERNMENT REGULATION. IF THIS REGULATION WERE TO LIMIT THEIR
USE OF OUR PRODUCTS, SOLUTIONS OR SERVICES OR INCREASE THE COSTS TO THEM OF
DOING SO, DEMAND FOR THESE PRODUCTS, SOLUTIONS AND SERVICES COULD DECLINE.

     The use of some of our products, solutions and services by customers in the
pharmaceutical and biotechnology industries may be or may become subject to
regulatory approval by the U.S. Food and Drug Administration and comparable
regulatory authorities in other jurisdictions. For example, the U.S. Food and
Drug Administration regulates the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of
pharmaceutical products. In addition, any new drug developed by the efforts of
customers as a result of their use of our products, solutions or services must
undergo an extensive regulatory review process before marketing or commercial
sales may begin. This process can take many years and require substantial
expense. To the extent that use of our products, solutions or services is
limited or additional costs are imposed on customers due to regulation, the
potential market for these products, solutions or services could decrease. As a
result, our business, financial condition and results of operations could be
adversely affected.

     HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY AFFECT THE ABILITY
OF PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES TO PURCHASE OR LICENSE OUR
PRODUCTS, SOLUTIONS AND SERVICES, WHICH MAY AFFECT OUR PROFITABILITY.

     The continuing efforts of government and third party payors to contain or
reduce the costs of health care may reduce the profitability of pharmaceutical
and biotechnology companies. For example, in some foreign markets, the
government controls pricing or profitability of prescription pharmaceuticals. In
the United States, we expect the continuation of federal and state proposals to
implement similar governmental control. We cannot predict what actions federal,
state or private payors for health care goods and services may take in response
to any health care reform proposals or legislation. We currently expect to
derive almost all of our revenues in the foreseeable future from the
pharmaceutical and biotechnology industries. Accordingly, our success will
depend, in part, upon the success of the companies within those industries and
their demand for our products, solutions and services. Any reduction in the
profitability of actual or prospective customers for our products, solutions and
services could result in reduced revenues for us.

     SECURITY RISKS IN ELECTRONIC COMMERCE OR UNFAVORABLE INTERNET REGULATIONS
MAY DETER FUTURE USE OF OUR PRODUCTS AND SERVICES.

     We make selected LSI(TM) products, such as our SRS data integration system
and our bioSCOUT(R) softwarE, available to customers on our own Internet portal
on a subscription basis. In addition, some of our customers use our SRS
technology to make their proprietary databases available to their customers
through Internet-based portals. Our ability and the ability of those who offer
our products over the Internet to provide secure transmissions of confidential
information over the Internet may limit on-line uses and purchases of products.
A breach of security measures may result in the misappropriation of our
proprietary information or confidential information about our customers. The
security measures we adopt may not be sufficient to prevent breaches, and we may
be required to incur significant costs to protect against security breaches or
to alleviate problems caused by breaches. Further, security breaches in general
may result in customers not using the Internet to access our products. Attacks
by computer hackers on major electronic commerce websites and other Internet
service providers have heightened concerns regarding the security and
reliability of the Internet.

     Because of the growth in electronic commerce, the United States Congress
has held hearings on whether to further regulate providers of services and
transactions in the electronic commerce market. The U.S. federal or state
governments could enact laws, rules and regulations that would affect our
business and operations. The European Union, individual countries or other
foreign jurisdictions could also enact laws regulating the use of the Internet.
If enacted, these federal, state or foreign laws, rules and regulations could
limit the growth and development of our Internet-enabled products and services.

                                     - 14 -

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     WE RECORD REVENUES AND EXPENSES DENOMINATED IN BOTH EUROS AND DOLLARS.
FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THESE TWO CURRENCIES COULD HAVE THE
EFFECT OF DECREASING OUR REPORTED REVENUES OR INCREASING OUR REPORTED EXPENSES.

     We report our results of operations in euros. In our financial year ended
March 31, 2002, approximately 78%% of our revenues and approximately 45% of our
expenses were denominated in U.S. dollars. As a result of the expansion of our
operations in the United States through our acquisitions of Trega and NetGenics,
an even greater proportion of our expenses and revenues may denominated in U.S.
dollars. Accordingly, our business and results of operations can be hurt by
changes in exchange rates, particularly between the euro and the U.S. dollar. In
addition, the balance sheet impact of translation adjustments may be material.

     REGULATORY APPROVALS MAY PREVENT US OR OUR COLLABORATORS FROM
COMMERCIALIZING PRODUCTS RELATED TO OUR NUCLEAR RECEPTOR RESEARCH, REDUCING ANY
FUTURE ROYALTIES OR REVENUES.

     The manufacturing and marketing of any pharmaceutical products based upon
our drug discovery efforts, particularly our nuclear receptor research,
developed by us will be subject to regulatory approval and further regulation in
the United States and other countries. These regulations could subject us or our
collaborators to several problems, such as:

     o   failure to obtain necessary regulatory approvals or clearances for
         these nuclear receptor-related products on a timely basis, or at all;

     o   delays in receipt of or failure to receive approvals or clearances;

     o   the loss of previously received approvals or clearances; or

     o   limitations on intended uses imposed as a condition of approvals.

     Our collaborators will not be able to commence marketing or commercial
sales of pharmaceutical products until they receive clearance or approval from
the U.S. Food and Drug Administration (FDA) in the United States and its
counterparts in other countries, which can be a lengthy, expensive and uncertain
process. Currently, neither we nor our collaborators have applied for FDA or
other regulatory approvals with respect to the sale of any of our pharmaceutical
products under development. We or our collaborators may experience difficulties
that could delay or prevent the successful development, introduction and
marketing of proposed products. If we or our collaborators do not receive FDA
and other approval on a timely basis or at all, we may not receive milestone or
royalty payments.

     THE USE OF LIFE SCIENCE PRODUCTS CAN BE SUBJECT TO ETHICAL, LEGAL, SOCIAL
OR PRIVACY CONCERNS AMONG THE PUBLIC. IF THESE CONCERNS WERE TO LIMIT DEMAND FOR
OUR CUSTOMERS' PRODUCTS, DEMAND FOR OUR OWN PRODUCTS COULD SUFFER.

     The use of genetic information in various areas of the life sciences
industry, particularly in the areas of food production, medicine and
pharmaceutical research, has raised issues regarding the appropriate uses of the
resulting information. This could lead to governmental authorities calling for
limits on or regulation of the use of genetic information or prohibiting testing
for genetic predisposition to certain diseases, particularly for those that have
no known cure. Any of these scenarios could reduce the potential markets for the
products of our customers and could reduce the potential markets for our own
products and services.

RISKS RELATED TO HOLDING OUR COMPANY'S ADSS AND SHARES

     YOU MAY BE UNABLE TO ENFORCE A JUDGMENT AGAINST OUR COMPANY OR MEMBERS OF
OUR COMPANY'S MANAGEMENT BOARD OR SUPERVISORY BOARD.

     Our company is a stock corporation organized under the laws of the Federal
Republic of Germany. None of the current members of our company's management
board or supervisory board is a resident of the United States. All or
substantially all of the assets of these individuals and of our company are
located outside the United States. As a result, it may not be possible for you

                                     - 15 -

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to enforce against them judgments obtained in U.S. courts based on the civil
liability provisions of the U.S. securities laws. The enforcement in Germany of
civil liabilities based solely upon U.S. securities laws in original actions or
in actions for the enforcement of judgments of U.S. courts may encounter
difficulties. In addition, awards of punitive damages in actions brought in the
United States or elsewhere may be unenforceable in Germany.

     SALES OF SHARES BY OUR PRINCIPAL SHAREHOLDERS COULD ADVERSELY AFFECT THE
PRICE OF OUR CAPITAL STOCK.

     Dr. von Bohlen und Halbach, the Chief Executive Officer of his company,
together with his spouse and children, beneficially owns at least 18% of the
outstanding ordinary shares in our company. In addition, various individuals had
significant shareholdings in our company prior our company's initial public
offering of its shares in August 2000. Our most important customer, Bayer AG,
holds at least 1.4 million shares in our company. The sale of a large number of
ordinary shares by any of these principal shareholders could have a negative
effect on the trading price of our company's ADSs or ordinary shares. Except for
voluntary commitment by Dr. von Bohlen und Halbach not to sell his shares prior
to August 2002, we are not aware of any restrictions on the transferability of
the shares owned by the principal shareholders, any of their immediate family
members or any related entity.

     YOU WILL BE SUBJECT TO EXCHANGE RATE RISKS, AND THE MARKET PRICE OF OUR
COMPANY'S ADSS MAY DECLINE IF THE VALUE OF THE EURO FALLS AGAINST THE DOLLAR.

     Individuals and entities located in the United States who hold our
company's ADSs and our company's shares will bear exchange rate risk. A decrease
in the value of the euro relative to the dollar will cause a decrease in the
dollar value of the our company's shares, which will also affect the market
price of our company's ADSs on U.S. securities markets. Since its introduction
in January 1999, the value of the euro to the dollar has fallen significantly.
Recent fluctuations in the dollar/euro exchange rate have been significant, and
fluctuations may be significant in the future. You may receive a reduced dollar
value upon the sale of our company's ADSs or shares held by you as the result of
the dollar/euro exchange rate in effect at that time which may have no relation
to the operations or prospects of our company.

     YOU MAY HAVE LESS ACCESS TO INFORMATION ABOUT OUR COMPANY AND LESS
OPPORTUNITY TO EXERCISE YOUR RIGHTS AS A SHAREHOLDER IF YOU HOLD OUR COMPANY'S
SHARES THROUGH OUR COMPANY'S ADSS.

     There are risks associated with holding our company's shares through ADSs,
as our company is a stock corporation organized under the laws of the Federal
Republic of Germany. Our company is subject to German laws and regulations, and
to its articles of association (Satzung). Your rights as a holder of our
company's ADSs will differ in various ways from a shareholder's rights, and you
may be affected in other ways, including:

     o   you may not be able to participate in rights offerings or dividend
         alternatives;

     o   you may not receive copies of reports and may have to go to the office
         of the depositary to inspect any reports issued, or may only be able to
         request a report to be sent to you at your own expense;

     o   the deposit agreement may be amended by our company and the depositary,
         or may be terminated by our company or the depositary, without your
         consent in a manner that could prejudice your rights; and

     o   the deposit agreement limits our company's obligations and liabilities
         and those of the depositary.

     GERMAN LAW REQUIRES LESS CORPORATE DISCLOSURE THAN THE LAWS OF THE UNITED
STATES, WHICH MEANS THAT PUBLICLY AVAILABLE INFORMATION ABOUT OUR COMPANY IS
LESS EXTENSIVE AND MAY BECOME AVAILABLE LATER THAN PUBLICLY AVAILABLE
INFORMATION ABOUT A DOMESTIC COMPANY THAT IS PUBLICLY TRADED IN THE UNITED
STATES.

     There is less publicly available information about our company as a foreign
issuer of securities publicly traded in the United States than is regularly
published by or about domestic issuers of publicly traded securities. Therefore,
our company's shareholders may receive less information about our performance
than shareholders receive about a domestic company that is publicly traded in
the United States.

                                     - 16 -

<PAGE>

     Our company is subject to the disclosure requirements mandated by German
law and the rules of the Frankfurt Stock Exchange. The provisions thereunder
generally impose more limited disclosure requirements than their U.S.
counterparts. For example, under German law, our company is required to make
year-end financials available to its shareholders upon request within eight
months and file them with the Heidelberg company registrar without delay after
submission to its shareholders within twelve months after the close of each
financial year at the latest. The rules of the Neuer Markt segment of the
Frankfurt Stock Exchange also require our company to prepare quarterly
consolidated financial accounts without delay within two months after the close
of each quarter at the latest. Subsequently, the Frankfurt Stock Exchange makes
such reports publicly available. As a foreign private issuer under U.S.
securities laws:

     o   our company is required to file an annual report on Form 20-F with the
         SEC within six months after the close of each financial year; if our
         company were a domestic U.S. public company, it would be required to
         file an annual report on Form 10-K with the SEC within 90 days after
         the close of each fiscal year;

     o   our company is not required to file quarterly or current reports with
         the SEC, except to the extent required to do so under the rules of the
         Neuer Markt segment of the Frankfurt Stock Exchange; U.S. public
         companies are required to file quarterly reports on Form 10-Q with the
         SEC within 45 days of the end of each of their first three quarters of
         each financial year.

     THE MARKET PRICE FOR OUR ADSS AND ORDINARY SHARES MAY BE VOLATILE.

     The trading prices of our company's ADSs and ordinary shares have
experienced and may continue to experience significant volatility. The current
trading price of the ADSs and ordinary shares reflect certain expectations about
the future performance and growth of our company, particularly on a quarterly
basis. However, our revenue and expenses can vary, sometimes substantially, from
quarter to quarter, causing significant variations in operating results during
certain quarters and in growth rates compared to prior periods. Any shortfall in
revenue, expenses or net losses or earnings from levels projected or estimated
by us or annual, quarterly or other projections or estimates made by securities
analysts could have an immediate and significant adverse effect on the trading
price of our company's ADSs or the ordinary shares in any given period.
Additionally, we may not be able to confirm any such shortfalls until late in
the quarter or following the end of the quarter because license or service
agreements are often executed late in a quarter. Finally, the stock prices for
many companies in the software and biotechnology sectors have experienced wide
fluctuations, which may not have been directly related to our company's
operating performance. The trading price of our company's ADSs or the ordinary
shares may fluctuate in response to the announcement of new products or product
enhancements by us or our competitors, technological innovation by us or our
competitors, quarterly variations in our competitors' results of operations,
changes in revenue and revenue growth rates on a consolidated basis or for
specific geographic areas, business units, products or product categories,
speculation in the press or analyst community and general market conditions
specific to particular industries. In the past, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. Any such securities class action litigation
against us, with or without merit, could result in substantial costs to us and
the diversion of management's attention and resources.


ITEM 4: INFORMATION ON THE COMPANY

     A glossary of certain industry terms used in this Item 4 can be found at
the end of this Item 4.

ORGANIZATION AND HISTORY

     The legal name of our company is LION bioscience Aktiengesellschaft. Our
company, located in Heidelberg, Germany was founded in March 1997 around a
nucleus of six scientists from the European Molecular Biology Laboratory in
Heidelberg, Germany and the University of Heidelberg, together with the chairman
of our management board, Dr. Friedrich von Bohlen und Halbach. Our company was
incorporated on March 4, 1997 by registration with the commercial register of
the local court in Heidelberg, Germany, under the number HRB 5706.

                                     - 17 -

<PAGE>

     In addition to offering software licenses, we are developing integrated
information and knowledge management solutions for the broader life sciences
industry that span the entire R&D organization of life sciences customers. We
offer these solutions on a fee-for-value basis. We also offer global
professional services to customers related to these solutions. We have also
applied our solutions and high-throughput technologies to our internal IT-driven
drug discovery activities to validate our approach.

     In August 2000, our company completed the initial public offering of its
ordinary shares and American Depositary Shares (ADSs) consisting of public
offerings in Germany and the United States and an offering to institutional
investors outside the United States and Germany. The net proceeds to us from
this initial public offering, after deduction of expenses and commissions,
totaled approximately (euro) 209.29 million, including the net proceeds of
shares sold offshore in transactions as part of our initial public offering that
were not subject to registration under the U.S. Securities Act of 1933. Our
ordinary shares have been listed at the Frankfurt Stock Exchange in the market
segment Neuer Markt since August 11, 2000. Our ADSs have been quoted on the
Nasdaq National Market since August 11, 2000. For further information concerning
our company's initial public offering and the stock market listings of our
company's shares and ADSs, see "Item 9: The Offer and Listing" and "Item 14:
Material Modifications to the Rights of Security Holders and Use of Proceeds".

     The principal office of our company is located at Waldhofer Str. 98, 69123
Heidelberg, Germany. Our company's telephone number is: +49 (0) (6221) 4038-100.
The principal office of LION bioscience Inc., our main U.S. subsidiary, is 9880
Campus Point Drive, San Diego, CA 9212. Our agent for service in the United
States is CT Corporation System located at 111 Eighth Avenue, New York, NY
10011. Our Internet address is http://www.lionbioscience.com. None of the
information on our web site is incorporated by reference into this annual
report.

SCIENTIFIC BACKGROUND

     GENOMICS

     The blueprint for all biological activity is deoxyribonucleic acid, or DNA.
DNA is located within the nucleus of almost every cell of an organism. This
blueprint, or genome, comprises the total DNA content of the organism. DNA
molecules consist of two long chains made up of millions of pairs of four
different bases - adenine, cytosine, guanine and thymine, often abbreviated with
their first letters A, C, G and T. Thanks to private and public efforts, the map
of the human genome, comprising some 3.2 billion base pairs, has been almost
completely unraveled. Despite what has been discovered to date, however, only a
limited amount is understood about the functioning of the human genome. We
believe that the importance of this discovery will only reach its full potential
if this sequence data is explored using additional techniques such as expression
analysis, proteomics, functional genomics, genetic epidemiology, high-throughput
screening and combinatorial chemistry. Significant additional discoveries in
each of these areas are needed to transform raw sequence data from the human
genome into a more comprehensive understanding of genes, their functions and
their role in health and disease.

     DISEASE

     Essentially all stages of disease are caused by or associated with changes
in the expression levels of genes and the activities of specific proteins and
biological pathways in affected cells. Disease can occur when a biological
pathway in a normal biological function is upset or blocked as a result of a
mutated or defective gene or genes, or by exogenic factors, such as bacterial or
viral infections. The ability to detect mutations in the DNA of a gene and to
understand the process by which they contribute to disease is crucial to
understanding the fundamental mechanisms of a disease. Likewise it is important
to understand the mechanisms of infection and replication of bacteria and
viruses to specifically find treatments against such exogenic disease triggers.

     GENE-BASED DRUG DISCOVERY AND TREATMENT

     While most treatments for disease rely on drugs that modify the activities
of biological pathways by interacting with proteins expressed by genes in the
affected cells and tissues, most drugs have been discovered more or less by
chance, with little understanding of their modes of action. This reflects the
fact that most drugs address the symptoms of diseases rather than their causes,

                                     - 18 -

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especially as the causes of many diseases are still largely unknown. In the
search for safer and more effective drugs targeted at the causes of disease,
pharmaceutical companies have begun to explore the application of molecular
sciences, such as genomics, to the processes of drug discovery and development.
By understanding the role of genes and their functional counterparts in the
body, the proteins in the control and function of biological pathways and
cellular processes, scientists seek to more fully understand the genetic basis
of the biological functions involved in disease.

     Modern gene-based drug discovery and development programs typically involve
a series of complex steps, including gene discovery, target identification,
target validation, high-throughput screening, lead selection and optimization,
pre-clinical and clinical trials and patient stratification based on
pharmacogenomic studies. In order to rationally discover a drug, scientists must
first identify a gene related to a disease. Scientists must then identify
whether the protein encoded by the gene can serve as a drug target. Targets are
protein molecules that cause diseases or are somehow involved in the history of
a disease. Most drugs work by binding to a target and changing the target's
function. Scientists must then validate a target by understanding its functional
role in the disease process. Scientists then try to identify those chemical or
biological compounds that change the target's function. These compounds are
known as hits. Scientists identify hits by testing, or screening, hundreds of
thousands of chemical compounds they have generated or acquired against the
selected target in a process called high throughput screening. Screening may
identify hundreds of hits. Scientists then determine how the human body absorbs,
distributes, metabolizes and excretes these hits and whether they are toxic. The
life science industry refers to these characteristics as ADMET (absorption,
distribution, metabolism, excretion and toxicity). Scientists then chemically
modify the hits to identify those with the appropriate activity and ADMET
characteristics for potentially safe and effective use in humans. This entire
process of determination and modification is called lead optimization and
results in the identification of drug candidates. A drug candidate then
undergoes preclinical development and multiple phases of human clinical
development before receiving marketing approval from the U.S. Food and Drug
Administration, or FDA, and their equivalent foreign government authorities.
Scientists also seek to understand variances in the susceptibility of drugs and
the varying appearance of adverse effects on the drug within a population
through a procedure called pharmacogenetics.

INDUSTRY CHALLENGES

     Companies in the life sciences industry suffer from increasingly intense
pressure to develop innovative and effective drugs, chemicals and agricultural
products on shorter schedules and at reduced cost in order to maintain
sustainable growth, profits, market capitalization and their competitive
positions. The success of pharmaceutical and other companies in the life
sciences industry is dependent on their ability to identify and bring to market
new compounds with targeted activities and properties in a timely and effective
manner. In particular, life science companies are striving to reduce their
product development cycles by obtaining more reliable, and useful information
about product candidates at earlier stages in the R&D process. By doing so,
these companies hope to more efficiently employ their finite R&D resources by
focusing on more promising product candidates at earlier stages of development.
As a result of competitive pressures to increase the number of products and
reduce time-to-market, R&D expenditure has been increasing in recent years.
Nonetheless, there is as yet little evidence to suggest that this increased
spending is leading to improved productivity or quality in terms of more or
better products and product candidates.

     The process by which pharmaceutical and other life science companies
identify new product candidates has traditionally been based primarily on
decades-old advances in chemistry. Chemistry-based product development, however,
is error-prone and serendipitous because it relies on trial-and-error methods of
identifying product candidates with the activities and properties targeted but
cannot explain the mechanisms by which these candidates produced the desired
biological effects. These traditional methods are also unable to predict side
effects or poor response levels in individual patients.

     As a result of enormous advances in the understanding of genetics in
particular and of biology beginning in the 1980's, the life sciences industry is
undergoing a paradigm shift, as biology increasingly supplants chemistry as the
basis for product development. This shift from chemistry to biology and the
introduction of high-throughput technologies as well as new research areas, such
as proteomics and pharmacogenomics, as the basis for product discovery has
presented life science companies with significant new challenges. The foremost
of these challenges is managing the enormous volume, diversity and complexity of

                                     - 19 -

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data generated and the large number of disparate data analysis tools and
software applications and the consequent impact on the R&D decision-making
processes. Many life science companies are therefore struggling to design and
implement the systems required to manage this data, enable data integration with
the diverse analysis tools and applications across the different discovery and
development departments and to capture and share the knowledge resulting from
these analyses in order to achieve a more rational basis for the decision-making
processes in their R&D organizations.

     We believe that life science companies' failure to date to generate
increased R&D productivity despite significant investment in new technologies
primarily reflects their inability to take advantage of the increasing volume
and complexity of data and turn it into information and, ultimately, knowledge.
Turning data from a particular scientific discipline into information requires
integration and analysis of the data in the context of background information
contained in the scientific literature of that discipline and, increasingly,
related disciplines despite the large number of disparate data analysis tools
and software applications used throughout the entire R&D organization.
Converting this information into knowledge about a particular disease, drug,
target, gene or drug in turn requires the accumulation, integration, analysis
and validation of this information by teams of researchers, that currently use
disparate data analysis tools and software applications, throughout their
discovery and development departments.

     We believe that remedying the discontinuity between R&D expenditures and
results requires improved data and IT application integration as well as
knowledge and decision support management by the R&D organizations of the life
science companies. Through the use of effective, integrated IT solutions in the
drug discovery process, companies in the life sciences industry may be able to
evaluate scientific data faster, more cost-effectively and more comprehensively
to create new product candidates and to select the more promising candidates at
earlier stages of the discovery and development process. Nonetheless,
sophisticated IT solutions are only part of the ultimate solution to overcome
the problems facing pharmaceutical R&D efforts. Despite advancements in R&D
processes, computer-derived results still have to be validated by experimental
means. We believe that successfully meeting these challenges requires a solution
that brings together scientists, applied researchers and bioinformaticians via
new technologies and Internet and intranet-based communications systems. While
scientists have typically worked together only in teams organized by indication,
new research processes require the exchange of knowledge across teams, for
example in relation to target classes. The effective use of data and IT
application integration as well as knowledge management and decision support
systems in the life sciences industry therefore also involves a reengineering of
the R&D process.

STRATEGY

     We have refined our strategy to focus on our core competencies and to
respond to demands and opportunities in the life sciences industry.

     We strive to become the world leader in providing IT-driven R&D solutions
for the life sciences industry. Our solutions aim to improve the efficiency of
the research and development processes and to increase R&D productivity of life
sciences companies. Our solutions are built from a modular integration platform
that can be expanded to create a knowledge management and decision environment
tailored to the specific needs of each R&D organization.

     At the core of this modular integration platform is our proprietary data
and application integration technology, which combines of our state-of-the-art
SRS data integration and DiscoveryCenter(TM) application integration
technologies. Our SRS data integration system is the leading technology for
integrating diverse types of life sciences data and databases. Our
DiscoveryCenter(TM) technology is capable of integrating disparate data analysis
and IT applications that are used throughout the life sciences R&D process, in
particular bioinformatics and cheminformatics tools and applications, as well as
diverse data structure and databases, in particular biological and chemical
data. We expect to release our integration platform during FY 2003.

     Our solutions use this integration platform to integrate the diverse
databases and data analysis and application software used in the R&D
organizations of our customers. These tools and applications may include our own
IT products and customized software components developed by us as well as public
domain and proprietary life science tools, applications and databases of our

                                     - 20 -

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customers or third parties. Our modular integration platform thus enables the
R&D organizations of our life sciences customers to manage the enormous volume,
diversity and complexity of their data and to integrate this data with the
disparate analysis tools and applications across the different research and
development departments.

     We also plan to offer a proprietary knowledge management and decision
support module, as part of our integration platform. This module will enable our
customers to promote collaborations across different departments of their R&D
organizations, to capture and share the knowledge resulting from the data and
application integration capabilities of our customized solution and to support
the decision-making processes in their R&D organizations in order to achieve
greater efficiency and productivity. We are currently in the process of
developing this knowledge management and decision support module based on the
technologies and know-how we developed through our i-biology collaboration with
Bayer, in particular our proprietary Gene Index knowledge technology, and the
knowledge management components of our DiscoveryCenter(TM) technology.

     The modular and highly flexible nature of our integration platform enables
our customers to expand our solutions throughout their entire global R&D
organization. For example, our customized biology solution for the target
identification and target validation activities of a life science customer's R&D
organization can be seamlessly combined with our pharmacogenetics solution to
support these other activities of the customer's R&D organization.

     Our goal is that our customers adopt our comprehensive discovery solution
that supports all R&D activities and spans the entire drug discovery process of
a life science customer's R&D organization on the basis of our integration
platform. Our solutions thus represent a new approach to reengineering the life
science R&D process to take advantage of the capabilities that new
high-throughput technologies and developments in information technology provide.
These solutions ultimately involve reengineering a life science customer's R&D
organization to integrate IT systems and expertise into each individual research
group, to facilitate the communication between these research groups, to manage
and share knowledge throughout the customer's R&D organization and to support
the R&D decision-making process.

     We are growing our global professional services organization within our
Life Science Informatics(TM), or LSI(TM), business to offer and implement these
solutions. Our global professional organization customizes and adapts our
solutions to the specific needs of the customer's R&D organization and
implements these customized solutions on the basis of our integration platform.
These consultants have expertise in R&D processes as well as knowledge in the
life sciences.

     The customization and implementation of our solutions is complex and may
cut across many aspects of a customer's R&D organization. We may perform these
complex integration and customization projects through dedicated centers of
excellence that are staffed by our consultants and life science informaticians
as part of collaboration arrangements with a particular life science customer.

     We may also provide additional value-added research services and solutions
for these customers. For example, we may collaborate with life sciences
companies on research projects that utilize our solutions to produce specific
research results, such as in the area of genomics or nuclear receptors. Our
so-called i-biology(TM) collaboration with Bayer AG demonstrates this approach.
Pursuant to this collaboration, we maintain a dedicated center of excellence,
LION bioscience Research Inc., in Cambridge, Massachusetts, that provides
value-added target discovery services for Bayer and develops, implements and
manages an IT solution for Bayer's drug discovery activities.

     Our solutions are primarily focused on the R&D organizations of companies
active in the life sciences industry, in particular pharmaceutical companies,
established biotechnology companies and diversified food and agriculture
companies.

     The length of time between our initial contact with a customer and
conclusion of a signed agreement for our solutions can be lengthy because our
solutions are complex and may cut across many aspects of a potential customer's
R&D organization. Accordingly, we typically do not generate revenues from any
customer until substantially after we make initial contact with that customer.
Because many of the agreements that we conclude are individually negotiated with

                                     - 21 -

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the customer, the length of time before we recognize revenues under any
contract, and the terms of each contract, may vary substantially from customer
to customer.

     We seek to generate revenue from

     o   license fees from our solutions and our software tools and
         applications,

     o   fees and milestone payments, in particular on a fee-for-value basis,
         for our global professional services, such as for the implementation
         and customization of our solutions and the development of new
         customized software tools and applications,

     o   collaboration and milestone payments from value-added research services
         and solutions that we undertake in collaboration with life science
         customers, and

     o   royalty payments from the commercialization of the results of these
         value-added research collaborations.

     With this strategy, we are focusing on our core competencies and responding
to the market demands and opportunities that we have identified. Through our
LSI(TM) business, we have developed advanced expertise in data integration and
analysis software for the life sciences. Our industry-leading SRS data
integration system can integrate the diverse universe of biological data,
connecting customers' internal and in-licensed databases with public domain
databases through a single search query and navigation interface. We have
identified a market opportunity for data integration solutions and
customizations on the basis of our established SRS technology. As part of our
acquisition of NetGenics, we acquired NetGenics' core technology,
DiscoveryCenter(TM), a leading application and data integration system, togetheR
with NetGenics' DiscoveryCenter(TM) consulting and solutions business. We
believe the combination of thesE core integration technologies as the center of
our new integration platform leverages our unique life sciences data and
application integration expertise and technology.

     In addition, our landmark collaboration with Bayer AG under the name
i-biology(TM) demonstrates the validity of our strategy to offer customized
solutions for creating knowledge management and decision support environments
and to offer value-added research services on the basis of these solutions. Our
i-biology(TM) collaboration requires us to develop and implement a customized,
value-added IT solution for high-throughput identification and validation of new
drug target genes, diagnostic markers and SNPs from genomics sources as an
integral part of Bayer's own gene discovery activities. This customized solution
uses our SRS data integration technology in combination with our own
bioinformatics tools and applications as well as public domain and proprietary
bioinformatics tools and databases of Bayer and of third parties. We have also
developed new customized analysis tools and databases as well as a comprehensive
research information and knowledge management environment for all of Bayer's
research sites in North America, Europe and Japan as part of this solution.

     Since we will focus primarily on providing customized solutions based on
our modular integration platform, we will streamline our software product
portfolio and IT development activities. We currently expect to continue to
develop and market our established software tools and applications, such as
bioSCOUT(R) and our iDEA(TM) software modules. However, we do not intend to
continue offering our other software products, such as arraySCOUT(TM),
piSCOUT(TM), and pathSCOUT(TM), on a stand-alone basis. Instead, we plan to
incorporate the technologies of these products into optional components of our
modular integration platform. We can customize these additional components to
address the specific needs of each customer on an individual basis.

     In addition, through our internal IT-driven drug discovery activities,
which we call our iD3(TM), we have applied our LSI(TM) systems and solutions and
high-throughput technologies to applied drug discovery, in particular in the
area of nuclear receptor research. Our efforts in this area have focused on the
initial stages of the drug discovery process, from gene identification and
target discovery through lead selection and optimization. By applying our IT
solutions to our internal drug discovery activities, we have further
demonstrated the validity of our IT-driven drug discovery approach. Consistent
with our strategy to focus on our core competencies and to respond to demands
and opportunities in the life sciences industry, we have decided to shift
resources of our LSI(TM) business to focus solely on providing customized IT
solutions to external life sciences companies. Instead, we intend to collaborate
with one or more life sciences companies on value-added research projects that

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would utilize our IT-driven drug discovery approach. We may contribute the
resources, know-how and intellectual property of our iD3(TM) activities to this
collaboration. If we are unsuccessful in finding a collaborator or in entering
into such a collaboration, we will seek to license or sell the intellectual
property created through our internal drug discovery activities. As a result, we
plan to reduce, and may cease, our own drug discovery activities.

OUR ACQUISITION OF NETGENICS

     We acquired NetGenics, a privately held company having its principal place
of business in Cleveland, Ohio, in January 2002 to further expand our
technological platform for life science data and application integration.
NetGenics has developed and marketed data and application integration solutions
for the life sciences industry under the name DiscoveryCenter(TM). This solution
consists of a suite of software components, databases and consulting services to
address the biological and chemical data and application integration needs of
life science companies. DiscoveryCenter(TM) provides an integrated view of
chemical and biological information held in both internal and external data
repositories. In June 2001, NetGenics entered into a collaboration agreement
with Schering AG to develop a comprehensive gene database and gene data
integration solution for Schering on a worldwide basis, utilizing its
DiscoveryCenter(TM) data integration environment as well as IBM's
DiscoveryLink(TM) technology.

     We believe the capabilities of LION and NetGenics are highly synergistic.
NetGenics' DiscoveryCenter(TM) data integration technology is highly
complimentary with our leading SRS data integration system. The combination of
DiscoveryCenter(TM) and SRS technology forms the core of our new integration
platform. In addition, NetGenics has an experienced team of professional service
consultants to implement customized solutions on the basis of
DiscoveryCenter(TM) technology.

     Shortly after the acquisition, we reduced NetGenics' workforce by 18% and
closed NetGenics' facilities in San Diego, California and Boston, Massachusetts.
We also plan to merge the operations of NetGenics' United Kingdom subsidiary
with LION bioscience Ltd., our United Kingdom subsidiary.

     We have restructured NetGenics' activities at its Cleveland and Columbus,
Ohio, sites to focus on further development of the DiscoveryCenter(TM)
technology and to collaborate with our sites in Cambridge, UK and Heidelberg,
Germany in the development of our new integration platform. In addition, members
of our U.S. professional services organization are based at the Cleveland, Ohio
site.

OUR TECHNOLOGIES, SOLUTIONS, AND PRODUCTS

     We develop data and application integration technologies and solutions and
research software applications for life science data analysis for the life
sciences industry. Our LSI(TM) products, solutionS and services are currently
used primarily in the pre-clinical phases of new pharmaceutical development, the
equivalent pre-approval phase of agrochemical product development and product
discovery phases of other life science research. Through our LSI(TM) business,
we also develop customized IT solutions for life science customers on the basis
of our new integration platform and provide global professional services to
implement these customized solutions.

     DATA AND APPLICATION INTEGRATION AND KNOWLEDGE MANAGEMENT TECHNOLOGIES

     Our solutions are built from a modular integration platform that can be
expanded to create a knowledge management and decision environment tailored to
the specific needs of each R&D organization. At the core of this modular
integration platform is our proprietary data and application integration
technology, which combines our state-of-the-art SRS data integration technology
and DiscoveryCenter(TM) application integration technology.

     Our solutions use this integration platform to integrate the diverse data
analysis and application software and databases used in the R&D organizations of
our customers. These tools and applications may include our own IT products and
customized software components developed by us as well as public domain and
proprietary life science tools, applications and databases of our customers or
third parties. We expect to release our integration platform during FY 2003.

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     We also plan to offer a proprietary knowledge management and decision
support module as part of our integration platform. This module will enable our
customers to improve collaborations within their R&D organizations, to capture
and share the knowledge resulting from the data and application integration
capabilities of our customized solution and to support the decision-making
processes in their R&D organizations in order to achieve greater efficiency and
productivity. For example, this module will enable our customers' R&D
organizations to aggregate, standardize, and organize all available scientific
information within their respective R&D organization, to manage and track
projects and to create interfaces to the financial, business and intellectual
property protection systems and departments of our customers. We are currently
in the process of developing this knowledge management and decision support
module based on the technologies and know-how we developed through our i-biology
collaboration with Bayer, in particular our proprietary Gene Index technology,
and the knowledge management components of our DiscoveryCenter(TM) technology.

     SRS Data Integration System

     An understanding of modern biology requires the comprehensive integration
of a wide range of diverse types of data. Our SRS data integration system meets
this need. SRS can integrate the diverse universe of biological data,
historically contained in so-called "flat file" databases, connecting customers'
internal and in-licensed databases with over 400 public domain databases through
a single search query and navigation interface. Through SRS's single interface
and automatic search capabilities, researchers and bioinformaticians can find
the relevant data quickly and easily from among the vast universe of available
sources, substantially reducing search times. SRS searches can be performed over
the Internet or with a customized solution tailored to each customer's specific
requirements. The power of SRS lies in its ability to effectively integrate
heterogeneous data sources behind a single interface and integration framework.
It ensures an effective integration of heterogeneous data without losing data in
file and format conversions. At the same time, it provides a level of
integration that adds value to the whole application.

     SRS provides customers with an expandable framework for their data
integration needs. Using SRS' extensive platform, researchers can integrate new
databases into the system and exploit the links between databases. SRS is
designed to grow with the increasing volume and complexity of biological data.
It can also be adapted to each customer's specific needs as its needs evolve.
SRS thereby solves our customers' problems of accessing, integrating and
querying diverse biological data. It also enables bioinformaticians to develop
applications and algorithms on top of SRS to add value to their research
program.

     We provide value-added modules to enable our customers to expand the SRS
system:

     SRS Prisma(TM). SRS Prisma(TM) is a software tool that organizes all of the
routine tasks necessary TO integrate public data into the SRS environment. SRS
Prisma(TM) automates the daily integration of all relevant life science data
into a customer's own bioinformatics network. SRS Prisma(TM) supports the
mirroring of numerous public domain databases and can easily be configured to
monitor and update new databases. SRS Prisma(TM) thereby enables scientists to
access the most current data in multiple databases. At the same time it
facilitates the efficient administration of the customer's IT infrastructure.

     SRS Objects(TM). SRS Objects(TM) is a set of user-friendly programming
interfaces for creating customized features within SRS. SRS Objects(TM) provides
a suite of tools to facilitate fast and efficient software development around
SRS. This user-friendly software lets programmers access and deploy the full
range of SRS' capabilities tailored to each users' specific needs. SRS
Objects(TM) thereby eases access and promotes the use of integrated data within
a particular SRS installation. SRS Objects(TM) supports all common programming
languages.

     SRS 3D(TM). With SRS 3D(TM), molecular scientists can easily use structures
to gain insight Into potential drug targets. Through a state-of-the-art viewer
the user has access to public and customer data within the integrated SRS
environment.

     SRS Relational(TM). By adding the SRS Relational(TM) module, our customers
can conduct queries aCRoss flat file and relational databases, regardless of
database format. SRS was originally developed to query and integrate data from

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flat file databases, as the vast majority of biological databases contained flat
file database structures. SRS is also capable of integrating and querying XML
databases. SRS Relational(TM) is a module that enables customers to expand the
integration capabilities of SRS BY integrating ORACLE(TM) and MySQL(TM)
relational databases. By using SRS Relational(TM), data contained IN thESE
relational databases can be queried through the standard SRS user interface.

     DiscoveryCenter(TM)

     Our DiscoveryCenter(TM) software suite complements SRS. DiscoveryCenter(TM)
is a comprehensive knowleDGe presentation and management system, capable of
integrating disparate data analysis and IT applications that are used throughout
the life sciences R&D process, in particular bioinformatics and cheminformatics
tools and applications, as well as diverse data structure and databases, in
particular biological and chemical data.

     DiscoveryCenter(TM) provides an integrated view of chemical and biological
information held in both internal and external repositories, including
comprehensive summary views. These summaries display, annotate, and
cross-reference all of the information about a given topic (sequence, small
molecule, assay, gene, target) in a single, user-friendly interface. By
providing intuitive and comprehensive views of research information, wherever it
is held, DiscoveryCenter(TM) improves knowledge-management and decision-making
in the R&D process of our customers. DiscoveryCenter(TM) enables users to
annotate their discoveries on relevant data objects and to choose whether or not
to share these annotations with their colleagues, including on a project basis.
DiscoveryCenter(TM) maintains a history of each data object, listing all the
events and annotations, and alerts the user of new relevant information
appearing in databases.

     DiscoveryCenter(TM) has the capability of integrating seamlessly with
analytical and visualization tools and web sites developed by third party
suppliers as well as by the internal IT organization of our customers, in
particular software tools and applications used in the biology and chemistry
stages of the drug discovery process.

     DiscoveryCenter(TM) takes advantage of IBM's DiscoveryLink(TM) technology
to support the user when building complex queries involving chemical and
biological information. We have obtained a development license to DiscoveryLink
as part of our collaboration with IBM. A customer will have to license
DiscoveryLink(TM) directly from IBM if the customer wishes to add the
capabilities of IBM's DiscoveryLink(TM) to our DiscoveryCenter(TM) system.

     Gene Index

     There is a great deal of descriptive information available in public domain
and proprietary life science databases, but it is often difficult to make
complete use of the data contained in these databases because of redundancies
and ambiguities. We have developed a proprietary knowledge environment for Bayer
as part of our i-biology(TM) collaboration with Bayer, which we call Gene Index.
Our Gene Index assigns an unique identifier to each index member with links to
the underlying redundant, yet comprehensive data. It is a central repository of
non-redundant, gene sequences representative of the genes in the human genome.
Various types of data (e.g. research results, public domain information, patent
information) can be mapped to this index. Gene Index is the core of a
comprehensive knowledge management and decision support environment for the life
science R&D process, making all relevant information regarding a specific gene
available through one entry point. Different user groups at different sites
across a customer's R&D organization can readily view all of the research
efforts linked to a given gene sequence and the current research status. We have
licensed Gene Index to Bayer for Bayer's internal use as part of this
i-biology(TM) collaboration.

     GLOBAL PROFESSIONAL SERVICES

     We provide professional services relating to our integration and knowledge
management technologies, such as SRS and Discovery Center, as well as to our
IT-driven R&D solutions, which are designed to enable companies to transition
from conventional R&D processes to efficient and productive IT-driven R&D
processes.

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     We provide professional services for the rapid development of customized
SRS and DiscoveryCenter(TM) installations, such as the integration of in-house
applications and internal and in-licensed databases, the development of custom
views and interfaces and the integration of internal data visualization
resources. We also provide SRS and DiscoveryCenter(TM) administrators or
programmers with the skills they need to work effectively with our data and
application integration technologies. In addition, we offer training and on and
off-site installation and configuration assistance.

     Recently we have initiated a global professional service organization
providing expert guidance in design, implementation and ongoing optimization of
new solutions based on our SRS and DiscoveryCenter(TM) technologies. The
organization currently employs over 30 consultants at our sites in Germany, the
United Kingdom and the United States. This organization will also create
customized solutions based on our new integration platform, which combines our
SRS and DiscoveryCenter(TM) technologies.

     The modular nature of this integration platform will enable us to provide
highly customized solutions to our life science customers that are individually
tailored to the specific needs and approaches of their respective R&D
organizations. These customized solutions are based on customizable platform
components. For example, we plan to offer a customizable biology solution that
supports the target identification and target validation steps of the drug
discovery process. At the core of this solution is our proprietary data and
application integration platform. Our biology solution uses the integration
platform to integrate the optimal bioinformatics tools or applications and
databases for the specific target identification and target validation approach
of each life science customer. These tools and applications may include our own
IT products, such as our leading bioSCOUT(R) analysis application or our
genomeSCOUT(TM) software, and customized components developed by us as well as
public domain and proprietary life science tools, applications and databases
developed by the customer, or licensed from third parties. Our biology solution
will also include our proprietary knowledge management and decision support
module as part of our integration platform. We also plan to offer a customizable
chemistry solution that can support the compound screening, lead optimization
and prediction of ADME (absorption, distribution, metabolism and elimination)
and toxicity characteristics of chemical compounds. Other customizable
solutions, such as a pharmacogenetics solution, a preclinical solution, and a
chemical genetics solution, are intended to support the specific scientific
approaches and activities of a particular customer's R&D organization.

     RESEARCH SOFTWARE APPLICATIONS

     Consistent with our strategy to focus on providing customized IT-driven
solutions for our customers, we have streamlined our portfolio of research
software applications. We do not intend to continue offering some of our
research software applications, such as arraySCOUT(TM), piSCOUT(TM), and
pathSCOUT(TM), on A stand-alone basis. In addition, we will not develop further
our SNP-SCOUT or GT/PT-SCOUT prototype products. Instead, we plan to incorporate
the technologies of these products into optional components of our new modular
integration platform. We can customize these additional components to address
the specific needs of each customer on an individual basis.

     We expect to continue to develop and market the following industry-leading
software tools and applications:

     bioSCOUT(R). The identification of new drug targets and development of new
drugs and other biologically active compounds requires the transformation of raw
molecular sequences and other data into concrete information relating to matters
such as biochemical properties, structures and functions. This information
requires the compilation of enormous amounts of data as well as the expert
knowledge required to evaluate such data. Our bioSCOUT(R) bioinformatics
software provides easy-to-use automated methods for the comprehensive and
simultaneous annotation of single or multiple gene and protein sequences,
eliminating the tedium of repetitive manual sequence analysis. bioSCOUT(R)
simplifies and automates all essential steps of this analysis, from data
compilation to the prediction of gene function, thereby accelerating the
prediction of function and the generation of biological knowledge. bioSCOUT(R)
accomplishes this by allowing the user to enter a sequence and then launch an
automated analysis of the sequence by clicking a single button. The software's
algorithms then perform a range of different search, comparison and
interpretation processes to produce a report summarizing the results of each of
these steps and providing hyperlinks to more detailed information. bioSCOUT(R)
is integrated with the SRS data integration system to provide a comprehensive
solution for simultaneous sequence annotation and data integration.

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     The accuracy of bioSCOUT's(R) gene function prediction tool depends on the
accuracy of the data and information contained in the databases used by
bioSCOUT(R) in the relevant sequence analysis. Because databases with curators,
like the SwissProt protein database, tend to be more accurate in assigning
functions to genes than are databases without curators, bioSCOUT(R) ranks
databases by their expected accuracy. If different functions are assigned by
different databases, the software automatically uses this ranking feature to
include the most accurate information in its summary report.

     genomeSCOUT(TM). genomeSCOUT(TM) is our genome comparison and analysis
software system, which performS computational comparisons of genomes.
genomeSCOUT(TM) enables scientists to identify the unique genes withiN an
organism and explore the similarities and differences between entire genomes.
genomeSCOUT(TM) comes with precomputed comparison databases to enable scientists
to quickly perform comparative genomics experiments entirely by computer. This
software was developed primarily for the analysis of microbial genomes, with
applications in the identification of microbial drug targets and for the
development of vaccines. The software is designed for use across a company's
entire R&D process. It is a valuable tool for handling complex and diverse
projects ranging from the optimization of microorganisms for industrial
production to the identification of pathogenic principles in microbes and
viruses.

     SRSeverEST(TM). ESTs (Expressed Sequence Tags) are partial sequences of
cDNAs generated from cellular mRNAs. This sequence information can be used for
transcription investigation, gene identification, gene regulation studies and in
diagnostics. Due to the limited sequence length and quality, EST clustering is
necessary for these scientific applications. Our SRSeverEST(TM) software employs
state of the art clusterinG software for a robust EST assembly. In addition,
SRSeverEST(TM) is capable of handling large data sets efficiently and can
therefore be integrated with SRS. SRSeverEST(TM) has a user-friendly interface
for making queries and determining the biological significance of ESTs.
Applications of SRSeverEST(TM) can be found in fields as diverse as drug target
identification and crop science. SRSeverEST(TM) has been developeD by us using
software that we have licensed from Electric Genetics and a software that we
have licensed from the University of Washington.

     iDEA(TM) predictive ADME absorption module. The absorption module of our
iDEA(TM) predictive ADME simulation system is a computational system designed to
predict the rate and extent of absorption of compounds in the human digestive
system of orally applied compounds. Absorption is calculated by simulating
physiology, using equations based upon known transport processes which account
for regional intestinal permeability, solubility, surface area, and fluid
movement. The absorption module can be used to help prioritize hits from high
throughput screens during the early phase of drug discovery and lead
optimization, permitting our customers to focus their valuable optimization
efforts and limited resources on a small number of compounds. Life sciences
companies can save time, money and experimental resources by predicting which
compounds are likely to have the best ADME characteristics, rather than relying
solely on animal testing or in vitro assays for this information. The Absorption
Module also allows our customers to explore how solubility and permeability
affect absorption. It can predict the fractional dose absorbed to the portal
vein, mass absorbed, soluble mass, insoluble mass, absorption rate and
intestinal drug concentration. Results can be displayed either graphically or in
tabular form for individual intestinal regions or the total for all regions. To
ensure the reliability of predictions, we provide the user with all the in vitro
protocols necessary to generate inputs to the absorption module.

     Third party software, such software licensed from Chemical Computing Group,
is embedded in our Absorption Module. We may sublicense this third party
software to our customers as part of the end user license for the Absorption
Model.

     iDEA(TM) predictive ADME metabolism module. The metabolism module of our
iDEA(TM) predictive ADME simulation system is designed to predict the extent of
first pass metabolism for a compound. The metabolism model is based upon a
physiological metabolism model that is built on a proprietary database of 64
clinically tested compounds. The model correlates a compound's predicted
absorption from the absorption module, protein binding, metabolic turnover
measured in hepatocytes and human clinical data to predict the bioavailability
of drugs in humans. To facilitate the kinetic analysis of the metabolic turnover
data, the metabolism module incorporates a data expert to automatically
calculate the Michaels-Menton constants Km and Vmax. To ensure the reliability
of these predictions, we provide the user with all the in vitro protocols
necessary to generate inputs to the metabolism module. We expect life sciences

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companies to utilize the metabolism module during middle or late stages of lead
optimization.

     LION Web-Based Training Bioinformatics. Our LION Web-Based Training
Bioinformatics software is a Internet based modular training platform that
allows large life sciences organizations to train their scientists in the use of
bioinformatics tools and databases for their research. LION WBT Bioinformatics
places expert knowledge and reference materials at the disposal of scientists
and technical assistants and teaches them how to use more than 40 bioinformatic
tools and 100 public and proprietary databases. This platform uses the Learning
Management System Sitos(R)LT of bit media e-learning solution Deutschland GmbH,
a subsidiary of Siemens AG, which we have licensed from bit media e-learning
solution under an exclusive licensing arrangement.

     LION HOSTED SERVICES

     Our software products and solutions have significant hardware and system
requirements. In order to enable customers to use our LSI(TM) products without
having to satisfy these hardware and system requirements, we offer an Internet
portal, which we call LION Hosted Services. This portal allows our customers to
remotely access our SRS integration system as well as select research software
applications, such as our bioSCOUT(R) software, on a subscription basis
utilizing only an Internet connection and web browser. Customers can access
public domain life science databases as well as integrate their own databases or
third party databases that they have licensed. Access to the protal is secure to
ensure the confidentiality of our customers' research and data. We expect that
this Internet based access to our LSI(TM) products and solutions will appeal in
particular to biotechnology and other life sciences companies that wish to use
IT-driven R&D solutions without having to license our software products or
solutions and acquiring the necessary hardware and systems to operate them. We
have outsourced the administration of this Internet portal to our collaboration
partner SimUtility, Inc. We plan to terminate our collaboration with SimUtility
and to outsource the administration of this portal to another third party
provider.

OUR INTERNAL DRUG DISCOVERY ACTIVITIES

     Through our internal IT-driven drug discovery activities, which we call
iD3(TM), we seek to use our expertise in informatics and drug discovery to
conduct our own internal drug discovery and diagnostics research. iD3(TM) serves
as our in-house showcase for an efficiently established discovery solution.
Through our iD3(TM) activities, we seek to demonstrate the benefits of using our
LSI(TM) solutions and products at different stages of the drug discovery
process. We seek to do this by generating know-how, up to and including
target/lead combinations that our customers can use in their drug discovery,
drug development and molecular diagnostics efforts. Our activities in this area
are focused on two areas: i-drug discovery, which focuses on the initial stages
of the drug discovery process, and i-diagnostics, which uses the techniques of
genetic epidemiology to validate targets in humans and assess susceptibility to
disease based on individuals' genetic make-up.

     As a result of our acquisition of Trega, we gained access to Trega's
Chem.Folio(R) libraries of chemical compounds. These information rich
combinatorial chemistry libraries possess novel, diverse chemical structures. We
currently have an inventory of more than 0.4 million such compounds. We have
used these compound libraries in our own i-drug discovery efforts, in particular
for our own nuclear receptor research. We have applied data analysis and
integration technology as well as decision support systems, including our
iDEA(TM) predictive ADME simulation system, to screen these combinatorial
chemistry libraries in silico to predict with some degree of accuracy the
pre-clinical and clinical success or failure of potential novel drug candidates
from these compounds. Our technology applies a set of computational chemistry
algorithms to select a limited set of compounds with high probability to bind to
the target of interest. Due to the tight integration of computational and
synthetic chemistry, our researchers can shorten the lead generation cycles of
iterative screening, data analysis and chemical synthesis and therefore pursue
more projects in parallel. We expect that this approach will allow our
scientists to rank the hits based on chemical structure, ADME and toxicology
characteristics, thus reducing the time for optimization by allowing them to
focus on the most promising drug candidates. In August 2001, we filed our first
application for patent protection on a lead compound series resulting from our
i-drug discovery approach. The filed compounds have a potent activity against a
specific nuclear receptor.

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     Consistent with our strategy to focus on our core competencies and to
respond to demands and opportunities in the life sciences industry, we have
decided to shift the resources of our LSI(TM) business to focus solely on
providing customized IT solutions to external life sciences companies. As a
result, we intend to collaborate with one or more life sciences companies on one
or more value-added research projects that would utilize our IT driven drug
discovery approach. We may contribute the resources, know-how and intellectual
property of our iD3(TM) activities to this collaboration. For more information
about our strategy, please see the description under "Strategy" above.

     We also plan to outsource the productuion of our arrayTAG(TM) and
arrayBASE(TM) products to a collaboration partner. arrayTAG(TM) is a collection
of cDNA clones of mice, rat and dog, which are generated by a novel technology
developed as a result of our iD3(TM) activities to specifically tailor cDNA
clones for chip technology. These newly designed clones facilitate the
production of high-quality microarrays. arrayTAG(TM) is directly linked to our
integrated annotation database arrayBASE(TM) to speed up access to in-depth
information about differentially expressed genes.

CUSTOMERS

     We currently have more than 100 for-profit customers throughout the global
life science and health care industries. Several of our customers have expanded
their existing agreements with us. We believe this demonstrates the value of our
solutions, products and services to our customers.

     Our most important customer relationship is with Bayer. For more
information on our arrangements with Bayer, see "Overview" under item 5 and
"Material Contracts" under item 10 of this annual report

     Our i-biology(TM) Arrangement with Bayer

     In June 1999, we entered into a range of agreements to implement a
customized solution for Bayer, which we call i-biology(TM). Through this
arrangement, we are developing and applying new IT systems for high-throughput
identification and validation of new drug targets, diagnostic markers and SNPs
from genomics sources as an integral part of Bayer's own gene discovery
activities. Our specific tasks are to:

     o   identify and annotate 500 potential drug target genes;

     o   annotate the function of 70 target candidates provided by Bayer;

     o   identify and validate genetic markers;

     o   establish and expand an intranet-based research information management
         framework for all of Bayer's research sites in North America, Europe
         and Japan; and

     o   set up an organizational infrastructure to implement a new model of
         gene-based drug discovery based on this IT infrastructure.

     We have established LION bioscience Research, Inc., a subsidiary in
Cambridge, Massachusetts, that acts as center of excellence to develop these IT
solutions for Bayer. As compensation, Bayer:

     o   has agreed to pay us approximately $32 million in upfront payments,
         operating expenses, license fees, and milestones over a period of five
         years; and

     o   has agreed to pay us royalties on sales of drugs acting against
         identified targets and diagnostic markers.

     In addition, Bayer acquired 200,000 of our company's ordinary shares for
aggregate consideration of (euro) 27.73 million. LION bioscience Research
operates pursuant to a five-year business plan and annual budgets and conducts
its research activities in accordance with annual research and development
plans. Bayer holds a veto right with respect to proposed members of LION
bioscience Research's board of directors and the issuance of additional shares

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by LION bioscience Research. The agreement also sets up a steering committee
consisting of two representatives of each party, which approves revisions to
LION bioscience Research's five-year business plan, its annual budget, the
implementation of its annual research and development plan and any other matters
concerning LION bioscience Research's business activities brought before the
committee by one of its members. The chairman of the steering committee, who is
appointed by Bayer, holds a tie-breaking vote.

     The parties have agreed that all rights and title to all information
technology developed by LION bioscience Research would belong to our company. At
the same time our company is required to grant Bayer a license to use such
information technology for Bayer's internal purposes only. Our company has
agreed not to market or distribute any of this information technology
commercially for a period of one year from the time it becomes workable and has
been tested and accepted by Bayer.

     The basic agreement grants Bayer the option, exercisable within six months
prior to the expiration of the basic agreement, to acquire all of the shares of
LION bioscience Research from our company for a price corresponding to the
equity paid in by our company, which was $1.0 million as of March 31, 2002. If
Bayer chooses to exercise this option, Bayer is required to change the name of
LION bioscience Research. Our company has a right of first refusal to exploit
commercially any new IT software developed by LION bioscience Research during a
period of two years after any acquisition of the shares by Bayer, if this
software competes with our activities and Bayer decides to exploit it
commercially.

     In June 2000, we expanded this arrangement with Bayer into the areas of
plant protection and animal health. In return for providing our services in
these areas as well, Bayer has agreed to pay us additional consideration in the
aggregate amount of $1.65 million.

     In February 2002, the parties amended the basic agreement to the effect
that Bayer agreed to pay us an additional fee of $2.310 million for the delivery
of 200 additional "public-domain" drug targets.

     We are well ahead of the timetable for performing the agreement. As of
March 31, 2002, Bayer has filed in excess of 350 provisional patent applications
as well as various PCT patent applications with the help of our services under
this arrangement.

     Our Development Agreement with Bayer

     In October 2000, we agreed with Bayer to expand our collaboration into the
areas of pharmacophore, informatics and cheminformatics. Under a separate
development agreement entered into by our company and Bayer, we have agreed to
provide Bayer with an integrated pharmacophore and informatics technology
platform to speed Bayer's identification of lead candidates for its drug and
agricultural chemical programs. Under this arrangement, we will deliver
existing, and will develop future, information technology and software, such as
pharmacophore and informatics tools, for Bayer to significantly enhance Bayer's
lead identification and optimization capabilities for pharmaceutical and
agrochemical discovery and development.

     Under the terms of this arrangement Bayer originally agreed to pay to us
total consideration in the amount of $16.25 million, payable in installments
over the course of this agreement, one-time fees and license fees in an
aggregate amount of $2 million and a management fee in the amount of $3.25
million, payable in installments.

     We entered into amendments to the development agreement with Bayer in
December 2001 and March 2002 by revising the original milestone requirements and
dates as well as the original payment schedule under the development agreement.
Under the development agreement as amended, we were required to achieve a new
milestone by April 1, 2002. Thereafter a new milestone is due every six months
except that the final milestone will be due on December, 1 2003. Bayer will pay
us the remainder of our management fee in the amount of $ 1.083 million in three
installments on July 30, 2002, January 30, 2003 and July 30, 2003. Bayer will
make future installment payments in the aggregate amount of $ 8.607 million
under the development agreement, as amended, subject to its acceptance of the
key milestone

                                     - 30 -

<PAGE>

deliverables. Bayer is entitled to withhold these milestone payments, and to
terminate the development agreement if we do not achieve the corresponding
deliverables as due under the development agreement as amended.

     We did not achieve certain deliverables due under the April 1, 2002
milestone. As a result, Bayer is entitled to withhold the corresponding
milestone payment in the amount of $2 million. Bayer has agreed in principle to
extend the due dates for these and other deliverables under the April 1, 2002
milestone based on a schedule of consecutive due dates, with delivery of a
critical set of deliverables due in August 2002 and the final deliverables under
the April 1, 2002 milestone now due in October 2002. If we do not make
satisfactory progress in achieving the deliverables when due under this
schedule, Bayer may terminate the development agreement as a result of our
failure to achieve the April 1, 2002 milestone. The failure to receive milestone
payments or the termination of our development agreement with Bayer would have a
material adverse effect on our business.

RESEARCH AND DEVELOPMENT

     IN-HOUSE ACTIVITIES

     We are actively engaged in R&D programs to develop new software products
and provide additional value-added solutions to customers in the broader life
sciences industries. Our R&D expenses totaled (euro) 53.947 million during in FY
2002, (euro) 26.872 million in FY 2001 and (euro) 12.394 million in FY 2000.

     ALLIANCES

     As part of our strategy, we have entered into a number of strategic
alliances and collaborations with other leading industry participants for the
creation and development of our solutions and for the application of our
solutions to new areas or life science R&D. The following are the more
significant of our current arrangements.

     Celera

     In October 2000, we entered into a strategic alliance with Celera Genomics
to develop and deliver new software tools and technologies for the Celera
Discovery System(TM) (CDS), Celera's Internet-based portal through which a
variety of customers access Celera's expanding databases and analysis tools. We
collaborate with Celera to create improved software tools to meet the dynamic
bioinformatics needs of life science researchers. The new tools should enable
scientists to more efficiently manage and analyze the large volumes of
biological and medical data generated and acquired by Celera. Based on this
agreement, we plan to further develop and customize our SRS system to better
organize and analyze the large volume of new biological data being created by
Celera and others. In addition, Celera offers our LSI(TM) products, such as
bioSCOUT(R), and genomeSCOUT(TM), through its CDS.

     IBM

     In November 2001, we entered into a strategic alliance with International
Business Machines Corporation (IBM). Under the terms of this strategic alliance,
IBM and LION expect to develop and market joint life sciences informatics
solutions based on our and IBM product offerings and joint enterprise-wide drug
discovery solutions and services, including enterprise-wide solutions and
services to specified customers, which will combine IBM and our technologies to
expedite the drug discovery process. The initial term of this strategic alliance
is two years.

     As part of this strategic alliance, we will collaborate with IBM to combine
our SRS integration system with IBM's DiscoveryLink(TM) data integration
software. LION and IBM Life Sciences will jointly provide integration services
for integrating our SRS system with IBM's DiscoveryLink(TM) to joint customers.
We have granted IBM a limited developer license to SRS that allows IBM to use
SRS to provide integration services for integrating SRS and DiscoveryLink(TM) to
joint integration customers and for integrating IBM middleware with SRS. IBM has
granted us a developer license to DiscoveryLink(TM). We will also port and make
specified LSI(TM) product offerings available on IBM hardware platforms and
integrate them with IBM middleware, including IBM's WebSphere(R) Internet
infrastructure software. IBM Life Sciences will provide us with assistance and
support to facilitate this porting.

     In addition, we will, with assistance from IBM Life Sciences, set up and
operate a demonstration showcase at our Heidelberg, Germany facility featuring
our and IBM product offerings to demonstrate to customers our and IBM product

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<PAGE>

offerings and their capabilities. As part of this collaboration, we also agreed
to acquired hardware from IBM.

     Paradigm Genetics

     In November 2000, we formalized and expanded our strategic alliance with
Paradigm Genetics, a leading agricultural biology genomics company, to extend
the applicability of our integrated bio-IT solutions into the agricultural
biology business. Under our five-year alliance, we have agreed with Paradigm to
co-develop and co-market a new plant and fungal metabolic profiling database as
well as new bioinformatics software and solutions. Our SRS data integration
system will provide the foundation for the integrated solutions. The database
will be populated with data from Paradigm Genetics' GeneFunction Factory(TM). We
will share in the revenues with Paradigm from the sale of the database,
bioinformatics tools and solutions that result from the collaboration. We own
400,000 shares of common stock issued by Paradigm. In November 2001, we expanded
our strategic alliance with Paradigm to co-develop and co-market MetaTrace(TM),
a metabolic profiling database. Under the terms of the expanded agreement,
biochemical data will be added to the MetaTrace(TM) database enabling
pharmaceutical research and discovery based on metabolic information.
MetaTrace(TM) is expected to consist of biochemical profiling data predominantly
from human cells, fluids and tissues. This data will be accessible through an
IT-interface.

     In June 2002, the U.S. National Institute of Standards and Technology
(NIST) announced that it had awarded a five-year, $11.7 million Advanced
Technology Program (ATP) grant to our U.S. subsidiary, LION bioscience Inc., and
to Paradigm Genetics. The federal funding is designed to support the development
of a Target Assessment Technologies Suite (TATS) by us and Paradigm. This suite
of technologies is intended to increase the number and success rate of validated
targets for product development in the pharmaceutical and other life sciences
industries. The project's main goal is to enable higher quality decision support
by ensuring that the data scientists work with are of a known quality and origin
and that their relationships are well understood. According to NIST, both
companies will participate equally in the grant. The grant is a matching
program, which means that we must match the funds we receive under this grant to
support our R&D efforts with corresponding R&D expenditures. Final award of this
grant to us is contingent upon us and Paradigm each entering into a cooperative
agreement with NIST on mutually acceptable terms. We have not yet entered into
this cooperative agreement. We have entered into a joint venture agreement with
Paradigm that governs our joint R&D efforts under this project and regulates
intellectual property ownership rights between us and Paradigm relating to the
use of our respective technologies and the results of this R&D effort, as well
as the commercialization of these results. This joint venture becomes effective
when we and Paradigm have each entered into the cooperative agreement with NIST.

     Tripos

     We have entered into a strategic alliance with Tripos Inc. As part of our
collaboration with Tripos, we entered into a project agreement with Tripos'
United Kingdom subsidiary, Tripos UK, in October 2000 to perform certain aspects
of our development agreement with Bayer to provide Bayer with an integrated
pharmacophore and informatics technology platform. For more information about
our pharamcophore informations arrangement with Bayer, see the section entitled
"Customers" under Item 4.

     Under this arrangement, we serve as the overall project manager and
coordinate the development of the novel informatics platform at Bayer while
Tripos UK assists us in performing our obligations under our pharmacophore and
informatics arrangement with Bayer. We develop and install the new combined
platform together with Tripos UK, linking the existing bioinformatics platform
at Bayer with cheminformatics. This platform will integrate Tripos'
MetaLayer(TM) enterprise-wide cheminformatics portal and application development
environment with our SRS system. As part of this arrangement, Tripos UK has
licensed to us its MetaLayer(TM) software and other software tools and routines
necessary for the performance of our cheminformatics arrangement with Bayer for
a license fee. We will share the total payments from Bayer with Tripos UK based
upon Tripos UK's relative contribution to the development of the software
required by Bayer less the management fee paid by Bayer to us. We will retain
joint rights with Tripos UK for the immediate resale of software systems and
solutions developed jointly as part of this project. Software derived from the
intellectual property of either party will be owned by that party. Software
developed jointly by us and Tripos UK will be owned jointly based upon a pro
rata allocation of ownership rights in accordance with the relative contribution
of each party.

                                     - 32 -

<PAGE>

     In January 2002 we amended our project agreement with Tripos UK to reflect
the new milestone and payment schedule under our development agreement with
Bayer as amended. Under the project agreement as amended, Tripos UK made
commitments with respect to the minimum number of Tripos UK employees allocated
to this project.

     In order to perform our obligations under the development agreement as
amended with Bayer, including achieving the deliverables and milestones
thereunder, such as certain of the deliverables under the April 1, 2002
milestone, we require the cooperation of Tripos UK in accordance with the terms
of our project agreement as amended with Tripos UK

     GeneProt

     In March 2002, we entered into a marketing collaboration agreement with
GeneProt Inc., an industrial-scale proteomics company that identifies,
characterizes, and synthesizes select human proteins for use by pharmaceutical
companies and other partners in their drug discovery and development activities.
Pursuant to this collaboration, we will jointly market an integrated offering
with GeneProt that combines our respective core competencies to accelerate the
drug discovery and development process. GeneProt has licensed our SRS and
DiscoveryCenter(TM) integration systems as well as a customized integration
platform consisting of SRS and DiscoveryCenter(TM) technology and selected
research applications from us and has purchased related professional services
from us to implement this solution. We will receive up to $4.95 million from
GeneProt in license and professional service fees. Payment of a portion of these
fees is dependent in part on the success of our marketing collaboration with
GeneProt in marketing our solutions and integration platform. GeneProt will use
this solution and these services in collaboration with us to enhance its
internal information management platform. GeneProt will make its own data and
offering, together with our information integration solution available to joint
customers at our discretion, allowing them to benefit from this unique
combination of content and information management for their own research and
development process. We will also co-market, together with GeneProt, our joint
solutions in the proteomics area enabling our customers to speed up their
discovery process by integrating their data across different disciplines and
analyzing them using industry-leading systems.

     We have made a strategic equity investment in GeneProt valued at
approximately $7.5 million. As a result, we hold 681,818 shares of Series B
Preferred Stock of GeneProt.

PRODUCTION

     Our software production operations consist of assembling, packaging and
shipping our software products and documentation needed to fulfill orders.
CD-ROM duplication, printing of documentation and product assembly are conducted
in-house. We currently produce our clone collections in-house using the
laboratory facilities of our iD3(TM) activities. However, we intend to outsource
production of our arrayBASE(TM) clone collections to a collaboration partner.

SALES, MARKETING AND DISTRIBUTION

     We use a variety of channels to market and distribute our solutions,
products and services.

     We market and sell our solutions, products and services through our direct
sales force in all markets other than Japan, where marketing and distribution
are handled by distributors. As of March 31, 2002, our sales and marketing
organization consisted of approximately 90 full-time equivalent employees. Our
sales and marketing organization maintains offices in the United States, the
United Kingdom, and Germany and representations in France and Canada. A
significant number of our sales and marketing staff have scientific degrees,
such as a doctorate or other advanced academic degrees in relevant subjects,
predominantly in the molecular biology or chemistry area.

     As part of our global marketing strategy to establish SRS as the standard
data integration platform in the broader life sciences industry, and pursuant to
the terms of our exclusive SRS licensing arrangement with the EMBL, we have made
SRS available to academic institutions free of charge for their internal
research purposes. More than 100 academic users around the world take advantage
of SRS, including the Institute Pasteur, the German Cancer Research Institute,
the Sanger Centre, and the European Molecular Biology Laboratory. As part of
this marketing strategy and to demonstrate the powerful search capabilities of
SRS, we have authorized select academic licensees to make basic versions of SRS
available on the Internet to enable users to conduct non-secure online queries
of third party databases free of charge.

                                     - 33 -

<PAGE>

     We have also entered into exclusive distribution partnerships for our
arrayTAG(TM) and arrayBASE(TM) products for the German-speaking region and
Japan. As part of our strategy to focus on our core competencies, we expect to
distribute our arrayTAG(TM) and arrayBase(TM) products primarily through these
and other distribution arrangements.

     We also exhibit our products and services at various scientific conferences
and trade exhibitions. Our scientists publish and present results of original
research at these and other conferences throughout the world.

COMPETITION

     Our principal competitors include third-party commercial software
developers, bioinformatics and genomics companies, academic institutions and
in-house software development teams at life science companies. Our competitors
with respect to our SRS and DiscoveryCenter(TM) integration systems and our
research software applications include Biomax, Informax, and Pharmacopeia's
software subsidiary, Accelrys, Tripos, MDL, IBM, Simulations Plus, and Camitro.

     In addition to direct commercial competitors, the most important other
source of competition comes from development teams within life science
companies. In some cases, life science companies maintain software development
teams that rival, or surpass in size, those at commercial software, and in
particular pharmaceutical, companies. In many cases, these in-house groups pose
the most daunting competition to us. Many of these companies and institutions,
either alone or together with their collaborative partners, have substantially
greater financial resources and larger research and development staffs than we
do. In addition, many of these competitors, either alone or together with their
collaborative partners, have significantly greater experience than we do in
developing and marketing products and solutions. Accordingly, our competitors
may succeed in obtaining patent protection or commercializing products before
us. Developments by others may render our product candidates or technologies
obsolete or noncompetitive.

INTELLECTUAL PROPERTY

     Our business and competitive position is dependent, in part, upon our
ability to protect our proprietary technologies, processes, databases and
information systems. Additionally, we may seek protection for inventions that do
not belong to our core business when they promise to be of commercial or
strategic interest. We protect our intellectual property primarily through a
combination of patent, trade secret and copyright law as well as non-disclosure,
license and other contractual arrangements.

     PATENTS AND COPYRIGHTS

     Our intellectual property strategy focuses on applying for patent
protection covering our core markets in the United States, Europe and, on a
case-by-case basis, Japan. We generally seek the broadest possible patent
protection for our inventions related to our IT platform. In addition, we seek
to obtain protection for targets identified through our iD3(TM) activities,
primarily human targets, for diagnostic substances and/or procedures. As of June
5, 2002, we hold 103 granted patents and 220 pending patent applications. For
example, we currently pursue patent protection for our SRS, DiscoveryCenter(TM)
and iDEA(TM) predictive ADME simulation technologies as well as for novel
targets and lead compound series with a potent activity against one or more
specific nuclear receptors.

     The granting of patents on genomics and software is uncertain worldwide and
is currently under review and revision in many countries. We believe that, as a
result of recent decisions and rulings in this field by national patent offices
and governments, the uncertainty surrounding the patentability of such
inventions has been substantially removed. However, we cannot ensure that any
changes to, or interpretations of, the patent laws will not adversely affect our
intellectual property.

                                     - 34 -

<PAGE>

     LICENSES

     We grant software licenses pertaining to our LSI(TM) solutions and products
to our customers. For a description of our licensing policies, see "Overview -
Sales and Customers" and "Critical Accounting Policies - Revenue Recognition"
under Item 5 below. We do not charge license fees to academic licensees of our
SRS software.

     Our end-user licenses typically entitle the licensee to use our licensed
software product for their internal research purposes only. However, we have
also granted select customers the right to use our SRS technology for their
Internet portals. For example, in May 2001, we granted a license for our data
integration system SRS to Affymetrix, a leading manufacturer of DNA microarray,
to build an Internet portal for its customers as well as for internal use. This
web portal will supply detailed information relating to Affymetrix' GeneChip(R)
probe arrays and related products. Affymetrix's portal is expected to provide
access to a wide range of biological data including genomes, genes, transcripts,
proteins, and literature annotation. In March 2002, we entered into an agreement
with Incyte Genomics, a leading provider of genomics information and related
products, to develop and license a customized solution based on our SRS
technology that gives Incyte customers a user-friendly web-based interface to
access and analyze the wealth of genomic and proteomic data and technology that
Incyte provides through its information product offerings. In FY 2002, Derwent
Information, a leading provider of life sciences information, entered into an
agreement with us to develop, license and host a solution consisting of an
Internet-based portal that allows Derwent customers to access and query Derwent
`s GENESEQ and GENESEQ FASTAlert databases based on our SRS technology and our
LION Hosted Services portal hosting capabilities.
 SRS also serves as the web portal platform for the Celera Discovery System(TM),
established in March 2000, of our collaboration partner Celera, which allows for
rapid access to human genome data. As part of our marketing strategy, select
academic licensees are also entitled to make SRS available on the Internet to
enable users to conduct non-secure online queries of third party databases free
of charge. Additionally, we may license intellectual property rights to third
parties for strategic or commercial reasons, including in particular in
connection with our collaborations and our customized solutions.

     We have licensed software and other important technology from third
parties, including in particular all earlier versions of SRS from EMBL pursuant
to a worldwide exclusive license as amended, as well as EMBL's Gene Quiz
software pursuant to a worldwide non-exclusive license. EMBL's Gene Quiz
software is a predecessor of our bioSCOUT(R) software. For a discussion of our
exclusive SRS license as amended from EMBL, see "Item 10: Additional Information
- Material Contracts - Exclusive License Arrangement with EMBL Concerning SRS".
We have also licensed software in the field of expression analysis from the
German Cancer Research Center on a non-exclusive basis. We have also obtained
licenses for software from Chemical Computing which is embedded in the
absorption module of our iDEA(TM) predictive ADME simulation system and is
necessary to use the absorption module. Under this licensing arrangement, we are
entitled to sublicense the use of this software to end users of the absorption
module. In addition, we have licensed software and databases that are embedded
in, or necessary to use, our bioSCOUT(R) software. We are either entitled to
sublicense this software or these databases to end-users, or end-users must
obtain a license for these databases or software directly from the third-party
licensor.

     In July 2001, we have licensed a wide range of chemical informatics
applications and databases from MDL Information Systems, Inc, including MDL's
ISIS, Assay Explorer, Apex, Afferent and CrossFire Beilstein software. We have
obtained the right from MDL to develop and commercialize software applications
that can interface with these software products of MDL, which allows us to
enable our customers to integrate our rsearch software applications and
databases with the cheminformatics products of MDL on the basis of our
integration platform.

GOVERNMENTAL REGULATION

     Our LSI(TM) solutions, products, and services are not currently regulated
by governmental agencies, such as the Food and Drug Administration in the United
States (FDA) or similar agencies in the jurisdictions in which we do business.
Nonetheless, the products of many of the life science research companies to
which we market these products are regulated by the FDA and similar agencies.

     Some of our iD3 research and development activities in Heidelberg are
subject to regulation, in particular under several European Union directives and
regulations on genetic engineering. They generally require notification of the
genetic research to, or approval thereof by, governmental authorities. The
specific regulations applicable to a specific genetic research project are
subject to the project's security classification by the competent authorities.
The classification depends on the possible danger to human health and

                                     - 35 -

<PAGE>

environment and the necessary security measures relating to laboratories and
working conditions. Our current research projects are considered as bearing no
or only low risks and have accordingly been approved by the governmental
authorities. According to the classification, we have to comply with security
standards including self-contained laboratories, certain working procedures,
record keeping and health protection programs for our employees. Under European
Union regulations, products containing genetically engineered organisms
generally require pre-market approval by the relevant authorities.

     Our iD3 research and development activities in San Diego, California, are
subject to regulation under the Toxic Substances Control Act, the Environmental
Protection Act, the Clean Air Act, the Resource Conservation and Recovery Act,
Occupational Safety and Health Act, regulations promulgated by the United States
Department of Agriculture, and other federal, state and local laws and
regulations. For example, we use various substances in its drug discovery
research in San Diego that qualify as controlled substances under the Toxic
Substances Control Act. We may posses and use these controlled substances only
with a permit issued by the Drug Enforcement Agency (DEA). The possession and
use of these substances is subject to stringent regulations.

SEASONALITY

     As is the case with other companies distributing software products, there
may be a seasonal variability to our business relating to the receipt of orders
for our LSI(TM) products and solutions. Orders may increase in the fourth
quarter of each calendar year, as business customers attempt to make full use of
their IT purchase budgets before year end, and to a somewhat lesser degree in
the first quarter of each calendar year, as business customer attempt to make
first use of their IT purchase budgets. However, because of the historical
growth in overall sales and the impact of revenue from other sources, in
particular revenue from milestone payments and professional service fees, this
seasonal variability in orders for our LSI(TM) products and solutions has not
yet resulted in any significant variability in revenue.

FACILITIES

     We do not own any real estate, but lease all of our facilities. Our
principal administrative, sales and marketing facilities are located in leased
premises in Heidelberg, Germany. Our iD3(TM) activities in Germany are based in
another leased facility in Heidelberg, with some 2,000 square meters of lab
space. We also have a facility in Cambridge, England, which is the center for
developing our SRS system and related products. In addition, we maintain an
office in leased premises in Cambridge, Massachusetts, which is principally
responsible for the conduct of our i-biology(TM) collaboration with Bayer and
from which we coordinate our U.S. sales and marketing activities. We also lease
a facility in San Diego, California, of 71,510 square feet (approximately 55,000
square feet of laboratory and office space). We have subleased approximately 23%
of this facility until 2005. In accordance with the sublease agreement, we
receive monthly rent payments from the subtenant totaling approximately 23% of
our required annual rent payments. In addition, we have leased office space in
Cleveland and Columbus, Ohio.

     We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed. We are currently
assessing our future real estate needs in San Diego, Columbus and Heidelberg. We
may sublease or assign additional portions or all of our San Diego facility and
the lab facility in Heidelberg, including to one or more possible collaborators
in connection with one or more collaborations covering our iD3(TM)activities in
San Diego and Heidelberg. We may also construct, purchase or lease a facility in
Heidelberg that would house all of our operations in Heidelberg.

SUBSIDIARIES

     We currently have four wholly-owned subsidiaries with active business
operations. The following table shows information relating to each of these
subsidiaries:

                                     - 36 -

<PAGE>

<TABLE>
                      GROUP STRUCTURE AS OF MARCH 31, 2002

<CAPTION>
         CORPORATE NAME                   COUNTRY OF INCORPORATION                    FIELD OF ACTIVITY
         --------------                   ------------------------                     -----------------

     <S>                                      <C>                    <C>
     LION bioscience Ltd.(1)                         Wales                SRS and DiscoveryCenter(TM)integration
                                                                     platform development, solutions development

     LION bioscience Inc.(2)                  United States                   Marketing and distribution, global
                                                 (Delaware)                                professional services

     LION bioscience Research Inc.(3)         United States                  Center of excellence for performing
                                                 (Delaware)                         Bayer i-biology(TM)agreement

     NetGenics, Inc.(4)                       United States                 DiscoveryCenter software and SRS and
                                                 (Delaware)              DiscoveryCenter(TM)integration platform
                                                                          development, solutions development and
                                                                                    global professional services

(1) Wholly-owned by LION bioscience AG.
(2) Wholly-owned by LION bioscience AG.  In April 2002, we merged former Trega Bioscience Inc. into
    LION bioscience Inc.
(3) LION bioscience Research Inc. is wholly-owned by LION bioscience Inc. Bayer holds an option to acquire
    all of the shares of LION bioscience Research Inc. See the section entitled "--Customers" above.
(4) Wholly-owned by LION bioscience Inc.  We expect to merge NetGenics into LION bioscience Inc. in the near
    future.

</TABLE>

                           GLOSSARY OF INDUSTRY TERMS

Bioinformatics                      The use of computer software to assist in
                                    the acquisition and analysis of information
                                    relating to genes, proteins, biological
                                    pathways and drugs.

Biological pathways                 Carefully regulated, complex networks of
                                    interactions by which the proteins expressed
                                    by genes carry out the biological function
                                    of cells. Biological pathways are generally
                                    classified as metabolic pathways, which are
                                    responsible for cellular metabolism and
                                    signal transduction pathways, which use
                                    secreted proteins, cell-surface receptor
                                    proteins and intracellular proteins to allow
                                    cells to communicate, coordinate and
                                    regulate their activities. The activities of
                                    biological pathways have many levels of
                                    control and redundancy and thus can be
                                    affected by many genes within a pathway. In
                                    addition to the effects of inherited genetic
                                    differences within the genome, a biological
                                    pathway is also affected by the expression
                                    levels of its key genes and proteins.

Chem(ical) informatics              The use of computer software to assist in
                                    the acquisition, analysis and management of
                                    data and information relating to chemical
                                    compounds and their properties.

Combinatorial chemistry             The typical drug is a small organic molecule
                                    derived from natural sources or synthesized
                                    using organic chemistry methods. The
                                    high-volume testing required for
                                    high-throughput screening involves the
                                    testing of a huge variety of chemical
                                    structures. Combinatorial chemistry uses
                                    organic chemistry methods and automated
                                    techniques and equipment to synthesize
                                    thousands of related chemical compounds for
                                    use in the screening process.

Expression analysis                 Each cell of an organism uses, or expresses,
                                    only those genes necessary for its specific
                                    role. When a gene is expressed, it produces
                                    a derivative copy of its sequence of bases
                                    called messenger ribonucleic acid, or mRNA.
                                    Messenger RNA is used as a template to
                                    direct the production of a protein. The
                                    order of the bases in DNA determines the
                                    order of amino acids in a protein. Different
                                    types of cells thus express different sets

                                     - 37 -

<PAGE>

                                    of genes. The types and amount of proteins
                                    expressed depends on the so-called
                                    expression levels of the cell's genes. The
                                    study of different gene expression levels
                                    and of the correlation between different
                                    expression levels and cellular behavior is
                                    known as expression analysis. The most
                                    common technique for expression analysis
                                    involves the use of DNA microarrays, which
                                    are small chip-like solid supports in which
                                    each gene is represented by a single dot.
                                    DNA microarrays enable the parallel study of
                                    all genes in a particular cell.

Expression profiling                The analysis of a gene's expression in
                                    parallel with other genes in a cell is also
                                    known as expression profiling.

Functional genomics                 The field of functional genomics seeks to
                                    identify and characterize the various gene
                                    and protein expression patterns that
                                    modulate cellular processes, particularly
                                    the manner in which genes impact the disease
                                    process. It is the study of the function of
                                    genes, including how the expression of a
                                    particular gene is regulated, how the
                                    protein that the gene encodes functions, and
                                    how a gene affects normal physiology and
                                    disease. Expression analysis and proteomics
                                    form part of functional genomics and have a
                                    descriptive role as a preliminary step in
                                    functional analysis.

Gene                                The fundamental unit of heredity. A gene is
                                    a specific sequence of bases (usually
                                    hundreds or thousands of bases) located in a
                                    specific location on a particular
                                    chromosome. Each gene contains a set of
                                    instructions to produce a particular
                                    protein. A gene is "transcribed" to produce
                                    multiple molecules of mRNA, which are then
                                    "translated" to produce multiple copies of
                                    this protein.

Gene expression                     The process used by a cell to determine
                                    which proteins to produce. Initially, the
                                    genetic information in DNA is copied, or
                                    "transcribed," to a complementary molecule
                                    called mRNA. The information in the mRNA is
                                    then "translated" to produce a protein with
                                    a precise sequence of amino acid building
                                    blocks that determine its structure and
                                    function. Although all cells contain the
                                    full set of DNA and thus each gene,
                                    different cells express different sets of
                                    genes depending on cell type and
                                    environmental conditions. Thus, each cell
                                    normally expresses only those genes it needs
                                    for the specific functions it performs. The
                                    level of mRNA expressed for each gene
                                    dictates its activity and the number of
                                    protein molecules produced. The "over" or
                                    "under" expression of genes can lead to
                                    various diseases.

Genetic epidemiology                Genetic epidemiology makes use of a
                                    collection of single nucleotide
                                    polymorphisms and other genetic variations
                                    in large population samples to correlate
                                    variation in the genetic constitution of an
                                    individual (the "genotype") to differences
                                    in the individual's observable character
                                    (the "phenotype") in relation to disease
                                    susceptibility and drug response. Genetic
                                    epidemiology analyzes a gene's role in a
                                    particular disease or its suitability as a
                                    drug target. Genetic epidemiology thereby
                                    supplements studies of animal models, cell
                                    cultures and biochemical reactions with
                                    information derived from the genes of both
                                    diseased and healthy humans.

Genomics                            The study of the genome and all related
                                    genetic information relating to humans or
                                    other species, particularly its relationship
                                    to biological processes such as disease

High-throughput screening           A drug target is usually a protein the
                                    modification of which can beneficially
                                    influence the progression or symptoms of a
                                    disease. Drug targets are identified and

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                                    validated through the combined application
                                    of the techniques of expression analysis,
                                    proteomics, functional genomics and genetic
                                    epidemiology, as well as through animal
                                    studies. Once a drug target is identified
                                    and validated, a functional assay is
                                    developed. This assay attempts to indicate
                                    how the target's activity is influenced by
                                    the administration of drug-like chemical
                                    compounds. To select the best drug candidate
                                    from among hundreds of thousands of
                                    candidate molecules, the drug target is
                                    tested against each candidate molecule using
                                    automated methods. This process is known as
                                    high-throughput screening.

Pharmacology                        Pharmacology is the study of the effects of
                                    drugs on the living processes of all cells.
                                    Clinical pharmacology is the study of drugs
                                    that are useful in the prevention,
                                    diagnosis, and treatment of human disease.

Proteins                            Proteins are large molecules composed of
                                    organic molecules called amino acids, which
                                    control all biological processes. Proteins
                                    are required for the structure, function and
                                    regulation of an organism's cells, tissues
                                    and organs. Each protein has a unique
                                    biological function.

Proteomics                          Proteomics means the "set of proteins
                                    encoded by the genome" or the protein
                                    complement of an organism. The aim of
                                    proteomics is to produce a complete
                                    description of a cell/tissue/organism in
                                    terms of the proteins produced. In contrast
                                    to a static genome, the proteome is dynamic
                                    because the expressed protein pattern
                                    changes with time and environment,
                                    responding to developmental signals,
                                    disease, nutrients available, and other
                                    factors.

Single nucleotide polymorphisms     The sequence of bases of the DNA of
                                    individual members of a species is
                                    substantially, but not completely,
                                    identical. Individual differences between
                                    humans, whether in terms of outward
                                    appearance or susceptibility to disease,
                                    derive from variations in approximately 0.1%
                                    of their DNA sequences. Variations in a
                                    single base pair position within genomic DNA
                                    between individuals are known as single
                                    nucleotide polymorphisms, or SNPs. Some SNPs
                                    have a direct impact on gene function;
                                    others serve as markers for other, as yet
                                    unidentified, SNPs that themselves influence
                                    gene function.


ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     This discussion includes forward-looking statements based on assumptions
about our future business. Our actual results could differ materially from those
contained in these forward-looking statements. Special terms used in our
industry are defined in a glossary that is included in "Item 4: Information on
the Company".

     You should read the following discussion of our financial condition and
results of operations in conjunction with our audited consolidated financial
statements and the related notes and the other financial information included
elsewhere in this annual report.

     Our financial year ends on March 31 of each year. Unless the context
requires otherwise, references to any financial year or to "FY" refer to the
year ended March 31 of the calendar year specified.

OVERVIEW

     GENERAL

     Our company was incorporated on March 4, 1997. We have incurred losses in
each year since our company's inception, principally as a result of our research
and development (R&D) expenses and, to a lesser extent, our selling, general and
administrative (SG&A) expenses in support of operations. On March 31, 2002, we
had accumulated consolidated net losses of (euro) 97,273 million. We may

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continue incurring additional losses over the next years as we expand our Life
Science Informatics, or LSI(TM), business. We expect that our losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial,
especially because the length of time between our initial contact with a
customer and conclusion of a signed agreement can be lengthy as our products,
solutions and services are complex and cut across many aspects of a potential
customer's business. In addition, milestone payments under our customer
agreements can fluctuate between quarters.

     We have reclassified various amounts in our balance sheet, statements of
operations and statements of cash flows for the financial years prior to FY 2002
to enable comparisons to the information set forth in our financial statements
for FY 2002.

     We have organized our business activities around our Life Science
Informatics, or LSI(TM) business. Our LSI(TM) business is primarily responsible
for the development of our IT solutions and products as well as for providing
professional services to customers related to these solutions and products. In
the past, we have also focused on sequencing and genomics research projects on a
fee-for-service basis, in our research laboratory. However, we ceased these
fee-for-service projects in FY 2001. Instead, we shifted the resources from
these projects to pursue our own internal IT-driven drug discovery and
diagnostics activities which we call iD3(TM). iD3(TM) now primarily focuses on
its own IT driven research projects. Our iD3(TM) approach applies IT solutions,
including those developed by our LSI(TM) business, as well the professional
services of our LSI(TM) business to our own drug discovery efforts. This
approach assists our LSI(TM) business in the development of our IT solutions and
products and related professional services. As a result, our IT product or
solution development activities and professional services projects may be
staffed by LSI(TM) and iD3(TM) employees under the leadership of our LSI(TM)
business. In light of this close interaction and collaboration, we did not
allocate revenues and operating losses among LSI(TM) and iD3(TM) in FY 2002, as
we effectively managed our business as one integrated operation.

     As part of our strategy to focus on our core competencies, we plan to seek
a collaborator or investor for our internal drug discovery activities, which we
call iD3(TM), starting in FY 2003. For a discussion of our strategy, see "Item
4: Information on Our Company - Our Strategy".

     We have a strong commitment to our R&D activities and expect our R&D
expenses, in particular R&D expenses as part of our LSI(TM) activities, to
continue to comprise a substantial part of our total expenses. As is the case
with many other companies in the life sciences industry, we reported R&D
expenses in each of our fiscal years have been reduced by the recognition of
various subsidies and grants from third parties, including the German
government. We received grants and subsidies from third parties in a total
amount of (euro) 1.317 million in FY 2002, (euro) 0.731 million in FY 2001 and
(euro) 0.446 million in FY 2000. For the next few years, the aggregate aMOUNT OF
third party subsidies and grants received may significantly exceed the level of
those recorded in FY 2002 as a result of the award to our subsidiary LION
bioscience Inc. of a grant from the U.S. National Institute of Standards and
Technology (NIST) in June 2002. For a description of this award, see "Research
and Development - Alliances - Paradigm Genetics".

     We have granted stock options to our management board and our employees
during FY 2001 and FY 2002 pursuant to our 2001 Stock Option Plan and our 2002
Stock Option Plan. For a discussion of these stock option plans and the options
we have granted, please see "Item 6. Directors, Senior Management and Employees
- Share Ownership". We allocated the expenses of these outstanding stock
options, which amounted to (euro) 4.2 million in FY 2002, and (EURO) 1.7 million
in FY 2001 among our R&D and SG&A expenses as non-cash compensation.

     In FY 2002, we initiated measures to further reduce our expenses. As part
of these measures, we did not renew employment agreements and issued employment
termination notices to 45 employees of our iD3(TM) activities at our facilities
in Heidelberg, Germany, in December 2001. In addition, in February 2002, we
issued employment termination notices to 38 employees at our facilities in
Heidelberg and 3 employees at our facilities in Cambridge, UK. These reductions
in our workforce were in addition to the termination of 23 employees at our
facilities in the United States in February 2002, as discussed further below.
These terminations became effective between March and June, 2002. We have
recorded a total of (euro) 0.8 million in FY 2002 as one-time expenses in
connection with these workforce reductions, all of which were paid prior to
March 31, 2002. As a result of this workforce reduction, we have also recorded a

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one-time expense of (euro) 1.1 million in FY 2002 as an impairment charge for
equipment and facilities that are no longer in use as a result of this workforce
reduction.

     SALES AND CUSTOMERS

     Our revenues consist of fees from our licensing activities and from our R&D
activities. Our licensing revenue derives from licensing fees for our LSI(TM)
products and solutions, fees for support and maintenance provided to customers
related to these products and solutions, and fees, including milestone payments
for professional services related to these products and solutions. Revenues
generated from R&D activities comprise fees, including milestone payments, from
our R&D collaborations and other R&D activities, such as our i-biology
arrangement and our development agreement with Bayer, our collaboration with
Schering to develop a comprehensive corporate gene database and gene data
integration solution for Schering, the sale of our arrayBase(TM) clone
collections, and the sale of compounds from our Chem.Folio(R) compound library.
For a description of our revenue recognition policies, please see the discussion
under "Critical Accounting Policies - Revenue Recognition" below.

     For our software products, professional services and our R&D collaboration
arrangements, the length of time between our initial contact with a customer and
conclusion of a signed agreement can be lengthy because our products, services
and solutions are complex and cut across many aspects of a potential customer's
business. Accordingly, a substantial period of time may elapse between the time
we make initial contact with that customer and the time we generate revenues
from such customer. Because many of the agreements that we conclude are
individually negotiated with the customer, the length of time before we
recognize revenues under any contract, and the terms of each contract vary
substantially from customer to customer.

     Our most important customer is Bayer AG, revenues from which accounted for
46% of our revenues in FY 2002, 60% of our revenues in FY 2001, and 56% of our
revenues in FY 2000. We receive revenues from Bayer for a number of different
projects. For more information on these projects, see the section entitled
"Customers" under Item 4 of this annual report. These projects include:

     o   Our landmark i-biology(TM) arrangement of June 1999, under which we
         recorded revenues of (euro) 11.0 milliON IN FY 2002, including a
         one-time payment of (euro) 2.62 million ($2.310 million) for the
         delivery of 200 additional "public-domain" drug targets pursuant to an
         amendment to our i-biology arrangement with Bayer, (euro) 7.76 million
         in FY 2001 and (euro) 3.05 million in FY 2000. Through this
         arrangement, we are developing and applying new IT systems for the
         high-throughput identification and validation of new drug targets,
         diagnostic markers and variations in single base pair positions between
         individuals from genomics sources;

     o   Our development agreement of October 2000. Under this agreement, we
         agreed to deliver existing and to develop future information technology
         and software, such as pharmacophore and informatics tools, for Bayer to
         significantly enhance Bayer's lead identification and optimization
         capabilities for pharmaceutical and agrochemical discovery and
         development. We recorded revenue in the amount of (euro) 7.58 million
         under this agreement during FY 2002 and (euro) 5.39 million during FY
         2001;

     o   The "Ustilago" project, under which we perform research into the genome
         of the maize fungus Ustilago maydis on behalf of Bayer. We recorded
         revenues from this project of (euro) 0.51 million in FY 2001 and (eURO)
         1.46 million in FY 2000; and

     o   Several licenses under which Bayer makes use of our Life Science
         Informatics software. We recorded revenues of (euro) 1.28 million in
         respect of these licenses in FY 2002, (euro) 1.28 million in FY 2001
         and (euro) 1.06 million in FY 2000.

     INVESTMENTS

     In early February 2002, we sold all of our shareholdings in Tripos, Inc. We
had purchased 409,091 shares of convertible preferred stock from Tripos in early
February 2000 for a total purchase price of $9 million. In late January 2002, we
converted these shares into 818,182 shares of Tripos common stock. At that time,
Tripos paid us an accrued dividend on the shares of convertible preferred stock

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of more than $0.890 million ((euro) 0.982 million). In early February 2002, we
sold all of our shares of Tripos common stock. The net proceeds to us from this
sale after deducting the sales commission and related expenses were
approximately $21.6 million. We thus recorded income of approximately $13.5
million ((euro) 14.536 million) from this transaction.

     During FY 2002, we reviewed our various shareholdings in other companies
and our investments in available-for-sale securities. For a description of our
accounting policies with respect to our investments, please see "Critical
Accounting Policies - Marketable Securities and Other Financial Assets" below.
Based on our review, we determined to adjust the value of these shareholdings
and investments and to record the following losses in FY 2002:

     o   We recorded a loss in the amount of (euro) 8.830 million from our
         shareholding in Munich based Gesellschaft fur Medizinische
         Datenverarbeitung mbH (GMD). As part of our collaboration with GMD, we
         acquired 46,600 of the shares issued by GMD in February 2001,
         representing approximately 16% of all outstanding shares of GMD on a
         fully diluted basis. Based on GMD's performance, we determined the fair
         value to be zero and to completely write off this investment.

     o   We recorded a loss in the amount of (euro) 1.726 million from our
         shareholding in SimUtility, Inc. As part of our collaboration with
         SimUtility, a Westford, Massachusetts based company, we had acquired an
         equity interest in SimUtility of less than 20% in May 2001 for a total
         purchase price of $1.5 million ((euro) 1.726 million). Based on
         SimUtility's performance and our decision not to continue our
         collaboration with SimUtility, we determined the fair value to be zero
         and to completely write off this investment.

     o   We lowered the value of our investments in available-for-sale
         securities. In November 2000, we invested approximately (euro) 30.4
         million in diversified funds that are listed on the Frankfurt Stock
         Exchange consisting of available-for-sale securities. Based on the
         performance of these funds, we reduced the value of our investments in
         these funds by (euro) 7.218 million, as measured by the closing price
         per fund unit, which we recorded as a realized loss as we determined
         that this decline was other than temporary.

     o   We reduced the value of our shareholding in Paradigm Genetics Inc. In
         January 2000, we had acquired 400,000 shares of Series C Preferred
         Stock of Paradigm Genetics at a purchase price of $ 2 million. These
         shares were converted into 400,000 shares of common stock of Paradigm
         Genetics in May 2000. Based upon the trading price for Paradigm
         Genetics' shares on the Nasdaq National Market at the end of FY 2002,
         we lowered the value of our shareholding in Paradigm Genetics by (euro)
         1.237 million, which we recorded as a realized loss as we determined
         that this decline was other than temporary.

     U.S. EXPANSION

     We have significantly expanded our activities in the United States. As a
result of these acquisitions and our expanded activities in the United States,
we may become exposed to greater exchange rate risks because we report our
revenues and expenses in euros:

     Effective March 14, 2001, our company acquired Trega Biosciences, Inc.,
located in San Diego, California, in the form of a stock-for-stock merger and
accounted for under the purchase method of accounting. Trega was first
consolidated on March 31, 2001, and, accordingly, none of the operating results
for Trega are included in our results of operations for FY 2001. Trega's
operating results subsequent to the acquisition were included in our results of
operations for FY 2002. We initially allocated the total acquisition costs in
the amount of (euro) 38.497 million as follows: (euro) 7.519 million was
allocated to various intangible assets, including software and technology and
assembled workforce, with useful lives of up to two years from March 31, 2001,
the effective date of this allocation; the remaining net acquisition costs of
(euro) 30.978 million were allocated to goodwill. The amortization period was
determined based on our management's assessment of the expected benefit and
related future cash flows. In accordance with Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") issued
by the Financial Accounting Standards Board (FASB) in July 2001, we allocated
the value of Trega's assembled workforce in the amount of (euro) 2.5 million to
goodwill in FY 2002. For a description of our application of SFAS No. 142, see
"Critical Accounting Policies - Goodwill".

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     Following the acquisition of Trega, we restructured our new San Diego
facility to create a research and development "center of excellence," which
leverages our extensive knowledge in chemistry, medicinal chemistry and
computational sciences to focus on the development of our iDEA(TM) predictive
ADME simulation system and on our internal drug discovery efforts related to
nuclear receptor research. We discontinued Trega's other drug discovery efforts
in FY 2002. As part of this restructuring, we reduced the Trega workforce by 18%
shortly after the acquisition. In February 2002, we further reduced the
workforce at our San Diego and Cambridge, Massachusetts facility by 8%. In FY
2002, we ceased selling compounds from the Chem.Folio(R) combinatorial chemistry
library we had acquired as part of our acquisition of Trega and have used the
inventory of currently more than 0.4 million compounds in our own drug discovery
efforts. In addition, portions of our pharmacophore informatics solutions
provided to Bayer have also migrated to our San Diego facility.

     Effective January 30, 2002, we acquired NetGenics Inc., having its
principal place of business in Cleveland, OH, in the form of a stock-for-stock
merger and accounted for under the purchase method of accounting. We first
consolidated NetGenics on January 31, 2002. NetGenics' operating results are
thus included in our results of operations for the period from January 31, 2002
until March 31, 2002 of FY 2002. We allocated the total acquisition costs in the
amount of (euro) 23.723 million as follows: We allocated a total of (euro) 2.665
million to intangible assets in form of software and technology, and (euro)
0.695 million to customer relationships, each with useful lives of up to two
years from January 31, 2002 the effective date of this allocation. We also
allocated (euro) 0.695 million to in process R&D. The remaining net acquisition
costs of (euro) 19.668 million were allocated to goodwill. The amortization
periods were determined based on our management's assessment of the expected
benefit and related future cash flows.

     Following the acquisition of NetGenics, we restructured NetGenics'
operations in Cleveland and Columbus, Ohio to focus on development efforts
related to our LSI(TM) data integration platforms, including in particular
NetGenics' flagship DiscoveryCenter(TM) data integration software suite, and to
provide professional services related to our LSI(TM) solutions. Portions of the
development work to be performed for Schering AG under the collaboration
agreement between NetGenics and Schering have migrated to our facilities in
Heidelberg, Germany. As part of this restructuring, we reduced the NetGenics
workforce by 18% in February 2002, closed NetGenics' San Diego, California, and
Boston, Massachusetts, sites and integrated NetGenics' operations at these sites
into our existing San Diego and Cambridge, Massachusetts, sites.

      We also expanded our sales, marketing and distribution efforts in the
United States, including by increasing our U.S. sales and marketing staff at our
Cambridge, Massachusetts, and San Diego, California, facilities, during FY 2001
and FY 2002.

CRITICAL ACCOUNTING POLICIES

     We have identified the following as critical accounting policies to our
company due to the estimation processes involved in each of the following:
revenue recognition, valuation of goodwill, accounting for income taxes, and
accounting for our marketable securities and other financial assets.

     REVENUE RECOGNITION

     We derive a significant portion of our revenue from licensing activities,
which consists of licensing fees for our LSI(TM) products and solutions, fees
for support and maintenance provided to customers related to these products and
solutions, and fees, including milestone payments for professional services
related to these products and solutions. Significant management judgments and
estimates must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.

     Our LSI(TM) products are typically licensed under non-cancelable license
agreements with license periods ranging from one year to multiple years. For our
one-year licenses, customers pay fees for use of the software at the beginning
of the license term or following installation if installation is required by the
customer. These licenses typically renew automatically for a further one-year
period at our prevailing license fees unless either party terminates. For our

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multiple-year licenses, our policy requires annual license payments in advance
throughout the term of the license without contractual concessions. We also
license various LSI(TM) products under perpetual license agreements. Under our
perpetual licenses, the customer pays a one-time license fee and may, at its
option, pay additional annual fees for maintenance and support.

     In addition, the customer pays, at the customer's option, an annual fee for
support and maintenance of our products. The license and support and maintenance
fees are typically determined on the basis of the number of servers or
installation sites where the program is installed and, except for our SRS
software licensed during FY 2001 and prior financial years, on the number of
workstations or users.

     We also charge fees for product training and installation and software
customization and related professional services.

     We apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the licensing of our LSI(TM) products and solutions.

     We recognize revenues in the form of license fees from the sales of both
term and perpetual licenses when evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable collection of the fee is probable
and, if required under the contract, customer acceptance has been obtained.
Delivery generally occurs when product is delivered to a common carrier. Revenue
in the form of fees for support and maintenance from multiple-year contracts are
recognized ratably on a straight-line basis over the term of these services.

     At the time of the transaction, we assess whether the fee associated with
our revenue transactions is fixed and determinable based on the payment terms
associated with the transaction and whether or not collection is reasonably
assured. We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.

     For all sales, we use a signed license agreement as evidence of an
arrangement. Sales through our distributors are evidenced by a master agreement
governing the relationship together with binding purchase orders or license
agreements on a transaction by transaction basis.

     We typically ship our LSI(TM) products promptly after the execution of a
software license agreement. Accordingly, we do not generally have any
significant software backlog, and believe that backlog at any particular time,
or any fluctuation in backlog, is not indicative of sales of any succeeding
period.

     For arrangements with multiple obligations (for example, license and
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements, which is specific to our company. This means that we defer
revenue from the arrangement fee equivalent to the fair value of the undelivered
elements. Fair values for the ongoing maintenance and support obligations for
both our multiple year licenses and perpetual licenses are based upon separate
sales of renewals to other customers or upon renewal rates quoted in the
contracts. Fair value of services, such as training, and installation services,
is based upon separate sales by us of these services to other customers.

     If an arrangement includes an acceptance provision, acceptance occurs upon
the earlier of receipt of a written customer acceptance or expiration of the
acceptance period.

     Revenue from installation and training services are recognized when these
services have been rendered.

     We may enter into professional services arrangements related to our
products, such as the development of customized solutions that require us to
perform significant work either to alter our underlying software or to build
additional complex interfaces so that the software performs as the customer
requests based on our products. The fees and payment terms for these

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professional services are negotiated with each customer based either on value
added or number of days spent performing these services.

     Fees earned from R&D collaboration agreements, such as our i-biology(TM)
arrangement and our development agreement with Bayer, are recognized as revenue
in accordance with the terms of the relevant agreement. Some of these agreements
contain negotiated milestones. Fees for achieving these milestones are
recognized as revenue when we and our customer agree that the stipulated results
or milestones have been met. If the results or milestones are not met or agreed
upon, our recognition of revenue will be affected. As is the case with license
fees and fees from professional services, fees received pursuant to R&D
collaboration but not yet recognized as revenues are recorded as deferred
revenue.

     Fees earned from these professional services and R&D collaborations are
recognized as revenue in accordance with the terms of the relevant agreement and
our progress in performing under the relevant agreement. These agreements often
contain negotiated milestones and delivery of specified deliverables as well as
term or perpetual licenses for use of the customized solutions or other
deliverables by the customer. Fees for achieving these milestones and delivery
of these milestones are recognized as revenue when we assess that the stipulated
results or milestones have been met. Revenues in the form of license fees from
licensing the customized solutions or other deliverables under these
professional service agreements are recognized when delivery of the
corresponding solution or deliverable has occurred, the fee is fixed and
determinable, collection of the fee is probable and, if required under the
contract, customer acceptance has been obtained.

     In light of our increased focus on providing IT solutions and related
professional services for the broader life sciences industry as part of our
business strategy, we expect a larger proportion of our revenue to come from
professional services and license fees for customized solutions. For a
discussion of our strategy, please see "Item 4: Information on Our Company -
Strategy".

     GOODWILL

     In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". This standard changes the accounting for goodwill and
other intangible assets by, among other things, requiring companies to cease
amortizing goodwill and certain intangible assets with an indefinite useful life
created by business combinations accounted for using the purchase method of
accounting. In lieu of amortization, we are required to perform an impairment
review of our goodwill during each financial year and other times during the
financial year when indicators of impairment exist.

     In accordance with the provisions of SFAS No. 142, we have adopted the
statement effective April 1, 2001 and have not amortized the goodwill created by
our acquisitions of Trega and NetGenics. Under SFAS No. 142, the workforce we
acquired as part of our acquisition of Trega may no longer be considered an
intangible asset. Therefore, (euro) 2.5 million was subsumed into goodwill in FY
2002. As of March 31, 2002, we have therefore recorded goodwill in the aggregate
amount of (euro) 58.6 million.

     We assess the impairment of this goodwill annually or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:

     o   a significant decline in our share price for a sustained period;
     o   our market capitalization relative to our net book value;
     o   a significant underperformance by us relative to expected historical or
         projected future operating results;
     o   significant changes in the manner of our use of the acquired assets or
         the strategy for our overall business; and
     o   significant negative industry or economic trends.

     In assessing the fair value and a possible impairment of our goodwill, we
must make assumptions regarding the development of our share price, market
capitalization, estimated future cash flows and other factors. The fair value of
goodwill is determined by allocating the fair value of the reporting unit to all
of the assets and liabilities of that unit as if the unit had just been acquired

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in a business combination and the fair value of the reporting unit was the price
paid to acquire the reporting unit.

     If these estimates or their related assumptions change in the future, we
may be required to record impairment charges for these assets not previously
recorded. When we determine that the carrying value of this goodwill may not be
recoverable based upon our annual review or the existence of one or more of
these indicators of impairment, we measure any impairment based on the excess of
the carrying amount of the reporting unit goodwill over the implied fair value
of that goodwill.

     If we determine, based on a future review, that the goodwill is impaired,
we will have to record an impairment charge corresponding to this excess of the
carrying amount of goodwill over the implied fair value of that goodwill, which
could have a material adverse effect on our results of operations. Based on our
impairment review at the end of FY 2002, we did not record any impairment losses
related to goodwill. Due to recent declines in our share price, we expect to
conduct our next impairment review in connection with the preparation of our
results of operations for the first quarter of FY 2003.

     INCOME TAXES

     As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of assets and liabilities for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet.

     We account for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the amounts carried on the
balance sheet of our financial statements for existing assets and liabilities
and their respective tax bases, and net operating losses and net operating
losses carried forward under applicable tax laws. Deferred tax assets and
liabilities are determined on the basis of the tax rates applicable to taxable
profits in the year in which we expect the differences to be recovered or
settled.

     We must assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in our statement of operations.

     Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. As of March 31, 2002,
our aggregate net operating losses carried forward came to (euro) 338 million.
German losses accounted for roughly (euro) 110 million, and the losses from the
operations of our U.S. subsidiaries for most of the remaining balance. While
under applicable German law, these losses may be carried forward indefinitely,
United States tax law as a general rule imposes a maximum period of 20 years. In
view of the uncertainty regarding our company's future profitability and our
ability to utilize these deferred tax assets before they expire, we have
recorded a valuation allowance representing (euro) 120.616 million.

     This valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods we may need to
establish an additional valuation allowance which could materially impact our
financial position and results of operations.

     Our net deferred tax asset as of March 31, 2002 was (euro) 2.587 million
after the adjustment for a valuation allowance of (euro) 120.616 million.

                                     - 46 -

<PAGE>

     MARKETABLE SECURITIES AND OTHER FINANCIAL ASSETS

     We classify our investments in securities as "marketable securities" and
"other long-term investments".

     Marketable Securities

      We consider our securities to be "marketable securities" if they have a
readily determinable fair market value and can be readily converted into cash.
We classify our marketable securities as "available-for-sale" or
"held-for-maturity", and short-term and long-term, based on our intent with
respect to these securities and the maturity dates of these securities. If our
intent with respect to these securities changes, this could affect our results
of operations.

     Our available-for-sale securities consist of debt and equity securities
that are publicly traded. During FY 2002, our available-for-sale securities also
included investments in diversified funds. At March 31, 2002, we classified
(euro) 59.524 million as long-term available-for-sale securities. We did not
classify any available-for-sale securities as short-term marketable securities.
We carry our available-for-sale investments at fair value, based on quoted
market prices, and unrealized gains and losses, net of taxes, are included in
accumulated other comprehensive income, which is reflected as a separate
component of stockholders' equity. Realized gains and losses are recognized when
realized on our consolidated statement of operations.

     Our held-to-maturity marketable securities comprise debt securities with
maturities of up to five years. We carry our held-to-maturity investments at
acquisition cost unless a decline in market value is considered other than
temporary. We may sell held-to-maturity securities before their maturity date if
we have classified them as short-term marketable securities. At March 31, 2002,
we classified marketable securities in the amount of (euro) 21.847 million as
short-term held-to-maturity, because maturity dates of these securities are less
than one year. Long-term held-to-maturity securities amounted to (euro) 23.468
million at March 31, 2002, as the maturity dates extend beyond one year.

     We have a policy in place to review our investments in available-for-sale
and held-to-maturity marketable securities on a regular basis to evaluate
whether or not these securities have experienced an other-than-temporary decline
in fair value. If we believe that an other-than-temporary decline exists in our
marketable securities, it is our policy to write down these investments to the
market value and record the related write-down as an investment loss on our
consolidated statement of operations. This determination involves determinations
and judgments that will be made by our management. The amount and timing
involved in recording these write-downs may affect our results of operations.

     In FY 2002, we accordingly lowered the value of our investments in
available-for-sale securities. In November 2000, we invested approximately
(euro) 30.4 million in diversified funds that are listed on the Frankfurt Stock
Exchange consisting of available-for-sale securities. Based on the performance
of these funds, we reduced the value of our investments in these funds by (euro)
7.218 million, as measured by the closing price per fund unit, which we recorded
as a realized loss as we determined that this decline was other than temporary.
In addition, we reduced the value of our shareholding in Paradigm Genetics Inc.
Based upon the trading price for Paradigm Genetics' shares on the Nasdaq
National Market, we lowered the value of our shareholding in Paradigm Genetics
by (euro) 1.237 million in FY 2002, which we recorded as a realized loss as we
determined that this decline was other than temporary. We have classified our
shares in Paradigm Genetics as long-term marketable available-for sale
securities. However, we may consider selling all or a portion of our
shareholding in Paradigm Genetics depending on the future performance of
Paradigm's stock price.

     Other Long-Term Investments

     Our other long-term investments comprise investments in privately-held
companies, in particular investments in our strategic alliance partners, that we
intend to hold as a long-term investment. We accounted for these investments
using the cost method of accounting. Our other long-term investments are in
companies whose shares are not publicly traded, and, therefore, there is no
established market for their securities. As such, the fair value of these
investments is determined by us. We have a policy in place to review the fair
value of these investments on a regular basis to evaluate the carrying value of
the investments in these companies.

                                     - 47 -

<PAGE>

     This policy includes, but is not limited to, reviewing each of the
companies' cash position, financing needs, earnings/revenue outlook, operational
performance, management/ownership changes, and competition. The evaluation
process is based on information that we receive or request from these
privately-held companies. This information is not subject to the same disclosure
regulations as U.S. public companies, and as such, the basis for these
evaluations is subject to the timing and the accuracy of the data received from
these companies. If we believe that the carrying value of a company is carried
at an amount in excess of fair value, it is our policy to record a reserve and
the related write-down is recorded as an investment loss on our consolidated
statement of operations. Estimating the fair value of non-marketable equity
investments in early-stage technology companies is inherently subjective and may
contribute to significant volatility in our reported results of operations.

     We recognize realized gains and losses upon sale or maturity of these
investments using the specific identification method.

         Based on our review, we determined to write-down the value of our
shareholdings and investments in Gesellschaft fur Medizinische Datenverabeitung
(GMD) and SimUtility, Inc. and to record realized losses in FY 2002
corresponding to these write-downs. For a description of these write-downs and
realized losses, see "Overview - Investments" above.

     RESULTS OF OPERATIONS

     The table below sets forth information about our net sales by geographical
region.

<TABLE>
                                     RESULTS OF OPERATIONS BY SEGMENT AND REGION(1)

<CAPTION>
                                          FY 2000          FY 2001           FY 2002
                                      ---------------  ---------------  -----------------

<S>                                    <C>      <C>     <C>      <C>     <C>        <C>
Net revenues by geographic
region(2): ((euro)in millions)

  Germany........................      3.978    39.0%   8.697    37.4%   10.147     25.1%
  United States..................      5.103    50.1%   9.958    42.8%   22.698     56.2%
  Other .........................      1.106    10.9%   4.620    19.8%    7.535     18.7%
                                      ------   ------  ------   ------  ------     ------
      Total......................     10.187   100.0%  23.275   100.0%   40.380    100.0%
                                      ======   ======  ======   ======  ======     ======
---------------------
(1) Columns may not add up due to rounding.
(2) Allocated based on location of the customer.

</TABLE>

     FY 2002 COMPARED WITH FY 2001

     Revenues. Our revenues for FY 2002 increased by (euro) 17.105 million to
(euro) 40.380 million compared to (euro) 23.275 million in FY 2001. Revenue from
licenses increased to (euro) 19.198 million in FY 2002 compared to (euro) 8.780
million during FY 2001. This increase in licensing revenue is mainly
attributable to the increase in the number of license agreements for our LSI(TM)
software products and related maintenance and support fees. The total number of
new software licenses came to 55 in FY 2002 compared with 30 new software
licenses in FY 2001. New customers that licensed our products include Affymetrix
and GeneProt. In addition, existing customers renewed their license agreements
for our software products. Furthermore, customers, such as Derwent Information,
Incyte Genomics, Schering, and Nestle, retained us to provide professional
services and to provide them with customized software solutions.

                                     - 48 -

<PAGE>

     Our revenue from R&D services and activities increased to (euro) 21.182
million in FY 2002 compared to (euro) 14.495 million during FY 2001. This
increase in R&D revenue is mainly attributable to our development agreement with
Bayer, which expanded our collaboration with Bayer into the field of
pharmacophore informatics to pioneer the linkage of chemistry and informatics in
order to accelerate life science research. Furthermore, Bayer made an additional
one-time payment in the amount of (euro) 2.62 million ($2.310 million) for our
delivery of an additional 200 targets pursuant to an amendment to our i-biology
arrangement with Bayer. In addition, we generated revenue from the sale of
chemical compounds from our Chem.Folio(R) compound libraries and from sales of
our arrayBase(TM) clone collections.

     Our revenue for FY 2002 includes fees in the amount of approximately (euro)
2.0 million for products and services that Trega had committed to providing to
third parties prior to the acquisition. We recognized these fees as revenue in
FY 2002 after we delivered the products and performed the services corresponding
to these fees.

     We expanded our sales and distribution activities in foreign markets. For
example, revenues from the United States increased to (euro) 22.698 million in
FY 2002 compared to (euro) 9.958 million in FY 2001 while revenues from Europe
(excluding Germany) increased to (euro) 3.365 million in FY 2002 compared to
(euro) 2.705 million in FY 2001. Revenues from Japan, where we sell our products
through CTC, our Japanese distributor, increased 3.683 million in FY 2002
compared to (euro) 1.865 million million in FY 2001.

     SG&A Expenses. Our SG&A expenses increased to (euro) 31.611 million in FY
2002 compared to (euro) 13.220 million in FY 2001. Our selling and marketing
expenses increased to (euro) 12.874 million in FY 2002 compared to (euro) 5.719
million in FY 2001. This increase is mainly attributable to the increase of
staff within our sales and marketing departments and the further expansion of
LION bioscience Inc, our U.S. subsidiary, which is focused on sales and
marketing in the United States. In addition, our sales and marketing expenses
increased as a result of the selling and distribution activities, which we
acquired as part of our acquisition of NetGenics. Our general and administrative
expenses increased to (euro) 18.737 million in FY 2002 compared to (euro) 7.501
million in FY 2001. This increase is mainly attributable to the expansion of our
operations in the United States as a result of our acquisitions of Trega and
NetGenics, and our consolidation of twelve months of activities for Trega's and
two months of activities for NetGenics' general and administrative expenses
during FY 2002. In FY 2002, our San Diego facility also became the headquarters
of our U.S. operations, which resulted in increased general and administrative
expenses. In addition, we expanded our internal IT systems administration
department in FY 2002. A portion of the expenses from the operations of this
department were allocated to general and administrative expenses. Our SG&A
expenses in FY 2001 included a one time non-cash compensation charge of (euro)
8.743 million related to the conversion of preferred shares in our company into
ordinary shares by several of our employees.

     R&D Expenses. Our R&D expenses increased in FY 2002 to (euro) 53.947
million compared to (euro) 26.872 million in FY 2001. This increase in R&D
expenses is primarily attributable to the expansion of our R&D activities in the
United States as a result of our acquisitions of Trega and NetGenics, and our
consolidation of Trega's and NetGenics' R&D expenses during FY 2002. Our iD3(TM)
activities emplos R&D personnel and conducts R&D activities in the United States
at our San Diego facility while the U.S. R&D activities of our LSI(TM) business
involve personnel and facilities at our San Diego site as well as our sites in
Cleveland and Columbus, OH. In addition, our R&D expenses increased during FY
2002 as a result of new product development activities, in particular with
respect to new LSI(TM) products. Our expenses related to the purchase or
in-licensing of products for use in our R&D activities, such as Affymetrix'
GeneChip(R) probe arrays and related products and MDL software and databases,
increased as well.

     Our actual R&D expenses in each of FY 2002 and FY 2001 were reduced by the
receipt of subsidies and grants from third parties, including the German
government. These payments totaled (euro) 1.317 million in FY 2002 and (euro)
0.731 million in FY 2001.

     Other Operating Income and Expenses. Our gains from other operating income
and expenses increased to (euro) 1.104 million in FY 2002 from (euro) 0.727
million in FY 2001. This increase is primarily attributable to gains from the
conversion of revenues and expenses in foreign currencies into euros in the
amount of (euro) 0.929 million in FY 2002 compared with (euro) 0.501 million in
FY 2001.

                                     - 49 -

<PAGE>

     Depreciation and Amortization. Our depreciation and amortization expenses
increased to (euro) 13.160 million in FY 2002 compared to (euro) 4.218 million
in FY 2001. This increase is primarily attributable to depreciation of property,
plant and equipment during FY 2002, including an impairment charge in the amount
of (euro) 1.1 million as a result of equipment write-down from our iD3(TM)
activities in Heidelberg in December 2001, as well as amortization expense as a
result of our amortization of Trega's intangible assets in form of software and
technology and to a lesser extent, the amortization expense of NetGenics'
intangible assets during the period from January 31 through March 31, 2002. In
accordance with SFAS No. 142 our depreciation and amortization expenses do not
include any amortization of goodwill resulting from our acquisitions of Trega
and NetGenics. For a description of SFAS No. 142, please see "Critical
Accounting Policies -Valuation of Goodwill and Other Assets" below.

     Interest Income. Our interest income (net) increased to (euro) 6.302
million in FY 2002 compared to (euro) 5.234 million in FY 2001. We received
interest income in FY 2001 and FY 2002 from our investment of a portion of the
proceeds from our initial public offering in fixed income securities in November
2000. This increase is attributable mainly to the additional interest we
received for the full financial year 2002 compared with interest payments we
recived during the investment period of November 2000 until March 31, 2001 of FY
2001.

     Results from Marketable Securities and Other Long-Term Investments. Our
loss from investments (net) increased to (euro) 3.493 million in FY 2002
compared to (euro) 0 in FY 2001. This loss is attributable to the the sale of
all of our shareholdings in Tripos, Inc. in February 2002 and the payment of an
accrued dividend on these shares in January 2002 in connection with this sale.
We recorded a gain in the amount of (euro) 15.518 million from this transaction.
For a description of this transaction, see "Overview - Investments" above. In
addition, as part of our strategy to focus on our core competencies, we reviewed
our various shareholdings in GMD, Paradigm Genetics, SimUtility and our
investments in available-for-sale securities. Based on our review, we determined
to adjust the value of these shareholdings and investments and to record a
combined total loss in the amount of (euro) 19.011 million in FY 2002. For a
description of this review and value adjustments, see the discussion in
"Overview - Investments" above.

     Net Loss. We incurred a net loss of (euro) 54.686 million in FY 2002
compared to a net loss of (euro) 23.944 million in FY 2002. This increase is
attributable mainly to the increase of our expenses, in particular our R&D
expenses and depreciation and amortization expenses, relative to the increase of
our revenue, resulting to a large extent from our expansion in the United
States. In addition, we recorded one-time net losses in the amount of (euro)
3.493 million as a result of the sale of all of our shareholdings in Tripos as
well as a value adjustment of our shareholdings in other companies and of our
investments in available-for-sale securities. We also recorded as an expense
non-cash compensation for outstanding stock options and employee shares
outstanding in the amount of (euro) 4.542 million in FY 2002 and (euro) 1.732
million in FY 2001. Our net loss in FY 2001 includes a one-time non-cash
compensation expense in the amount of (euro) 8.743 million, resulting from the
conversion of preferred shares of our company into ordinary shares.

     As a result, our accumulated net losses as of March 31, 2002 increased to
(euro) 54.686 million from (euro) 23.944 million as of March 31, 2001.

     FY 2001 COMPARED WITH FY 2000

     Revenues. Our revenues for FY 2001increased to (euro) 23.275 million
compared to (euro) 10.187 million in FY 2000. This is mainly attributable to our
on-going i-biology(TM) arrangement with Bayer as well as the expansion of this
collaboration into the field of pharmacophore informatics to pioneer the linkage
of chemistry and informatics in order to accelerate life science research and to
an increase of our licensing revenues generated from additional customers and
new product modules. The total number of new software licenses came to 30 during
FY 2001. In addition, existing customers renewed their contracts and licensed
new product modules, such as SRS Prisma and SRS Objects. Our LSI(TM) business
increased sales to (euro) 21.166 million in FY 2001 compared to (euro) 7. 119
million during FY 2000. Since we conducted a strategic shift in our iD3(TM)
activities that refocused iD3(TM) away from fee-for-service projects in order to
expand our internal drug discovery efforts, the revenues from these activities
decreased to (euro) 2.109 million during FY 2001 compared to (euro) 3.068
million in FY 2000.

                                     - 50 -

<PAGE>

     SG&A Expenses. Our SG&A expenses increased to (euro) 13.220 million in FY
2001 compared to (euro) 6.762 million in FY 2000. This increase is mainly
attributable to the staff increases within our sales and marketing department
and the further expansion of LION bioscience Inc, our U.S. subsidiary, focused
on sales and marketing.

     R&D Expenses. Our R&D expenses increased in FY 2001 to (euro) 26.872
million compared to (euro) 12.394 million in FY 2000. This significant increase
in R&D expenses is primarily attributable to salaries as a result of hiring of
additional personnel for our R&D activities, including additional personnel for
the pharmacophore informatics arrangement with Bayer, as well as the start-up
costs for our pharmacophore informatics arrangement with Bayer.

     Our actual R&D expenses in each of FY 2001 and FY 2000 were reduced by the
receipt of subsidies and grants from third parties, including the German
government. These payments totaled (euro) 0.731 million in FY 2001 and (euro)
0.446 million in FY 2000.

     Other Operating Income and Expenses. Our other operating income and
expenses increased to a gain of (euro) 0.727 million in FY 2002 from an expense
of (euro) 0.542 million in FY 2001. This increase is primarily attributable to
gains from the conversion of revenues and expenses in foreign currencies Yen
into euros.

     Depreciation and Amortization. Our depreciation and amortization expenses
increased to (euro) 4.218 million in FY 2001 compared to (euro) 3.061 million in
FY 2000. This increase is primarily attributable to depreciation of property,
plant and equipment during FY 2001, such as hardware and laboratory equipment
purchased during 2001 and used by our LSI(TM) and iD3(TM) lines of business.

     Interest Income. Our interest income (net) increased to (euro) 5.234
million in FY 2001 compared to (euro) 0.008 million in FY 2000. This increase is
attributable mainly to the fact that we received interest income in FY 2001 from
our investment of a portion of the proceeds from our initial public offering in
fixed income securities in November 2000.

     Net Loss. We incurred a net loss of (euro) 23.944 million in FY 2001
compared to a net loss of (euro) 12.585 million in FY 2000. The net loss for FY
2001 includes non-cash compensation expenses in the amount of (euro) 8.743
million, resulting from the conversion of preferred shares of our company shares
held by of our employees into ordinary shares. The exchange of one equity
instrument for another equity instrument was treated, in substance, as the
repurchase by our company of the first equity instrument and the issuance of a
new equity instrument. Any difference in the fair value between the two
instruments at the date of exchange had to be recorded as a non-cash item. By
resolution of our company's general meeting of May 15, 2000, all of the existing
preferred shares in our company were converted into ordinary shares. In FY 2001,
we recorded an additional personnel expense as non-cash compensation in the
amount of (euro) 1.732 million for outstanding stock options.

LIQUIDITY AND CAPITAL RESOURCES

     We fund our operations mainly through our operating cash flow, bank debt
and equity. Over the past three fiscal years, we have funded our operations
principally from the issuance of equity, the proceeds of which have been used to
fund operating deficits and repay indebtedness. We anticipate that during FY
2003 we will continue to generate operating deficits, which will be funded from
existing cash and marketable securities.

     We believe that our existing cash balances will be sufficient to fund our
current plans to operate and expand our business. Our belief is based on our
current business plan and our refined strategy, which could change in the future
as a result of new developments and require additional funding sooner than
anticipated. Even if we have sufficient cash for our current business plan, we
may seek to raise additional funding because of favorable market conditions or
other strategic factors.

     Our future cash requirements depend on numerous factors, including:

     o   the development of software and integrated IT solutions for the life
         sciences industry;

                                     - 51 -

<PAGE>

     o   our ability to attract subscribers and purchasers for our
         LSI(TM)software products, solutions and services;

     o   our ability to establish and maintain additional collaborations;

     o   our reaction to technological developments of competitors and to market
         developments; and

     o   the costs involved in enforcing patent and copyright claims and other
         intellectual property rights.

     These factors may result in our need for significant additional funds in
the future, which we may seek to raise through public or private offerings or
debt financing. We cannot assure you that additional financing or customer
arrangements for our LSI(TM) solutions, products or services will be available
when needed or that, if available, such financing or arrangements will be
obtained on favorable terms. If adequate funds are not available when needed, we
may have to curtail our operations or attempt to raise funds on unattractive
terms.

     CASH FLOW

     During FY 2002 and during FY 2001, we had net cash outflows of (euro)
48.042 million and net cash inflows of (euro) 60.224 million, respectively.

     The net cash used in our operating activities was (euro) 51.500 million in
FY 2002, (euro) 13.381 million in FY 2001, and (euro) 4.687 million in FY 2000.
The substantial increase in the amount of net cash used in our operating
activities in FY 2002 compared to FY 2001 was attributable mainly to our
expansion in the United States as a result of our acquisitions of Trega and
NetGenics as well as the build-up of our sales and marketing activities in the
United States and higher R&D activities. The substantial increase in the amount
of net cash used in our operating activities in FY 2001 compared to FY 2000 was
attributable mainly to higher R&D expenses and, to a lesser extent, higher SG&A
expenses.

     Our investing activities provided (euro) 5.044 million in FY 2002 while we
used net cash in the amount of (euro) 127.917 million in FY 2001 and (euro)
20.033 million in FY 2000 for our investing activities. Cash outflows from our
investing activities in FY 2002 are attributable mainly to our investments in
ownership interests in our collaboration partners GMD, GeneProt, SimUtility and
BioSolveIT, for a total of (euro) 10.805 million. In addition, we made
improvements to our facilities in Heidelberg and purchased hardware totaling
(euro) 7.960 million. These cash outflows from our investing activities in FY
2002 were more than offset by cash inflows in the amount of (euro) 23.720
million from the sale of all of our shares in Tripos and the payment by Tripos
of an accrued dividend immediately prior to the sale and cash inflows in the
amount of (euro) 5.863 million from interest payments received from our
investments in fixed-income securities. The high level of investments in FY 2001
is attributable mainly to our investments in available-for-sale and
held-to-maturity-securities of (euro) 43.732 million and (euro) 71.525 million
respectively, our purchase of capillary sequencers and computer hardware, and
the expansion of a new mainframe computer center totaling (euro) 8.245 million.
The high level of investments in FY 2000 covering (euro) 11.164 million of
long-term investments made during the year, including the purchase of 409,091
shares of convertible preferred stock of Tripos Inc. for $9 million and the
purchase of 400,000 shares of preferred stock of Paradigm for $2 million. The
amount for FY 2000 also reflects increased levels of capital expenditure,
primarily for the purchase and lease of laboratory equipment, computer equipment
and furniture and office equipment

     Net cash used in our financing activities was (euro) 1.586 million in FY
2002, which is attributable mainly to payments under our capital leases to
finance laboratory equipment and IT hardware in the total amount of (euro) 0.863
million and payment of interest and principal under our loan agreement with
Bayerische Hypo- und Vereinsbank in the amount of (euro) 0.569 million.
Financing activities provided (euro) 201.522 million in cash during FY 2001
compared to (euro) 30.509 million provided during FY 2000. These funds are
primarily attributable the fact that our company conducted its initial public
offering in August 2000 and listed its ordinary shares on the Neuer Markt
segment of the Frankfurt Stock Exchange and on the Nasdaq National Market in the
form of ADSs. Our company offered 4,575,375 ordinary shares, as well as an
additional 685,625 ordinary shares to cover over-allotments, at (euro) 44.00 a
share and $39.68 per ADS. We used a portion of the proceeds received from this
public offering to repay approximately (euro) 6.6 million, which represented the

                                     - 52 -

<PAGE>

total amount drawn under a (euro) 11.00 million bridge loan facility provided to
us by Deutsche Bank Aktiengesellschaft on April 5, 2000, which was used to
finance operations. Amounts drawn under this credit facility bore interest at an
annual rate of 10%. During FY 2001, we invested (euro) 114 million in fixed
income funds, money market funds, corporate bonds, German government bonds
(Pfandbriefe), and other mutual funds. Net cash provided by our financing
activities in FY 2000, primarily reflect the issuance of 1,400,000 ordinary
shares (after giving effect to the stock split) to Bayer early in FY 2000 for
aggregate consideration of (euro) 27.73 million and the issuance of 1,076,600
preferred shares (after giving effect to our stock split) to a private investor
early in FY 2000 for aggregate consideration of (euro) 3.68 million. All of our
company's preferred shares have since been converted into ordinary shares.

     Our cash, cash equivalents and marketable securities amounted to (euro)
124.023 million at March 31, 2002.

     LOAN AGREEMENTS

     In December 1997, our company entered into a loan agreement with Bayerische
Hypo- und Vereinsbank for the financing of research and development activities.
Under the loan agreement, we may borrow up to (euro) 4.55 million through
September 30, 2007. At March 31, 2000, the Company had fully utilized the
facility. The loan principal is due in 16 equal semi-annual payments in the
amount of (euro) 284,406, which began on March 31, 2000. At March 31, 2002, we
had repaid approximately (euro) 1.421 million of the total principal amount
borrowed under this facility. Interest is paid in quarterly installments at a
rate of 4.75% per annum. In connection with the loan our company granted the
lender a security interest in our property, plant and equipment, accounts
receivable and claims by certain members of our management board and senior
management under life insurance policies.

     CAPITAL EXPENDITURES

     We had no material capital commitments for capital expenditures at March
31, 2002. We expect our capital expenditures to increase in future periods
because of planned expansion of our operations. The planned expansion will be in
support of expected growth both in the provision of solutions and products of
our LSI(TM) business.

IMPACT OF INFLATION

     Inflation has not had a material effect on our business.

RECENT ACCOUNTING ANNOUNCEMENTS

     In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for
Asset Retirement Obligations." This statement deals with the accounting and
reporting duties with regard to obligations and related expenses that arise in
connection with the disposal or retirement of long-lived tangible assets. SFAS
No. 143 requires a company to set up an accrual for the fair value of the
obligation in the period in which it accepts a legal obligation associated with
the disposal or retirement of a long-lived tangible asset. The statement further
requires that the carrying amount of the tangible asset be increased by the
expenses accrued as liabilities. The increase in the carrying amount of the
tangible asset is then regularly depreciated over the remaining term. In valuing
the accrued liability, the effects of accrued interest and changes in estimated
future cash flow must be taken into account in every period. SFAS No. 143 must
be applied in all fiscal years commencing after June 15, 2002, but may be
applied earlier. We do not believe the application of this statement will have
any material effect on our net assets, financial position, or results of
operations.

     In October 2001, FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," which deals with the accounting for and
reporting of impairment and disposal of long-lived assets. Statement No. 144
replaces both SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" and APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effect of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." However, SFAS No. 144 retains many of the basic provisions of
SFAS No. 121. Similarly, SFAS No. 144 adopts the obligation of Opinion No. 30
that discontinued operations must be reported separately. The scope of the
reporting obligation is expanded to include components of an entity that are
disposed of by sale, retirement, demerger or spin off or that are held for sale.

                                     - 53 -

<PAGE>

SFAS No. 144 must be applied in fiscal years commencing after December 15, 2001,
but may be applied earlier. We will apply SFAS No. 144 starting April 1, 2002.
We have not yet conclusively determined the potential effects of this statement
on us.


ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

     In accordance with the German Stock Corporation Act, our company has a
supervisory board and a management board. The two boards are separate, and no
individual may simultaneously be a member of both boards. The management board
is responsible for managing our company's business in accordance with applicable
laws and our company's articles of association. It represents our company in its
dealings with third parties. The supervisory board appoints and removes the
members of the management board and oversees the management of our company but
is not permitted to make management decisions.

     In carrying out their duties, members of both the management board and
supervisory board must exercise the standard of care of a prudent and diligent
businessperson, and they are liable to our company for damages if they fail to
do so. Both boards are required to take into account a broad range of
considerations in their decisions, including the interests of our company and
its shareholders, employees and creditors. The management board is required to
respect shareholders' rights to equal treatment and equal information.

     The supervisory board has comprehensive monitoring functions. To ensure
that these functions are carried out properly, the management board must, among
other things, regularly report to the supervisory board with regard to current
business operations and future business planning. The supervisory board is also
entitled to request special reports at any time. The management board is
required to ensure appropriate risk management within our company and to
establish an internal monitoring system.

     Under German law, shareholders of a company, like other persons, are liable
to the company for damages if they intentionally use their influence on the
company to cause a member of the management board or supervisory board, or
holders of special proxies, to act in a way that is harmful to the company. If a
member of the management board or supervisory board neglects his or her duties,
he or she is jointly and severally liable with any other persons exercising such
influence.

     As a general rule under German law, a shareholder has no direct recourse
against the members of the management board or the supervisory board in the
event that they are believed to have breached a duty to our company. Apart from
insolvency or other special circumstances, only our company has the right to
claim damages from members of either board. Our company may only waive these
damages or settle these claims if at least three years have passed and if its
shareholders approve the waiver or settlement at the shareholders' general
meeting with a simple majority, provided that opposing shareholders do not hold,
in the aggregate, one-tenth or more of the share capital of our company and do
not have their opposition formally noted in the minutes maintained by a German
notary.

     SUPERVISORY BOARD

     Our company's supervisory board consists of six members. Our company's
shareholders elect the members of the supervisory board at the general meeting
of the shareholders. The current members of the supervisory board were elected
in the course of formation of our company and at extraordinary general meetings
held on November 19, 1998 and May 15, 2000.

     Our company's shareholders may remove any member of the supervisory board
by a majority of votes cast at a general meeting of the shareholders. The
supervisory board elects a chairman and one deputy chairman from among its
members. The participation of at least three members, which would include
abstaining from voting, is required for the supervisory board to act. The
supervisory board normally acts by simple majority vote of the votes cast, with
the chairman having a deciding vote in the event of a deadlock in a second vote
on the same matter. The supervisory board may set forth in its rules of

                                     - 54 -

<PAGE>

procedure that any resolutions by the supervisory board and its committees may
be passed in writing, by telegram, telephone, facsimile, telex, or similar
means, including in particular by way of video conference.

     Under our company's articles of association, the supervisory board should
meet at least once during each quarter of the calendar year. The supervisory
board is required to meet at least twice during each half of a calendar year.

     Unless the shareholders determine a reduced term, the maximum term of
office of each member of the supervisory board expires at the end of the general
meeting of the shareholders for the fourth fiscal year following the fiscal year
in which the member was elected. The fiscal year in which a member's term of
office commenced is not included in the five-year period.

     The present members of our company's supervisory board, their ages, the
years in which their terms expire and their principal occupations are as
follows:

<TABLE>
                            SUPERVISORY BOARD MEMBERS

<CAPTION>
         NAME                  AGE     TERM                        PRINCIPAL OCCUPATION
         ----                  ---   EXPIRES(1)                    --------------------
                                     ---------

<S>                             <S>  <S>         <S>
Dr. Thomas Schuerrle......      46     2003      Attorney-at-law, partner with the law firm of Debevoise &
   Chairman                                      Plimpton
Lorenzo Giulini(2)........      44   July 2002   Partner of Ascend Company
   Vice-Chairman
Joern Aldag...............      43     2003      Chief Executive Officer of Evotec OAI AG
Markus Metyas.............      39     2003      Chief Financial Officer of QSC AG
Dr. Michael Steiner.......      47     2003      Partner of Boston Consulting Group GmbH & Partner
Dr. h.c. Klaus Tschira....      61     2003      Former member of the management board and co-founder of
                                                 SAP AG; Partner of the Klaus Tschira Stiftung Heidelberg GmbH

(1)      Unless replaced earlier by another member elected in a regularly held election.
(2)      Mr. Giulini is the brother-in-law of Dr. von Bohlen und Halbach, the Chief Executive Officer and
         Chairman of our company's management board. Mr. Giulini has resigned
         from our company's supervisory board effective after the conclusion of
         our annual general shareholders meeting scheduled to be held on July
         19, 2002.

</TABLE>

     MANAGEMENT BOARD

     Our company's management board currently consists of four members. Under
our company's articles of association, the supervisory board determines the size
of the management board.

     Our company's articles of association provide that the management board
normally acts by simple majority vote of the members present. Our company's
management board may take action by circulating written consents or orally by
telephone in lieu of a meeting. The management board may take action if at least
two-thirds of its members are present.

     Pursuant to the rules of procedure of our management board, attendance by
at least one half of all members is required for a quorum of the management
board. The chairman of the management board has two votes and casts the deciding
vote in the event of a tie. The other members have one vote each. The entire
management board must decide on matters of significance to our company or its
subsidiaries, our annual report, matters to be submitted to the supervisory
board, and matters relating to any meeting of the shareholders.

                                     - 55 -

<PAGE>

     In addition to matters requiring the consent of the supervisory board under
German law, the management board may only engage in certain transaction with
approval of the supervisory board. These transactions include investments
exceeding (euro) 1 million mergers and acquisitions, termination of business
divisions, certain financial transactions, such as borrowings exceeding (euro) 2
million, the issuance of debt securities, and the granting of security
interests, as well as other specified transactions exceeding specified threshold
amounts, such as lease agreements, service agreements, consulting agreements,
and the appointment of holders of a general power of attorney.

     The supervisory board appoints the members of the management board for a
maximum term of five years. The initial term of office for a member of
management is one year. At the end of this initial one-year, the term
automatically extends for another four years, unless our company's supervisory
board gives notice of termination within three month prior to expiration of the
initial one-year term. Our company's supervisory board is contemplating to
shorten the total term of office for members of our company's management board
from five to four years. Members of the management board may be reappointed or
have their term extended for one or more terms of up to five years each. The
supervisory board may remove a member of the management board prior to
expiration of his term for good cause, for example in the case of a serious
breach of duty or good faith vote of no confidence by the shareholders' general
meeting.

     Our company may be represented by two members of the management board or by
a member of the management board together with a holder of a general power of
attorney (Prokurist). According to our company's articles of association, the
supervisory board may grant sole power of representation to the members of the
management board. Our company's supervisory board has used this authority and
has granted sole power of representation to Dr. von Bohlen und Halbach, the
Chairman of our management board. A member of the management board may not deal
with, or vote on, matters that relate to proposals, arrangements or contracts
between himself and the company.

     The present members of our company's management board, their ages, the
years in which their terms expire and their positions are as follows:

<TABLE>
                                                MANAGEMENT BOARD MEMBERS

<CAPTION>
                                                            TERM
NAME                                         AGE           EXPIRES                        POSITION
----                                         ---           -------                        --------

<S>                                           <S>        <C>                 <C>
Dr. Friedrich von Bohlen und Halbach.......   39             2007            Chairman, Chief Executive Officer
Martin Hollenhorst.........................   43           2003(1)           Chief Financial Officer
Dr. Jan Mous...............................   50             2005            Chief Scientific Officer
Dr. Reinhard Schneider.....................   40         Oct. 2002(2)        Chief Information Officer


(1)  The initial term of Mr. Hollenhorst's employment as Chief Financial Officer
     and a member of our company's management board runs until April 1, 2003.
     The term automatically extends until 2007, unless his employment is
     terminated by our company's supervisory board by notice given within three
     month prior to April 1, 2003.

(2)  The initial term of Mr. Schneider's employment as Chief Financial Officer
     and a member of our company's management board runs until October 1, 2002.
     The term automatically extends until 2006, unless his employment is
     terminated by our company's supervisory board by notice given within three
     month prior to October 1, 2002.

</TABLE>

     Dr. Friedrich von Bohlen und Halbach has been our company's Chairman of our
management board and Chief Executive Officer since our company was founded in
March 1997. Previously, Dr. von Bohlen und Halbach was the Chief Executive
Officer of WASAG Chemie AG, Essen. Before joining WASAG, Dr. von Bohlen und
Halbach held the position of assistant to the Chairman of the management board
of FAG Kugelfischer KGaA, Schweinfurt, Germany. He started his career as a
trainee in research and development at Fresenius AG, Oberursel, Germany, and
holds a PhD. in neurobiology from the Swiss Federal Institute of Technology
(FTII), Zurich.

                                     - 56 -

<PAGE>

     Martin Hollenhorst joined our company as Chief Financial Officer in April
2002. Mr. Hollenhorst has accumulated extensive finance, controlling and
management experience working for a variety of companies operating on an
international scale. Most recently he worked as a freelance management
consultant in Washington, D.C., specializing in advising German-American
companies on strategic and acquisition matters. Prior to that, he was Chief
Executive Officer of A.N.N. Systems ASA, a German-American software company, and
prior to that, he worked for seven years for the Vossloh group, a listed finance
and management holding company with an international portfolio of industrial
subsidiaries, where he was responsible for finances and controlling. In
addition, he was General Manager of Hegenscheidt MFD GmbH, based in Erkelenz,
Germany, and Detroit, Michigan. Martin Hollenhorst also worked for six years at
Deloitte & Touche, eighteen months of which he spent in the USA working as a
consultant for company mergers and acquisitions.

     Dr. Jan Mous has been the Chief Scientific Officer of our company since May
2000. Dr. Mous has both extensive scientific and managerial experience that he
gained from working for approximately 15 years at Hoffmann-LaRoche Ltd. in
Basel, Switzerland, starting in 1985. From 1998 to 2000, Dr. Mous served as the
global head of genomics technologies and director of the genomics technology
platform of Hoffmann-La Roche and, from 1997 to 1998, as head of genomics
research and deputy head of central nervous system research. From 1994 until
1996, Dr. Mous was head of gene technology and genomics research at Hoffmann-La
Roche. Before then, he conducted various research projects for Hoffmann-La
Roche, including exploratory research projects for drug target identification in
the areas of virology, immunology and the central nervous system, preclinical
Hepatitis C virus research and preclinical AIDS research. Dr. Mous holds a PhD.
in biochemistry from the University of Leuven in Belgium.

     Dr. Reinhard Schneider has been the Chief Information Officer of our
company since September 2001. Dr. Schneider is a co-founder of our company and
has been with our company since March 1997 as Vice President of LSI(TM)
Research. He previously served as the chief executive officer of our company's
subsidiary, LION bioscience Inc., and is the Chief Executive Officer of our U.S.
subsidiary LION bioscience Research Inc., located in Cambridge, Massachusetts.
While a scientist in the BioComputing Department at EMBL, Dr. Schneider studied
various aspects of protein structure prediction and sequence alignment as well
as the development of large-scale automated sequence analysis and the use of
massive parallel computers in biology. Dr. Schneider studied biology at the
University of Aachen and the University of Heidelberg and received his PhD. from
EMBL.

     At the end of May 2002, our company's supervisory board appointed Dr.
Daniel Keesman as Chief Business Officer and a member of our company's
management board, effective July 1, 2002. This appointment is subject to our
company entering into a employment agreement with Dr. Keesman on mutual
acceptable terms. Dr. Keesman joined our company in March 2001 as Vice President
of Global Sales and Marketing and was subsequently promoted to Executive Vice
President, Global Business. Prior to joining us, he served as Vice President for
MDL Information Systems Europe and Managing Director of MDL Information Systems
GmbH, Frankfurt. He had also held various other positions within MDL, one of
which was Director, Professional Services Europe. He received his PhD. in
chemistry from the University of Stuttgart, Germany.

     Our senior management consists of the following persons:

     Mark Canales, PhD., joined us in March of 2001 as Senior Vice President of
Cheminformatics Development of our U.S. operations at San Diego, California. He
currently serves as Executive Vice President, Chief Technology Officer of our
U.S. operations. Prior to joining us, Dr. Canales acted as vice president of
product development at MDL Information Systems, Inc. Dr. Canales has over 17
years experience in the design and development of software and hardware
solutions for the scientific market. He has managed several multinational
projects with development groups spread across multiple sites. Prior to working
at MDL, Dr. Canales served as director of product development at Finnigan
Corporation, a subsidiary of ThermoQuest Corporation. Prior to joining Finnigan,
Dr. Canales worked with PE Nelson Systems (formerly Nelson Analytical) where he
led both software and hardware programs within the Desktop DataSystems Group.
Dr. Canales holds a Ph.D. in biochemistry from the University of Minnesota. His
undergraduate degrees are an A.B. in classical philosophy and B.S. in chemistry
from Gonzaga University.

     Anthony Caruso, joined our subsidiary LION bioscience Research, Inc, in
March, 2000, as Director of Bioinformatics. In March of 2001, Anthony was
promoted to Managing Director of LION bioscience Research Inc. and is currently

                                     - 57 -

<PAGE>

responsible for all aspects of our collaboration with Bayer AG in Cambridge,
Massachusetts. Prior to joining LION bioscience Research Inc., Anthony worked at
Cereon Genomics on their SNP and pathway projects. Prior to that, Anthony was
Group Leader of the Computational Biology Group at Genome Therapeutics
Corporation in support of DNA sequencing, microbial genomics, functional
genomics and human genetics. Anthony transitioned from wet research laboratory
research to bioinformatics while at Genetics Institute, where his career started
as a molecular biologist in the department of Hematopoiesis. Anthony graduated
from the University of Massachusetts with a degree in Biology - Biotechnology.


     Dr. Thure Etzold joined us in July 1998 as chief executive officer of our
subsidiary, LION bioscience Ltd., in Cambridge, England. He also serves as Vice
President, LSI Research and Vice President, SRS Group. He is also a group leader
in the research program at the European Bioinformatics Institute (EBI) in
Hinxton, U.K. Previously, he was a staff scientist at EMBL. He developed and
optimised LION's SRS data integration system and brought the exclusive
commercial rights to SRS to us. He holds a PhD. from the Max-Planck-Institut fur
Zuechtungsforschung in Cologne, Germany and from EMBL.

     Dr. Claus Kremoser joined us in June 1998 as Director of Business
Development and was promoted to Vice President of Drug Discovery in December
1998. Prior to joining us, Dr. Kremoser served as a biotech and pharmaceutical
consultant at Ernst & Young, where he co-authored the fourth and fifth editions
of the European biotech report and authored that firm's first report on German
biotech. Dr. Kremoser studied biochemistry in Munich and Tubingen and received
his PhD. in molecular neurobiology at the Max Planck Institute for Developmental
Biology in Tubingen.

     Rudolph Potenzone, PhD., joined us in March 2001 as Chief Executive Officer
of our U.S. operations. Prior to joining us, he was Senior Vice President for
Marketing & Development at MDL Information Systems, where he managed the design,
development and marketing of MDL's software and database products. Previously,
Dr. Potenzone was Director of Research and New Product Development at Chemical
Abstracts Service (CAS), and, prior to CAS, at Polygen/Molecular Simulations,
Inc. Dr. Potenzone has over ten years of industry experience managing chemical
information systems and over 20 years of cheminformatics experience. He holds a
PhD. in macromolecular science from Case Western Reserve University in
Cleveland, Ohio and a Bachelor of Science degree in biophysics and microbiology
from the University of Pittsburgh.

COMPENSATION

     The members of our company's supervisory board received compensation in the
aggregate amount of (euro) 107,000 in FY 2002. Under our company's articles of
association, the compensation for each member of the supervisory board is
currently (euro) 15,350 per fiscal year. The chairman of the supervisory board
currently receives twice this amount. The general meeting of the shareholders
may increase the amount of compensation of the supervisory board. Our company
also reimburses the costs incurred by the members of the supervisory board and
any turnover tax. Members of the supervisory board have received no compensation
from any of our company's subsidiaries. In FY 2002, none of the members of our
supervisory board were granted options.

     The aggregate compensation of our company's management board in respect of
FY 2002 was (euro) 962,630, including discretionary bonuses in the aggregate
amount of (euro) 230,081. In addition to salaried remuneration, the members of
our company's management board receive benefits in the form of automobile
allowance, allowance for life insurance, allowance for housing expenses, as well
as continued payment of salary in the event of illness for up to three months
and payment of relocation expenses. Two members of our management board, Dr.
Reinhard Schneider and Dr. Jan Mous hold options to purchase 37,100 shares and
105,000 shares respectively under our 2000 stock option plan. These options were
granted in August 2000. Our 2000 stock option plan is described below under
"Share Ownership". Each member of our management board may receive an annual
bonus in an amount determined by our supervisory board in its discretion. Our
company's employment agreement with Dr. von Bohlen und Halbach also provides for
the payment of bonuses to him based on our pre-tax net income, if any, up to an
aggregate maximum of 10% of such amount. As we have not had pre-tax net income
in any of our financial years to date, no bonuses under this arrangement have
been paid. The members of the management board have received no compensation
from any of our company's subsidiaries.

                                     - 58 -

<PAGE>

     The members of our supervisory and management board are also entitled
receive liability insurance coverage, including insurance against liabilities
under U.S. securities laws. We currently provide such coverage at no cost to the
members of our supervisory and management board.

EMPLOYEES

     The following table sets forth the full time equivalent number of our full
time equivalent employees by job category at the end of each of the last three
financial years.

<TABLE>
                                    WORLDWIDE EMPLOYEES

<CAPTION>
                                                         2000          2001           2002
                                                         ----          ----           ----

     <S>                                                  <C>           <C>            <C>
     Operation, Administration and Finance                 23            82             94
     Product Development                                  160           318            405
     Marketing, Sales and Related                          20            41             91
     Customer-Support Activities

     Total                                                203           441            590

</TABLE>

     Of our full-time equivalent employees at March 31, 2002, 323 were based in
Germany, 44 were based in the United Kingdom and 223 were based in the United
States. As of March 31, 2002, approximately 40% of our employees held doctoral
degrees in fields such as information technology, computational biology,
molecular biology, chemistry, physics and experimental genomics, and a further
40% held other advanced academic degrees.

     We do not have a works council. None of our United States based employees
are subject to a collective bargaining agreement. We have not experienced any
major labor disputes resulting in work stoppages since our formation.

     SHARE OWNERSHIP

     Each member of our supervisory board and our management board, other than
Dr. Friedrich von Bohlen und Halbach, beneficially own less than one percent of
our shares. Dr. von Bohlen und Halbach's share ownership is disclosed in Item 7.

     2000 Stock Option Plan. Under a stock option plan adopted by our general
meeting on March 13, 2000, our company has the authority to grant
non-transferable options to acquire shares in our company to members of its
management board and to our employees until December 31, 2004. Our company may
grant options covering up to 184,800 ordinary shares to members of its
management board and up to 757,050 ordinary shares to its employees. In
addition, our company may grant options covering up to 82,250 ordinary shares to
members of the management boards of our company's subsidiaries and up to 214,900
ordinary shares to employees of our company's subsidiaries. Our company may not
grant options covering more than 1,239,000 ordinary shares in the aggregate from
our company's conditional capital in the amount of (euro) 1,239,000.

     Prior to our initial public offering in August 2000, our company's
management board granted options to our management and employees to purchase up
to 1,113,000 ordinary shares, of which options to purchase up to 145,475
ordinary shares were subsequently cancelled when the option holders terminated
their employment with us. In December 2000, our management board granted options
to our employees to purchase up to 96,375 shares of which options to purchase up
to 20,950 shares were subsequently cancelled when the option holders terminated
their employment with us, and in March 2001, our management board granted
options to our employees to purchase up to 63,000 shares of which options to
purchase up to 8,000 shares were subsequently cancelled when the option holders
terminated employment with us. In December 2001, our management board granted
options to our employees to purchase up to 38,600 shares of which options to

                                     - 59 -

<PAGE>

purchase up to 2,000 shares were subsequently cancelled when the option holders
terminated employment with us

     Options, if granted, may be exercised if the market price of our company's
shares exceeds the price at which the options were granted by at least 40%.
Holders of options may exercise them during the eight-year period following the
date of grant, but only after the second anniversary of the date of the grant.
Once this threshold is met, the holder may exercise up to 33% of his options
from the second anniversary of the grant date, up to 66% of his options from the
third anniversary of the grant date and all of his remaining options from the
fourth anniversary of the grant date. Holders may not, however, exercise an
option within fixed time periods of at least ten business days established by
our company's supervisory board and management board in our interest, for
example, prior to publication of our quarterly or annual results of operations.

     2001 Stock Option Plan. Under an option plan approved by our company's
shareholders at our company's annual meeting of its shareholders on July 18,
2001, our company may grant options for the purchase of up to 636,400 shares to
members of the management board and employees of our company as well as to
executives and employees of our company's subsidiaries by December 31, 2005.
Options may be issued in one or several tranches. Up to 17% of all options may
be granted to members of our company's management board, up to 5% to executives
of our company's subsidiaries, and up to 78% to employees of our company and its
subsidiaries.

     An option may only be exercised during a term of five years and may only be
exercised after expiration of a waiting period. This waiting period is two years
in respect of 50% of the option rights granted to the beneficiary under one
tranche, and three years after the respective date of issue in respect of the
remaining 50%. Participants must be employed by, and receive regular
remuneration from, our company or one of its subsidiaries at the time of
issuance of the option rights. An option right may generally be exercised only
as long as the holder is an employee of our company or one of its subsidiaries.

     The exercise price of the option must correspond to the reference price of
the shares at the time the option right is granted, plus a success target of
40%. The reference price will be calculated on the basis of the mean of the
closing prices of the shares quoted on the Frankfurt Stock Exchange during the
20 trading days prior to the date of issuance of the option.

     The number of shares that may be purchased under an option may be adjusted
depending on certain share transactions. Our company will be entitled to grant
to the beneficiary a smaller number of new shares without payment of the
exercise price, for which the beneficiary will merely pay an amount
corresponding to the interest of such shares in the Company's registered
capital, or to make a cash payment towards the beneficiary amounting to the
difference between the exercise price and the current price of the shares quoted
on the day of receipt of the exercise notice instead of delivering the new
shares at the time the option rights are exercised.

     Our company may only issue shares to cover options granted under the 2001
stock option plan from our company's conditional capital in the amount of (euro)
636,400. In December 2001, our management board granted options to our
employees, including executives of our subsidiaries, to purchase up to 595,300
shares of which options to purchase up to 112,350 shares were subsequently
cancelled when the option holders terminated their employment with us.


ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     The following table shows the current beneficial ownership of our company's
share capital by each person who owns beneficially 5% or more of our company's
shares as of June 10, 2002 and is based on the information known to us or can be
ascertained by us from public filings. Our company is not directly or indirectly
owned or controlled by any foreign government or by any other corporation.

                                     - 60 -

<PAGE>

<TABLE>
<CAPTION>
                                                                                   SHARES BENEFICIALLY
                                                                                         OWNED(1)
                                                                                         --------

                                                                               AMOUNT OF
                                                                               BENEFICIAL           PERCENT
     NAME AND ADDRESS OF BENEFICIAL OWNER                                      OWNERSHIP           OF SHARES
     ------------------------------------                                      ---------           ---------

<S>                                                                             <C>                    <C>
Dr. Friedrich von Bohlen und Halbach..............................              2,178,535(2)          11.0
Dr. Anna Caterina von Bohlen und Halbach..........................              1,221,485(3)           6.2
Bayer AG..........................................................              1,400,000              7.0

(1)  (1) The share information set forth in the table is based upon information
     known by us or ascertained by us from public filings. The shares offered by
     us in our public offering were bearer shares and we are generally unable to
     determine the holders of these shares.
(2)  Does not include 150,000 shares that had been transferred by Dr. Friedrich
     von Bohlen und Halbach to the three underage children of Dr. Friedrich von
     Bohlen und Halbach and his spouse, Dr. Anna Caterina von Bohlen und
     Halbach, by way of a gift for estate planning purposes. The competent court
     has provided a guardian for the children. The guardian administers the
     children's interests with regard to these shares. Without the consent of
     the guardian, the shares cannot be sold.
(3)  Includes 35,000 shares held by Dr. Anna Caterina von Bohlen und Halbach,
     Dr. Friedrich von Bohlen und Halbach's spouse, in trust for Huberta
     Giulini, and 35,000 shares held by Dr. Anna Caterina von Bohlen und Halbach
     in trust for Hans-Jochen Giulini. Does not include 90,000 shares that had
     been transferred by Dr. Anna Caterina von Bohlen und Halbach to the three
     underage children of Dr. Friedrich von Bohlen und Halbach and Dr. Anna
     Caterina von Bohlen und Halbach by way of a gift for estate planning
     purposes. The competent court has provided a guardian for the children. The
     guardian administers the children's interests with regard to these shares.
     Without the consent of the guardian, the shares cannot be sold.

</TABLE>

RELATED PARTY TRANSACTIONS

     RELATIONSHIPS WITH BOHLEN INDUSTRIE

     On February 24, 1999, our company, as lender, entered into a loan agreement
with Bohlen Industrie GmbH, a German limited liability company, as borrower.
Bohlen Industrie is owned by relatives of Dr. Friedrich von Bohlen und Halbach,
the Chairman and Chief Executive Officer of our company. Dr. von Bohlen und
Halbach also holds a minority ownership interest in Bohlen Industrie. The
original principal loan amount under the agreement was DM 300,000 ((euro)
153,390), repayable on March 31, 2000. The loan agreement provided for an annual
interest rate of 6%, payable on a quarterly basis. On April 21, 1999, the
parties amended the loan agreement by increasing the principal loan amount to DM
900,000 ((euro) 460,163). On November 19, 1999, the parties amended the loan
agreement by increasing the principal loan to DM 1.5 million ((euro) 766,950)
and extended the maturity date for repayment of the loan to December 31, 2000.
Under the revised loan agreement, we were also granted a call right, which gave
our company until December 31, 1999 to demand early repayment of DM 600,000
((euro) 306,775). We did not exercise this right. Bohlen Industrie paid a total
of (euro) 1,508 of interest to us in FY 1999, (euro) 34,989 in FY 2000 and
(euro) 44,738 in FY 2001. Bohlen Industrie repaid the principal loan amount to
us in full on December 31, 2000. Bohlen Industrie periodically provides
insurance brokerage services to us. Bohlen Industrie receives commissions for
these services from the insurance companies that we purchase insurance policies
from. We have not paid Bohlen Industrie any compensation for these services.

     LEGAL SERVICES BY NOERR STIEFENHOFER LUTZ

     Dr. Thomas Schuerrle, who has been a member of our company's supervisory
board since the formation of our company, was a partner with the law firm of
Noerr Stiefenhofer Lutz prior to May 1, 2001. In the past, we regularly engaged
Norr Stiefenhofer Lutz to advise us on corporate transactions and other legal
matters.

                                     - 61 -

<PAGE>

ITEM 8:  FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS

     See "Item 18.  Financial Statements" and pages F-1 through F-32.

OTHER FINANCIAL INFORMATION

     LEGAL PROCEEDINGS

     We are not now a party to any material litigation, nor are we currently
aware of any pending or threatened litigation or arbitration proceedings that
could have a material adverse effect upon our business, results of operations or
financial condition.

     DIVIDEND POLICY

     Dividends, if any, are declared at the annual general meeting of
shareholders of our company and are paid once a year, although we currently
cannot pay any dividends. Upon proposal by our management board and supervisory
board, the annual general meeting of shareholders approves the allocation of our
company's net profits, which we determine on the basis of our unconsolidated
financial statements prepared in accordance with the accounting principles
generally accepted in Germany. The management board and the supervisory board
are authorized to allocate, in their discretion, up to half of our company's net
profit in any fiscal year to other retained earnings. Shareholders participate
in dividends in proportion to the number of shares held by each shareholder.

     Dividends approved at the general meeting of the shareholders are payable
on the first stock exchange trading day after that meeting, unless decided
otherwise at the general meeting of the shareholders. Where shareholders hold
physical certificates, they may present the appropriate dividend coupon to
receive such dividends. When shareholders hold shares that are entitled to
dividends in a clearing system, the dividends are paid according to that
clearing system's rules. We will publish notice of dividends paid and the paying
agent or agents appointed in the German federal gazette (Bundesanzeiger).

     We have never declared or paid any cash dividends. We expect to retain our
future earnings, if any, for use in the operation and expansion of our business
and do not anticipate paying any cash dividends in the foreseeable future.


ITEM 9: THE OFFER AND LISTING

     GENERAL

     The principal trading market for our company's shares is the Frankfurt
Stock Exchange, where our shares trade under the symbol LIO. All of our
company's shares are in bearer form. American depositary shares ("ADSs"), each
representing one share, are listed on the Nasdaq National Market and trade under
the symbol LEON. The depositary for the ADSs is JPMorgan Chase Bank. As of March
31, 2002, there were a total of 1,664,477 ADSs outstanding, held by144 holders
of record having addresses in the United States and 4 holders with a
non-U.S.address. As of June 10, 2002, there were a total of 1,698,764 ADSs
outstanding held by 215 holders of record having addresses in the United States
8 holders having non-U.S. addresses. Since our company's shares are in bearer
form, we have only limited ownership information concerning our publicly traded
shares.

     TRADING ON THE NASDAQ NATIONAL MARKET

     ADSs representing our company's shares have traded on the Nasdaq National
Market since August 11, 2000. The table below sets forth, for the periods
indicated, the high and low closing prices for the ADSs on the Nasdaq National
Market.

                                     - 62 -

<PAGE>

                                                               LION ADSS
                                                         NASDAQ NATIONAL MARKET
                                                         ----------------------
                                                           HIGH         LOW
                                                           ----         ---
                                                             $            $
     MOST RECENT FISCAL YEARS
     Fiscal Year Ended March 31, 2001........              106.50      18.75
     Fiscal Year Ended March 31, 2002........               37.80       7.20

     MOST RECENT FISCAL QUARTERS
     August 1 through September 30, 2000.....              106.50      54.50
     October 1 through December 31, 2000.....               95.50      56.17
     January 1 through March 31, 2001........               78.25      18.00
     April 1 through June 30, 2001...........               37.80      19.25
     July 1 through September 30, 2001.......               26.00       7.20
     October 1 through December 31, 2001.....               19.68       9.65
     January 1 through March 31, 2002........               18.00       8.77


                                                               LION ADSS
                                                          NASDAQ NATIONAL MARKET
                                                          ----------------------

                                                           HIGH         LOW
                                                           ----         ---
                                                             $            $
     MOST RECENT SIX MONTHS
     December 2001...........................               18.24      15.50
     January 2002............................               18.00      12.70
     February 2002...........................               12.80       8.90
     March 2002..............................               12.27       9.77
     April 2002..............................               10.35       8.13
     May 2002................................                8.70       4.16



     On June 14 , 2002, the closing sales price per ADS on the Nasdaq National
Market was $3.90.

     TRADING ON THE FRANKFURT STOCK EXCHANGE

     Our company's ordinary shares have traded on the Neuer Markt segment of the
Frankfurt Stock Exchange since August 11, 2000. The table below sets forth, for
the periods indicated, the high and low closing prices for our company's
ordinary shares on the Frankfurt Stock Exchange, as reported by the Frankfurt
Stock Exchange's Xetra trading system. Translation of euros into dollars has
been made at the daily conversion rate for each day during the respective
period. This translation is provided solely for your convenience.

                                                          LION ORDINARY SHARES
                                                          FRANKFURT STOCK MARKET
                                                          ----------------------

                                                           HIGH         LOW
                                                           ----         ---
                                                          (euro)       (euro)
     MOST RECENT FISCAL YEARS
     Fiscal Year Ended March 31, 2001........             123.50       20.05
     Fiscal Year Ended March 31, 2002........              42.20        7.90

     MOST RECENT FISCAL QUARTERS
     August 1 through September 30, 2000.....             123.50       58.00
     October 1 through December 31, 2000.....             109.50       61.50
     January 1 through March 31, 2001........              83.00       20.05
     April 1 through June 30, 2001...........              42.20       23.00
     July 1 through September 30, 2001.......              32.00        7.90
     October 1 through December 31, 2001.....              22.45       10.85
     January 1 through March 31, 2002........              19.75        9.90

                                     - 63 -

<PAGE>

                                                           LION ORDINARY SHARES
                                                          FRANKFURT STOCK MARKET
                                                          ----------------------

                                                           HIGH         LOW
                                                           ----         ---
                                                          (euro)       (euro)
     MOST RECENT SIX MONTHS
     December 2001...........................              20.55       17.50
     January 2002............................              19.75       13.95
     February 2002...........................              14.60        9.90
     March 2002..............................              13.95       10.97
     April 2002..............................              11.70        8.95
     May 2002................................               9.30        5.05


     On June 14, 2002, the closing sales price per share on the Frankfurt Stock
Exchange was (euro) 4.20, equivalent to approximately $3.97 per share,
translated at the noon buying rate for June 14, 2002.


ITEM 10: ADDITIONAL INFORMATION

REGISTRATION WITH THE COMMERCIAL REGISTER

     Our company is registered with the commercial register of the local court
(Amtsgericht) in Heidelberg, Germany, under the number HRB 5706 and the
corporate name LION bioscience Aktiengesellschaft. Its registered office (Sitz)
is Heidelberg and its principal executive office is located at Waldhofer Str.
98, 69123 Heidelberg, Germany.

MEMORANDUM AND ARTICLES OF ASSOCIATION

     This section summarizes the material rights of our company's shareholders
under German law, and the material provisions of our company's articles of
association as amended by resolution adopted by the annual general meeting of
our company's shareholders on July 18, 2001. This description does not describe
the articles of association in their entirety. Copies of our company's articles
of association are publicly available from the commercial register in
Heidelberg, and an English translation of them has been filed with the SEC as
Exhibit 1 to this annual report.

     SHARE CAPITAL

     Our company's share capital amounts to (euro) 19,870,175 divided into
19,870,175 ordinary bearer shares without par value. All of our company's shares
are in bearer form. Our company may issue share certificates in global form.
Shareholders are not entitled to have single shares issued in certificated form.
As of June 10, 2002, there were 19,870,175 shares of our company issued and
outstanding, all of which were fully paid. Our shares are freely transferable.

     Authorized Capital

     Our company's articles of association authorize our company's management
board to increase, in each case, with consent of the supervisory board, our
company's share capital at any time or from time to time on or before June 1,
2005 by up to (euro) 3,954,825 by issuing new shares against either cash
contributions or contributions in kind. Our company's management board is also
authorized to exclude, in each case with the consent of the supervisory board,

                                     - 64 -

<PAGE>

the preferential rights of the existing shareholders to subscribe for any issue
of new shares, which rights are described below:

     o   in case of a capital increase against cash contributions, if the
         capital increase does not exceed 10% of the existing share capital and
         the issuing price is not significantly less than the share price quoted
         on any stock exchange on which our company's shares are traded; and

     o   in case of a capital increase against contributions in kind, if the
         capital increase is effected to acquire other companies, company
         divisions, shareholdings in companies or other operating assets.

     In March 2001, our company's management board resolved, with the consent of
the supervisory board, to use authorized capital in the amount of (euro) 500,000
to issue 500,000 shares underlying our company's ADSs to Trega's former
stockholders in connection with our acquisition of Trega. In January 2002, our
company's management board resolved, with the consent of the supervisory board,
to use authorized capital in the amount of (euro) 1,116,175 to issue 1,116,175
shares underlying our company's ADSs to NetGenics' former stockholders in
connection with our acquisition of NetGenics. Our company's authorized capital
was reduced by these amounts to the current amount of (euro) 3,954,825, and this
reduction was reflected in our articles of association.

     Conditional Capital

     In 2000, our company increased its share capital conditionally by up to
(euro) 1,239,000, divided into up to 1,239,000 new ordinary shares. This
conditional capital may be used only to the extent that option rights under our
2000 stock option plan adopted by resolution of the general meeting of our
company's shareholders on March 13, 2000 are issued and exercised.

     On July 18, 2001, the general meeting of our shareholders conditionally
increased our company's capital further by up to (euro) 636,400 divided into up
to 636,400 shares. This conditional capital increase may be used only to the
extent that holders of option issued under our 2002 stock option exercise their
options.

     FUTURE SHARE CAPITAL; PREFERENTIAL RIGHTS

     Under our company's articles of association, our company's share capital
may be increased against either contributions of cash or contributions in kind
by a resolution of the general meeting of our company's shareholders with a
majority of the share capital represented at the meeting at which the resolution
is adopted, or by a resolution of the management board with the consent of the
supervisory board by using our company's authorized capital.

     In accordance with the German Stock Corporation Act (Aktiengesetz), an
existing shareholder in a stock corporation has a preferential right to
subscribe for any issue of new shares, debt instruments convertible into shares
and participating debt instruments (Genussrechte) in proportion to the number of
shares held by that shareholder in the existing share capital of the company.
The general meeting of the shareholders may exclude this preferential right by a
majority of at least three quarters of the share capital represented at the
meeting at which the resolution authorizing the capital increase is adopted. In
addition to these formal procedural requirements, the exclusion requires a
substantive justification. The management board is required to submit a written
report concerning this justification to the general meeting. The goal pursued by
the company through the issuance of the new security must outweigh the
elimination of this preferential right and the goal could not be reasonably
achieved without it. A substantive justification is not required for any
increase in the share capital for contributions in cash if the increase does not
exceed 10% of the existing share capital and the issue price is not
substantially less than the market price for shares that are traded on a stock
exchange.

     The preferential rights are freely assignable and may be traded on German
stock exchanges for a specified time within the subscription period. The
preferential rights lapse if they are not used.

                                     - 65 -

<PAGE>

     DIVIDEND AND LIQUIDATION RIGHTS

     Upon proposal by our company's management board and supervisory board, the
annual general meeting of our company's shareholders approves the allocation of
our company's net profits, which our company determines on the basis of its
unconsolidated financial statements prepared in accordance with the accounting
principles generally accepted in Germany. The management board and the
supervisory board are authorized to allocate, in their discretion, up to half of
our company's net profit in any fiscal year to other retained earnings.
Shareholders participate in dividends in proportion to the number of shares held
by each shareholder.

     In accordance with the German Stock Corporation Act, upon our company's
liquidation, shareholders will receive, in proportion to their shareholdings,
any liquidation proceeds remaining after payment of all of our company's
liabilities.

     VOTING RIGHTS AND GENERAL MEETINGS

     A general meeting of our company's shareholders may be called by our
company's management board or supervisory board. Shareholders holding in the
aggregate at least 5% of our company's issued share capital may also require the
management board to call a meeting. The annual general meeting must take place
within the first eight months of our company's financial year. The management
board calls this meeting upon the receipt of the supervisory board's report on
the annual financial statements.

     Under German law and our company's articles of association, our company
must publish notices of shareholders meetings in the German federal gazette
(Bundesanzeiger) at least one month before the last day on which the
shareholders must deposit their shares for the meeting

     Under our company's articles of association, those shareholders who have
deposited their shares during regular business hours before any general meeting
with our company and left on deposit until the end of such general meeting, a
public notary, a securities depository bank (Wertpapiersammelbank) or any other
place of deposit specified in the notice of the meeting, may participate in and
vote in that general meeting. Shares are also deemed to have been deposited if,
with the consent of an approved depository, they are deposited with a bank in a
blocked security deposit until the end of the general meeting. The deposit must
be made by no later than the seventh day before the day of the general meeting.
If such day falls on a Saturday, Sunday, or national holiday at the place of
deposit, the deposit may take place on the immediately following business day.
Saturdays will not count as business days. The voting rights attached to the
shares may be exercised by an authorized representative of the shareholder. This
authorization must be in written form, and if so specified in the invitation to
the general meeting, may be submitted to our company by facsimile or in
electronic form

     A shareholder or a group of shareholders holding a minimum of either 5% of
the capital or shares representing at least (euro) 500,000 of our company's
registered capital may require that additional or modified proposals be made at
the general meeting.

     Each share carries one vote at general meetings of the shareholders.
According to our company's articles of association, resolutions are generally
passed with a simple majority of the votes cast. Resolutions that require a
capital majority are passed with a simple majority of the share capital
represented at the meeting of shareholders at which the resolution is
considered, unless statutory law or our company's articles of association
require otherwise. Under the German Stock Corporation Act, a number of
significant resolutions must be passed by a majority of the votes cast and at
least 75% of the share capital represented in connection with the vote taken on
that resolution. The majority required for some of these resolutions may be
lowered by the articles of association. Our company's shareholders have lowered
these majority requirements to the extent permitted by law.

     However, the following resolutions require the approval of a majority of at
least three-quarters of the share capital represented at the meeting:

     o   the exclusion of preferential rights in a capital increase;

     o   capital decreases;

     o   the creation of authorized capital or conditional capital;

                                     - 66 -

<PAGE>

     o   an amendment to the business purpose stated in our company's articles
         of association;

     o   the dissolution of our company;

     o   a merger or a consolidation with another stock corporation or another
         corporate transformation;

     o   a transfer of all or substantially all of our company's assets; or

     o   the conclusion of any direct control, profit and loss pooling or
         similar intercompany agreements.

     Although our company must notify shareholders of any ordinary or
extraordinary shareholders' meeting as described above, neither the German Stock
Corporation Act nor our company's articles of association fixes a minimum quorum
requirement. This means that holders of a minority of our company's shares could
control the outcome of resolutions not requiring a specified majority of our
company's outstanding share capital.

     CORPORATE PURPOSE

     Under our company's articles of association, its corporate purpose is:

     o   the analysis and interpretation of genetic information and functions in
         the field of biotechnology and their use;

     o   the development, manufacture, distribution, implementation, sale of and
         trade in IT products, systems and processes in the area of
         biotechnology, as well as the provision of services in the area; and

     o   consulting services in the area of biotechnology for the life sciences
         as well as scientific information and documentation.

     Our company is entitled to enter into any and all business transactions and
take any and all measures which directly or indirectly seem to be necessary or
useful to achieve its purpose. For this reason, our company is entitled to
establish branches at home and abroad, found, acquire and participate in other
enterprises of the same or similar kind and take over their management or limit
itself with respect to the management of the enterprise in which it holds an
interest. Our company is entitled to spin off its business in whole or in part
into affiliated companies.

NOTICE REQUIREMENTS

     As of January 1, 2002, under the revised German Security Trading Act
(Wertpapierhandelsgesetz) any person whose voting rights reach, exceed or, after
exceeding, falls below the 5%, 10%, 25%, 50% or 75% voting right threshold in
our company has the duty to notify our company and the Federal Authority for the
Supervisory of Financial Services (Bundesanstalt fuer
Finanzdienstdienstleistungsaufsicht) thereof. Since with respect to companies,
such as our company, listed on the Neuer Markt segment of the Frankfurt Stock
Exchange, this reporting requirement went into effect only on January 1, 2002,
any shareholder who on March 31, 2002 holds voting rights of 5% or more in our
company must within seven calendar days from March 31, 2002 report to our
company and to the Federal Authority for the Supervisory of Financial Services
in writing his address and the amount of his voting rights, unless he has
previously done so. No rights shall attach to the ordinary shares in our company
held by such company or person so long as such disclosure has not been made.
These rules also apply to foreign holders of our shares.

NOTICES, PAYING AGENT AND DEPOSITORY

     Our company publishes official notices exclusively in the German federal
gazette (Bundesanzeiger). In addition, our company publishes notices regarding
its shares in at least one national newspaper designated for notices by the
Frankfurt Stock Exchange.

                                     - 67 -

<PAGE>

     In addition, our company files information with the SEC as described under
the section entitled "Documents on Display."

     Deutsche Bank Aktiengesellschaft is the German Paying and Depository Agent,
at whose offices any measures regarding our company's shares may be taken free
of charge.

FISCAL YEAR

     Our financial year begins April 1 and ends March 31 of the following year.

MATERIAL CONTRACTS

     This section provides a summary of all material contracts to which we are a
party and that have been entered into during the two immediately preceding
financial years. The full text of the agreements discussed below along with
English translations thereof, where applicable, is available as exhibits to this
annual report or to our Registration Statement on Form F-1, Registration No.
333-12262, filed with the Securities and Exchange Commission (SEC) on July 10,
2000, or to our Registration Statement on Form F-4, Registration No. 333-13150,
filed with the SEC on February 9, 2001.

     DEVELOPMENT AGREEMENT WITH BAYER AG

     On October 13, 2000, our company and Bayer entered into a development
agreement, pursuant to which our company has agreed to provide Bayer with an
integrated pharmacophore and informatics technology platform to speed Bayer's
identification of lead candidates for its drug and agricultural chemical
programs. Under this arrangement, we will deliver existing, and will develop
future, information technology and software, such as pharmacophore and
informatics tools, for Bayer to significantly enhance Bayer's lead
identification and optimization capabilities for pharmaceutical and agrochemical
discovery and development.

     Under this agreement, Bayer originally agreed to pay to our company total
consideration in the amount of $16.25 million for our performance of the
development agreement, payable in installments over the course of the agreement,
and one-time fees and license fees in an aggregate amount of $2 million and a
management fee in the amount of $3.25 million, payable in six equal
installments.

     Our performance under the agreement was originally divided into four
successive milestones and the agreement would originally expire when Bayer
accepts our performance of the fourth milestone, which was originally due on
March 1, 2003 or when Bayer has twice objected to our performance of the fourth
milestone.

     We entered into amendments to the development agreement with Bayer in
December 2001 and March 2002 by revising the original milestone requirements and
dates as well as the original payment schedule. Under the development agreement
as amended, we were required to achieve a new milestone by April 1, 2002.
Thereafter a new milestone is due every six months except that the final
milestone will be due on December 1, 2003. Bayer will pay us the remainder of
our management fee in the amount of $ 1.083 million in three installments on
July 30, 2002, January 30, 2003 and July 30, 2003. Bayer will make future
installment payments in the aggregate amount of $ 8.607 million under the
development agreement, as amended, subject to its acceptance of the key
milestone deliverables. Bayer is entitled to withhold these milestone payments,
and to terminate the development agreement if we do not achieve the
corresponding deliverables as due under the development agreement as amended.

     We did not achieve certain deliverables due under the April 1, 2002
milestone. As a result, Bayer is entitled to withhold the corresponding
milestone payment in the amount of $2 million. Bayer has agreed in principle to
extend the due dates for these and other deliverables under the April 1, 2002
milestone based on a schedule of consecutive due dates, with delivery of a
critical set of deliverables due in August 2002 and the final deliverables under
the April 1, 2002 milestone now due in October 2002. If we do not make
satisfactory progress in achieving the deliverables when due under this
schedule, Bayer may terminate the development agreement as a result of our
failure to achieve the April 1, 2002 milestone. The failure to receive milestone
payments or the termination of our development agreement with Bayer would have a
material adverse effect on our business.

                                     - 68 -

<PAGE>


     Any software developed or invented under this development agreement and all
other developments, inventions, know-how, whether patentable or not, will be
owned by our company. We will grant to Bayer and the Bayer group an irrevocable,
non-transferable, non-exclusive, worldwide license to use this software,
inventions and know-how for internal purposes only for the maximum period of
time legally possible. We have the unrestricted right to commercialize this
software, inventions and know-how, provided that new software for pharmacophore
identification and project tracking may not be commercialized until acceptance
of our performance of the last milestone.

     During the arrangement and for nine months after acceptance of the last
milestone, we may have to pay to Bayer royalties in the amount of 10% of all
payments received by us for new products created or services performed in the
field of pharmacophore and informatics. The overall amount of such royalty
payments for a single third party agreement is limited to a maximum of $750,000.
Our obligation to pay such royalties terminates after nine months from the date
of acceptance of the last milestone under the development agreement.

     Pursuant to the agreement, the parties have established a steering
committee that will approve details of the software to be delivered by us and to
approve any changes to the milestones. The parties have also agreed to set up an
operational committee, which will coordinate the operational activities under
this development agreement. Each party has the right to appoint four members to
the operational committee with our company appointing the chairman and Bayer
appointing the vice chairman of the committee.

     EXCLUSIVE LICENSE AGREEMENT WITH THE EMBL CONCERNING SRS

     On September 15, 1998, our company and EMBL entered into a worldwide
exclusive license agreement under which our company is exclusively entitled to
use the Sequence Retrieval System (SRS) software version 5.1 developed at EMBL.

     On January 21, 2002, we entered into a comprehensive amendment to this
exclusive SRS license agreement with EMBL in the form of a software license and
distribution agreement. Under the terms of this agreement, EMBL granted us an
exclusive, irrevocable license to use and exploit all early versions, up to and
including version 5.1, of the SRS computer program and all associated versions
of the computer programs IKARUS, and their respective source code, updates,
upgrades and related documentation, whether released before or after the
effective date of this agreement, and all related intellectual property rights.
The license is perpetual and covers the worldwide territory as well as all
fields and extends to all commercial and non-commercial purposes, including the
right to grant sublicenses to all early SRS software versions, modify and
develop the SRS software further and create derivative works thereof, and to
distribute, license and sublicense the original or modified software to our
customers and other third parties or our affiliates. In particular, we are free
in our communications with third parties, including in particular companies
active in the broader life sciences industry, to hold us out as having the
exclusive right to exploit all intellectual property pertaining to all early
versions of the SRS software. EMBL has granted us the exclusive right to
register the copyright of any early SRS version in our company's name.

     The parties further intend that we have standing as an "exclusive licensee"
to pursue copyright infringement actions against commercial infringers and to
negotiate to reform any other aspects of this agreement to the extent necessary
to convey this status to us.

     In consideration for the rights granted in this agreement, we agreed to pay
to EMBL a total of DM 220,000 ((euro) 112,484) in three annual installments
commencing on January 1, 2002. EMBL is not entitled to any other remuneration or
back payment, including any royalty payments, from our use or commercialization
of the SRS software under any prior license agreement between EMBL and us.

     Upon request, EMBL agrees to cooperate and assist us in enforcing our
rights to the early SRS software versions under this agreement, including
through enforcement or termination of any third party licenses to early SRS
versions, providing evidence in support of any infringement or enforcement
action brought by us against a third party and providing active assistance in
our efforts to persuade or judicially enjoin third parties from distributing or
offering early SRS versions through the Internet. EMBL has also assigned to us
the right to pursue legal action, in particular infringement actions, to enforce
licenses or agreements to which EMBL or its affiliate is a party concerning
early SRS versions without having to join EMBL.

     Prior to the effective date of this agreement, EMBL granted use rights in
early SRS version to third parties. Other parties may claim to have acquired use
rights in early SRS versions as a result of downloading these early versions,
together with any associated "readme" file. EMBL exclusively authorizes us to
enforce on EMBL's behalf all rights of EMBL arising from licenses to use early
SRS versions granted to non-academic third parties, in particular the right to
terminate these third party licenses where permitted by applicable law. EMBL has
agreed to assign all monetary claims it may have arising from violations of
these licenses to us.

     Except for specified third parties, EMBL will, upon our request, notify
non-academic third parties that have been granted or have asserted a license or
use rights to early SRS versions or that have downloaded these early SRS
versions from a web site or ftp server under EMBL's control as follows:

     o    LION has held the worldwide exclusive rights to the commercial use and
          exploitation of the SRS software since September 1998 with respect to
          SRS version 5.1 and since July 2001 with respect to prior versions.

                                      -69

<PAGE>


     o    Any non-academic third party licenses or use rights (except as
          specified in the agreement) for use of early SRS versions that have
          been granted by EMBL are terminated effective immediately.

     o    Any third party that has downloaded or obtained or intends to download
          or obtain early SRS versions from any Internet web site or ftp server
          after the effective date of the September 1998 exclusive SRS license
          agreement has no right to use these SRS versions and infringes upon
          our rights.

     o    Non-academic users of SRS should obtain a license for their use of SRS
          from us.

     We have agreed to waive our claims against EMBL arising from any breach or
violation by EMBL of the warranties or other provision in the SRS agreement of
September 15 1998 and the Annex Agreement between EMBL and us dated July 20,
2001.

     EMBL retains the right to use the early SRS versions for its own
scientific, non-commercial purposes and to incorporate these early SRS versions,
as well as any upgrades or updates developed by EMBL thereof, in a public
Internet server until September 15, 2004. We have also granted EMBL a license to
use our updates and upgrades to early SRS versions for EMBL's internal
non-commercial purposes and for non-commercial use by the public from a Internet
server. This license expires on September 15, 2004.


EXCHANGE CONTROLS

     At present, Germany does not restrict the movement of capital between
Germany and other countries except investments in Iraq and the freezing of funds
related to Slobodan Milosevic and the Taliban party in Afghanistan. These
restrictions were established to coincide with resolutions adopted by the United
Nations and the European Union. Restrictions to Libya have been partially
suspended

     For statistical purposes, with some exceptions, every corporation or
individual residing in Germany must report to the German Central Bank any
payment received from or made to a nonresident corporation or individual if the
payment exceeds (euro) 12,500. Additionally, corporations and individuals
residing in Germany must report to the German Central Bank any claims of a
resident corporation or individual against, or liabilities payable to, a
non-resident corporation or individual exceeding an aggregate of (euro) 5.0
million at the end of any calendar month.

     Neither German law nor our articles of association restricts the right of
nonresident or foreign owners of our company's shares or ADSs to hold or vote
the shares.

TAXATION

     The following is a discussion of the material German and United States
federal income tax consequences for Qualified Holders holding shares or ADS of
our company. This discussion is based upon existing German and United States
federal income tax law, including legislation, regulations, administrative
rulings and court decisions, as in effect on the date of this Form 20-F, all of
which are subject to change, possibly with retroactive effect.

     For purposes of this discussion, in general, a "Qualified Holder" means a
beneficial owner of shares or ADS of our company that (i) is a resident of the
United States for purposes of the United States-German income tax treaty (the
"Income Tax Treaty"), which generally includes an individual United States
resident, a corporation created or organized under the laws of the United
States, any state thereof or the District of Columbia and a partnership, estate
or trust, to the extent its income is subject to taxation in the United States
as the income of a United States resident, either in its hands or in the hands
of its partners or beneficiaries, (ii) does not hold shares or ADS of our
company as part of the business property of a permanent establishment located in
Germany or as part of a fixed base of an individual located in Germany and used
for the performance of independent personal services, and (iii) if not an
individual, is not subject to the limitation on benefits restrictions in the
Income Tax Treaty. This discussion assumes that the Qualified Holder holds
shares or ADS of our company as a capital asset.

                                     - 70 -

<PAGE>

     This discussion does not address all aspects of German and United States
federal income taxation that may be relevant to all Qualified Holders in light
of their particular circumstances, including, for example, Qualified Holders
whose stock was acquired pursuant to the exercise of an employee stock option or
otherwise as compensation or Qualified Holders who are subject to special
treatment under United States federal income tax laws (for example, financial
institutions, insurance companies, tax-exempt organizations and broker-dealers).
This discussion also does not address any aspects of state, local or non-United
States (other than German) tax law.

     EACH QUALIFIED HOLDER IS STRONGLY URGED TO CONSULT HIS OR HER TAX ADVISOR
AS TO THE GERMAN AND UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF HOLDING
SHARES OR ADS OF OUR COMPANY, INCLUDING THE PARTICULAR FACTS AND CIRCUMSTANCES
THAT MAY BE UNIQUE TO SUCH QUALIFIED HOLDER, AND AS TO ANY OTHER TAX
CONSEQUENCES OF HOLDING SHARES OR ADS OF OUR COMPANY.

     GERMAN TAXATION

     Taxation of our company

     Since April 1, 2001, our company has been subject to a corporation tax at
the rate of 25%. An additional solidarity surcharge equal to 5.5% of the
corporation tax is also imposed. The total corporation tax burden is therefore
26.375%.

     Our company is also subject to an income-based trade tax. The rate of tax
depends on the municipalities in which our establishments are located.
Generally, the trade tax ranges between 15% and 21% of the income assessed for
trade tax purposes. The trade tax is deductible as a business expense in
determining the corporation tax.

     If our company has loss carry forwards for corporation tax or trade tax
purposes, the availability of these loss carry forwards may be subject to
limitation in certain circumstances.

     Taxation of dividends

     Dividends are subject to a 20% withholding tax plus a solidarity surcharge
equal to 5.5% of the corporation tax, for a total withholding tax of 21.1%. The
Income Tax Treaty reduces the withholding tax rate to 15%. In the case of a
United States corporation owning at least 10% of the voting stock of our company
(a "10% Holder"), the total German withholding tax rate is reduced under the
Income Tax Treaty to 5%.

     To receive this reduction in the withholding tax, the recipient of
dividends must be eligible for treaty benefits and must apply to the German tax
authorities, located at the Bundesamt fur Finanzen, Friedhofstrasse 1, D-53225
Bonn, Germany, for a refund. Copies of the form required for refund claims may
be obtained from the German tax authorities at the same address or from the
embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W.,
Washington, D.C. 20007-1998. The refund claim must include the original bank
voucher issued by the paying entity documenting the tax withheld (or a certified
copy) and certification of the filing of the taxpayer's last U.S. federal income
tax return from the Internal Revenue Service (IRS) on Internal Revenue Service
Form 6166.

     Taxation of dispositions

     Long term capital gains from the sale or other disposition of our company's
shares or ADSs are not subject to tax in Germany unless a Qualified Holder has
held, directly or indirectly, our company's shares or ADSs representing 1% or
more of the registered share capital of our company at any time during the
five-year period immediately preceding the disposition. If a Qualified Holder is
eligible for the benefits of the Income Tax Treaty, such Qualified Holder
generally will not be subject to capital gains tax in Germany.

     Inheritance and gift tax

     German gift or inheritance tax does not apply to a Qualified Holder's
transfer of our company's shares or ADSs by gift or a Qualified Holder's death
unless at the time of the transfer:

                                     - 71 -

<PAGE>

     o   The Qualified Holder or the transferee were domiciled in Germany or
         were a German citizen who had not been continuously outside of Germany
         for more than five years (or were employed by or living in the
         household of a person employed by a German public authority);

     o   The Qualified Holder directly or with a related person held our
         company's shares or ADSs representing 10% or more of the registered
         share capital of our company; or

     o   The transfer occurs within ten years after the Qualified Holder or the
         transferee, having previously been subject to unlimited German tax
         jurisdiction for at least five years during a ten-year period and
         having moved to a specified low-tax jurisdiction, were no longer
         subject to unlimited German tax jurisdiction.

     The estate tax treaty between Germany and the United States provides that
German gift or inheritance tax may be imposed only in the first situation
described above.

     Other taxes

     No German transfer, stamp or other similar taxes apply to the sale or other
disposition of our company's shares or ADSs.

     UNITED STATES TAXATION

     Taxation of dividends

     Dividends (including the amount of German tax withheld) will be included in
a Qualified Holder's gross income as ordinary income from foreign sources. The
dividends will not be eligible for the dividends-received deduction available to
corporations. Dividends paid in euro will be includible in a Qualified Holder's
income in a U.S. dollar amount based on the exchange rate in effect on the date
a Qualified Holder (in the case of our company's shares) or the depositary (in
the case of our company's ADSs) receives the dividend whether or not the payment
is converted into U.S. dollars at that time. Any gain or loss recognized on a
subsequent conversion of euro into U.S. dollars generally will be U.S. source
ordinary income or loss. Distributions of additional shares or ADSs of our
company or rights to acquire additional shares or ADSs of our company that are
made as part of a pro rata distribution to all of our company's shareholders
should not be subject to U.S. federal income tax.

     If a Qualified Holder is eligible to claim benefits under the Income Tax
Treaty, such Qualified Holder may claim a reduced rate of German withholding tax
equal to 15% or 5% (in the case of a 10% Holder) as discussed under "German
Taxation--Taxation of dividends" above. Subject to generally applicable
limitations, a Qualified Holder may claim a deduction or a foreign tax credit
for the amount of German tax withheld or deemed withheld at the appropriate
rate.

     Taxation of dispositions

     A Qualified Holder will recognize capital gain or loss on the sale or other
disposition of our company's shares or ADSs in an amount equal to the difference
between the Qualified Holder's basis in our company's shares or ADSs and the
amount the Qualified Holder realizes from the sale or other disposition. Any
gain or loss generally will be treated as arising from U.S. sources.

     A Qualified Holder's basis in our company's shares purchased with euro will
be equal to the U.S. dollar value of the euro at the spot rate on the date of
purchase (or in the case of cash basis and electing accrual basis taxpayers, the
settlement date). If a Qualified Holder receives euro on the sale or other
disposition of our company's shares, the Qualified Holder will realize an amount
equal to the U.S. dollar value of the euro on the date of sale or other
disposition (or in the case of cash basis and electing accrual basis taxpayers,
the settlement date). A Qualified Holder will have a tax basis in the euro it
receives equal to the U.S. dollar amount it realizes. Any gain or loss realized
on a subsequent conversion of the euro into U.S. dollars generally will be U.S.
source ordinary income or loss.

                                     - 72 -

<PAGE>

     Passive foreign investment company

     We do not believe that our company was a passive foreign investment
company, or "PFIC", for U.S. federal income tax purposes for FY 2002. Because
our company holds significant amounts of working capital in marketable
securities, however, our company could become a PFIC during the current or
subsequent years. Our company would be a PFIC in any taxable year when, taking
into account the income and assets of certain subsidiaries, either (i) at least
75 percent of our company's gross income is passive income or (ii) at least 50
percent of the average value of our company's assets is attributable to assets
that produce or are held to produce passive income.

     If our company became a PFIC in any year when a Qualified Holder owned our
company's shares or ADSs, the Qualified Holder would be subject to additional
taxes on any excess distributions received from our company and any gain
realized from the Qualified Holder's sale or other disposition of the our
company `s shares or ADSs (regardless of whether our company continued to be a
PFIC). The Qualified Holder would have an excess distribution to the extent that
distributions on our company's shares or ADSs during a taxable year exceed 125
percent of the average amount received during the three preceding taxable years
(or, if shorter, the Qualified Holder's holding period). To compute the tax on
excess distributions or any gain, (i) the excess distribution or the gain would
be allocated ratably over the Qualified Holder's holding period, (ii) the amount
allocated to the current taxable year and any year before our company became a
PFIC would be taxed as ordinary income in the current year and (iii) the amount
allocated to other taxable years would be taxed at the highest applicable
marginal rate in effect for each year and an interest charge would be imposed to
recover the deemed benefit from the deferred payment of the tax attributable to
each year.

     If our company became a PFIC, the Qualified Holder could avoid some of the
tax consequences just described by electing to mark our company's shares or ADSs
to market annually. Any gain from marking our company's shares or ADSs to market
or from disposing of them would be ordinary income. The Qualified Holder would
recognize loss from marking our company shares or ADSs to market, but only to
the extent of the Qualified Holder's unreversed gains. Loss from marking our
company's shares or ADSs to market would be ordinary, but loss on disposing of
them would be capital loss except to the extent of unreversed gains. A Qualified
Holder will not be able to avoid the tax consequences just described by electing
to treat our company as a qualified electing fund ("QEF") because our company
does not intend to prepare the information that a Qualified Holder would need to
make a QEF election.

     Information reporting and backup withholding

     Proceeds from the sale of our company's shares or ADSs and dividends may be
reported to the IRS unless you

     o   are a corporation;

     o   provide a properly executed IRS Form W-8BEN; or

     o   otherwise establish a basis for exemption.

     Backup withholding tax may apply to amounts subject to reporting to the IRS
if you fail to provide an accurate taxpayer identification number. The amount of
any backup withholding tax will be allowed as a credit against your U.S. federal
income tax liability if you provide the appropriate documentation or information
to the IRS.

DOCUMENTS ON DISPLAY

     Our company is subject to the informational requirements of the U.S.
Securities Exchange Act of 1934, as amended. In accordance with these
requirements, we file reports and other information with the Securities and
Exchange Commission (SEC). These materials, including this annual report and the
exhibits thereto, may be inspected at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 233 Broadway,
New York, New York 10279. Copies of the materials may be obtained from the

                                     - 73 -

<PAGE>

Public Reference Room of the SEC at 450 Fifth Street, N.W. Washington D.C. 20549
at prescribed rates. The public may obtain information on the operation of the
Commission's Public Reference Room by calling the SEC in the United States at
1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that
contains reports, proxy statements and other information regarding registrants
that file electronically with the Commission.


ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     We do not use market sensitive instruments, such as derivative financial
instruments. Our primary market risk is in the area of exchange rate
fluctuations.

     We maintain our cash balances in deposits at banks in highly liquid
short-term investments, such as money market funds, which lowers our exposure to
interest income risks. We do not consider our exposure to interest rate and
exchange rate fluctuations risks to be material to our deposits and investments.

INTEREST RATE AND EXCHANGE RATE RISK

     We have financial instruments that are subject to interest rate risk,
principally short-term investments. We have not experienced material gains or
losses due to interest rate changes. We do not consider our interest rate risk
to be material to our short-term investments.

FOREIGN CURRENCY EXCHANGE RISK

     We publish our consolidated financial statements in euros. Currency
fluctuations can affect our financial results, particularly fluctuations between
the euro and the U.S. dollar. The U.S. dollar denominated proportion of our
revenues and expenses, respectively, are not fixed but vary. In FY 2002,
approximately 78% of our revenues and approximately 45% of our expenses were
denominated in U.S. dollars. As a result of the expansion of our operations in
the United States, including through our acquisitions of Trega and NetGenics, an
even greater proportion of our revenues and expenses may be denominated in U.S.
dollars. Accordingly, any changes of the euro against the dollar would affect
our reported income.

     We have not previously engaged in currency hedging transactions and do not
currently contemplate doing so in the future. We may, however, enter into such
transactions on a non-speculative basis to the extent that we may in the future
have substantial foreign currency exposure, for example, in connection with
payments from customers or collaboration partners or due to investments.


ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.


PART II

     Not applicable.


PART III

ITEM 17:  FINANCIAL STATEMENTS

     Not applicable.

                                     - 74 -

<PAGE>

ITEM 18:  FINANCIAL STATEMENTS

     See pages F-1 through F-32.

     ITEM 19:  EXHIBITS

          EXHIBIT NO.                      DESCRIPTION OF EXHIBIT
          -----------                      ----------------------

               1           Articles of Association of LION bioscience
                           Aktiengesellschaft (English translation)
               4.1         Basic Agreement between Bayer AG and LION bioscience
                           Aktiengesellschaft, dated June 17, 1999 (incorporated
                           by reference to Exhibit 10.1 of our company's
                           Registration Statement on Form F-1, File No.
                           333-12262)
               4.2         Development Agreement between Bayer AG and LION
                           bioscience Aktiengesellschaft, dated October 13, 2000
                           (incorporated by reference to Exhibit 10.4 of our
                           company's Registration Statement on Form F-4, File
                           No. 333-13150)
               4.3         License Agreement concerning SRS between LION
                           bioscience Aktiengesellschaft and the European
                           Molecular Biology Laboratory, dated September 15,
                           1998 (incorporated by reference to Exhibit 10.2 of
                           our company's Registration Statement on Form F-1,
                           File No.
                           333-12262)
               4.4         Amendment to the Basic Agreement between Bayer AG and
                           LION bioscience Aktiengesellschaft, dated February
                           16, 2002
               4.5         Amendment to the Development Agreement between Bayer
                           AG and LION bioscience Aktiengesellschaft, dated
                           December 1, 2001
               4.6         Amendment to the Development Agreement between Bayer
                           AG and LION bioscience Aktiengesellschaft, dated
                           March 29, 2002
               4.7         Software License and Distribution Agreement between
                           LION bioscience Aktiengesellschaft and the European
                           Molecular Biology Laboratory, dated January 21, 2002
                 8         List of subsidiaries

                                     - 75 -

<PAGE>

SIGNATURES

     The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused and authorized the undersigned to sign
this annual report on its behalf.

     Date:  June 17, 2002

                                            LION BIOSCIENCE AKTIENGESELLSCHAFT

                                            /s/ Friedrich von Bohlen und Halbach
                                            ------------------------------------
                                            Dr. Friedrich von Bohlen und Halbach
                                            Chief Executive Officer




                                      -76-

<PAGE>

                        CONSOLIDATED FINANCIAL STATEMENTS

                      OF LION BIOSCIENCE AKTIENGESELLSCHAFT







TABLE OF CONTENTS                                                           PAGE

      Report of Independent Auditors                                         F-2
      Consolidated Balance Sheets as of March 31, 2001 and 2002              F-3
      Consolidated Statements of Operations for the Fiscal Years Ended on
        March 31, 2000, 2001, and 2002                                       F-4
      Consolidated Statements of Cash Flows for the Fiscal Years Ended on
        March 31, 2000, 2001 and 2002                                        F-5
      Consolidated Statements of Shareholders' Equity as of March 31, 2002   F-6
      Notes to the Consolidated Financial Statements                         F-7



                                      F-1

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

       We have audited the accompanying consolidated balance sheets of LION
bioscience AG, as of March 31, 2002 and 2001 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended March 31, 2002. These financial statements,
prepared in accordance with United States generally accepted accounting
principles, are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

       In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
LION bioscience AG as of March 31, 2002 and 2001 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 2002 in conformity with accounting principles generally accepted
in the United States of America.


Mannheim, May 17, 2002,
except for Note VI. 10, as to which the date is
June 6, 2002

Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft



Ketterle                                                      K. Berger
Wirtschaftsprufer                                             Wirtschaftsprufer
Certified Public Accountant



                                      F-2

<PAGE>

<TABLE>
                                                   LION BIOSCIENCE AG

                                         CONSOLIDATED BALANCE SHEETS (U.S. GAAP)
                                 (IN THOUSAND EURO, EXCEPT FOR SHARE AND PER-SHARE DATA)

<CAPTION>
                                                                                               March 31
                                                                               Notes      --------------------
                                                                                No.         2001         2002
                                                                                          --------     -------
                                                                                           (euro)        (euro)

<S>                                                                             <C>         <C>         <C>
ASSETS
CURRENT ASSETS
     Cash and cash equivalents............................................      II          67,197      19,184
     Marketable securities, short term....................................     III 4        13,071      21,847
     Trade accounts receivable,  net......................................      II           4,407       7,835
     Inventories..........................................................      II             192          80
     Prepaid expenses, short-term.........................................     III 1         2,693       2,396
     Other  assets........................................................     III 2         4,536       4,315
                                                                                          --------     -------
            TOTAL CURRENT ASSETS .........................................                  92,096      55,657

Property, plant and equipment, net .......................................   II, III 3      16,896      18,138
Marketable securities, long-term..........................................     III 4       101,068      82,992
Other long-term investments...............................................     III 5        19,695      10,760
Goodwill, net.............................................................     III 6        36,526      58,663
Other intangible assets, net..............................................   II, III 7      10,459       8,089
Trade accounts receivable, long-term......................................      II             409       3,351
Prepaid expenses, long-term...............................................     III 1           722         340
                                                                                          --------     -------
                                                                                           277,871     237,990
                                                                                          ========     =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Trade accounts  payable .............................................                   6,261       2,298
     Accrued liabilities..................................................     III 8         5,180       8,461
     Current portion of long-term  debt...................................     III 12          569         569
     Current portion of capital lease obligation .........................     III 11          970         134
     Deferred income and advance payments ................................                   6,877       4,644
     Advance payments received less costs and
         estimated income for services not yet invoiced...................     III 9         3,887         388
     Other current liabilities............................................     III 10        8,907       1,745
                                                                                          --------     -------
            TOTAL CURRENT LIABILITIES ....................................                  32,651      18,239

Long-term debt less current portion.......................................     III 12        3,129       2,560
Capital lease obligations less current portion............................     III 11          113          85

SHAREHOLDERS' EQUITY
     Ordinary shares, each with a notional par value of(euro)1.00;
         18,754,000 and 19,870,175 shares authorized, issued, and
         outstanding as of March 31, 2001 and March 31, 2002,
         respectively ....................................................                  18,754      19,870
     Additional paid-in capital ..........................................                 270,286     293,937
     Accumulated other comprehensive income ..............................                  (4,475)        572
     Accumulated losses ..................................................                 (42,587)    (97,273)
                                                                                          --------     -------
            TOTAL SHAREHOLDERS' EQUITY ...................................                 241,978     217,106
                                                                                          --------     -------
                                                                                           277,871     237,990
                                                                                          ========     =======

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

</TABLE>

                                      F-3

<PAGE>

<TABLE>
                                                   LION BIOSCIENCE AG

                                    CONSOLIDATED STATEMENTS OF OPERATIONS (U.S. GAAP)
                                   (IN THOUSAND EURO, EXCEPT SHARE AND PER-SHARE DATA)

<CAPTION>
                                                                                               Fiscal year ended March 31
                                                                         Notes        ----------------------------------------
                                                                          No.            2000           2001           2002
                                                                                        (euro)         (euro)         (euro)
                                                                                      ----------     ----------     ----------

<S>                                                                    <C>                 <C>           <C>            <C>
REVENUES:
     Research and development fees..................................   II, VI 7            6,509         14,495         21,182
     Licenses.......................................................   II, VI 7            3,678          8,780         19,198
                                                                                      ----------     ----------     ----------

         TOTAL REVENUES ............................................                      10,187         23,275         40,380

COSTS AND EXPENSES
     Selling costs .................................................                       1,795          5,719         12,874
     General and administrative costs ..............................                       4,967          7,501         18,737
     Research and development costs ................................     II               12,394         26,872         53,947
     Other operating income and expenses ...........................                         542           (727)        (1,104)
     Conversion of preferred shares into ordinary shares ...........                           0          8,743              0
                                                                                      ----------     ----------     ----------

         TOTAL COSTS AND EXPENSES ..................................                      19,698         48,108         84,454

OPERATING RESULTS BEFORE DEPRECIATION AND AMORTIZATION: ............                      (9,511)       (24,833)       (44,074)

     Depreciation of property, plant and equipment and amortization
        of intangible assets........................................   II, III 3           3,061          4,218         13,160
                                                                                      ----------     ----------     ----------

OPERATING RESULTS: .................................................                     (12,572)       (29,051)       (57,234)
     Interest income and expenses ..................................                           8          5,234          6,302
     Results from marketable securities and other long-term
       investments                                                       IV                    0              0         (3,493)

LOSS BEFORE TAXES: .................................................                     (12,564)       (23,817)       (54,425)
     Tax expense....................................................    III 14               (21)          (127)           (261)
                                                                                      ----------     ----------     ----------

NET LOSS FOR THE YEAR ..............................................                     (12,585)       (23,944)       (54,686)
Preferred stock dividend ...........................................                         (99)           (25)             0
Deemed preferred stock dividend ....................................                           0        (14,410)             0
                                                                                      ----------     ----------     ----------
NET LOSS ATTRIBUTABLE TO ORDINARY SHARES AFTER PREFERRED STOCK
DIVIDEND AND DEEMED PREFERRED STOCK  DIVIDEND ......................                     (12,684)       (38,379)       (54,686)
                                                                                      ==========     ==========     ==========

BASIC AND DILUTED NET LOSS PER SHARE
AFTER PREFERRED STOCK DIVIDEND AND DEEMED PREFERRED STOCK DIVIDEND      VI 8               (1.97)         (2.52)         (2.89)
                                                                                      ==========     ==========     ==========

Average number of outstanding  shares ..............................    VI 8           6,433,882     15,247,146     18,940,029
                                                                                      ==========     ==========     ==========

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

</TABLE>

                                      F-4

<PAGE>

<TABLE>
                                                   LION BIOSCIENCE AG

                                    CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. GAAP)
                                                   (IN THOUSAND EURO)

<CAPTION>
                                                                                  Fiscal year ended March 31
                                                                             -----------------------------------
                                                                                2000        2001        2002
                                                                               (euro)      (euro)      (euro)
                                                                             ----------  ----------  ----------

<S>                                                                             <C>         <C>         <C>
OPERATING ACTIVITIES:
Net loss ...................................................................    (12,585)    (23,944)    (54,686)
Adjustments to reconcile net loss and net cash used in operating activities:
    Conversion of preferred shares into ordinary shares ....................          0       8,743           0
    Stock options outstanding and deferred compensation ....................          0       1,732       4,542
    Depreciation of property, plant and equipment ..........................      2,596       3,542       7,986
    Write down of other long-term investments ..............................          0           0      10,556
    Write down of marketable securities ....................................          0           0       8,454
    Amortization of intangible assets ......................................        493         676       5,174
Loss (gain) on sale of fixed assets ........................................         87        (224)        (56)
Loss (gain) on sale of other long-term investments .........................          0           0     (14,536)
Changes in operating assets and liabilities:
    Trade accounts receivable ..............................................        320      (3,089)     (6,370)
    Inventories ............................................................        (61)         76         112
    Prepaid expenses and other current assets ..............................        110      (2,291)        220
    Trade accounts payable .................................................        453      (1,594)     (3,963)
    Accrued liabilities ....................................................        916       1,001       3,281
    Deferred income and advance payments received ..........................      2,746         856      (5,052)
    Other current liabilities ..............................................        238       1,135      (7,162)
                                                                             ----------  ----------  ----------
      Net cash used in operating activities ................................     (4,687)    (13,381)    (51,500)

INVESTING ACTIVITIES:

Investments in property, plant and equipment ...............................     (5,595)     (8,245)     (7,960)
Proceeds from the sale of property, plant and equipment ....................          6         243          56
Investments in other long-term investments .................................    (11,164)     (1,737)    (10,805)
Proceeds from the sale of other long-term investments ......................          0           0      23,720
Investments in software development ........................................       (511)       (817)          0
Investments in related-party notes .........................................       (614)        767           0
Investments in restricted cash .............................................     (1,916)          0           0
Investments in marketable securities .......................................          0    (115,257)      5,863
Investments in other assets ................................................       (239)     (2,871)     (5,830)
                                                                             ----------  ----------  ----------
      Net cash used in / provided from investing activities ................    (20,033)   (127,917)      5,044

FINANCING ACTIVITIES:

Proceeds from issuance of ordinary shares ..................................        511       5,296           0
Proceeds from issuance of preferred shares .................................        393           0           0
Increase (decrease) in additional paid-in capital ..........................     30,503     203,899        (154)
Proceeds from (payments on) current loans ..................................     (1,753)       (524)          0
Proceeds from long-term liabilities ........................................      2,595           0           0
Principal payments on long-term debts ......................................       (415)     (6,031)       (569)
Proceeds from capital leases ...............................................        548           0           0
Principal payments on capital leases .......................................     (1,873)     (1,118)       (863)
                                                                             ----------  ----------  ----------
      Net cash provided from / used in financing activities ................     30,509     201,522      (1,586)
Increase (decrease) in cash ................................................      5,789      60,224     (48,042)
Currency adjustments .......................................................        174         325          29
Cash and cash equivalents at beginning of period ...........................        685       6,648      67,197
                                                                             ----------  ----------  ----------
Cash and cash equivalents at end of period .................................      6,648      67,197      19,184
                                                                             ==========  ==========  ==========


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

</TABLE>

                                      F-5

<PAGE>

<TABLE>
                                                   LION BIOSCIENCE AG

                               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (U.S. GAAP)
                                   (IN THOUSAND EURO, EXCEPT SHARE AND PER-SHARE DATA)

<CAPTION>
                                                                                                       Accumulated other
                                                                                                      comprehensive income
                                                                                                     -----------------------
                                                                    Preferred     Addi-                                       Total
                                                                      Shares     tional               Cumulative  Available- Share-
                                Ordinary Shares Preferred Shares    subscribed   Paid-In Accumulated translation for-sale-  holders'
                                 Shares  Amount  Shares   Amount  Shares  Amount Capital   Deficit   adjustments securities Equity
                             ------------------ ----------------  -------------- ------- ----------- ----------- ---------- --------
<S>                             <C>      <C>    <C>       <C>     <C>       <C>    <C>      <C>           <C>         <C>  <C>
BALANCES AT MARCH 31, 1999      800,000  2,045  618,500   1,582   40,000    102             (6,058)       (52)        0      (2,381)
                             - - - - - - - - -  - - - - - - - -   - - - - - - -  - - - - - - - - - - - - - - - - - - - - -  - - - -
Preferred shares issued
 against cash contribution                      153,800     393                    3,288                                     3,681
Ordinary shares issued
 against cash contribution      200,000    511                                     27,215                                    27,726
Adjustment items for foreign
 currency translation afte                                                                                174
 deduction of (euro)87 tax                                                                                                      174
Net loss                                                                                    (12,585)                        (12,585)
                             ------------------ ----------------  -------------- ------- ----------- ----------- ---------- --------
BALANCES AT MARCH 31, 2000    1,000,000  2,556  772,300   1,975   40,000    102    30,503   (18,643)      122         0      16,615
                             - - - - - - - - -  - - - - - - - -   - - - - - - -  - - - - - - - - - - - - - - - - - - - - -  - - - -
Conversion preferred shares
 subscribed into
 preferred shares                                40,000     102  (40,000)  (102)                                                 0
Conversion preferred shares
 into ordinary shares           812,300  2,077 (812,300) (2,077)                                                                 0
Conversion of employee
 preferred shares into
 ordinary shares                                                                    8,743                                     8,743
Conversion of convertible
 note into ordinary shares       50,000    127                                                                                 127
Capital increase from
 company resources           11,205,000  8,299                                     (8,299)                                        0
Ordinary shares issued
 against cash contributions   5,186,700  5,195                                    204,198                                   209,393
Stock options outstanding                                                           1,732                                     1,732
Ordinary shares issued
 against contribution
 in kind                        500,000    500                                     33,409                                    33,909
Valuation of securities
 available-for-sale at
 market prices                                                                                                   (4,922)     (4,922)
Adjustment items for
 foreign currency transla-
 tion after deduction of                                                                                  325
 (euro) 130 taxes                                                                                                               325
Net loss                                                                                    (23,944)                        (23,944)
                             ------------------ ----------------  -------------- ------- ----------- ----------- ---------- --------
BALANCES AT MARCH 31, 2001   18,754,000 18,754        0       0        0      0   270,286   (42,587)      447    (4,922)    241,978
                             - - - - - - - - -  - - - - - - - -   - - - - - - -  - - - - - - - - - - - - - - - - - - - - -  - - - -
Stock options outstanding                                                           4,225                                     4,225
Deferred compensation                                                                 317                                       317
Valuation of securities
 available-for-sale at
 market prices(1)                                                                                                 5,018       5,018
IPO expenses                                                                         (154)                                     (154)
Adjustment items for
 foreign currency
 translation                                                                                               29                    29
Ordinary shares issued
 against contribution
 in kind                      1,116,175  1,116                                     19,263                                    20,379
Net loss                                                                                     54,686)                        (54,686)
                             ------------------ ----------------  -------------- ------- ----------- ----------- ---------- --------
BALANCES AT MARCH 31, 2002   19,870,175  19,870        0       0        0      0  293,937   (97,273)     476        96      217,106
                             ------------------ ----------------  -------------- ------- ----------- ----------- ---------- --------

(1) In the fiscal year 2002 the valuation of certain available-for-sale securites have been reclassified from other comprehensive
 income and have been realized in the current year's earnings.
The accompanying notes are an integral part of these consolidated financial statements

</TABLE>

                                      F-6

<PAGE>

                               LION BIOSCIENCE AG

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)
                                 MARCH 31, 2002

I.   OPERATIONS AND BASIS OF PRESENTATION

     LION bioscience AG ("LION" or "the Company") was incorporated in Germany in
March 1997. The Company offers genomics and information management solutions and
develops information-management software and data integration and analysis
systems. In addition, LION applies state-of-the-art high-throughput technologies
and internally-produced information technology systems for drug research and
development.

II.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements include the financial
statements of LION bioscience AG and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in the
consolidation. The fiscal years of the companies in the group end on March 31.

     In fiscal year 2002 NetGenics, Inc., Cleveland, USA (including its two
subsidiaries) was acquired and was first consolidated as of January 31, 2002.
NetGenics' fiscal year ends on December 31. The acquisition of NetGenics was
accounted for according to the purchase method and is included in the results of
the period following the acquisition (see note VI. 2).

USE OF ESTIMATES

     The preparation of consolidated financial statements requires the board to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses in the financial statements and disclosures
of commitments and contingencies. Actual results can differ from those
estimates.

REVENUE RECOGNITION

     The Company's revenue consists of fees from licensing its software products
and fees earned from research and development collaboration agreements. As a
rule, the Company's LSI(TM) software is licensed under non-cancellable licensing
agreements, which typically grant the customer the right to use the software for
periods of one to three years. According to the Company policy payments
resulting from these contracts are paid in advance every year throughout the
term of the contract without any contract concessions. The Company also sells
its software under perpetual licensing agreements. License agreements are
generally extended automatically unless terminated by either party. Revenue from
the sale of software under these licenses is recognized when evidence of an
agreement exists, delivery has been made, the fee is fixed or determinable,
collection of the fee is probable, and the customer has accepted delivery. The
Company's license agreements generally include the provision of telephone
customer support and may also include basic training and consultation services.
The Company does not allocate any separate revenue to these services, as they
are generally provided within one year and the costs are insignificant. For
professional services of the Company conducted over a period of one year or
longer separate contracts for maintenance and support are created. The revenues
from these contracts are recognized on a straight-line basis over the term of
the contract. The Company guarantees its software for the term of the license
period. The Company has received no warranty claims to date and, accordingly,
has not built up a reserve for warranty costs.

     Revenue from research and development collaboration agreements is
recognized in accordance with the terms of the respective agreement. Some of the
research and development collaboration agreements involve milestones. Revenues
from the attainment of milestone events are recognized when the Company and its
customers agree that the scientific results or the milestones defined in the
agreement have been achieved. As a general rule revenue from other contracts is
recognized on a straight-line basis over the term of the contract, which

                                      F-7

<PAGE>

generally represents the pattern of costs incurred by the Company. Signing fees
and other advance payments are allocated pro rata to the milestones specified
and recognized when they are achieved, or allocated on a straight-line basis
over the term of the contract.

     In the preceeding fiscal years the Company realized revenues from a long
term collaboration agreement according to the percentage of completion method
with estimates on the basis of total incurred costs in relation to total
expected costs. As of January 1, 2002, a contract change became effective, so
that payments become due with the achievement of the milestones fixed in the
contract. Revenues are realized only when the milestone is reached. Accrued
costs are treated as expenditures of the period.

     The portion of revenue with respect to this research and development
collaboration agreement that has been received but not yet recognized is shown
as deferred income. As of the end of the fiscal year 2002 this revenue amounted
to (euro) 388,000 (previous year: (euro) 3,887,000).

GOVERNMENT GRANTS

     Government grants to defray the costs of research and development are
offset on receipt against pertinent expenses. The total amount offset in fiscal
2002 was (euro) 1,316,900, as compared to (euro) 730,600 in 2001 and (euro)
445,700 in 2000.

RESEARCH AND DEVELOPMENT COSTS

     Research and development costs are expensed as incurred. Research and
development costs in fiscal 2002 (excluding depreciation and government grants)
totaled (euro) 55,263,900, as compared to (euro) 27,602,800 in fiscal 2001, and
(euro) 12,839,800 in fiscal 2000.

SOFTWARE DEVELOPMENT

     The Company capitalizes software development costs incurred subsequent to
the establishment of technological feasibility. Under the Company's product
development process, technological feasibility is established on completion of a
working model. Once technological feasibility has been established, the costs
involved are capitalized until the software has been marketed and is offered for
sale. Software development costs are amortized on a product-by-product basis,
using whichever is the greater of (a) the ratio of current gross revenue for a
product to the total of current revenue and anticipated gross revenue for that
product, or (b) the straight-line method over a maximum of three years. The
Company capitalized no software development costs in fiscal 2002, as compared to
(euro) 816,800 capitalized in 2001 and (euro) 511,300 capitalized in 2000.
Amortization expense was (euro) 406,800, (euro) 536,500 and (euro) 603,500 in
2000, 2001, and 2002 respectively. Residual book values as of March 31, 2000,
2001 and 2002 were (euro) 908,500, (euro) 1,188,800 and (euro) 585,300,
respectively.

STOCK-BASED COMPENSATION

     The Company accounts for its stock options under the fair-value method
according SFAS No. 123. Accordingly, compensation expense is recorded over the
period until vesting based on the fair value of the option on the date of grant.
This expense estimate may not be representative of the actual costs in future
reporting periods.

                                      F-8

<PAGE>

MARKETABLE SECURITIES

     The Company is exposed to exchange risks with respect to its cash
equivalents and securities available for sale. The Company invests its excess
liquidity in money market funds, mortgage bonds, corporate debt securities, and
commercial paper, with the objective to assure both the liquidity and security
of the capital invested. Its investments are restricted to securities of issuers
with high credit ratings. Some of the securities held are classified as
"available for sale," and are thus adjusted to their market or fair value. The
remaining securities are classified as "held to maturity" and carried at net
book value.

OTHER LONG-TERM INVESTMENTS

     Other long-term investments are generally carried at their acquisition
cost.

CONCENTRATION OF CREDIT RISKS

     The Company's accounts receivable are unsecured and thus the Company is at
risk to the extent such amounts become uncollectible.

     In the fiscal years 2000, 2001 and 2002, revenues with Bayer AG constituted
56%, 60% and 46% of the Company's total revenues. The outstanding accounts
receivables against Bayer AG at March 31, 2002 amounted to (euro) 222,000
(previous year: (euro) 0).

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents consist of short-term, highly liquid cash
investments with original maturities of less than three months from the date of
acquisition.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, short-term loans, and accrued liabilities approximate their
fair value due to the short maturities of these instruments.

     The carrying amount of long-term debt and capital lease obligations
approximates their fair value, based on the market price for similar borrowings.
The same applies to other financial assets.

TRADE ACCOUNTS RECEIVABLE

     The reported trade accounts receivable are reduced by an allowance for
doubtful accounts amounting to (euro) 457,000 (previous year: (euro) 0).

INVENTORIES

     Inventories are valued at a fixed value. They pertain to raw materials and
supplies used in research and development.

PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment are recorded at acquisition cost less
accumulated depreciation. Depreciation is computed on a straight-line basis over
the estimated useful life of the assets as follows:

     Laboratory equipment..........................................5 to 10 years
     Computer software...................................................3 years
     Furniture and office equipment......................................5 years

     Leasehold improvements and equipment under capital lease are depreciated
over their useful lives or the term of the lease, which ever is shorter.

                                      F-9

<PAGE>

INTANGIBLE ASSETS

     Intangible assets are reported at acquisition cost less accumulated
amortization. The amortization is computed on a straight-line basis over the
estimated useful life of the assets as follows:

     Software and technology, acquired customer relationship.......      2 years
     Software licenses.............................................      3 years
     Commercial rights and patents.................................      4 years

IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS

     Long-lived and intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may no longer be recoverable. In the event that facts and circumstances indicate
an impairment, the carrying amount of the asset is compared with the estimated
undiscounted future cash flow to determine whether a write-down to the lower
fair value must be recorded. The fair value is calculated based on the
discounted cash flows expected to be received over the estimated useful life of
the assets.

CURRENCY TRANSLATION

      The financial statements of the Company's subsidiaries are prepared in
their functional currencies, i.e. their local currencies. Balance sheet accounts
are translated to the reporting currency (the euro) at the exchange rates in
effect at the end of the fiscal year, except for shareholders' equity, which is
translated at the rates in effect when the underlying transactions were
originally recorded. Revenue and expense accounts are translated at a weighted
average of exchange rates during the fiscal year. Differences resulting from
translation are shown in a separate component of shareholders' equity
(cumulative translation adjustments).

      In fiscal 2002, exchange rate gains were (euro) 928,600, as compared to
exchange rate losses of (euro) 501,200 in 2001 and exchange rate gains of (euro)
206,000 in 2000.

TAXES OF INCOME AND EARNINGS

     The Company accounts for income taxes under the asset and liability method
(balance sheet method) and, accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and net operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are determined on the basis
of the tax rates applicable to taxable profits in the year in which the
differences are expected to be recovered or settled. The effect of changes in
the tax rates on deferred tax assets and liabilities is recognized in the period
in which the amended tax rates are passed.

BASIC AND DILUTED NET LOSS PER ORDINARY SHARE

     The basic loss per share is calculated based on the weighted number of
common shares outstanding, including common-share equivalents. Common-share
equivalents resulting from stock-based compensation are excluded from the
calculation, as their effect is anti-dilutive.

RECLASSIFICATIONS

     Several values of the previous years' balance sheet, statements of
operations and statements of cash flows have been reclassified to achieve a
comparability with this year's statements.

                                      F-10

<PAGE>

NEW ACCOUNTING REGULATIONS

     In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset
Retirement Obligations." This Statement deals with the accounting and reporting
duties with regard to obligations and related expenses that arise in connection
with the disposal or retirement of long-lived tangible assets. SFAS No. 143
requires a company to set up an accrual for the fair value of the obligation in
the period in which it accepts a legal obligation associated with the disposal
or retirement of a long-lived tangible asset. The Statement further requires
that the carrying amount of the tangible asset be increased by the expenses
accrued as liabilities. The increase in the carrying amount of the tangible
asset is then regularly depreciated over the remaining term. In valuing the
accrued liability, the effects of accrued interest and changes in estimated
future cash flow must be taken into account in every period. SFAS No. 143 must
be applied in all fiscal years commencing after June 15, 2002, but may be
applied earlier. The Company does not believe the application of this statement
will have any material effect on its net assets, financial position, or results
of operations.

     In October 2001, FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," which deals with the accounting for and
reporting of impairment and disposal of long-lived assets. SFAS No. 144 replaces
both SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effect of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occuring Events and
Transactions." However, SFAS No. 144 retains many of the basic provisions of
SFAS No. 121. Similarly, SFAS No. 144 adopts the obligation of Opinion No. 30
that discontinued operations must be reported separately. The scope of the
reporting obligation is expanded to include components of an entity that are
disposed of by sale, retirement, demerger or spin off or that are held for sale.
SFAS No. 144 must be applied in fiscal years commencing after December 15, 2001,
but may be applied earlier. The Company will apply SFAS No. 144 starting April
1, 2002. The potential effects of this statement have not yet been finally
calculated.



                                      F-11

<PAGE>

III.   ADDITIONAL BALANCE SHEET INFORMATION

1.   PREPAID EXPENSES, DEFERRED ITEMS

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)
CURRENT DEFERRED ITEMS :

Deferred payments .......................................     844             0
License expense Metalayer, short-term portion............     821           461
Other ...................................................   1,028         1,935
                                                          ---------    ---------
                                                            2,693         2,396
                                                          =========    =========

LONG-TERM DEFERRED ITEMS:

License expense Metalayer, less short term portion.......     722           340
                                                          =========    =========


2.   OTHER ASSETS

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

Accrued interest.........................................   2,130         1,904
Creditable capital gains tax.............................     865         1,069
Sales tax (VAT) receivable...............................     542            14
Other....................................................     999         1,328
                                                          ---------    ---------
                                                            4,536         4,315
                                                          =========    =========

3.   PROPERTY, PLANT AND EQUIPMENT

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

Laboratory equipment ....................................     5,732       8,582
Laboratory equipment (capital lease).....................     2,468       2,331
Computer software .......................................     1,453       2,906
Computer hardware (capital lease) .......................     1,010         619
Furniture and office equipment ..........................     8,148      12,102
Leasehold improvements ..................................     2,602       4,614
Construction in progress ................................     1,327         208
                                                          ---------    ---------
                                                             22,740      31,362
Less accumulated depreciation ...........................    (5,844)    (13,224)
                                                          ---------    ---------
                                                             16,896      18,138
                                                          =========    =========

      Accumulated depreciation as of March 31, 2002 includes a total of (euro)
2,748,100 (previous year: (euro) 2,511,000) relating to property, plant and
equipment under capital lease.

      Depreciation of property, plant and equipment totaled (euro) 7,986,100 in
2002, as compared to (euro) 3,542,100 in 2001 and (euro) 2,473,000 in 2000. In
fiscal year 2002 impairment charges of (euro) 1,099,500 relating to laboratory
equipment are included.

                                      F-12

<PAGE>

4.   MARKETABLE SECURITIES

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

SHORT TERM
Securities held to maturity .............................    13,071      21,847
                                                          ---------    ---------

LONG TERM
Securities available for sale............................    44,243      59,524
Securities held to maturity .............................    56,825      23,468
                                                          ---------    ---------
                                                            101,068      82,992
                                                          =========    =========
TOTAL
Securities available for sale............................    44,243      59,524
Securities held to maturity .............................    69,896      45,315
                                                          ---------    ---------
                                                            114,139     104,839
                                                          =========    =========



                                      F-13

<PAGE>

SECURITIES AVAILABLE FOR SALE

     The following table shows the Company's investments in securities available
for sale (in thousands):

                                              MARCH 31, 2002
                         -------------------------------------------------------
                         Acquisition     Market or    Unrecognized  Unrecognized
                            costs        fair value       gains       losses
                                           (euro)         (euro)      (euro)
                         -------------------------------------------------------
Equity securities          54,383          54,479           96             0
Debt securities             5,045           5,045            0             0
                         -------------------------------------------------------
                           59,428          59,524           96             0
                         =======================================================

                                              MARCH 31, 2001
                         -------------------------------------------------------
                         Acquisition     Market or    Unrecognized  Unrecognized
                            costs        fair value       gains       losses
                                           (euro)         (euro)
                         -------------------------------------------------------
Equity securities          44,120          39,198          511         5,433
Debt securities             5,045           5,045            0             0
                         -------------------------------------------------------
                           49,165          44,243          511         5,433
                         =======================================================

     The acquisition costs include write-offs of Paradigm (euro) 1,237,200 and
investment funds (euro) 7,218,500 because the impairment is assumed as
other-than-temporary.

     At March 31, 2002 (euro) 4,922,100 have been reclassified affecting net
income from other comprehensive income.

     In January 2000, the Company entered into a stock purchase agreement with
Paradigm Genetics, Inc. ("Paradigm"), a U.S. whereby it acquired 400,000 Series
C preferred shares in Paradigm for a total purchase price of $2 million. At the
time of corporation, Paradigm's initial public offering on May 10, 2000, the
preferred shares were automatically converted to common shares at a 1:1 ratio.
As of the balance sheet date, the stock had a market value of $1.62 per share.
The Company has reviewed the value of the Paradigm stock and concluded that the
reduction in value was permanent. Therefore, the Company has written-off the
investment to the lower market price in fiscal 2002 and included a charge
of(euro)1,237,000 in the statements of operations.

SECURITIES HELD TO MATURITY

     The following table shows the Company's investments in securities held to
maturity (in thousands):

                                              MARCH 31, 2002
                         -------------------------------------------------------
                         Acquisition     Market or    Unrecognized  Unrecognized
                            costs        fair value       gains       losses
                            (euro)         (euro)         (euro)      (euro)
                         -------------------------------------------------------
Equity securities               0               0            0             0
Debt securities            45,315          45,188            0           127
                         -------------------------------------------------------
                           45,315          45,188            0           127
                         =======================================================

                                              MARCH 31, 2001
                         -------------------------------------------------------
                         Acquisition     Market or    Unrecognized  Unrecognized
                            costs        fair value       gains       losses
                            (euro)         (euro)         (euro)      (euro)
                         -------------------------------------------------------
Equity securities               0               0            0             0
Debt securities            69,896          70,712          819             3
                         -------------------------------------------------------
                           69,896          70,712          819             3
                         =======================================================

     The debt securities comprise securities with a maturity up to one year
amounting to (euro) 21,847,000 (previous year: (euro) 13,071,000). The debt
securities generally have maturities of 1 to 5 years. In fiscal 2002 securities
held to maturity have been sold before the day of maturity in order to cover
cash needs.

                                      F-14

<PAGE>

5.   OTHER LONG-TERM INVESTMENTS

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

GeneProt Inc. ...........................................         0       8,509
ChemNavigator.com Inc. ..................................     1,681       1,702
BioSolveIT GmbH .........................................         0         549
Tripos Inc. .............................................     9,184           0
Gesellschaft fur medizinische Datenverarbeitung mbH......     8,830           0
                                                          ---------    ---------
                                                             19,695      10,760
                                                          =========    =========

     In February 2000, the Company entered into a stock purchase agreement with
Tripos Inc. ("Tripos"), a U.S. corporation, whereby it acquired 409,091
preferred shares for a total purchase price of $9 million. The Company reported
the investment at cost. The preferred shares are convertible at the Company's
option into common stock at a ratio of 1:1 (subject to adjustments for stock
splits, capital increases, and comparable equity transactions). The Tripos
preferred shares are subject to mandatory conversion if the price of common
shares exceeds a certain level on 30 consecutive days. Effective February 5,
2001, Tripos had a 2:1 stock split, which gave the Company 818,182 preferred
shares. At the end of January 2002, the Company converted the preferred shares
into common stock at a ratio of 1:1. At that time, Tripos paid LION accumulated
dividends of about $890,000 on the convertible preferred shares. On February 7,
2002, the Company sold its entire portfolio of Tripos common shares for a total
of (euro) 23.7 million. The realised profit amounted to (euro) 14.5 million.

     In February 2001, the Company acquired an approximate 16% interest in
Gesellschaft fur medizinische Datenverarbeitung mbH ("GMD"), Munich, at a price
of (euro) 8,774,906 plus incidental acquisition costs. As part of its program of
focusing on its core lines of business, the Company examined the value of GMD
and, as a result, fully written-off the investment in fiscal 2002.

      In May 2001, the Company entered into a stock purchase agreement with
SimUtility Inc., a U.S. corporation, whereby it acquired 937,500 common shares
in the company at a price of $1.5 million. As a result of a change in strategic
direction, the Company will not continue its collaboration with SimUtility Inc.
In making this decision, the Company reviewed the value of SimUtility and has
fully written-off the investment in fiscal 2002.

      In June 2001, the Company participated in founding BioSolveIT GmbH, Sankt
Augustin, by acquiring a 15% interest at a price of (euro) 548,800, including
incidental acquisition costs. For accounting purposes, the investment was
reported at the lower of cost or market. LION intends to hold the shares in
BioSolveIT GmbH as a long-term investment.

      In March 2002, the Company entered into a stock purchase agreement with
GeneProt, Inc. ("GeneProt"), a U.S. corporation, whereby it acquired 681,818
Series B preferred shares for $7.5 million. For accounting purposes, the
investment was reported at the lower of cost or market. The Company intends to
hold these shares as a long-term investment.

                                      F-15

<PAGE>

6.   GOODWILL

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

Trega biosciences/NaviCyte operations....................    36,526      38,995
NetGenics operations ....................................         0      19,668
                                                             36,526      58,663
                                                          ---------    ---------
Less accumulated amortization ...........................         0           0
                                                          ---------    ---------
                                                             36,526      58,663
                                                          =========    =========

     Since April 1, 2001, the Company has applied the new accounting rule SFAS
No. 142 (Goodwill and Other Intangible Assets), which the Financial Accounting
Standard Board adopted in July 2001, to the accounting treatment of purchases of
companies, particularly the treatment of goodwill. According to SFAS No. 142,
acquired goodwill is no longer subject to scheduled amortization. Rather, the
Company must conduct an annual impairment test. The Company performed this test
and found there was no impairment of the goodwill. In addition, under SFAS No.
142, the workforce taken over is not considered to be a separate intangible
asset. Therefore, its value ((euro) 2.5 million) was reclassified in fiscal year
2002 and is now reported as goodwill.

     Amortization of goodwill in fiscal 2001 and 2002 totaled (euro) 0,
respectively, as Trega was consolidated beginning March 31, 2001.

7.   OTHER INTANGIBLE ASSETS

                                                 ESTIMATED  3/31/2001  3/31/2002
                                                 ---------  ---------  ---------
                                                USEFUL LIFE
                                                -----------
                                                            (IN THOUSAND EURO)

Licenses ......................................   4 years     1,434      2,856
Software and  technology ......................   2 years     4,076      6,741
Workforce taken over ..........................      --       2,491          0
Customer relationships ........................   2 years       906      1,601
In-process R&D... .............................                  46        740
Internally developed software..................   3 years     2,293      2,293
Clone collections .............................   3 years       556        556
                                                             ------     ------
                                                             11,802     14,787
                                                             ------     ------
Less accumulated amortization                                (1,343)    (6,698)
                                                             ------     ------
                                                             10,459      8,089
                                                             ======     ======

     In fiscal 2002, (euro) 695,100 in in-process R&D were capitalized, as
compared to (euro) 45,400 in 2001. In fiscal 2002, amortization of the
capitalized in-process R&D costs amounted to (euro) 740,400 (previous year:
(euro) 0). Amortization of other intangible assets amounted to (euro) 5,173,500
in 2002, as compared to (euro) 676,300 in 2001 and (euro) 587,200 in 2000.

     Amortization of other intangible assets will be allocated as follows:

         (in thousand euro)
2003:                5,395
2004:                2,421
2005:                  273
2006:                    -
2007:                    -
--------------------------
Total:               8,089
==========================

                                      F-16

<PAGE>

8.   ACCRUED LIABILITIES

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

Outstanding invoices .....................................    1,705       3,460
Vacation accrual .........................................      903       1,881
Consulting services ......................................      999         738
Supervisory board ........................................      108         108
Audit of annual accounts and general shareholders' meeting      540         850
Supplementary grants .....................................      483         450
Other ....................................................      442         974
                                                          ---------    ---------
                                                              5,180       8,461
                                                          =========    =========

9.   ADVANCE PAYMENT RECEIVED LESS COSTS AND ESTIMATED REVENUE FOR SERVICES NOT
     YET INVOICED

     This item relates to the contract with Bayer AG regarding cheminformatics:

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

Advance payment received .................................    9,277         621
Costs and estimated revenue for services not yet invoiced.   (5,390)       (233)
                                                          ---------    ---------
                                                              3,887         388
                                                          =========    =========

10.   OTHER CURRENT LIABILITIES

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

Payroll-related taxes and social security
 contributions .........................................        867         991
Payroll liabilities ....................................        724          20
Liability in connection with the acquisition
 of an interest in GMD .................................      7,001           0
Other ..................................................        315         734
                                                          ---------    ---------
                                                              8,907       1,745
                                                          =========    =========

11.   CAPITAL LEASE

     The Company has entered into leases for laboratory equipment and IT
hardware that are treated as capital leases. Future minimum lease payments under
capital lease obligations as of March 31, 2002 are:

                                                              (IN THOUSAND EURO)
2003....................................................                    142
2004....................................................                     24
2005....................................................                     16
2006....................................................                     16
2007....................................................                     16
Thereafter..............................................                     27
                                                                          -----
Total minimum lease payments............................                    241
Less: amounts representing imputed interest ............                    (22)
                                                                          -----
Present value of minimum lease payments ................                    219
Less: current portion...................................                   (134)
                                                                          -----
Non-current portion of capital lease obligations .......                     85
                                                                          =====

                                      F-17

12.   LONG-TERM DEBT

     In December 1998, the Company entered into a loan agreement with Bayerische
Hypo- und Vereinsbank to finance its research and development activities, under
which it was entitled to take up amounts up to (euro) 4.6 million until
September 30, 2007. As of March 31, 2000, the Company had made full use of this
loan agreement. The loan amount is repayable in 16 equal, semi-annual
installments, beginning on March 31, 2000. Interest is payable quarterly at a
rate of 4.75% per annum. In connection with this loan, the Company granted the
lender a security interest in its property, plant and equipment, accounts
receivable, and officers' life insurance policies.

                                                          3/31/2001    3/31/2002
                                                          ---------    ---------
                                                            (IN THOUSAND EURO)

Loans, long-term .......................................       3,698      3,129
Short-term portion .....................................        (569)      (569)
                                                           ---------    --------
Total long-term debt ...................................       3,129      2,560
                                                           =========    ========

     As of March 31, 2002, principal payments on long-term debt for the next
five years and thereafter are as follows:

                                                              (IN THOUSAND EURO)
     2003..................................................                 569
     2004..................................................                 569
     2005..................................................                 569
     2006..................................................                 569
     2007..................................................                 569
     Thereafter............................................                 284
                                                                          ------
                                                                          3,129
                                                                          ======

13.      SHAREHOLDERS' EQUITY

ORDINARY SHARES

     By resolution of the management board of April 19, 2000, and with the
consent of the supervisory board, the Company further increased its capital
stock by DM 26,000 ((euro) 13,293.80) against a cash contribution. Klaus
Sprockamp, a former member of the Company's management board, subscribed for
5,200 of the newly issued bearer preferred shares at an issue price of DM 244.02
((euro) 124.77) per share and paid the cash contribution in full. The capital
increase was entered in the commercial register on June 19, 2000.

     By resolution of the general shareholders' meeting on November 19, 1998,
entered in the commercial register on March 31, 1999, the Company created
conditional capital in the amount of DM 250,000 ((euro) 127,823) to accommodate
the conversion of 10 convertible bearer bonds in the nominal amount of DM 5,000
each (total: DM 50,000), which were issued to Bayerische Hypo- und Vereinsbank
AG and were to be converted prior to a public offering of the Company's shares.
As the holder of the convertible bonds, Bayerische Hypo- und Vereinsbank AG
declared on June 19, 2000 that it would convert these into 50,000 shares of
common stock. The conditional capital was thus utilized. In accordance with the
terms of the convertible bonds, the bank paid a premium of DM 200,000 ((euro)
102,260). This capital increase was entered in the commercial register on June
27, 2000.

     On June 28, 2000, the Company's general shareholders' meeting adopted a
resolution to convert its capital stock from DM 9,337,500 to (euro) 4,774,187.94
and to increase the capital stock by (euro) 8,298,312.06 from Company funds from
(euro) 4,774,187.94 to (euro) 13,072,500. The Company's capital stock was
redivided into 13,072,500 no par value bearer shares, each representing a
nominal (euro) 1 of the stated capital stock. These capital measures were
entered in the commercial register on August 7, 2000.

                                      F-18

<PAGE>

PREFERRED SHARES

     By resolution of the general shareholders' meeting of May 15, 2000, all
existing preferred shares were converted into common stock. The holders of the
preferred shares consented to this conversion by special resolution on May 15,
2000. The commercial register has entered the conversion on June 19, 2000. In
addition, the general shareholders' meeting annulled the management board's
authorization, contained in its resolution of October 6, 1998, to increase the
Company's capital stock by DM 2,050,000 ((euro) 1,048,165) on or before
September 30, 2003 with respect to the residual sum of DM 112,500 ((euro)
57,266).

CONVERSION OF PREFERRED SHARES TO COMMON STOCK

     The general shareholders' meeting adopted a resolution on May 15, 2000 on
the conversion of existing preferred shares to common stock. The holders of the
preferred shares consented to this by special resolution on May 15, 2000. The
commercial register entered the conversion on June 19, 2000. Under U.S. GAAP,
converting preferred shares to common stock is treated as a repurchase of the
stock originally issued and a subsequent new issue of stock.

         The difference between the fair value of the shares originally issued
and that of the newly issued shares at the conversion date resulted in a
non-cash expense for Company employees of (euro) 8,743,000. For other
shareholders, the conversion is classified as a deemed dividend (not affecting
net income) of (euro) 14,410,000. These mentioned amounts were recognized in the
first quarter of fiscal 2001.

CAPITAL INCREASES IN CONNECTION WITH THE INITIAL PUBLIC OFFERING

     On June 28, 2000, the Company's general shareholders' meeting adopted a
resolution to increase its capital stock from (euro) 13,072,500 to (euro)
17,647,875 against a cash contribution of (euro) 4,575,375. Morgan Stanley & Co.
International Ltd. subscribed for the newly issued shares in its own name and on
behalf of the underwriters at an issue amount per share equivalent to the
portion of the Company's capital stock represented by each no par value share,
on the condition that the new shares would be made available under the public
offering. The difference between the issue price and the purchase price for the
new shares created as part of the capital increase was paid to the Company.

     Moreover, on June 28, 2000, the general shareholders' meeting authorized
the management board, with the consent of the supervisory board, to increase the
Company's capital stock by up to (euro) 352,125 on one or more occasions on or
before June 1, 2005 through the issuance of new common bearer shares against
cash contributions. This authorized capital was mainly created to accommodate
the exercise of the over-allotment option on a total of 606,125 shares. The
preemptive rights of existing shareholders may be excluded if Morgan Stanley &
Co. International Ltd. subscribes for the up to 352,125 new shares within 30
days of their being listed on a national or foreign stock exchange on its own
behalf and for the account of the underwriters and agrees to pay the Company the
difference between the issue price and the purchase price for the new shares
created as part of the capital increase. Shareholders' preemptive rights may
also be excluded if the Company issues new shares against cash contributions and
this capital increase, together with any shares issued from the authorized
capital in the amount of (euro) 5,825,000 and any of the Company's own shares
purchased by it, does not exceed 10% of the existing capital stock, and the
issue price is not significantly lower than the market price. These capital
meaures were entered in the commercial register on August 7, 2000.

     In connection with these capital measures, 5,181,500 shares were issued at
a price of (euro) 44.00, bringing the gross issue proceeds to (euro)
227,986,000. After deduction of the IPO costs, the net proceeds came to
approximately (euro) 209 million.

     In fiscal 2002, additional IPO-related expenses were incurred in the amount
of (euro) 154,000 and have been booked against additional paid-in capital.

                                      F-19

<PAGE>

CAPITAL INCREASES AGAINST NON-CASH CAPITAL CONTRIBUTIONS

       By agreement dated December 27, 2000 ("Merger Agreement"), LION and Trega
agreed that LION would acquire 100% of the shares of Trega in exchange for LION
stock, represented by LION American Depository Shares. This agreement was based
on an assessment of Trega's value at approximately $34 million, subject to
certain adjustments when the transaction was executed (which are described in
detail in the agreement). The final exchange ratio was determined by a series of
factors, including changes in the market value of LION shares. After the
transaction was completed, Trega became a wholly owned subsidiary of LION.

      LION's supervisory board approved the agreement at its meeting on December
21, 2000.

      Execution of the transaction was dependent on the fulfillment of certain
conditions, including approval by Trega's shareholders' meeting. The agreement
was approved at a separate shareholders' meeting held on March 12, 2001
Thereafter, the LION management board adopted a resolution on March 13, 2001
(ratified by the supervisory board on March 13 and 14) issuing 500,000 shares
from authorized capital.

      (euro) 1,116,175 of the Company's authorized capital was used in
connection with the acquisition of NetGenics. Based on the authorization granted
to the management board by ss. 4 (4) of the bylaws of June 28, 2000, the
management board increased the Company's capital stock by (euro) 1,116,175 to
(euro) 19,870,175 (with the approval of the supervisory board). The capital
increase was entered in the commercial register on March 4, 2002. For further
details, cf. footnote VI/2.

EMPLOYEE SHARES

         During the acquisition of Trega Biosciences Inc., Trega's employees
were issued restricted shares of LION in exchange for their common stock of
Trega . The difference between the purchase price and the fair value of the
shares are recorded pro rata as a compensation expense over the two-year waiting
period. In the fiscal year 2002, approximately (euro) 317,000 was recorded as a
compensation expense.

STOCK OPTION PLANS

2000 STOCK OPTION PLAN

         Under a stock option plan adopted by the Company on March 13, 2000 (the
"2000 Option Plan"), and amended by resolutions of the general shareholders'
meetings on May 15, 2000 and June 28, 2000, the Company's management board is
authorized to grant non-transferable options to acquire the Company's shares to
employees (up to 757,050) and members of the management board (up to 184,800) on
or before December 31, 2004. In addition, members of the management boards and
employees of LION subsidiaries may be granted options on up to 82,250 and
214,900 of the Company's shares, respectively.

         All permanent employees of LION AG and its subsidiaries are entitled to
take part in the stock option program. In addition to imposing a lock-in period
of several years, the program contains defined performance targets to be
achieved before options can be exercised. The program is designed to retain
individual employees to the Company over the long term and to increase
employees' identification with the Company and its objectives. The Company
granted a total of 1,080,900 stock options to all employees in four tranches by
March 31, 2002.

         The Company may grant a maximum of 1,239,000 stock options under the
"2000 Option Plan". Options granted may not be exercised unless the market value
of the Company's shares exceeds the issue price of the options by at least 40%.
Holders of the options may exercise them at least two years and no more than
eight years after the issue date. Holders may exercise up to 33% of their
options after two years, up to 66% in the third year, and all of them in the
fourth year after acquisition. However, the option holders may not exercise them
during the following blocking periods:

a)    10 stock-exchange working days before the publiation of figures for the
      first, second, and third quarters of any fiscal year;
b)    between the end of a fiscal year and the conclusion of the regular general
      shareholders' meeting,

                                      F-20

<PAGE>

c)    10 stock-exchange working days before extraordinary general shareholders'
      meetings of LION bioscience AG.

In this respect, in connection with the 2000 stock option program a non-cash
compensation expense of (euro) 3,776,100 was recorded in fiscal year 2002
compared to (euro) 1,731,600 in fiscal year 2001 and (euro) 0 in fiscal year
2000.

         In accordance with FASB No. 123, the fair value of options is
determined on the basis of the Black Scholes method. The following factors are
relevant at the time the options are granted:

<TABLE>
<CAPTION>
                                         Tranche 1      Tranche 2      Tranche 3      Tranche 4
                                       ---------------------------------------------------------
<S>                                           <C>            <C>            <C>            <C>
Risk-free interest rate                       5.50%          5.50%          5.50%          4.00%
Anticipated dividend distribution                 0              0              0              0
Anticipated volatility                        0.01%         75.00%         75.00%         75.00%
Anticipated option term                     3 years        3 years        3 years        3 years
Maximum residual term                    6.25 years     6.75 years     7.00 years     7.75 years
Anticipated weighted average market
price per option                           (euro) 6      (euro) 41      (euro) 14      (euro) 10
Exercise price                         (euro) 40.46   (euro) 78.29   (euro) 30.61   (euro) 19.72

</TABLE>

Changes in stock options in fiscal 2002 were as follows:

<TABLE>
<CAPTION>
                                                                     Average         Stock options
                                                Stock options     exercise price   yet to be issued
                                                    Number           (euro)             Number
                                               ------------------------------------------------------
<S>                                                   <C>                       <C>        <C>
In existence on April 1, 2000                                 0                            1,239,000
Granted 1. tranche                                    1,113,000                 40
Granted 2. tranche                                       96,375                 78
Granted 3. tranche                                       63,000                 31
Exercised                                                     0
Expired                                                  55,125
Lapsed                                                        0
In existence on March 31, 2001                        1,217,250                               21,750
                                               =================                   ==================
Exercisable on March 31, 2001                                 0
                                               =================
In existence on April 1, 2001                         1,217,250                 40            21,750
Granted 4. tranche                                       38,600                 20
Exercised                                                     0
Expired                                                 174,950
Lapsed                                                        0
                                               ------------------------------------------------------
In existence on March 31, 2002                        1,080,900                 37           158,100
                                               =================                   ==================
Exercisable on March 31, 2002                                 0
                                               =================
</TABLE>

2001 STOCK OPTION PLAN

      Under an additional stock option plan ("2001 Option Plan"), which was
approved by a resolution of the general shareholders' meeting dated July 18,
2001, the Company's management board is authorized to grant up to 636,400
non-transferable options for acquiring the Company's shares to employees and
members of the management board and employees and members of the management
boards of LION subsidiaries on or before December 31, 2005. Up to 17% of all
options may be granted to members of the Company's management board, up to 5% to
the members of the management boards of LION subsidiaries, and up to 78% to
employees of the Company and its subsidiaries.

      The options have a term of five years from the date of issue. The options
must be exercised within this period. Options may not be exercised until the
waiting period has expired. For 50% of the options in a tranche granted to an
eligible employee, the waiting period is two years from the issue date. For the
other 50%, the waiting period is three years from the issue date. At the time of

                                      F-21

<PAGE>

issue, participants in an option plan must be in good standing with the Company
or a LION subsidiary.

      The exercise price for a new share of LION bioscience AG is the reference
price of the Company's shares when the option was granted plus a premium of at
least 20% as a performance goal.

      The reference price for LION bioscience AG shares at the time the options
are granted is determined based on the arithmetic mean of the market prices for
the Company's shares in the final XETRA auctions on the Frankfurt Stock Exchange
(or a comparable successor system) on the last 20 trading days before the issue
date.

      By March 31, 2002, the Company had issued 593,300 stock options in one
tranche to all employees under the"2001 Option Plan".

      In connection with the 2001 stock options plan a non-cash compensation
expense of (euro) 449,400 was recorded for the first time in fiscal 2002.

      In accordance with FASB No. 123, the fair value of options is determined
on the basis of the Black Scholes method. The following factors were relevant at
the time the options were granted:

                                                   Tranche 1
                                               ----------------
Risk-free interest rate                                   4.00%
Anticipated dividend distribution                             0
Anticipated volatility                                   75.00%
Anticipated option term                               2.5 years
Maximum residual term                                4.75 years
Anticipated weighted average market
price per option                                       (euro) 8
Exercise price                                        (euro) 28

      Changes in stock options in fiscal 2002 were as follows:

<TABLE>
<CAPTION>
                                                                      Average         Stock options
                                                Stock options     exercise price    yet to be issued
                                                    Number          (euro)               Number
                                               -------------------------------------------------------
<S>                                                     <C>                      <C>          <C>
In existence on April 1, 2001                                 0                               636,400
Granted                                                 593,300                  28
Exercised                                                     0
Expired                                                       0
Lapsed                                                        0
                                               -------------------------------------------------------
In existence on March 31, 2002                          593,300                  28            43,100
Exercisable on March 31, 2002                                 0

</TABLE>

      There are no stock option plans that have not been approved by the general
shareholders' meeting.

                                      F-22

<PAGE>

14.   INCOME TAXES

      As required by SFAS No. 109, "Accounting for Income Taxes," deferred tax
assets and liabilities are reported for temporary differences between the
financial statements and the tax accounts.

      The reconciliation of actual tax expenses and the amount resulting from
applying the German statutory corporate-tax rate to the pre-tax loss is as
follows:

<TABLE>
<CAPTION>
                                                                                       MARCH 31
                                                                                       --------
                                                                             2000        2001      2002
                                                                                 (IN THOUSAND EURO)

<S>                                                                         <C>        <C>       <C>
Corporation tax and trade income tax at approximately 39% (FY 2000: 50%,
 FY 2001/2002: 39 %) ...................................................    (6,282)    (9,289)   (21,206)
Foreign taxes ..........................................................        11        127        261
Increase in valuation discount on deferred taxes .......................     6,292      9,289     21,206
Tax on income and earnings .............................................        21        127        261

</TABLE>

      Deferred tax assets and liabilities arising from timing differences
between the financial statements and the valuation of assets and liabilities for
tax purposes are shown in the following table:

                                                              MARCH 31
                                                       -------------------------
                                                          2001         2002
                                                           (IN THOUSAND EURO)
Deferred Tax Assets:

               Loss carryforward                         65,273       123,203
               Capitalized software                         431             0
               Financial assets                           1,920             0
                                                       -------------------------
                                                         67,624       123,203
               Less valuation allowance                 (62,570)     (120,616)
                                                       -------------------------
               Net deferred tax assets                    5,054         2,587
                                                       =========================

Deferred Tax Liabilities

               Currency translation                           2             0
               Capitalized software                       1,112           305
               Other assets                                 631             0
               Software and technology                    1,590         1,834
               Workforce taken over                         971             0
               Customer relationships                       353           448
               R&D costs                                     18             0
               Capital leases                               377             0
                                                       -------------------------
               Net deferred tax liabilities               5,054         2,587
                                                       =========================

      As of March 31, 2002, loss carryforwards totaled (euro) 338 million.
German losses account for roughly (euro) 110 million, and the American
subsidiaries for most of the rest. Loss carryforwards attributable to the
recently acquired business of Trega Biosciences Inc. and NetGenics Inc. are also
included. Whereas in Germany losses can be carried forward indefinitely, as a
rule, American tax law imposes a maximum period of 20 years.

      In view of the uncertainty regarding the Company's future profitability
and, accordingly, regarding the Company's ability to utilize these losses, the
Company has recorded a valuation allowance representing the balance of the net
deferred tax assets.

                                      F-23

<PAGE>

IV.   NOTES TO THE STATEMENTS OF OPERATIONS

RESULT FROM MARKETABLE SECURITIES AND OTHER LONG-TERM INVESTMENTS

      The components of the result of marketable securities and other long-term
investments are as follows:

<TABLE>
<CAPTION>
                                                                     FISCAL YEAR AS OF MARCH 31
                                                                     --------------------------
                                                                      2000      2001    2002
                                                                        (IN THOUSAND EURO)

<S>                                                                     <C>       <C>  <C>
Income from the sale of Tripos shares .........................         0         0    14,536
Tripos dividend payment .......................................         0         0       982
Impairment of the GMD investment ..............................         0         0    (8,830)
Impairment of the SimUtility investment .......................         0         0    (1,726)
Impairment of Investment funds ................................         0         0    (7,218)
Impairment of Paradigm shares .................................         0         0    (1,237)
                                                                                       ------
Result from marketable securities / other long-term investments         0         0    (3,493)
                                                                                       ======
</TABLE>

INTEREST RESULT

                                              FISCAL YEAR ENDED MARCH 31
                                             ----------------------------
                                               2000     2001      2002
                                                  (IN THOUSAND EURO)
Interest income                                 408     5,691     6,517
Interest expenses                              (400)     (457)     (215)
                                             ----------------------------
Interest result                                   8     5,234     6,302
                                             ============================

V.   NOTES TO THE STATEMENTS OF CASH FLOWS

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                             FISCAL YEAR ENDED MARCH 31
                                                                                ---------------------------------------------------
                                                                                     2000              2001               2002
                                                                                                 (IN THOUSAND EURO)

<S>                                                                                   <C>            <C>               <C>
Cash paid during the Year
        Interest expenses                                                             245               457               215
        Income taxes                                                                   21               127                 0

Non-Cash Financing and Investing Activities
        Trega contribution in kind                                                      0            34,458                 0
        Conversion of convertible note into capital stock                               0                26                 0
        Conversion of preferred shares into common stock                                0             2,077                 0
        Capital increase from Company resources                                         0             8,299                 0
        Conversion of preferred shares into common stock of employees                   0             8,743                 0
        Acquisition of GMD                                                              0             7,001                 0
        NetGenics contribution in kind                                                  0                 0            20,379

</TABLE>

                                      F-24

<PAGE>

VI.   OTHER INFORMATION

     1.       ACQUISITION OF TREGA BIOSCIENCES, INC.

      Effective on March 14, 2001, the Company acquired Trega Biosciences, Inc.
("Trega") at a purchase price of $34 million. Trega was founded in 1991 and was
incorporated in Delaware. The company is based in San Diego, California (USA).

PRO-FORMA INFORMATION ON TREGA BIOSCIENCES INC.

      The first consolidation of Trega was executed on March 31, 2001.
Accordingly no revenues and expenditures are included in the consolidated income
statement of fiscal 2001. If Trega had been purchased on April 1, 2000 or April
1, 1999, the following selected key data would have resulted:

                                                      FISCAL YEAR ENDED MARCH 31
                                                      --------------------------
IN THOUSAND EURO, EXCEPT FOR SHARE AND PER SHARE DATA     2000         2001
                                                        ((EURO))     ((EURO))
                                                     ------------  -------------
Net sales                                                24,030      35,411
Loss for the year                                        43,073      53,337
Loss and diluted loss per share                            2.92        3.50

2.   ACQUISITION OF NETGENICS, INC.

COMPANY DESCRIPTION

      Effective March 4, 2002, the Company acquired NetGenics Inc.
("NetGenics"). NetGenics was incorporated in Delaware (USA) in 1996 and is based
in Cleveland, OH (USA).

      The purpose of the company is the development and marketing of software
products and solutions and related consulting services for use by the
pharmaceutical and biotech industries in integrating biological and chemical
data. NetGenics collaborated on a research program with Schering AG, which was
taken over by the Company after the acquisition.

CONTRACTUAL BASIS

      By contract dated January 14, 2002 ("Merger Agreement") LION and NetGenics
agreed that LION would acquire 100 % of the equity in NetGenics in exchange for
shares in LION, represented by LION American Depository Shares. This agreement
was based on a valuation of approximately $20 million for NetGenics, subject to
certain adjustments on completion of the transaction, as detailed in the
agreement. The exchange ratio was set forth in the Merger Agreement. On
completion of the transaction, NetGenics became a wholly-owned subsidiary of
LION.

      The LION supervisory board approved the Merger Agreement at its meeting on
January 11, 2002.

      The completion of the transaction was conditioned on the fulfillment of
certain prerequisites, among them approval by the shareholders of NetGenics.
After these approvals were obtained, the LION management board adopted a
resolution on January 25, 2002 with the consent of the supervisory board granted
in a circulation procedure between January 28 and 31, 2002 to issue a total of
1,116,175 shares from authorized capital.

                                      F-25

<PAGE>

ACCOUNTING

      The acquisition of NetGenics is accounted for in accordance with SFAS No.
141 (according to the purchase method). This stipulates that the acquisition
cost must be allocated among the acquired assets and liabilities on the basis of
their respective fair values. The acquisition cost was calculated as follows:

                                                              (IN THOUSAND EURO)

1,116,175  shares at(euro)18.2576 each:                             20,379
Transaction costs:                                                   1,682
                                                                    ------
                                                                    22,061
                                                                    ------

The value of the tangible assets acquired (less debt) of            (1,662)
                                                                    ------
results in a total of                                               23,723
                                                                    ======

      This difference is allocated to the following intangible assets:

                                            Amount                   Useful life
                                            ------                   -----------
                                       (in thousand(euro))

Software and technology                     2,665                      2 years
Customer relationships                        695                      2 years
In-process R&D                                695                      0 years
Goodwill                                   19,668
                                           ------
                                           23,723
                                           ======

      As of January 31, 2002, the balance sheet of NetGenics was as follows:

CURRENT ASSETS                            IN THOUSAND EURO    IN THOUSAND EURO
Accounts receivable                                    353
Other current assets                                 1,211

NON-CURRENT ASSETS
Property, plant and equipment                        1,281
Goodwill                                            19,668
Other intangible assets                              4,055

             TOTAL ASSETS                                               26,568

CURRENT LIABILITIES
Trade accounts payable                                 320
Other current liabilities                            4,187

           TOTAL LIABILITIES                                             4,507

TOTAL ASSETS LESS TOTAL LIABILITIES                                     22,061

                                      F-26

<PAGE>

      In connection with the acquisition of NetGenics, it was decided in
February 2002 to make a number of personnel changes and to lay off some
employees. The affected employees were informed of the details, and the measures
were completed by mid-March 2002. The associated costs of approximately (euro)
500,000 were taken into account in calculating acquisition costs.

3.   PRO FORMA INFORMATION ON NETGENICS INC.

      NetGenics was first consolidated as of January 31, 2002, and accordingly
its revenues and expenses for February and March 2002 are included in the
consolidated statements of operations for fiscal 2002. If NetGenics had been
acquired as of April 1, 2001 or April 1, 2000, selected key figures for fiscal
2001 and 2002 would have been as follows:

IN THOUSAND EURO, EXCEPT PER-SHARE DATA              FISCAL YEAR ENDED MARCH 31
                                                     --------------------------
                                                      2001                2002
                                                              (EURO)

Revenues..................................           37,558              43,051
Net loss..................................           70,389              69,967

Basic and diluted loss per share..........             4.30                3.52

      The pro forma information for fiscal year 2001 stated above includes the
pro forma figures for Trega Biosciences Inc.

4.   COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

     The Company leases offices, laboratory space and equipment under
non-cancellable operating leases. Future minimum lease payments under these
agreements as of March 31, 2002 were:

                                                    IN THOUSANDS EURO
     2003.............................                     5,882
     2004.............................                     5,162
     2005.............................                     4,150
     2006.............................                     3,622
     2007.............................                     3,354
     Thereafter.......................                     3,259
     Total minimum lease payments.....                     25,429

     Rental costs for fiscal 2002 totaled (euro) 5,165,900, as compared to
(euro) 2,005,400 in fiscal 2001 and (euro) 1,459,400 in fiscal 2000. The
sublease rental income amounted to (euro) 256,800 in 2002, as compared to (euro)
0 in 2001 and (euro) 0 in 2000.

LITIGATION

     From time to time the Company has been involved in litigations arising from
its business activities. The Company is not aware of any such action that would
have a material adverse effect on its earnings, liquidity, or financial
position.

                                      F-27

<PAGE>

OBLIGATIONS UNDER LICENSE AGREEMENTS

     Under a license agreement with the European Molecular Biology Institute
("EMBL"), the Company was obligated to pay license fees of 1.5% of the one-time
access fee payable by each customer for the installation of the software
developed by EMBL. The Company terminated this license agreement in March 2002
by making a (euro) 50,000 release payment.

      Under a second lease agreement with EMBL, the Company is obligated to pay
license fees between 3% and 6% of relevant annual sales. The Company recognized
expenses of (euro) 173,000 in 2002, (euro) 23,000 in 2001, and (euro) 8,835 in
2000 under this agreement.

     Under a software and technology license agreement with the DKFZ ("Deutsches
Krebsforschungszentrum": German Cancer Research Center), the Company is
obligated to pay license fees for the sale of software developed by DKFZ of 1.5%
of sales (on annual sales up to (euro) 5 million), 2.5 % of sales (on annual
sales between (euro) 5 million and (euro) 10 million), and 3% of sales (on
annual sales exceeding (euro) 10 million), subject to a minimum annual license
fee of (euro) 77,000. In 2000, 2001 and 2002, the Company recognized license
fees in the amount of (euro) 77,000 under this agreement.




                                      F-28
<PAGE>

4.   COLLABORATION AGREEMENTS

     On June 18, 1999, the Company entered into a basic agreement with Bayer AG
("Bayer"), under which it was to develop and launch an innovative bio-IT
solution for Bayer. The agreement also governs collaboration in research and
development between the two companies over the next five years.

     The basic agreement required the Company to establish LION bioscience
Research Inc. ( "LBRI"), based in Cambridge, Massachusetts, as a wholly-owned
U.S. subsidiary of LION and one of the vehicles through which LION would perform
the basic agreement. LION is also obligated to provide LBRI with adequate
numbers of scientific experts and engineers from its existing staff. LBRI will
operate on the basis of a five-year plan and annual budgets and will conduct
research activities in accordance with a research and development plan.

     Under the basic agreement, all rights and claims to the technology
developed by LBRI are the property of LION. At the same time, LION grants Bayer
a license to use this information technology exclusively for internal purposes.
LION may not market or distribute any of these information technologies within
one year of their becoming functional. The parties have also agreed that all
rights and claims to targets and genetic markers found by LBRI belong to Bayer.

     As consideration for the services of LION under this basic agreement, Bayer
is obligated to pay LION a sum equal to the LBRI operating costs pursuant to the
annual budget, subject to a maximum budget increase of up to 10%. The total sums
due over the term of the agreement may not exceed $26.8 million. LBRI's
operating costs are payable to LION by Bayer in advance at the beginning of July
and January of each calendar year on the basis of the approved budget for the
pertinent half year. Since LBRI incurs these costs, the Company recognizes the
sums paid by Bayer as revenue. Advance payments received from Bayer that have
not yet been reported as revenue, are shown as prepaid expenses. Bayer also pays
LION a fixed annual fee of (euro) 1,283,000. This fixed annual fee is also
reported as revenue. In addition, Bayer pays license fees with respect to drugs
and diagnostic products developed and marketed by Bayer on the basis of targets
or genetic markers found by LBRI or LION or with the assistance of IT solutions
supplied by LION or LBRI. For the fiscal years 2000, 2001 and 2002, the Company
reported revenues of (euro) 4,108,000, (euro) 7,755,000 and (euro) 10,997,000,
respectively, under this agreement.

     The basic agreement grants Bayer an option to acquire all the shares in
LBRI from LION at a price equal to the capital paid in by LION ($1.0 million).
For two years after any acquisition of the shares by Bayer, LION has a right of
first refusal with regard to the commercial exploitation of new IT software
developed by LBRI, in the event this software is in competition with LION's
activities and Bayer has decided to market the software commercially.

     Under the terms of the contract, Bayer is entitled to terminate the
agreement at the end of the second year. Thereafter, the agreement can be
terminated by either party, on an annual basis, on the grounds of
non-performance.

      On October 13, 2000, the Company entered into a research and development
agreement ("Development Agreement") with Bayer AG, Leverkusen. The objective of
the development agreement is to improve and speed up Bayer's pre-clinical
research process, to integrate chemical data and to develop customer-specific
software for the analysis of high-throughput screening and structural activity
data, in order to arrive at lead compunds faster and reduce the failure rate in
the subsequent research process. On December 11, 2001 ( "First Amendment"), and
March 29, 2002 ("Second Amendment) a change to the contract effective January 1,
2002 established a new schedule for reaching five milestones and extended the
contract until January 1, 2004. The achievement of the agreed-upon milestones
triggers the acceptance test by Bayer. Payments within the scope of the
subpayments are dependent on Bayer's acceptance of the predetermined milestones.

    We were required to achieve the next milestone by April 1, 2002. Thereafter
a new milestone is due every six months except that the final milestone will be
due on December 1, 2003. Bayer will make future milestone payments, except our
management fee, under the development agreement subject to its acceptance of the
key milestone deliverables. Bayer has not yet accepted the deliverables due
under the April 1, 2002 milestone. As a result, Bayer is entitled to withhold
the corresponding installment payment in the amount of $2 million. Bayer may
decide to terminate the development agreement as a result of our failure to
achieve the milestone.

     The Company reported revenues in fiscal 2001 and 2002 of (euro) 5,390,000
and (euro) 7,579,000, respectively, under this collaboration agreement.

                                      F-29

<PAGE>

6.   RELATED PARTY TRANSACTIONS

    The Company has entered into several research and development agreements
with Bayer, which is a shareholder of the Company. It also has contractual
relationships with EMBL and DKFZ, which are also shareholders of the Company.
None of these shareholders have a material influence on the company.

    Dr. Thomas Schurrle, who has been a member of our company's supervisory
board since the formation of our company, was a partner with the law firm of
Norr Stiefenhofer Lutz prior to May 1, 2001. In the past, we regularly engaged
Norr Stiefenhofer Lutz to advise us on corporate transactions and other legal
matters.

                                      F-30

<PAGE>

7.   BUSINESS SEGMENTS AND FOREIGN BUSINESS ACTIVITIES

     Due to the acquisition of Trega Biosciences Inc. on March 31, 2001 and the
associated changes in management structure, the Group is currently managed as
one segment for purposes of segment reporting requirements.

      Included in the consolidated financial statements are the following
amounts relating to geographical locations:

<TABLE>
<CAPTION>
                                                            FISCAL YEAR ENDED MARCH 31
                                                         ------------------------------
                                                           2000       2001       2002
                                                               (IN THOUSAND EURO)

<S>                                                        <C>        <C>       <C>
REVENUES (1)
   Germany ...........................................     3,978      8,697     10,147
   United States .....................................     5,103      9,958     22,698
   Other .............................................     1,106      4,620      7,535
                                                         -------    -------    -------
   Group .............................................    10,187     23,275     40,380
                                                         =======    =======    =======

OPERATING RESULTS BEFORE DEPRECIATION AND AMORTIZATION
   Germany ...........................................    (6,306)   (15,468)   (12,178)
   United States .....................................    (1,702)    (6,949)   (27,686)
   Other .............................................    (1,503)    (2,416)    (4,210)
                                                         -------    -------    -------
   Group .............................................    (9,511)   (24,833)   (44,074)
                                                         =======    =======    =======

LONG-LIVED ASSETS
   Germany ...........................................     5,050      8,119      8,247
   United States .....................................     2,192      8,118      9,182
   Other .............................................       155        659        709
                                                         -------    -------    -------
   Group .............................................     7,397     16,896     18,138
                                                         =======    =======    =======

(1) Revenues are allocated based on customer location.

</TABLE>

8.   LOSS PER ORDINARY SHARE

     The following table shows the calculation of the basic and diluted net loss
per common share:

<TABLE>
<CAPTION>

IN THOUSANDS, EXCEPT SHARE AND PER-SHARE DATA                                               FISCAL YEAR ENDED MARCH 31
                                                                                            --------------------------
                                                                                      2000          2001             2002
                                                                                             ((EURO) IN THOUSANDS)

<S>                                                                                   <C>            <C>            <C>
NUMERATOR
Net loss for the year .........................................................       (12,585)       (23,944)       (54,686)
Dividends on preferred shares .................................................           (99)           (25)             0
                                                                                  -----------    -----------    -----------
Net loss attributable to ordinary shares before deemed preferred stock dividend       (12,684)       (23,969)       (54,686)
                                                                                  ===========    ===========    ===========
Deemed preferred stock dividend ...............................................             0        (14,410)             0
                                                                                  -----------    -----------    -----------


Net loss attributable to ordinary shares after deemed preferred stock dividend        (12,684)       (38,379)       (54,686)
                                                                                  ===========    ===========    ===========
DENOMINATOR
Weighted averages of ordinary shares outstanding ..............................     6,433,882     15,247,146     18,940,029
                                                                                  ===========    ===========    ===========
Basic and diluted net loss per ordinary share before deemed preferred stock ...
dividend ......................................................................         (1.97)         (1.57)         (2.89)
                                                                                  ===========    ===========    ===========
Deemed preferred stock dividend per share .....................................             0          (0.95)             0
                                                                                  ===========    ===========    ===========

Basic and diluted net loss per ordinary share after deemed preferred stock
dividend ......................................................................         (1.97)         (2.52)         (2.89)
                                                                                  ===========    ===========    ===========
</TABLE>

                                      F-31

     Stock options issued have not been considered in calculating the diluted
net loss per common share, due to their anti-dilutive effect.

9.   COMPENSATION OF THE GOVERNING BODIES

a) MANAGEMENT BOARD
      The members of the management board are listed under "Organs of the
company" at the end of the report. In fiscal 2002, the members of the management
board received total compensation of (euro) 926,000 (previous year: (euro)
1,064,000).

b) SUPERVISORY BOARD
      The members of the supervisory board are listed under "Organs of the
company" at the end of the report. In fiscal 2002, the members of the
supervisory board received total compensation of (euro) 107,000 (previous year:
(euro) 107,000).

10.   SUBSEQUENT EVENTS

      Consistent with its strategy to focus on its core competencies and to
respond to IT demands and opportunities in the life sciences industry, the
Company decided in June 2002 to actively search for a partner or investor
related to its the internal IT-driven drug discovery activities called iD3(TM)
during FY 2003. Consistent with its strategy, the Company has decided focus
primarily on providing customized IT solutions to external life sciences
companies. The company plans to collaborate with one or more life sciences
companies on value-added research projects that would utilize the iD3(TM) IT
driven drug discovery approach. The Company may contribute the resources,
know-how and intellectual property of iD3(TM) to this collaboration. If the
Company is unsuccessful in finding a collaborator or in entering into such a
collaboration, it may seek to license or sell the intellectual property created
through its internal drug discovery activities.



                                      F-32