1

     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2000

                                                      REGISTRATION NO. 333-96469
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                AMENDMENT NO. 4

                                       TO
                                    FORM S-1
                            ------------------------
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
                         LEXICON GENETICS INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                                                
             DELAWARE                             8731                            76-0474169
 (STATE OR OTHER JURISDICTION OF      (PRIMARY STANDARD INDUSTRIAL             (I.R.S. EMPLOYER
  INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)           IDENTIFICATION NUMBER)

                           4000 RESEARCH FOREST DRIVE
                           THE WOODLANDS, TEXAS 77381
                                 (281) 364-0100
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------
                          ARTHUR T. SANDS, M.D., PH.D.
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                           4000 RESEARCH FOREST DRIVE
                           THE WOODLANDS, TEXAS 77381
                                 (281) 364-0100
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
                            ------------------------
                                   COPIES TO:

                                                 
                  DAVID P. OELMAN                                   GERALD S. TANENBAUM
              ANDREWS & KURTH L.L.P.                              CAHILL GORDON & REINDEL
              600 TRAVIS, SUITE 4200                                  80 PINE STREET
               HOUSTON, TEXAS 77002                              NEW YORK, NEW YORK 10005
                  (713) 220-4200                                      (212) 701-3000

                            ------------------------
          APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
  As soon as practicable after this registration statement becomes effective.

     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [ ]
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ]
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
     If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
     If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
   2

       THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
       MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
       THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
       NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
       TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS
       NOT PERMITTED.

                             SUBJECT TO COMPLETION

                              DATED APRIL 6, 2000

PROSPECTUS

10,000,000 Shares

[LEXICON LOGO]

LEXICON GENETICS INCORPORATED

Common Stock

Lexicon Genetics Incorporated is selling all of the shares of common stock in
this offering. This is our initial public offering. We estimate that the initial
offering price will be between $22.00 and $24.00 per share.

Our shares of common stock have been approved for quotation on the Nasdaq
National Market under the symbol "LEXG".

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. PLEASE READ "RISK FACTORS"
BEGINNING ON PAGE 7.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

                                                                  PRICE TO        UNDERWRITING       PROCEEDS TO
                                                                   PUBLIC           DISCOUNT           LEXICON
- -------------------------------------------------------------------------------------------------------------------
                                                                                         
Per Share                                                     $                 $                 $
- -------------------------------------------------------------------------------------------------------------------
Total                                                         $                 $                 $
- -------------------------------------------------------------------------------------------------------------------

We have granted the underwriters the rights to purchase up to an additional
1,500,000 shares of common stock to cover over-allotments.

                              Joint Lead Managers

J.P. MORGAN & CO.                                     CREDIT SUISSE FIRST BOSTON

CIBC WORLD MARKETS                                        PUNK, ZIEGEL & COMPANY

           , 2000
   3

[SCHEMATIC DEPICTING THE DRUG DISCOVERY PROCESS, WEB PAGES FROM LEXGEN.COM, DNA
        SEQUENCERS AND OMNIBANK LIQUID NITROGEN FREEZER AND VAULT ROOM]
   4

                               TABLE OF CONTENTS

                                              PAGE
                                           
Prospectus Summary.........................      3
Risk Factors...............................      7
Special Note Regarding Forward-Looking
  Statements...............................     15
Use of Proceeds............................     16
Dividend Policy............................     16
Capitalization.............................     17
Dilution...................................     18
Selected Financial Data....................     19
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...............................     20
Business...................................     23
Management.................................     34

                                              PAGE
                                           
Transactions With Executive Officers,
  Directors and Five Percent
  Stockholders.............................     42
Principal Stockholders.....................     43
Description of Capital Stock...............     45
Material U.S. Federal Tax Considerations
  for
  Non-U.S. Holders of Common Stock.........     47
Shares Eligible for Future Sale............     49
Underwriting...............................     50
Legal Matters..............................     52
Experts....................................     52
Where You Can Find More Information........     52
Index to Financial Statements..............    F-1

   5

                               PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information you should consider before
buying shares of our common stock. You should read the entire prospectus
carefully.

                         LEXICON GENETICS INCORPORATED

We are using technology that we invented to define the functions of genes for
drug discovery. This technology, which we refer to as gene trapping, alters the
DNA of genes in a special variety of mouse cells, called embryonic stem (ES)
cells, which can be cloned and used to generate mice. In these mice, the altered
DNA disrupts, or "knocks out," the function of the gene, enabling the study of
the function of the knocked out gene. Our gene trapping technology also enables
us to obtain DNA sequences of genes from human and mouse cells. Using this
technology, we are discovering thousands of genes and expanding our OmniBank
library of tens of thousands of knockout mouse clones.

We have established an Internet exchange, Lexgen.com, to enable researchers
worldwide to access our OmniBank library and to form collaborations with us to
discover pharmaceutical products based on genomics - the study of genes and
their function. Through our ongoing collaborations with pharmaceutical
companies, biotechnology companies and academic researchers, we receive fees and
may obtain royalties and milestone payments from commercialization of
pharmaceutical products developed using our genomics technologies. We believe
that providing global access to our OmniBank library through the Internet will
significantly accelerate genomics research and will enable us to establish a
leadership position in the discovery of drug targets and proteins which can
themselves be used as drugs, commonly called therapeutic proteins.

Our gene trapping technology captures gene sequence information and enables us
to:

     - obtain DNA sequences of genes that operate, or are expressed,
       infrequently or at very low levels;

     - identify genes contained within the DNA sequence of the chromosome;

     - obtain DNA sequence of genes throughout the human genome at a fraction of
       the cost of traditional approaches; and

     - create a library of knockout mice for the discovery of gene function.

We have created three key genomics resources, which we are continuing to expand
for drug discovery:

     - Our OmniBank database and mouse clone library, which presently contains
       more than 70,000 embryonic stem (ES) cell clones stored in liquid
       nitrogen freezers and identified by DNA sequence in a searchable
       database. Each OmniBank ES cell clone can be grown into a knockout mouse
       for functional genomics research - the study of gene function.

     - Our Human Gene Trap database, which presently contains DNA sequence from
       approximately 50,000 human genes that we have rapidly and efficiently
       trapped from human chromosomes and analyzed in a database. We believe
       that, at present, approximately 50% of the gene sequences contained in
       our Human Gene Trap database are not represented in public gene sequence
       databases. We are using this resource to obtain full-length gene sequence
       information for drug discovery.

     - Lexgen.com, a genomics Internet exchange through which researchers at
       pharmaceutical and biotechnology companies and academic institutions
       worldwide subscribe to our OmniBank database to conduct web-based,
       computer or bioinformatics, analysis of genes, acquire knockout mouse
       clones and determine the function of genes with us under our e-Biology
       collaboration program.

We believe that collaborations are an effective way to conduct research and
development of pharmaceutical product opportunities created by our genomics
technologies. Our collaborations are typically non-exclusive arrangements, and
we retain the ability to pursue future applications of our technologies. Since
September 1999, we have established collaborations with, among others,
Millennium Pharmaceuticals, Inc., the R.W. Johnson Pharmaceutical Research
Institute (a subsidiary of Johnson & Johnson), G.D. Searle & Co., Boehringer
Ingelheim Pharmaceuticals, Inc. and N.V. Organon. We may also pursue development
of selected drug targets and therapeutic proteins on our own.

GENOMICS: CHALLENGE AND OPPORTUNITY

Genomics represents an opportunity for the development of drugs that address
medical needs for which there are presently no effective treatments, as well as
drugs that are more effective or have fewer side effects than the treatments
that are currently available. Most drugs on the market today interact with a
total of about 500 specific protein targets, each of which is encoded by a gene.
While estimates of the total number of potential drug targets encoded within the
human genome vary, many experts

                                        3
   6

believe that genomics research could discover between 5,000 and 10,000 new
targets for pharmaceutical development. Consequently, genomics represents a
significant opportunity for those companies with the key technologies that can
efficiently discover the most promising genes for drug discovery.

Large numbers of genes with little functional information can present a major
challenge to traditional drug discovery research. We believe that the solution
to this challenge requires redefining the way drug discovery is conducted by
systematically determining the function of large numbers of genes in animal
models to discover novel drug targets and therapeutic proteins. We believe our
technologies for discovering DNA sequences and the functions of genes, together
with our e-Biology collaboration program, provide significant opportunities for
us and our collaborators to discover and develop drugs more successfully than
those companies that utilize traditional methods.

STRATEGY

Our principal objective is to establish a leadership position in drug target and
therapeutic protein discovery. The key elements of our strategy include the
following:

     - discover and obtain proprietary rights to a substantial number of human
       genes using our gene trapping technology;

     - expand our library of knockout mice using our gene trapping technology
       and create custom knockout mice using our gene targeting technology;

     - use the Internet to establish gene function discovery collaborations
       based on knockout mice with researchers at pharmaceutical companies,
       biotechnology companies and academic institutions;

     - discover the functions of large numbers of genes that encode potential
       drug targets and therapeutic proteins through internal research programs
       using knockout mice; and

     - develop promising drug candidates through collaborations or with our own
       resources.

CORPORATE INFORMATION

Lexicon Genetics was incorporated in Delaware in July 1995, and commenced
operations in September 1995. Our corporate headquarters are located at 4000
Research Forest Drive, The Woodlands, Texas 77381, and our telephone number is
(281) 364-0100. Our Internet exchange is located at www.Lexgen.com and our
corporate website is located at www.lexicon-genetics.com. We do not intend for
information found on our Internet exchange and our website to be part of this
prospectus. We own or have rights to various copyrights, trademarks and trade
names used in our business, including the Lexicon Genetics name and logo,
OmniBank(R), LexGene(TM), Lexgen.com(TM), Internet Now(TM), Internet
Universal(TM), S-T-V(TM) and e-Biology(TM).

                                        4
   7

                                  THE OFFERING

The following information reflects 24,781,059 shares of common stock outstanding
as of March 15, 2000 and the conversion of all our outstanding convertible
preferred stock into 12,733,992 shares of common stock upon the closing of this
offering. The number of outstanding shares of common stock does not include:

     - 8,473,134 shares issuable on the exercise of stock options outstanding as
       of March 15, 2000 at a weighted average exercise price of $2.16 per
       share;

     - 990,000 shares that may be issued upon exercise of warrants outstanding
       as of March 15, 2000 at an exercise price of $2.50 per share; or

     - 3,032,001 additional shares that we could issue under our stock option
       plans.

Unless otherwise indicated, information in this prospectus gives effect to the
following:

     - a stock dividend paid on April 5, 2000 to effect a 3-for-1 stock split;

     - the filing of our amended and restated certificate of incorporation;

     - the adoption of our amended and restated bylaws immediately prior to the
       closing of this offering;

     - no exercise of the underwriters' over-allotment option; and

     - an estimated initial public offering price of $23.00 per share, the
       midpoint of the range shown on the cover of this prospectus.

COMMON STOCK OFFERED................. 10,000,000 shares

COMMON STOCK TO BE OUTSTANDING AFTER
THIS OFFERING........................ 47,515,051 shares

USE OF PROCEEDS...................... We expect to use the net proceeds to:

                                      - increase our functional genomics
                                        research efforts;

                                      - expand our Human Gene Trap database and
                                        OmniBank database and library;

                                      - generate full-length gene sequences for
                                        potential drug targets and therapeutic
                                        proteins; and

                                      - fund working capital, capital
                                        expenditures and other general corporate
                                        purposes.

                                      Please read "Use of Proceeds."

NASDAQ NATIONAL MARKET SYMBOL........ "LEXG"

                                        5
   8

                             SUMMARY FINANCIAL DATA

The following table summarizes our statements of operations data for the period
from our inception on July 7, 1995 through December 31, 1995 and the years ended
December 31, 1996, 1997, 1998 and 1999 and our balance sheet data as of December
31, 1999. The pro forma net loss per share data and the pro forma balance sheet
data reflect the conversion of our outstanding convertible preferred stock upon
the closing of this offering. The pro forma as adjusted balance sheet data
reflect that conversion and also reflect the sale of 10,000,000 shares of common
stock in this offering at an assumed initial public offering price of $23.00 per
share after deducting underwriting discounts and estimated offering expenses.
The following data should be read with our financial statements, including the
accompanying notes, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
Because all of our outstanding convertible preferred stock will be converted at
the closing of this offering, we will no longer recognize accretion on our
redeemable convertible preferred stock.

                                                  ------------------------------------------------------------------
                                                   PERIOD FROM
                                                    INCEPTION
                                                  (JULY 7, 1995)
                                                     THROUGH                    YEAR ENDED DECEMBER 31,
                                                   DECEMBER 31,    -------------------------------------------------
                                                       1995           1996         1997         1998         1999
                                                  --------------   ----------   ----------   ----------   ----------
                                                                                           
In thousands, except share data
STATEMENTS OF OPERATIONS DATA
Revenues........................................        $  --          $  306      $   968      $ 2,242     $  4,738
Operating expenses
  Research and development......................          445           2,409        4,970        8,410       14,646
  General and administrative....................          236             764        1,473        2,024        2,913
                                                    ---------      ----------   ----------   ----------   ----------
          Total operating expenses..............          681           3,173        6,443       10,434       17,559
                                                    ---------      ----------   ----------   ----------   ----------
Loss from operations............................         (681)         (2,867)      (5,476)      (8,192)     (12,821)
Interest income (expense), net..................            9             (12)          74          711          346
                                                    ---------      ----------   ----------   ----------   ----------
Net loss........................................         (672)         (2,879)      (5,402)      (7,481)     (12,475)
                                                    ---------      ----------   ----------   ----------   ----------
Accretion on redeemable convertible preferred
  stock.........................................           --              --           --         (357)        (535)
                                                    ---------      ----------   ----------   ----------   ----------
Net loss attributable to common stockholders....       $ (672)        $(2,879)     $(5,402)     $(7,838)    $(13,011)
                                                    =========      ==========   ==========   ==========   ==========
Net loss per common share, basic and diluted....      $ (0.07)       $  (0.17)    $  (0.23)    $  (0.32)  $   (0.5 3)
                                                    =========      ==========   ==========   ==========   ==========
Shares used in computing net loss per common
  share, basic and diluted......................    9,861,297      17,346,228   23,988,969   24,445,422   24,530,427
Pro forma net loss per common share, basic and
  diluted.......................................                                                           $   (0.33)
Shares used in computing pro forma net loss per
  common share, basic and diluted...............                                                          37,264,419

                                                              --------------------------------------
                                                                     AS OF DECEMBER 31, 1999
                                                              --------------------------------------
                                                                                          PRO FORMA
                                                               ACTUAL      PRO FORMA     AS ADJUSTED
                                                              --------    -----------    -----------
                                                                          (UNAUDITED)    (UNAUDITED)
                                                                                
In thousands
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities............  $  9,156     $  9,156       $222,056
Working capital.............................................     2,021        2,121        214,921
Total assets................................................    22,295       22,295        235,195
Long-term obligations, net of current portion...............     3,577        3,577          3,577
Redeemable convertible preferred stock......................    30,050           --             --
Accumulated deficit.........................................   (28,909)     (28,909)       (28,909)
Total stockholders' equity (deficit)........................   (21,936)       8,114        221,014

                                        6
   9

                                  RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. If any of the
following risks actually occurs, we may not be able to conduct our business as
currently planned and our financial condition and operating results could be
seriously harmed. In addition, the trading price of our common stock could
decline due to the occurrence of any of these risks, and you may lose all or
part of your investment. Please read "Special Note Regarding Forward-Looking
Statements."

RISKS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY

We have incurred net losses since our inception, including a net loss of
approximately $12.5 million for the year ended December 31, 1999. As of December
31, 1999, we had an accumulated deficit of approximately $28.9 million. We are
unsure when we will become profitable, if at all. The size of our net losses
will depend, in part, on the rate of growth, if any, in our revenues and on the
level of our expenses.

We derive substantially all of our revenues from subscriptions to our databases,
collaborations for the development and, in some cases, analysis of knockout mice
and government grants, and will continue to do so for the foreseeable future.
Revenues from database subscriptions, collaborations and grants are uncertain
because our existing agreements have fixed terms or relate to specific projects
of limited duration. Our ability to secure future agreements will depend upon
our ability to address the needs of our potential future subscribers and
collaborators.

A large portion of our expenses are fixed, including expenses related to
facilities, equipment and personnel. In addition, we expect to spend significant
amounts to fund research and development and to enhance our core technologies.
As a result, we expect that our operating expenses will increase significantly
in the near term and, consequently, we will need to generate significant
additional revenues to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.

WE ARE AN EARLY-STAGE COMPANY WITH AN UNPROVEN BUSINESS STRATEGY

Our strategy of using our gene sequence databases and knockout mice to select
promising candidates for drug target development is unproven. We have generated
limited revenues to date from subscriptions to our databases and collaborations
for the development and, in some cases, analysis of knockout mice. Our success
will depend upon our ability to enter into additional subscription and
collaboration agreements on favorable terms, determine which genes have
potential value and select an appropriate commercialization strategy for each
potential product we or our collaborators choose to pursue.

Biotechnology and pharmaceutical companies have successfully developed and
commercialized only a limited number of gene-based products to date. We have not
proven our ability to identify gene-based drugs or drug targets with commercial
potential, or to develop or commercialize drugs or drug targets that we do
identify. It is difficult to successfully select those genes with the most
potential for commercial development, and we do not know that any products based
on genes that we discover can be successfully commercialized. In addition, we
may experience unforeseen technical complications in the processes we use to
generate our gene sequence database and functional genomics resources. These
complications could materially delay or limit the use of those databases and
resources, substantially increase the anticipated cost of generating them or
prevent us from implementing our processes at appropriate quality and throughput
levels.

WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE AND, IF IT IS NOT AVAILABLE, WE
WILL HAVE TO CURTAIL OR CEASE OPERATIONS

Our future capital requirements will be substantial and will depend on many
factors, including our ability to obtain database subscription and collaboration
agreements and government grants, the amount and timing of payments under such
agreements and grants, the level and timing of our research and development
expenditures, market acceptance of our products, the resources we devote to
developing and supporting our products and other factors.

                                        7
   10

We anticipate that the net proceeds of this offering and interest earned thereon
will enable us to maintain our currently planned operations for at least two
years. However, changes may occur that would consume available capital resources
significantly sooner than we expect. If our capital resources are insufficient
to meet future capital requirements, we will have to raise additional funds to
continue the development of our technologies and complete the commercialization
of products, if any, resulting from our technologies. We may be unable to raise
sufficient additional capital; if so, we will have to curtail or cease
operations.

WE FACE SUBSTANTIAL COMPETITION IN THE DISCOVERY OF THE DNA SEQUENCES OF GENES
AND THEIR FUNCTIONS AND IN OUR DRUG DISCOVERY AND PRODUCT DEVELOPMENT EFFORTS

There are a finite number of genes in the human genome, and we believe that the
majority of such genes have been identified by us or others conducting genomic
research and that virtually all will be identified within the next few years. We
face significant competition in our efforts to discover and patent the sequence
and other information derived from such genes from entities using alternative,
and in some cases higher volume and larger scale, approaches for the same
purpose.

We also face competition from entities using more traditional methods to
discover genes related to particular diseases. Many of these entities have
substantially greater financial, scientific and human resources than we do. A
large number of universities and other not-for-profit institutions, many of
which are funded by the U.S. and foreign governments, are also conducting
research to discover genes. A substantial portion of this research is being
conducted under the international Human Genome Project, a multi-billion dollar
program funded by the U.S. government and The Wellcome Trust. The Human Genome
Project's initial rough draft of the human genome is expected to be completed
and released this year. Any one or more of these entities may discover and
establish a patent position in one or more of the genes that we wish to study.

We also face significant competition in our drug discovery and product
development efforts from entities using traditional knockout mouse technology
and other functional genomics technologies, as well using other traditional drug
discovery techniques. These competitors may develop products earlier than we do,
obtain regulatory approvals faster than we can and develop products that are
more effective than ours. Our ability to use our patent rights to prevent
competition in the creation and use of knockout mice is more limited outside of
the United States. Competitors could discover and establish patents in genes or
gene products that we or our collaborators identify as a drug target or
therapeutic protein. Numerous companies are in the business of determining the
function of genes and gene products. Furthermore, other methods for conducting
functional genomics research may ultimately prove superior, in some or all
respects, to the use of knockout mice. In addition, technologies more advanced
than or superior to our gene trapping technology may be developed, thereby
rendering our gene trapping technology obsolete.

WE RELY HEAVILY ON COLLABORATORS TO DEVELOP AND COMMERCIALIZE PRODUCTS BASED ON
GENES THAT WE IDENTIFY AS PROMISING CANDIDATES FOR DEVELOPMENT AS DRUG TARGETS

Since we do not currently possess the resources necessary to develop, obtain
approvals for or commercialize potential products based on genes contained in
our databases or genes that we identify as promising candidates for development
as drug targets or therapeutic proteins, we must enter into collaborative
arrangements to develop and commercialize these products. We will have limited
or no control over the resources that any collaborator may devote to this
effort. Any of our present or future collaborators may not perform their
obligations as expected. These collaborators may breach or terminate their
agreements with us or otherwise fail to conduct product discovery, development
or commercialization activities successfully or in a timely manner. Further, our
collaborators may elect not to develop products arising out of our collaborative
arrangements or may not devote sufficient resources to the development,
approval, manufacture, marketing or sale of these products. If any of these
events occurs, we may not be able to develop or commercialize potential
products.

Some of our agreements provide us with rights to participate in the commercial
development of compounds or therapeutic approaches derived from our
collaborations or access to our databases, technology or intellectual property.
We may not be able to obtain such rights in future collaborations or agreements.
Our ability to obtain such rights depends in part on the validity of our
intellectual property, the advantages and novelty of our technologies and
databases and our negotiating position relative to each potential collaborator
or customer. Previous attempts by others in the industry to obtain these rights
with respect to the development of knockout mice and related technologies have
generated considerable controversy, especially in the academic community.

                                        8
   11

ANY CANCELLATION BY OR CONFLICTS WITH OUR COLLABORATORS COULD HARM OUR BUSINESS

Our collaboration agreements may not be renewed and may be terminated in the
event either party fails to fulfill its obligations under these agreements. Any
failure to renew or cancellation by a collaborator could mean a significant loss
of revenues. In 1999, Millennium Pharmaceuticals, Inc. accounted for greater
than 10% of our revenues. Millennium has elected not to extend its database
subscription agreement, one of its two agreements with us, beyond its initial
term. Similar non-renewals or terminations could result in reductions in our
revenues and volatility in our earnings.

In addition, we may pursue opportunities in fields that could conflict with
those of our collaborators. Moreover, disagreements could arise with our
collaborators over rights to our intellectual property or our rights to share in
any of the future revenues of compounds or therapeutic approaches developed by
our collaborators. These kinds of disagreements could result in costly and
time-consuming litigation. Any conflict with our collaborators could reduce our
ability to obtain future collaboration agreements and could have a negative
impact on our relationship with existing collaborators, adversely affecting our
business and revenues. Some of our collaborators could also become competitors
in the future. Our collaborators could develop competing products, preclude us
from entering into collaborations with their competitors or terminate their
agreements with us prematurely. Any of these developments could harm our product
development efforts.

WE HAVE NO EXPERIENCE IN DEVELOPING AND COMMERCIALIZING PRODUCTS ON OUR OWN

Our ability to develop and commercialize products on our own will depend on our
ability to internally develop preclinical, clinical, regulatory and sales and
marketing capabilities, or enter into arrangements with third parties to provide
those functions. We may not be successful in developing these capabilities or
entering into agreements with third parties on favorable terms, or at all.
Further, our reliance upon third parties for these capabilities could reduce our
control over such activities and could make us dependent upon these parties. Our
inability to develop or contract for these capabilities would significantly
impair our ability to develop and commercialize products.

IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY BE UNABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN PRODUCTS

We are highly dependent on Arthur T. Sands, M.D., Ph.D., our president and chief
executive officer, as well as other principal members of our management and
scientific staff. The loss of any of these personnel would have a material
adverse effect on our business, financial condition or results of operations and
could inhibit our product development and commercialization efforts. Although we
have entered into employment agreements with some of our key personnel,
including Dr. Sands, these employment agreements are for a limited period of
time and not all key personnel have employment agreements.

We do not currently have sufficient executive management personnel to fully
execute our business plan. There is currently a shortage of skilled executives,
which is likely to continue and intensify. In addition, recruiting and retaining
qualified scientific personnel to perform future research and development work
will be critical to our success. Competition for experienced scientists is high.
Failure to recruit and retain executive management and scientific personnel on
acceptable terms would prevent us from achieving our business objectives.

WE MAY ENCOUNTER DIFFICULTIES IN MANAGING OUR GROWTH, WHICH COULD INCREASE OUR
LOSSES

We have experienced a period of rapid growth that has placed and, if this growth
continues, will continue to place a strain on our human and capital resources.
If we are unable to manage our growth effectively, our losses could increase.
The number of our employees increased from 57 at December 31, 1997 to 93 at
December 31, 1998 and 122 at December 31, 1999. We intend to increase the number
of our employees significantly in 2000. Our ability to manage our operations and
growth effectively requires us to continue to expend funds to improve our
operational, financial and management controls, reporting systems and
procedures. If we are unable to successfully implement improvements to our
management information and control systems in an efficient or timely manner, or
if we encounter deficiencies in existing systems and controls, our management
may not have adequate information to manage our day-to-day operations.

                                        9
   12

BECAUSE OUR ENTIRE OMNIBANK MOUSE CLONE LIBRARY IS LOCATED AT A SINGLE FACILITY,
THE OCCURRENCE OF A DISASTER COULD SIGNIFICANTLY DISRUPT OUR BUSINESS

Our OmniBank mouse clone library and its back-up are stored in liquid nitrogen
freezers located at our facility in The Woodlands, Texas. If a disaster such as
a fire, flood, hurricane, tornado or similar event significantly damages or
destroys the facility in which our mouse clone library and back-up are stored,
our business could be disrupted until we could regenerate the library and, as a
result, our stock price could decline. Our business interruption insurance may
not be sufficient to compensate us in the event of a major interruption due to
such a disaster.

RISKS RELATED TO OUR INDUSTRY

OUR ABILITY TO PATENT OUR DISCOVERIES IS UNCERTAIN BECAUSE PATENT LAWS AND THEIR
INTERPRETATION ARE HIGHLY UNCERTAIN AND SUBJECT TO CHANGE

The patent positions of biotechnology firms generally are highly uncertain and
involve complex legal and factual questions that will determine who has the
right to develop a particular product. No clear policy has emerged regarding the
breadth of claims covered in biotechnology patents. The biotechnology patent
situation outside the United States is even more uncertain and is currently
undergoing review and revision in many countries. Changes in, or different
interpretations of, patent laws in the United States and other countries might
allow others to use our discoveries or to develop and commercialize our products
without any compensation to us.

OUR PATENT APPLICATIONS MAY NOT RESULT IN ENFORCEABLE PATENT RIGHTS

Our disclosures in our patent applications may not be sufficient to meet the
statutory requirements for patentability in all cases. Additionally, our patent
applications will cover many genes. As a result, we cannot predict which of our
patent applications will result in the granting of patents or the timing of the
granting of our patents. In addition, the Human Genome Project, as well as many
companies and institutions, have identified genes and deposited partial gene
sequences in public databases and are continuing to do so. These public
disclosures might limit the scope of our claims or make unpatentable subsequent
patent applications on full-length genes.

Other companies or institutions have filed and will file patent applications
that attempt to patent genes or gene sequences that may be similar to our patent
applications. The Patent and Trademark Office could decide competing patent
claims in an interference proceeding. Any such proceeding would be costly, and
we may not prevail. In addition, patent applications filed by third parties may
have priority over patent applications we file. In this event, the prevailing
party may require us or our collaborators to stop pursuing a potential product
or to negotiate a license arrangement to pursue the potential product. We may
not be able to obtain a license from the prevailing party on acceptable terms,
or at all.

Some court decisions indicate that disclosure of a partial sequence may not be
sufficient to support the patentability of a full-length sequence. We believe
that these court decisions and the uncertain position of the Patent and
Trademark Office present a significant risk that the Patent and Trademark Office
will not issue patents based on patent disclosures limited to partial gene
sequences, like those represented in the Human Gene Trap database. In addition,
we are uncertain about the scope of the coverage, enforceability and commercial
protection provided by any patents issued on the basis of partial gene
sequences.

IF OTHER COMPANIES AND INSTITUTIONS OBTAIN PATENTS CLAIMING THE FUNCTIONAL USES
OF GENES AND GENE PRODUCTS BASED UPON GENE SEQUENCE INFORMATION AND PREDICTIONS
OF GENE FUNCTION, WE MAY BE UNABLE TO OBTAIN PATENTS FOR OUR DISCOVERIES OF
BIOLOGICAL FUNCTION IN KNOCKOUT MICE

We intend to pursue patent protection covering the novel uses and functions of
new and known genes and proteins in mammalian physiology and disease states.
While an actual description of the biological function of a gene or protein
should enhance a patent position, we cannot assure you that such information
will increase the probability of issuance of any patents. Further, many other
entities are currently filing patents on genes based primarily on gene sequence
information alone. Many such applications seek to protect partial human gene
sequences, full-length gene sequences and the deduced protein products encoded
by the sequences. In general, such applications attempt to assign biologic
function to the DNA sequences based on computer predictions. While we believe
that patents covering gene function based on speculation and prediction will not
be
                                       10
   13

issued, there is the significant possibility that patents claiming the
functional uses of genes and gene products will be issued to our competitors
based on such information.

IF OUR POTENTIAL PRODUCTS CONFLICT WITH PATENTS THAT COMPETITORS, UNIVERSITIES
OR OTHERS HAVE OBTAINED, THEN WE MAY BE UNABLE TO COMMERCIALIZE THOSE PRODUCTS

Our potential products and those of our collaborators may give rise to claims
that they infringe the patents of others. This risk will increase as the
biotechnology industry expands and as other companies obtain more patents and
attempt to discover genes through the use of high-speed sequencers. Other
companies or institutions could bring legal actions against us or our
collaborators for damages or to stop manufacturing and marketing the affected
products. If any of these actions are successful, in addition to potential
liability for damages, these persons may require us or our collaborators to
obtain a license in order to continue to manufacture or market the affected
products or may force us to terminate manufacturing or marketing efforts. We
believe that there will continue to be significant litigation in our industry
regarding patent and other intellectual property rights. Certain of our
competitors have and are continuing to expend significant amounts of time, money
and management resources on intellectual property litigation. If we become
involved in litigation, it could consume a substantial portion of our resources
and could negatively affect our results of operations.

ISSUED PATENTS MAY NOT FULLY PROTECT OUR DISCOVERIES, AND OUR COMPETITORS MAY BE
ABLE TO COMMERCIALIZE PRODUCTS SIMILAR TO THOSE COVERED BY OUR ISSUED PATENTS

Issued patents may not provide commercially-meaningful protection against
competitors. Other companies or institutions may challenge our or our
collaborators' patents or independently develop similar products that could
result in an interference proceeding in the Patent and Trademark Office or a
legal action. In the event any single researcher or institution infringes upon
our or our collaborators' patent rights, enforcing these rights may be difficult
and can be time consuming. Others may be able to design around these patents or
develop unique products providing effects similar to our products.

In addition, others may discover uses for genes or proteins other than those
uses covered in our patents, and these other uses may be separately patentable.
Even if we have a patent claim on a particular gene, the holder of a patent
covering the use of that gene could exclude us from selling a product that is
based on the same use of that gene. In addition, with respect to certain of our
patentable inventions, we have decided not to pursue patent protection outside
the United States, both because we do not believe it is cost effective and
because of confidentiality concerns. Accordingly, our international competitors
could develop, and receive foreign patent protection for gene sequences and
functions for which we are seeking U.S. patent protection.

OUR RIGHTS TO THE USE OF TECHNOLOGIES LICENSED BY THIRD PARTIES ARE NOT WITHIN
OUR CONTROL

We rely, in part, on licenses to use certain technologies which are material to
our business. We do not own the patents which underly these licenses. Our rights
to use these technologies and practice the inventions claimed in the licensed
patents are subject to our licensors abiding by the terms of those licenses and
not terminating them. In many cases, we do not control the prosecution or filing
of the patents to which we hold licenses. We rely upon our licensors to prevent
infringement of those patents. The scope of our rights under our licenses may be
subject to dispute by our licensors or third parties.

WE MAY BE UNABLE TO PROTECT OUR TRADE SECRETS

While we have entered into confidentiality agreements with employees and
collaborators, we may not be able to prevent the disclosure of our trade
secrets. In addition, other companies or institutions may independently develop
substantially equivalent information and techniques.

                                       11
   14

WE AND OUR COLLABORATORS ARE SUBJECT TO EXTENSIVE AND UNCERTAIN GOVERNMENT
REGULATORY REQUIREMENTS, WHICH COULD INCREASE OUR OPERATING COSTS OR ADVERSELY
AFFECT OUR ABILITY TO OBTAIN GOVERNMENT APPROVAL OF PRODUCTS BASED ON GENES THAT
WE IDENTIFY IN A TIMELY MANNER OR AT ALL

Drugs and diagnostic products are subject to an extensive and uncertain
regulatory approval process by the FDA and comparable agencies in other
countries. The regulation of new products is extensive, and the required process
of laboratory testing and human studies is lengthy and expensive. The burden of
these regulations will fall on us to the extent we are developing proprietary
products on our own. If the products are the result of a collaboration effort,
these burdens may fall on our collaborating partner or may be shared with us. We
may not be able to obtain FDA approvals for those products in a timely manner,
or at all. We may encounter significant delays or excessive costs in our efforts
to secure necessary approvals or licenses. Even if we obtain FDA regulatory
approvals, the FDA extensively regulates manufacturing, labeling, distributing,
marketing, promotion and advertising after product approval. Moreover, several
of our product development areas may involve relatively new technology and have
not been the subject of extensive product testing in humans. The regulatory
requirements governing these products and related clinical procedures remain
uncertain and the products themselves may be subject to substantial review by
foreign governmental regulatory authorities that could prevent or delay approval
in those countries. Regulatory requirements ultimately imposed on our products
could limit our ability to test, manufacture and, ultimately, commercialize our
products.

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

We provide access to our databases and the opportunity to acquire our knockout
mice on the Internet. A fundamental requirement to conduct Internet-based,
business-to-business electronic commerce is the secure transmission of
confidential information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
may result in a compromise or breach of the algorithms we use to protect content
and transactions on Lexgen.com or proprietary information in our OmniBank
database. Anyone who is able to circumvent our security measures could
misappropriate our proprietary information, confidential customer information or
cause interruptions in our operations. We may be required to incur significant
costs to protect against security breaches or to alleviate problems caused by
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information.

Because of the growth in electronic commerce, Congress has held hearings on
whether to regulate providers of services and transactions in the electronic
commerce market, and federal or state authorities could enact laws, rules or
regulations affecting our business or operations. If enacted and applied to our
business, these laws, rules or regulations could render our business or
operations more costly, burdensome, less efficient or impracticable.

WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS; ANY DISPUTES RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF
THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY

Our research and development processes involve the use of hazardous materials,
including chemicals and radioactive and biological materials. Our operations
also produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge or any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We could be
subject to civil damages in the event of an improper or unauthorized release of,
or exposure of individuals to, these hazardous materials. In addition, claimants
may sue us for injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our total assets.
Compliance with environmental laws and regulations may be expensive, and current
or future environmental regulations may impair our research, development or
production efforts.

WE MAY BE SUED FOR PRODUCT LIABILITY

We or our collaborators may be held liable if any product we or our
collaborators develop, or any product which is made with the use or
incorporation of any of our technologies, causes injury or is found otherwise
unsuitable during product testing, manufacturing, marketing or sale. Although we
currently have and intend to maintain product liability insurance, this

                                       12
   15

insurance may become prohibitively expensive, or may not fully cover our
potential liabilities. Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
us or our collaborators. If we are sued for any injury caused by our or our
collaborators' products, our liability could exceed our total assets.

PUBLIC PERCEPTION OF ETHICAL AND SOCIAL ISSUES MAY LIMIT OR DISCOURAGE THE USE
OF OUR TECHNOLOGIES, WHICH COULD REDUCE OUR REVENUES

Our success will depend in part upon our ability to develop products discovered
through our gene trapping and knockout mouse technologies. Governmental
authorities could, for social or other purposes, limit the use of genetic
processes or prohibit the practice of our gene trapping and knockout mouse
technologies. Claims that genetically engineered products are unsafe for
consumption or pose a danger to the environment may influence public attitudes.
The subject of genetically modified organisms, like knockout mice, has received
negative publicity and aroused public debate in some countries. Ethical and
other concerns about our technologies, particularly the use of genes from nature
for commercial purposes and the products resulting from this use, could
adversely affect our market acceptance.

RISKS RELATED TO THIS OFFERING

OUR STOCK PRICE COULD BE EXTREMELY VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE

Prior to this offering, there has been no public market for shares of our common
stock. An active trading market may not develop following completion of this
offering, and if it develops, may not be maintained. The initial public offering
price for the shares will be determined by negotiations between us and
representatives of the underwriters. This price may not be indicative of prices
that may prevail later in the market. The stock market has experienced
significant price and volume fluctuations, and the market prices of technology
companies, particularly life science companies such as ours and companies whose
businesses are dependent on the Internet, have been highly volatile. In
addition, broad market and industry fluctuations that are not within our control
may adversely affect the trading price of our common stock. You may not be able
to resell your shares at or above the initial public offering price.

In addition, our quarterly operating results have fluctuated in the past and are
likely to do so in the future. These fluctuations could cause our stock price to
fluctuate significantly or decline. In addition to the risks and uncertainties
described in this section, some of the factors that could cause our operating
results to fluctuate include:

     - expiration of database subscriptions or research contracts with
       collaborators or government research grants, which may not be renewed or
       replaced;

     - the success rate of our discovery efforts leading to milestones and
       royalties;

     - the timing and willingness of collaborators to commercialize products
       which would result in royalties;

     - general and industry-specific economic conditions, which may affect our
       and our collaborators' research and development expenditures; and

     - the timing and content of information released by the Human Genome
       Project.

Due to the possibility of fluctuations in our revenues and expenses, we believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. Our operating results in some quarters may
not meet the expectations of stock market analysts and investors. In that case,
our stock price would probably decline.

In the past, stockholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a stockholder files a securities class action suit against us, we
would incur substantial legal fees and our management's attention and resources
would be diverted from operating our business in order to respond to the
litigation.

                                       13
   16

THERE IS A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK

Sales of a substantial number of shares of our common stock in the public market
following this offering could cause the market price of our common stock to
decline. Upon completion of this offering, we will have outstanding an aggregate
of 47,515,051 shares of common stock, assuming no exercise of outstanding
options or warrants. Of these shares, all of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, or the Securities Act, unless these shares are purchased
by affiliates. The remaining 37,515,051 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under the Securities Act.

Our executive officers, directors and certain stockholders have agreed pursuant
to "lock-up" agreements that, with limited exceptions, for a period of 180 days
from the date of this prospectus, they will not sell any shares of common stock
without the prior written consent of J.P. Morgan Securities Inc.

As a result of these "lock-up" agreements and the rules under the Securities
Act, the restricted shares will be available for sale in the public market,
subject to certain volume and other restrictions, as follows:

- ----------------------------------------------------------------------------------------------------------
  DAYS AFTER THE    NUMBER OF SHARES
  EFFECTIVE DATE    ELIGIBLE FOR SALE                                COMMENT
  --------------    -----------------                                -------
                                 
Upon effectiveness  --                 Shares not locked-up and eligible for sale under Rule 144
90 days             --                 Shares not locked-up and eligible for sale under Rules 144 and 701
180 days            34,972,551         Lock-up released; shares eligible for sale under Rules 144 and 701

Additionally, of the 8,473,134 shares that may be issued upon the exercise of
options outstanding as of March 15, 2000, approximately 4,185,252 shares are
subject to options which will be vested and exercisable 180 days after the date
of this prospectus.

On the date 180 days after the closing date of this offering, the holders of
37,170,186 shares of our common stock and warrants exercisable for 740,001
additional shares of common stock will have rights to require us to register
their shares under the Securities Act. Upon the effectiveness of a registration
statement covering these shares, these shares would become freely tradable.

Immediately after this offering, we intend to file a registration statement
under the Securities Act covering approximately 11,505,135 shares of common
stock reserved for issuance under our stock option plans. We expect the
registration statement to be filed and become effective as soon as practicable
after the closing of this offering. Accordingly, shares registered under such
registration statement will be available for sale in the open market upon the
effectiveness of the registration statement unless they are held by persons that
have signed a "lock-up" agreement.

NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION

The initial public offering price will be substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will incur immediate dilution of $18.33 in net tangible book value per
share of common stock, based on an assumed public offering price of $23.00 per
share.

CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS ENABLES THEM TO COLLECTIVELY CONTROL ALL SIGNIFICANT
CORPORATE DECISIONS

Following this offering our directors, entities affiliated with our directors
and our executive officers will beneficially own, in the aggregate,
approximately 51.0% of our outstanding common stock. These stockholders as a
group will be able to elect our directors and officers, control the management
and affairs of our company and will be able to control most matters requiring
the approval of our stockholders, including any merger, consolidation or sale of
all or substantially all of our assets and any other significant corporate
transaction. The concentration of ownership will also prevent a change of
control of our company at a premium price if these stockholders oppose it.
Please read "Principal Stockholders" for details on our stock ownership.

                                       14
   17

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD NEGATIVELY AFFECT OUR STOCK PRICE

Provisions in our amended and restated charter and bylaws and applicable
provisions of the Delaware General Corporation Law may make it more difficult
for a third party to acquire control of us without the approval of our board of
directors. These provisions may make it more difficult or expensive for a third
party to acquire a majority of our outstanding voting common stock or delay,
prevent or deter a merger, acquisition, tender offer or proxy contest, which may
negatively affect our stock price.

WE MAY HAVE LIABILITY FOR A MEMORANDUM WE SENT TO OUR EMPLOYEES RELATING TO OUR
DIRECTED SHARE PROGRAM IF THE MEMORANDUM IS DEEMED TO BE A PROSPECTUS THAT DOES
NOT COMPLY WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933

We sent a written memorandum to our employees informing them that our
underwriters would conduct a directed share program as part of this offering and
asking that they identify members of their families whom they wished the
underwriters to contact in connection with that program. We did not request any
indication from our employees or their family members as to their interest in
buying shares in this offering, nor did we send any communication regarding this
offering or the directed share program to their family members. If the
memorandum were found to be a prospectus that did not comply with the
requirements of the Securities Act, we could have liability under the Securities
Act to persons who received the memorandum and who purchase stock in this
offering. This liability could include the right of such persons, for a period
of one year from the date of purchase of the common stock, to obtain recovery of
the consideration paid for the common stock or if they had already sold the
common stock, sue us for damages resulting from their purchase of common stock.
Assuming these persons purchase all of the shares in the directed share program,
these refunds or damages could total up to approximately $11.5 million based on
the assumed initial public offering price of $23.00 (the midpoint of the range
on the cover page), in the event that investors suffer a total loss of their
investment during this period and seek refunds or damages.

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These statements relate to
future events or our future financial performance. We have attempted to identify
forward-looking statements by terminology including "anticipate," "believe,"
"can," "continue," "could," "estimate," "expect," "intend," "may," "plan,"
"potential," "predict," "should" or "will" or the negative of these terms or
other comparable terminology. These statements are only predictions and involve
known and unknown risks, including the risks outlined under "Risk Factors," that
may cause our or our industry's actual results, levels of activity, performance
or achievements to be materially different from those implied by these
forward-looking statements. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.

                                       15
   18

                                USE OF PROCEEDS

Our net proceeds from the sale of the 10,000,000 shares of common stock we are
offering, at an assumed initial public offering price of $23.00 per share, are
estimated to be approximately $212.9 million after deducting underwriting
discounts and estimated offering expenses payable by us. We expect to use the
net proceeds to:

     - increase functional genomics research using knockout mice to define the
       functions of genes that encode potential drug targets and therapeutic
       proteins;

     - expand our Human Gene Trap database and OmniBank database and library;

     - generate full-length sequences of a prioritized set of genes that appear
       by computer, or bioinformatics, analysis to encode potential drug targets
       and therapeutic proteins; and

     - fund working capital, capital expenditures and other general corporate
       purposes.

The amounts and timing of our actual expenditures will depend upon numerous
factors, including the status of our product development and commercialization
efforts, the amount of proceeds actually raised in this offering, the amount of
cash generated by our operations, competition and sales and marketing
activities. We may also use a portion of the proceeds for the acquisition of, or
investment in, companies, technologies or assets that complement our business.
However, we have no present understandings, commitments or agreements to enter
into any potential acquisitions or investments. Further, we have not determined
the amounts we plan to spend on any of the areas listed above or the timing of
these expenditures. As a result, our management will have broad discretion to
allocate the net proceeds from this offering. Pending application of the net
proceeds as described above, we intend to invest the net proceeds of the
offering in short-term investment grade and U.S. government securities.

                                DIVIDEND POLICY

We have never paid cash dividends on our common stock or any other securities.
We anticipate that we will retain all of our future earnings, if any, for use in
the expansion and operation of our business and do not anticipate paying cash
dividends in the foreseeable future.

                                       16
   19

                                 CAPITALIZATION

The following table summarizes as of December 31, 1999 our cash, cash
equivalents and marketable securities and our capitalization:

     - on an actual basis; and

     - on a pro forma basis to reflect the conversion of all our outstanding
       convertible preferred stock into 12,733,992 shares of common stock upon
       the closing of this offering and

     - on a pro forma as adjusted basis to reflect the conversion of the
       preferred stock and the sale of 10,000,000 shares of common stock at an
       assumed initial public offering price of $23.00 per share, less estimated
       underwriting discounts and estimated offering expenses.

This table does not include: 5,196,555 shares issuable on the exercise of stock
options outstanding as of December 31, 1999 at a weighted average exercise price
of $1.67 per share; 1,003,500 shares issuable upon exercise of warrants
outstanding as of December 31, 1999 at an exercise price of $2.50 per share; or
685,938 additional shares that we could have issued under our stock option plan
as of such date.

This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
accompanying notes appearing elsewhere in this prospectus.

                                                              ------------------------------------
                                                                       DECEMBER 31, 1999
                                                              ------------------------------------
                                                                                        PRO FORMA
                                                               ACTUAL     PRO FORMA    AS ADJUSTED
                                                              --------    ---------    -----------
                                                                              
In thousands, except share data
Cash, cash equivalents and marketable securities............  $  9,156    $  9,156      $222,056
                                                              ========    ========      ========

Long-term obligations, net of current portion...............  $  3,577    $  3,577      $  3,577
Redeemable convertible preferred stock, $0.01 par value;
  4,244,664 shares authorized, 4,244,664 shares issued and
  outstanding, actual; no shares authorized or outstanding,
  pro forma and pro forma as adjusted.......................    30,050          --            --
Stockholders' equity (deficit):
     Preferred stock, $0.01 par value; 5,755,336 shares
      authorized, no shares issued and outstanding, actual;
      5,000,000 shares authorized, no shares issued and
      outstanding, pro forma and pro forma as adjusted......        --          --            --
     Common stock, $0.001 par value; 120,000,000 shares
      authorized; 24,540,201 shares issued and outstanding,
      actual; 37,274,193 shares issued
       and outstanding, pro forma; 47,274,193 shares
       issued and outstanding, pro forma as adjusted........        25          37            47
     Additional paid-in capital.............................     7,863      37,901       250,791
     Deferred stock compensation............................      (915)       (915)         (915)
     Accumulated deficit....................................   (28,909)    (28,909)      (28,909)
                                                              --------    --------      --------
          Total stockholders' equity (deficit)..............   (21,936)      8,114       221,014
                                                              --------    --------      --------
          Total capitalization..............................  $ 11,691    $ 11,691      $224,591
                                                              ========    ========      ========

                                       17
   20

                                    DILUTION

The pro forma net tangible book value of our common stock on December 31, 1999,
reflecting the conversion of all outstanding shares of convertible preferred
stock into shares of common stock upon the closing of this offering, was
approximately $8.1 million, or approximately $0.22 per share. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities divided by the number of shares of common stock
outstanding. Dilution in pro forma net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards. Assuming the sale of 10,000,000 shares of
our common stock offered by this prospectus at an assumed initial public
offering price of $23.00 per share, and after deducting estimated underwriting
discounts and estimated offering expenses, our adjusted pro forma net tangible
book value at December 31, 1999 would have been approximately $221 million, or
approximately $4.67 per share. This represents an immediate decrease in net
tangible book value of $18.33 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this dilution on
a per share basis.

                                                               --------------
                                                                 
Assumed initial public offering price per share.............           $23.00
     Pro forma net tangible book value per share at December
      31, 1999..............................................   $0.22
     Increase per share attributable to new investors.......    4.45
Adjusted pro forma net tangible book value per share after
  this offering.............................................             4.67
                                                                       ------
Dilution per share to new investors.........................           $18.33
                                                                       ======

The foregoing discussion and table assume no exercise of any outstanding stock
options or warrants. The exercise of all options and warrants outstanding as of
December 31, 1999 having an exercise price less than the initial public offering
price would increase the dilutive effect to new investors to $18.66 per share.

The following table summarizes, on a pro forma basis, as of December 31, 1999,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares in this offering. We
have assumed an initial public offering price of $23.00 per share, and we have
not deducted estimated underwriting discounts and estimated offering expenses in
our calculations.

                                                  -------------------------------------------------------------
                                                    SHARES PURCHASED      TOTAL CONSIDERATION
                                                  --------------------   ----------------------   AVERAGE PRICE
                                                    NUMBER     PERCENT      AMOUNT      PERCENT     PER SHARE
                                                  ----------   -------   ------------   -------   -------------
                                                                                   
Existing stockholders...........................  37,274,193     78.8%   $ 36,716,508     13.8%      $ 0.99
New investors...................................  10,000,000     21.2     230,000,000     86.2        23.00
                                                  ----------    -----    ------------   ------
Total...........................................  47,274,193    100.0%   $266,716,508    100.0%
                                                  ==========    =====    ============   ======

                                       18
   21

                            SELECTED FINANCIAL DATA

The statements of operations data for each of the years ended December 31, 1997,
1998 and 1999, and the balance sheet data as of December 31, 1998 and 1999, have
been derived from our audited financial statements included elsewhere in this
prospectus that have been audited by Arthur Andersen LLP, independent public
accountants. The statements of operations data for the period from our inception
on July 7, 1995 through December 31, 1995 and for the year ended December 31,
1996, and the balance sheet data at December 31, 1995, 1996 and 1997, have been
derived from our audited financial statements not included in this prospectus.
The pro forma net loss per share data reflect the conversion of our outstanding
convertible preferred stock upon closing of this offering. Our historical
results are not necessarily indicative of results to be expected for any future
period. The data presented below have been derived from financial statements
that have been prepared in accordance with generally accepted accounting
principles and should be read with our financial statements, including the
accompanying notes, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.

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

                                             PERIOD FROM
                                              INCEPTION
                                            (JULY 7, 1995)
                                               THROUGH                    YEAR ENDED DECEMBER 31,
                                             DECEMBER 31,    --------------------------------------------------
                                                 1995           1996         1997         1998         1999
                                            --------------   ----------   ----------   ----------   -----------
                                                                                     
In thousands, except share data
STATEMENTS OF OPERATIONS DATA
Revenues..................................         $  --         $  306       $  968      $ 2,242       $ 4,738
Operating expenses
  Research and development................           445          2,409        4,970        8,410        14,646
  General and administrative..............           236            764        1,473        2,024         2,913
                                            ------------     ----------   ----------   ----------   -----------
          Total operating expenses........           681          3,173        6,443       10,434        17,559
                                            ------------     ----------   ----------   ----------   -----------
Loss from operations......................          (681)        (2,867)      (5,476)      (8,192)      (12,821)
Interest income (expense), net............             9            (12)          74          711           346
                                            ------------     ----------   ----------   ----------   -----------
Net loss..................................          (672)        (2,879)      (5,402)      (7,481)      (12,475)
                                            ------------     ----------   ----------   ----------   -----------
Accretion on redeemable convertible
  preferred stock.........................            --             --           --         (357)         (535)
                                            ------------     ----------   ----------   ----------   -----------
Net loss attributable to common
  stockholders............................        $ (672)       $(2,879)     $(5,402)     $(7,838)     $(13,011)
                                            ============     ==========   ==========   ==========   ===========
Net loss per common share, basic and
  diluted.................................        $(0.07)       $ (0.17)     $ (0.23)     $ (0.32)     $  (0.53)
                                            ============     ==========   ==========   ==========   ===========
Shares used in computing net loss per
  common share, basic and diluted.........     9,861,297     17,346,228   23,988,969   24,445,422    24,530,427
Pro forma net loss per common share, basic
  and diluted.............................                                                             $  (0.33)
Shares used in computing pro forma net
  loss per common share, basic and
  diluted.................................                                                           37,264,419

                                                             -----------------------------------------------
                                                                           AS OF DECEMBER 31,
                                                             -----------------------------------------------
                                                             1995     1996      1997       1998       1999
                                                             -----   -------   -------   --------   --------
                                                                                     
In thousands
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities...........  $ 340   $    --   $ 1,980   $ 19,422   $  9,156
Working capital............................................      9      (303)    1,009     18,102      2,021
Total assets...............................................    721     1,090     4,917     28,516     22,295
Long-term obligations, net of current portion..............     --        81     5,268      5,024      3,577
Redeemable convertible preferred stock.....................     --        --        --     29,515     30,050
Accumulated deficit........................................   (672)   (3,551)   (8,953)   (16,790)   (28,909)
Total stockholders' equity (deficit).......................    340       521    (1,931)    (9,034)   (21,936)

                                       19
   22

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read with "Selected Financial
Data" and our financial statements and notes included elsewhere in this
prospectus.

OVERVIEW

We are a genomics company using gene trapping technology to discover thousands
of genes and to expand our OmniBank library of tens of thousands of knockout
mouse clones for drug discovery. We derive substantially all of our revenues
from subscriptions to our databases, collaborations for the development and, in
some cases, analysis of knockout mice and from government grants. To date, we
have generated a substantial portion of our revenues from a limited number of
sources.

Since our inception, we have incurred significant losses and, as of December 31,
1999, we had an accumulated deficit of $28.9 million, which includes $892,362 of
accretion on redeemable convertible preferred stock. Our losses have resulted
principally from costs incurred in research and development and from general and
administrative costs associated with our operations. Research and development
expenses consist primarily of salaries and related personnel costs, material
costs, legal expenses resulting from intellectual property prosecution and other
expenses related to the generation of our Human Gene Trap database, OmniBank
database and library and the development of knockout mice. We expense our
research and development costs as they are incurred. General and administrative
expenses consist primarily of salaries and related expenses for executive,
finance and other administrative personnel, professional fees and other
corporate expenses including business development and general legal activities.
In connection with the expansion of our Human Gene Trap database, OmniBank
database and library and functional genomics research efforts, we expect to
incur increasing research and development and general and administrative costs.
As a result, we will need to generate significantly higher revenues to achieve
profitability.

Our quarterly operating results will depend upon many factors, including
expiration of research contracts with collaborators or government research
grants, the success rate of our discovery efforts leading to milestones and
royalties, the timing and willingness of collaborators to commercialize products
which would result in royalties, general and industry-specific economic
conditions which may affect research and development expenditures and the timing
and content of information released by the Human Genome Project. As a
consequence, our quarterly operating results have fluctuated in the past and are
likely to do so in the future.

During 1999, we recorded deferred stock compensation of $1.0 million. Deferred
stock compensation represents the difference between the exercise price and the
fair value of our common stock at the date of grant. We anticipate that
additional deferred compensation totaling approximately $60.5 million will be
recorded for options granted in the first quarter of 2000. These amounts are
being amortized over the respective vesting periods of the individual stock
options. We recorded amortization of deferred compensation of $85,633 for 1999.
We expect to record amortization expense for deferred compensation as follows:
$21.6 million during 2000, $12.9 million during 2001, $12.9 million during 2002,
$12.9 million during 2003 and $1.1 million during 2004. The amount of deferred
compensation expense to be recorded in future periods may decrease if unvested
options for which deferred compensation has been recorded are subsequently
canceled.

As of December 31, 1999, we had net operating loss carryforwards of
approximately $27.0 million. We also had research and development tax credit
carryforwards of approximately $671,000. The net operating loss and credit
carryforwards will expire at various dates beginning in 2011, if not utilized.
Utilization of the net operating losses and credits may be substantially limited
due to the change in ownership provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of net operating losses and credits before utilization.

RESULTS OF OPERATIONS

Years Ended December 31, 1999 and 1998

Revenues.  Total revenues increased 111% to $4.7 million in 1999 from $2.2
million in 1998. Of the $2.5 million increase, $1.4 million was derived from
increased database subscription and license fees and $1.1 million was derived
from increased fees for the development of knockout mice. In 1999, Millenium
Pharmaceuticals, Inc. and ZymoGenetics, Inc. represented 28% and 23% of
revenues, respectively. In 1998, ZymoGenetics, Inc., Merck & Co. Inc., and
Genetics Institute represented 24%, 12% and 11% of revenues, respectively.

Research and Development Expenses.  Research and development expenses increased
74% to $14.6 million in 1999 from $8.4 million for 1998. The increase of $6.2
million was attributable to continued growth of research and development
activities, including $2.6 million related to increased personnel and laboratory
supply costs to support the generation of our

                                       20
   23

Human Gene Trap database, OmniBank database and library and the development of
knockout mice and $2.9 million related to higher operating expenses as a result
of the completion of our new animal facility in January 1999, with the remainder
due to expansion in operating activities. As of December 31, 1999, production
costs incurred in the development of knockout mice for commercial sale have not
been significant.

General and Administrative Expenses.  General and administrative expenses
increased 44% to $2.9 million during 1999 from $2.0 million for 1998. The
increase of $888,799 was due to $720,694 related to compensation for business
development, finance and administrative personnel, with the remainder due to
overall expansion in our operations.

Interest Income and Interest Expense.  Interest income decreased 23% to $648,906
in 1999 from $838,110 in 1998. This decrease resulted from a declining cash and
investment balance due to cash used in operating activities. Interest expense
increased 139% to $302,802 in 1999 from interest expense of $126,665 in 1998.
This increase resulted from higher debt obligation balances in 1999.

Years Ended December 31, 1998 and 1997

Revenues.  Total revenues increased 132% to $2.2 million in 1998 from $967,742
in 1997. Of the $1.3 million increase, $425,075 was derived from increased
database subscription and license fees and $585,789 was derived from increased
fees from the development of knockout mice. In 1998, ZymoGenetics, Inc., Merck &
Co. Inc., and Genetics Institute represented 24%, 12% and 11% of revenues,
respectively. In 1997, Merck & Co. Inc. represented 25% of revenues.

Research and Development Expenses.  Our research and development expenses
increased 69% to $8.4 million in 1998 from $5.0 million in 1997. The increase of
$3.4 million was due to $1.1 million related to compensation for additional
scientific personnel and $1.7 million due to additional laboratory supply costs,
with the remainder due to expansion in our operating activities.

General and Administrative Expenses.  General and administrative expenses
increased 37% to $2.0 million in 1998 from $1.5 million in 1997. The increase
was due to hiring of additional personnel to support our growing business
activities.

Interest Income and Interest Expense.  Interest income increased 530% to
$838,110 in 1998 from interest income of $133,004 for 1997. This increase was
due to increases in cash and investment balances as a result of our $31.8
million redeemable convertible Series A preferred stock equity financing in May
1998. Interest expense increased 115% to $126,665 in 1998 from interest expense
of $58,861 for 1997. This increase resulted from higher average capital lease
and debt obligation balances in 1998.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations from inception primarily through private sales
of common and preferred stock, contract and milestone payments to us under our
database subscription and collaboration agreements and equipment financing
arrangements. As of December 31, 1999, we had received net proceeds of $36.7
million from issuances of common and preferred stock. In addition, from our
inception through December 31, 1999, we received $13.1 million in cash payments
from database subscription and license fees, fees for the development of
knockout mice, sales of products related to the generation of knockout mice and
government grants, of which $8.3 million had been recognized as revenues through
December 31, 1999.

As of December 31, 1999, we had $9.2 million in cash, cash equivalents and
marketable securities, as compared to $19.4 million as of December 31, 1998. We
used $9.6 million for operations in the year ended December 31, 1999. This
consisted of the net loss for the period of $12.5 million offset in part by
non-cash charges of $1.9 million related to depreciation expense. We received
$5.2 million from investing activities for the year ended December 31, 1999,
which consisted principally of net proceeds from the sale of marketable
securities of $9.3 million offset by purchases of property and equipment of $4.1
million.

In June 1999, we entered into a $5.0 million financing arrangement for the
purchase of property and equipment. As of December 31, 1999, we had drawn down
approximately $4.2 million and had $831,940 remaining available under this
arrangement. As of December 31, 1999, $3.7 million of the amount outstanding was
secured by the equipment financed. This facility accrues interest at a
weighted-average rate of approximately 11.7% and is due in monthly installments
through 2003. In addition, as of December 31, 1999, we had $133,398 in
capitalized lease obligations outstanding compared to $303,199 at December 31,
1998.

Our capital requirements depend on numerous factors, including our ability to
obtain database subscription and collaboration agreements and government grants,
the amount and timing of payments under such agreements and grants, the level
and timing of our research and development expenditures, market acceptance of
our products, the resources we devote to developing and
                                       21
   24

supporting our products and other factors. We expect to devote substantial
capital resources to continue our research and development efforts, to expand
our support and product development activities, and for other general corporate
activities. We believe that our current cash balances, together with the net
proceeds of this offering and revenues to be derived from subscriptions to our
databases, collaborations for the development and, in some cases, analysis of
knockout mice and government grants, will be sufficient to fund our operations
for at least two years. During or after this period, if cash generated by
operations is insufficient to satisfy our liquidity requirements, we may need to
sell additional equity or debt securities or obtain additional credit
arrangements. Additional financing may not be available on terms acceptable to
us or at all. The sale of additional equity or convertible debt securities may
result in additional dilution to our stockholders.

IMPACT OF INFLATION

The effect of inflation and changing prices on our operations was not
significant during the periods presented.

DISCLOSURE ABOUT MARKET RISK

Our exposure to market risk is confined to our cash and cash equivalents which
have maturities of less than three months. We maintain an investment portfolio
which consists of U.S. Government debt obligations and investment grade
commercial paper that mature one to six months after December 31, 1999, which we
believe are subject to limited credit risk. We currently do not hedge interest
rate exposure. Because of the short-term maturities of our investments, we do
not believe that an increase in market rates would have any negative impact on
the realized value of our investment portfolio.

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

                                       22
   25

                                    BUSINESS

COMPANY OVERVIEW

We are a genomics company using gene trapping technology to discover thousands
of genes and to expand our OmniBank library of tens of thousands of knockout
mouse clones for drug discovery. We have established an Internet exchange,
Lexgen.com, to enable researchers worldwide to access our OmniBank library and
to form collaborations with us to discover pharmaceutical products based on
genes and knowledge of their function. Through our ongoing collaborations with
pharmaceutical companies, biotechnology companies and academic researchers, we
receive fees and may obtain royalties and milestone payments from
commercialization of pharmaceutical products developed using our genomics
technologies. We believe that providing global access to our OmniBank library
through the Internet will significantly accelerate genomics research and will
enable us to establish a leadership position in drug target and therapeutic
protein discovery.

STRATEGY

Our principal objective is to establish a leadership position in drug target and
therapeutic protein discovery. The key elements of our strategy include the
following:

Discover and Obtain Proprietary Rights to a Substantial Number of Human
Genes.  We plan to continue the development of our Human Gene Trap database
until we have substantially covered, or saturated, the human genome using our
proprietary gene trapping technology. We intend to continue our efforts to
obtain full-length sequences of a prioritized set of genes that appear by
computer, or bioinformatics, analysis to encode potential drug targets and
therapeutic proteins.

Expand OmniBank and Develop Custom Knockout Mice for Selected Genes.  OmniBank
currently contains over 70,000 knockout mouse clones. We plan to expand our
OmniBank library until we have saturated the mouse genome using our proprietary
gene trapping technology. We intend to use our patented gene targeting
technology as a complement to OmniBank to generate custom knockout mice to
discover the functions of specific genes.

Use the Internet to Establish Gene Function Discovery Collaborations.  Through
Lexgen.com, our genomics Internet exchange, we plan to expand our efforts to use
OmniBank knockout mouse clones to establish e-Biology gene function discovery
collaborations with researchers at pharmaceutical and biotechnology companies
and academic institutions worldwide. We believe that we can harvest high-value
information on gene function for drug discovery through our e-Biology
collaborations.

Discover the Functions of Large Numbers of Genes that Encode Potential Drug
Targets and Therapeutic Proteins.  We plan to conduct internal research programs
using a large number of knockout mice to discover the physiologic, cellular and
biochemical functions of a prioritized set of genes. Our goal is to identify the
most promising candidate genes for development as drug targets or therapeutic
proteins. We plan to use functional genomics information obtained from our
e-Biology collaborations to complement our internal research efforts.

Develop Promising Drug Candidates through Collaborations or with Our Own
Resources.  We have and will continue to establish drug discovery collaborations
with pharmaceutical and biotechnology companies for the identification and
development of promising drug target and therapeutic protein candidates. We will
continue to seek combinations of research funding, licensing fees, milestone
payments, royalties and co-promotion rights in connection with these
collaborative agreements. Although we generally expect to rely on our
collaborators for clinical development and commercialization of products, we may
elect to pursue the research and clinical development of drug candidates on our
own.

THE GENOME

The body is composed of specialized cells that perform different functions and
are organized into tissues and organs. Cells in the body contain approximately
100,000 genes, referred to as the genome. Approximately 10% of the total number
of genes are expressed in an individual cell, and different subsets of genes are
expressed at significantly different levels in distinct cell types. Most genes
direct the production of specific proteins, resulting in the production of
approximately 10,000 different proteins in a typical cell. Proteins, such as
peptide hormones, enzymes and receptors, carry out and regulate critical
physiological functions in the body. The genome encodes the proteins made by
cells of the body.

The human genome is comprised of complementary strands of deoxyribonucleic acid,
or DNA, molecules organized into 23 pairs of chromosomes. These DNA molecules
consist of long chains of nucleotide bases that pair to form a twisted ladder-
like structure known as the double helix. There are four types of nucleotides in
DNA, adenine, cytosine, guanine and thymine, which are often abbreviated by
their first letters A, C, G and T. The entire human genome contains
approximately 3.5 billion nucleotide base pairs.

                                       23
   26

Genes carry the specific information, or code, necessary to construct, or
express, proteins that regulate human physiology. Genes make up approximately
three to five percent of chromosomes and are structurally defined by the
sequence of nucleotide bases contained in DNA. The remaining 95% to 97% of DNA
in chromosomes does not code for protein. Genes are composed of segments called
exons that are separated by non-coding DNA known as introns. Taken together, the
coding and non-coding DNA is commonly referred to as genomic DNA or chromosomal
DNA.

The information contained in genes is used to express proteins via a two-step
process. The first step in protein expression is called transcription, in which
the DNA sequence of a gene is copied into a molecule known as ribonucleic acid,
or RNA. A splicing process within the cell then removes the introns, or
non-coding segments, from the transcript, thereby creating a messenger RNA, or
mRNA. The mRNA contains only the exons of the transcribed gene. In the second
step, the mRNA directs the assembly of the protein product of the gene in a
process called translation.

Genomics: Gene Sequence Discovery

The Human Genome Project and other publicly and privately-funded DNA sequencing
efforts have invested considerable resources to sequence the genes in the human
genome. Most of these resources have been invested in projects using two
approaches: one approach known as expressed sequence tag, or EST, sequencing and
another known as genomic DNA sequencing.

EST sequencing uses mRNA from transcription of genes that has been converted
artificially, or in vitro, to form complementary DNA, or cDNA. High-throughput
EST sequencing obtains partial DNA sequence from the ends of the cDNA molecules.
It is generally believed that more than one-half of all human genes have been at
least partially sequenced using the EST approach.

Obtaining a complete set of human gene sequences requires the sequencing of
cDNAs from many different cell types and tissues. Since EST sequencing relies on
cDNA from mRNAs, it can, at best, identify the 10% of genes that are typically
expressed in the tissue or cell type from which the mRNA was obtained. EST
sequencing is further complicated by the fact that many genes are expressed at
thousands of times the levels of other genes, leading to thousands more copies
of certain mRNAs as compared to mRNAs from rarely expressed genes. Using current
EST technology, mRNAs expressed at very low levels are rarely detected. This has
significant implications for genomics-based drug discovery since rare mRNAs are
thought to encode key regulatory proteins that are enriched for potential drug
targets or therapeutic proteins.

The Human Genome Project and certain other high-throughput genomic DNA
sequencing efforts have employed a second approach involving the sequencing of
genomic DNA or entire chromosomes. It is expected that the Human Genome Project
will release a "working draft" of sequence from the human genome in the spring
of 2000. Genomic sequencing efforts obtain the sequence of whole chromosomes,
including the 95% to 97% of non-coding DNA.

Genomic sequencing of entire chromosomes is an expensive and inefficient way to
determine gene sequence because the exons that represent a gene are separated by
large regions of non-coding intron DNA sequence. A significant amount of
analysis and additional information is required to identify the exons within the
genomic sequence and to determine how those exons splice together to form mRNAs
from genes.

Functional Genomics: Defining Gene Function

Gene sequencing permits identification of the nucleotide sequence of the gene
but by itself does not predict the function of a gene in physiology and disease.
The growing databases of gene sequences are analagous to a dictionary containing
thousands of words, with only a handful of definitions.

Researchers use a variety of methods to obtain clues about gene function, like
gathering information about where a gene's transcript is found and where the
corresponding protein is expressed in the cell. Experiments are also conducted
using cell culture, biochemical studies and non-mammalian organisms. While these
methods may provide useful information about gene function at the biochemical
and cellular levels, their ability to provide information about how genes
control mammalian physiology is significantly limited.

The preferred method of determining a gene's function in mammals is to disrupt,
or knock out, the gene in a mouse and then assess the physiological and
biochemical consequences in the whole animal. The results of such an analysis
can determine the function and disease relevance of a particular gene. Since
mice and humans are mammals, the mouse has advantages over non-mammalian model
organisms for defining the function and disease relevance of human genes:

     - The human and mouse genomes bear a high degree of similarity; large
       regions of the two genomes contain similar genes in a similar order.

                                       24
   27

     - The mouse is the only mammal for which ES cell cloning technology has
       been well-established, and it is also the only mammal that can be
       genetically engineered on a large scale.

     - The mouse is one of the most widely-used animal model systems in the
       pharmaceutical industry because it has similar organ systems and
       physiology to humans.

The value of knockout mice as models for defining the function and disease
relevance of human genes is further evidenced by the Mouse Genome Project
recently initiated by the National Institute of Health. This project is the only
large-scale mammalian genome sequencing project funded by the U.S. government
other than the Human Genome Project itself.

While gene-targeting experiments in ES cells have led to substantial successes
in identifying gene function, traditional methods of producing knockout mice are
slow, labor-intensive and often unpredictable. These impediments have limited
the rate at which knockout mice may be produced. In addition, only genes that
are cloned and partially sequenced can be knocked out. This procedure requires
highly-skilled scientific personnel and often requires a year or more of work.
We estimate that, to date, knockout mice for fewer than five percent of genes
have been made by traditional gene-targeting technology, indicating that
substantial opportunities exist for high-throughput methodologies to create
knockout mice to define gene function.

LEXICON GENETICS TECHNOLOGY

Gene Trapping

We believe that our proprietary gene trapping technology represents a
significant advance in the discovery of genes and their function and an equally
significant departure from traditional mechanisms of drug discovery. Our
proprietary gene trapping technology uses a type of virus called a retrovirus
that has been genetically engineered. These retroviruses infect cells in vitro,
integrate into the chromosome of the cell and deliver molecular traps for genes.
Our gene traps stimulate transcription and use the cell's own splicing machinery
to extract a transcript of a gene from the chromosome for automated DNA
sequencing. Additionally, when we introduce our gene traps in mouse ES cells,
they disrupt the function of the trapped genes and allow for the production of
knockout mice.

Gene Sequence Discovery.  We believe that our proprietary gene trapping
technology is able to identify genes largely independent of mRNA expression
levels in any given cell type. This ability allows us to identify rarely
expressed genes, which are thought to encode classes of proteins that are
enriched for important drug targets and therapeutic proteins. The same ability
also allows us to obtain DNA sequence of genes throughout the human genome at a
fraction of the cost of EST or genomic sequencing approaches. As a result, we
believe that our gene-trapping technology gives us a significant competitive
advantage in the race to identify novel genes, overcoming many of the
limitations of other gene discovery technologies.

                COMPARISON OF GENE SEQUENCE DISCOVERY TECHNOLOGY

       LEXICON GENE TRAPPING                       EST SEQUENCING                      CHROMOSOME SEQUENCING
       ---------------------                       --------------                      ---------------------
                                                                          
- - Trapped genes include rarely          - Bias toward sequencing highly         - Only 3% to 5% of sequence contains
  expressed genes                         expressed genes                         genes
- - High rate of novel gene discovery     - Difficult to obtain any more novel    - Difficult to identify novel genes
                                          genes                                   reliably
- - High-throughput gene function         - Lacking functional genomics           - Lacking functional genomics
  discovery                               capability                              capability

We have also conducted pilot programs in which we have demonstrated the utility
of gene trapping in several agriculturally important animals and companion
animals, and believe that our technology represents a superior method to capture
gene sequences from the genomes of such animals.

We believe that our scientists are the first in the world to automate a process
for the rapid production and analysis of gene trap events. We have also
implemented integrated and automated procedures using computers and robotics to
perform most of the DNA sequencing tasks. This integrated approach allows our
scientists to move from human gene trap template or mouse ES cell clone to DNA
sequence with speed and efficiency. We have also implemented a rapid method to
clone and sequence full-length human genes from cDNA libraries that are
discovered through our gene trapping technology.

Defining Gene Function.  Mouse ES cells are cells that may be genetically
manipulated using our gene trapping and gene targeting technologies. When the
desired genetic changes have been introduced into the ES cells, clones of cells
containing specific alterations in genes are selected and grown as colonies in
vitro. These colonies each represent a new mouse clone with

                                       25
   28

a defined alteration in a specific gene and can be grown into knockout mice with
the desired alteration. In this form, ES cell clones may be stored indefinitely
in liquid nitrogen freezers.

We use our gene trapping retroviruses in an automated process to rapidly and
cost-effectively create knockout mouse clones. Our OmniBank library presently
contains more than 70,000 frozen ES cell clones identified by DNA sequence in a
relational database. Importantly, our gene trapping vectors are designed to trap
genes in a manner largely independent of their levels of expression, permitting
even very rarely expressed genes to be included in our OmniBank database and
library. We estimate that OmniBank currently contains genes that represent
approximately one-third of the mammalian genome.

We are currently generating approximately 1,000 genetically engineered knockout
ES cell clones per week using our technology. Our OmniBank library permits
researchers to analyze gene function even without prior knowledge of the DNA
sequence of the gene, permitting analysis of large numbers of knockout mice in
order to discover those genes that are responsible for particular biological
functions. We believe that this combination of gene trapping and large-scale ES
cell cloning of the mouse will enable us and our collaborators to more rapidly
discover those genes that are the most promising for development as drug targets
and therapeutic proteins.

Complementing our OmniBank genome-wide knockout approach, we use technologies of
gene targeting by a process called "homologous recombination" to generate custom
knockout mice for the study of the functions of specific genes. These highly
specific methods enable us to alter interesting genes for our focused drug
discovery projects. We use a technology known as Cre/lox recombinase technology
to selectively disrupt, or conditionally regulate, the functions of targeted
genes in specific tissues of the mouse. We call these mice "conditional knockout
mice." This conditional regulation of gene activity may closely model the
pharmacological action of drugs that interact with specific targets.

We have developed a sophisticated series of tests, which we refer to as the
Seek-Target-Validation program, to rapidly and systematically analyze large
numbers of knockout mice to discover the function of genes. These tests are
structured in three levels: primary biological analysis, organ and physiological
systems analysis, and pathway discovery and analysis. These tests are stratified
according to level of complexity required to obtain information regarding a
particular function. Results obtained from tests at one level can serve to focus
the types of tests applied at the next level of analysis. We apply these tests
to specific knockout mice in a systematic fashion in order to reveal
physiological, cellular and biochemical consequences of a specific gene
knockout, thereby defining the function of the gene and the protein it encodes.
Diseases and conditions that are being surveyed under this program include genes
for obesity, anemia, immune disorders, inflammation, heart disease, diabetes,
cancer, neurological diseases and behavioral defects. In 1999, we expended $14.6
million on company sponsored research and development activities. Our customer
sponsored research and development expenditures in 1999 were immaterial.

COMMERCIALIZATION

Our commercialization strategy is to:

     - expand our efforts to establish additional subscription agreements for
       access to our Human Gene Trap database and OmniBank database and library;

     - enter into collaborations for the development and analysis of custom and
       OmniBank knockout mice;

     - expand our e-Biology collaborations through Lexgen.com; and

     - establish drug discovery and development collaborations with leading
       pharmaceutical and biotechnology companies.

Drug Target and Therapeutic Protein Discovery

Most human disease is associated with alterations in physiological processes
controlled by genes and the proteins they encode. Virtually all drugs interact
with proteins, commonly referred to as the drug's target. Some drugs, such as
insulin and erythropoetin, are themselves protein products of genes. The
discovery of genes within the human genome that encode novel proteins,
therefore, represents an opportunity for the discovery and development of novel
drug targets and therapeutic proteins that address medical needs for which there
presently may be no effective treatment.

Drugs on the market today interact with a total of about 500 specific protein
targets, each of which is encoded by the sequence of a gene. While estimates of
the total number of potential drug targets encoded within the human genome vary
widely, many experts believe that there may be between 5,000 and 10,000 such
targets. The emergence of genomics, therefore, presents an opportunity for
pharmaceutical companies to significantly expand the number of new targets
available for drug discovery.

                                       26
   29

We believe our genomics and functional genomics resources will enable the
discovery of a wide spectrum of potential pharmaceutical products. We are using
these resources both to provide products and services to our collaborators and
to drive our own discovery efforts. These efforts involve the following
elements:

     - computer analyses of our proprietary Human Gene Trap and OmniBank
       databases to prioritize genes for functional analysis;

     - more in-depth computer, or bioinformatics, analysis and studies to
       determine tissues in which genes are expressed to prioritize a set of
       genes for full-length sequencing;

     - internal and collaborative research programs analyzing the physiologic,
       cellular and biochemical consequences of the knockout of selected genes
       in mice; and

     - identification of certain genes and the proteins encoded by such genes as
       promising drug targets or therapeutic proteins.

We anticipate that most of our pharmaceutical products may be developed and
marketed in collaborative arrangements with pharmaceutical and biotechnology
companies. We may, however, independently develop a select group of
pharmaceutical products. We believe that the genes we identify and the gene
functions we define have the potential to be valuable in the discovery and
development of therapeutic proteins, antibody, small molecule and gene therapy
drugs, diagnostics, and pharmacology and toxicology applications.

Collaborators, Customers and Programs

Millennium Pharmaceuticals, Inc.  We established a collaboration for our Human
Gene Trap and OmniBank databases with Millennium Pharmaceuticals, Inc. in
October 1999. Under the agreement with Millennium, we provided Millennium with
non-exclusive access to our Human Gene Trap and OmniBank databases through the
initial term of the agreement, which will expire in April 2000. We received
$2.25 million in access fees from Millennium for the initial term which
constituted in excess of 10% of our revenues in 1999. Millennium has elected not
to extend this agreement beyond its initial term. The database agreement was our
second collaboration agreement with Millennium. We entered into a separate
multi-year agreement in July 1999 for the creation of custom knockout mice for
use by Millennium in the validation of potential drug targets identified and
selected by Millennium.

Merck Genome Research Institute.  We established an agreement for access to our
OmniBank database and library with Merck Genome Research Institute in March
1997. We have agreed to develop 150 lines of knockout mice from OmniBank for
payments totaling $8.0 million, of which $4.0 million has already been paid. The
OmniBank mice produced under the agreement will be made available to researchers
worldwide through one or more not-for-profit distributors selected by MGRI for
that purpose. A committee of leading scientists appointed by MGRI selects the
lines of OmniBank mice produced under the agreement. To date, the committee has
selected 75 of the 150 lines of knockout mice to be produced under the
agreement. The MGRI agreement continues until all 150 lines of knockout mice are
delivered. MGRI has rights to terminate the agreement if we fail to achieve
specified performance standards, and either party may terminate the agreement if
the other party breaches its material obligations under the agreement.

OmniBank Internet Universal Program. The OmniBank Internet Universal program
allows pharmaceutical and biotechnology companies to obtain non-exclusive access
to our OmniBank database through the Internet. In addition, these agreements
allow collaborators to obtain OmniBank and custom knockout mice under predefined
terms. Pharmaceutical and biotechnology companies that identify drug targets of
interest through either OmniBank or custom knockout mice also have the option to
engage us to analyze those mice through our Seek-Target-Validation program. We
receive annual subscription fees and fees for

                                       27
   30

knockout mice with annual minimum commitments and may receive royalties on
products developed using novel genes discovered in OmniBank. We have entered
into agreements with the following companies under this program:

COMPANY                                                       DATE OF AGREEMENT        END OF ACCESS PERIOD
- -------                                                       -----------------        --------------------
                                                                                 
Boehringer Ingelheim Pharmaceuticals Inc.                      February 2000            February 2003
  (a subsidiary of Boehringer Ingelheim GmBH, International)
G.D. Searle & Co.                                              January 2000             January 2003
  (a subsidiary of Monsanto Company)
The R.W. Johnson Pharmaceutical Research Institute*            December 1999            December 2001
  (a subsidiary of Johnson & Johnson)
N.V. Organon                                                   December 1999            December 2002
  (a subsidiary of Akzo Nobel)
DuPont Pharmaceuticals Company                                 July 1998                July 2001
  (a subsidiary of E.I. du Pont de Nemours and Company)
ZymoGenetics, Inc.                                             December 1997            December 2000
  (a subsidiary of Novo Nordisk A/S)

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

* includes Seek-Target-Validation analysis of knockout mice produced under this
agreement

Agreements under this program continue until all projects initiated during the
access period are completed. In general, the agreements may be terminated by
either party if the other party breaches its material obligations under the
agreement.

Lexgen.com and the e-Biology Global Collaboration Program. Finding the best
targets for drug discovery among the estimated 100,000 genes contained in the
human genome is a task of such complexity and scale that it will require the
combined efforts of leading research scientists worldwide. The identification of
drug targets and therapeutic proteins using our technology will require the
application of in-depth scientific and medical knowledge to prioritize genes for
functional studies and to execute those studies. Therefore, we believe that the
magnitude of our OmniBank functional genomics resource uniquely enables global
collaboration through the Internet to accelerate the discovery of gene function.

              [Figure depicting Lexgen.com Internet exchange site]

            Pictured above are screens from Lexgen.com, the Internet
            exchange where researchers search our OmniBank database.

Through Lexgen.com, our genomics Internet exchange, researchers at
pharmaceutical companies, biotechnology companies and academic institutions
worldwide subscribe to our OmniBank database. Lexgen.com allows subscribers to
mine our OmniBank database for interesting genes and knockout mice through the
use of our bioinformatics software. Our software uses a web interface to provide
access in a relational database to OmniBank gene sequence information with
similarity to publicly-available known genes, gene names and associated
substance names. Our bioinformatics software also includes a powerful

                                       28
   31

abstract navigator that allows users to search through knockout mouse clones
based on keywords and substance names that derive from the abstracts of relevant
medical and scientific articles regarding genes with high similarity to OmniBank
clones. For internal use, we also apply a wide variety of sophisticated
bioinformatics algorithms to identify DNA sequence motifs that can yield clues
as to gene function.

Subscribers to Lexgen.com can acquire OmniBank knockout mice on a non-exclusive
basis and determine the function of genes under our e-Biology Global
Collaboration program. In this program, we receive fees for OmniBank knockout
mice and, with participating institutions, certain rights to license inventions
or to receive royalties on pharmaceutical products discovered using our mice. In
cases where we do not obtain such rights, our e-Biology collaborations leverage
the value of OmniBank since we may also elect to pursue any clone acquired
through that program for gene function research either on our own or with a
commercial partner. We believe that Lexgen.com and our e-Biology collaborations
will allow us to harvest high-value functional genomics information for
application in drug discovery and facilitate collaborations between us and
pharmaceutical and biotechnology companies. We have entered into agreements
under our e-Biology Collaboration Program with researchers at the following
institutions:

- - Beth Israel Deaconess Hospital
- - Brigham & Women's Hospital
- - The Burnham Institute
- - Catholic University (Belgium)
- - Cedars-Sinai Medical Center
- - Center for Advanced Biotechnology (Italy)
- - Center for Blood Research
- - Children's Hospital Research Foundation
- - Copenhagen University (Denmark)
- - DIBIT, H. San FaFaele (Italy)
- - Emory University
- - Georgetown University
- - Harvard Medical School
- - Indiana University
- - Institute for Genetic Medicine (Italy)
- - Max-Planck Institute (Germany)
- - Mt. Sinai School of Medicine
- - National CardioVascular Center
- - New York University
- - Odense University (Denmark)
- - Osaka University (Japan)
- - Sung Kyun Kwan University (Korea)
- - St. Louis University
- - Telethon Institute of Genetics and Medicine (Italy)
- - Tohoku University (Japan)
- - University of Bordeaux (France)
- - University of British Columbia (Canada)
- - University College London (U.K.)
- - Uniformed Services University
- - University of Miami
- - University of Pennsylvania
- - University of Texas Southwestern Medical Center
- - University of Utah
- - Washington University, St. Louis
- - Yale University

Custom Knockout Mouse Program. The Custom Knockout Mouse program involves our
use of proprietary gene targeting technologies to rapidly produce custom
knockout mice and conditional knockout mice for specific genes. We receive
research fees for the creation of knockout mice under this program and, with
participating institutions, certain rights to license inventions or royalties on
products discovered using such mice. We have generated custom mice for or
currently have custom mouse projects under contract with the following
pharmaceutical and biotechnology companies and academic institutions:

- - BASF Bioresearch Corporation
- - Bayer Corporation
- - Baylor College of Medicine
- - Blood Research Institute of Wisconsin
- - Cedars-Sinai Medical Center
- - Cephalon Inc.
- - Children's Hospital Research Foundation
- - Elan Pharmaceuticals, Inc.
- - Genetics Institute (American Home Products)
- - Harvard University
- - H. Lundbeck A/S
- - Indiana University School of Medicine
- - Johns Hopkins University School of Medicine
- - Max Planck Institute
- - Merck & Co., Inc.
- - Millennium Pharmaceuticals, Inc.
- - Mount Sinai School of Medicine
- - New England Medical Center
- - Parke-Davis (Warner-Lambert Company)
- - Pennsylvania State University
- - Peptide Research Institute
- - Quark Biotech, Inc.
- - Roche BioSciences
- - Rockefeller University
- - Stanford University
- - Scripps Research Institute
- - Temple University
- - Tufts University School of Medicine
- - University College, London
- - University of California at Los Angeles
- - University of Florida
- - University of Marborg

                                       29
   32

- - University of Pennsylvania
- - University of Rochester
- - University of Southern California
- - University of Texas Medical Branch-Galveston
- - University of Virginia
- - University of Wisconsin, Madison
- - Virginia Commonwealth University
- - Wayne State University
- - Wyeth-Ayerst (American Home Products)

Significant Customers in 1999.

For the year ended December 31, 1999, Millennium Pharmaceuticals, Inc. and
ZymoGenetics, Inc, represented 28% and 23% of our revenues, respectively. In
December 1999 and January and February 2000 we entered into four additional
agreements with pharmaceutical companies under our OmniBank Internet Universal
Program. See "OmniBank Internet Universal Program."

PATENTS AND PROPRIETARY RIGHTS

We will be able to protect our proprietary rights from unauthorized use by third
parties only to the extent that those rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. Accordingly,
patents and other proprietary rights are an essential element of our business.
We seek patent protection for the genes, proteins and drug targets that we
discover. Specifically, we seek patent protection for:
     - the partial gene sequences contained in our Human Gene Trap and OmniBank
       databases that we believe to be novel;
     - the sequences of full-length genes that we believe to be novel, the
       proteins they encode and their predicted utility as a drug target or
       therapeutic protein;
     - the utility of genes and the proteins they encode using knockout mice to
       discover drug targets or therapeutic proteins based on our definition of
       their biological functions; and
     - various enabling technologies in the fields of mutagenesis, ES cell
       manipulation and transgenic or knockout mice.

We own or have exclusive rights to three issued U.S. patents, which cover
specific knockout mice and discoveries of the functions of genes made using
knockout mice. We have licenses under 23 additional U.S. patents, and
corresponding foreign patents and patent applications, in the fields of gene
targeting, gene trapping and genetic manipulation of mouse ES cells. These
include patents covering Cre/lox technology and the use of positive-negative
selection and other methods of efficient homologous recombination. We have filed
or have exclusive rights to 188 pending patent applications in the United
States, the European Patent Office, the national patent offices of other foreign
countries or under the Patent Cooperation Treaty, covering our gene trapping
technology, the DNA sequences of genes and other products and processes. Patents
typically have a term of no longer than 20 years from the date of filing.

All of our employees, consultants and advisors are required to execute a
confidentiality agreement upon the commencement of employment or consultation.
In general, the agreement provides that all inventions conceived by the employee
or consultant, and all confidential information developed or made known to the
individual during the term of the agreement, shall be our exclusive property and
shall be kept confidential, with disclosure to third parties allowed only in
specified circumstances. We cannot assure you, however, that these agreements
will provide useful protection of our proprietary information in the event of
unauthorized use or disclosure of such information.

COMPETITION

The biotechnology and pharmaceutical industries are highly competitive and
characterized by rapid technological change. We face significant competition in
each of the aspects of our business from for-profit companies such as Human
Genome Sciences, Inc., Incyte Pharmaceuticals, Inc., Millennium Pharmaceuticals,
Inc., Deltagen, Inc., DNX (a subsidiary of Phoenix International Life Sciences,
Inc.) and Celera Genomics, among others, many of which have substantially
greater financial, scientific and human resources than we do. In addition, the
Human Genome Project and a large number of universities and other not-for-profit
institutions, many of which are funded by the U.S. and foreign governments, are
also conducting research to discover genes.

We face significant competition in our efforts to discover and patent genes from
entities using high-throughput EST and genomic sequencing approaches, as well as
from entities using more traditional methods to discover genes related to
particular diseases. In addition, several genomics and bioinformatics companies,
including Double Twist, Inc. (through its doubletwist.com Internet portal) and
Hyseq Inc. (through its GeneSolutions.com website), provide
bioinformatics-related products and services through the Internet which
indirectly compete with the bioinformatics and gene discovery resources
available through Lexgen.com.

                                       30
   33

While we are not aware of any other commercial or not-for-profit entity that is
developing large-scale gene trap mutagenesis in ES cells, we face significant
competition from entities using traditional knockout mouse technology and other
technologies. Several companies and a large number of academic institutions
create knockout mice for third parties using these methods, and a number of
companies create knockout mice for use in their own research.

Many of our competitors in drug discovery and development have substantially
greater research and product development capabilities and financial, scientific,
marketing and human resources than we have. As a result, our competitors may
succeed in developing products earlier than we do, obtaining approvals from the
FDA or other regulatory agencies for those products more rapidly than we do, or
developing products that are more effective than those we propose to develop.
Similarly, our collaborators face similar competition from other competitors who
may succeed in developing products more quickly, or developing products that are
more effective, than those developed by our collaborators. We expect that
competition in this field will intensify.

GOVERNMENT REGULATION

Regulation of Pharmaceutical Products

The development, production and marketing of any pharmaceutical products
developed by us or our collaborators will be subject to extensive regulation by
United States and foreign governmental authorities. In the United States, new
drugs are subject to regulation under the Federal Food, Drug and Cosmetic Act
and biological products are subject to regulation both under certain provisions
of that Act and under the Public Health Services Act. The FDA regulates, among
other things, the development, testing, manufacture, safety, efficacy, record
keeping, labeling, storage, approval, advertising, promotion, sale and
distribution of biologics and new drugs. The process of obtaining FDA approval
has historically been costly and time-consuming.

The standard process required by the FDA before a pharmaceutical agent may be
marketed in the United States includes:

     - preclinical tests;

     - submission to the FDA of an Investigational New Drug application, or IND,
       which must become effective before human clinical trials may commence;

     - adequate and well-controlled human clinical trials to establish the
       safety and efficacy of the drug or biologic in our intended application;

     - for drugs, submission of a New Drug Application, or NDA, or a Biologic
       License Application, or BLA, with the FDA; and

     - FDA approval of the NDA or BLA prior to any commercial sale or shipment
       of the drug.

In addition to obtaining FDA approval for each product, each drug manufacturing
establishment must be inspected and approved by the FDA. All manufacturing
establishments are subject to inspections by the FDA and by other federal, state
and local agencies and must comply with current Good Manufacturing Practices
requirements.

The preclinical studies can take several years to complete, and there is no
guarantee that an IND based on those studies will become effective to even
permit clinical testing to begin. Once clinical trials are initiated, they
generally take two to five years, but may take longer, to complete. After
completion of clinical trials of a new drug or biologic product, FDA marketing
approval of the NDA or BLA must be obtained. This process requires substantial
time and effort and there is no assurance that the FDA will accept the NDA or
BLA for filing and, even if filed, that approval will be granted. In the past,
the FDA's approval of the NDA or BLA has taken, on average, two to five years;
if questions arise, approval can take more than five years.

In addition to regulatory approvals that must be obtained in the United States,
a drug product is also subject to regulatory approval in other countries in
which it is marketed, although the requirements governing the conduct of
clinical trials, product licensing, pricing, and reimbursement vary widely from
country to country. No action can be taken to market any drug product in a
country until an appropriate application has been approved by the regulatory
authorities in that country. FDA approval does not assure approval by other
regulatory authorities. The current approval process varies from country to
country, and the time spent in gaining approval varies from that required for
FDA approval. In some countries, the sale price of a drug product must also be
approved. The pricing review period often begins after market approval is
granted. Even if a foreign regulatory authority approves a drug product, it may
not approve satisfactory prices for the product.

                                       31
   34

Other Regulations

In addition to the foregoing, our business is and will be subject to regulation
under various state and federal environmental laws, including the Occupational
Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic
Substances Control Act. These and other laws govern our use, handling and
disposal of various biological, chemical and radioactive substances used in and
wastes generated by our operations. We believe that we are in material
compliance with applicable environmental laws and that our continued compliance
with these laws will not have a material adverse effect on our business. We
cannot predict, however, whether new regulatory restrictions on the production,
handling and marketing of biotechnology products will be imposed by state or
federal regulators and agencies or whether existing laws and regulations will
not adversely affect us in the future.

PROPERTIES

We currently lease approximately 63,000 square feet of space for our corporate
offices and laboratories in a building located at 4000 Research Forest Drive in
The Woodlands, Texas, a suburb of Houston, Texas. Our facilities at this
location include a 28,000 square foot state-of-the art animal facility completed
in January 1999. We believe this is one of the largest facilities in the world
dedicated to the generation and analysis of knockout mice. Pursuant to the
lease, monthly payments of $98,000, increasing over time, are required for base
rent through the expiration of the lease in 2013. We have options to lease
additional property that is contiguous to our existing location. We intend to
exercise these options as appropriate to accommodate our anticipated growth.

LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

EMPLOYEES AND CONSULTANTS

We believe that our success will be based on, among other things, achieving and
retaining scientific and technological superiority and identifying and retaining
capable management. We have assembled a highly qualified team of scientists as
well as executives with extensive experience in the biotechnology industry.

As of March 15, 2000, we employed 127 persons, of whom 22 hold M.D., Ph.D. or
D.V.M. degrees and 16 hold other advanced degrees. We believe that our
relationship with our employees is good.

SCIENTIFIC ADVISORY PANEL MEMBERS

We have consulting relationships with a number of scientific advisors, organized
into panels focused on specific human diseases or conditions. At our request,
these advisors review the feasibility of product development programs under
consideration, provide advice concerning advances in areas related to our
technology and aid in recruiting personnel. Most of these advisors receive cash
and stock-based compensation for their services, as well as access to our
OmniBank database and mice from our OmniBank library. All of the advisors are
employed by academic institutions or other entities and may have commitments to
or advisory agreements with other entities that may limit their availability to
us. Our advisors are required to disclose and assign to us any ideas,
discoveries and inventions they develop in the course of providing consulting
services to us. We also use consultants for various administrative needs. None
of our consultants or advisors is otherwise affiliated with us. Our scientific
advisors and consultants include the following persons:

NAME                               AFFILIATION                         TITLE
- ----                               -----------                         -----
                                                                 
AGING AND CANCER PANEL
Carlo M. Croce, M.D.               Thomas Jefferson University         Director, Kimmel Cancer Center
Richard Fishel, Ph.D.              Thomas Jefferson University         Professor of Microbiology and
                                                                       Immunology
H. Earl Ruley, Ph.D.               Vanderbilt University               Professor, Department of
                                                                       Microbiology and Immunology

                                       32
   35

NAME                               AFFILIATION                         TITLE
- ----                               -----------                         -----
                                                                 
METABOLISM, DIABETES AND OBESITY
Qais Al-Awqati, M.D.               Columbia University                 Professor of Medicine and
                                                                       Physiology
Tom Coffman, M.D.                  Duke University Medical Center      Professor of Medicine
Wolf-Georg Forsmann, M.D., Ph.D.   Neidersachsisches Institut fur
                                   Peptid-Forschung
Oliver Smithies, Ph.D.             University of North Carolina at     Excellence Professor, Department
                                   Chapel Hill                         of Pathology and Laboratory
                                                                       Medicine
Kenneth Heskel Gabbay, M.D.        Baylor College of Medicine          Head, Section of Molecular
                                                                       Diabetes and Metabolism,
                                                                       Department of Pediatrics
GENOMICS AND BIOINFORMATICS
Eric Douglas Green, M.D., Ph.D.    National Human Genome Research      Chief, Genome Technology Branch
                                   Institute
Gregory D. Schuler, Ph.D.          National Center for Biotechnology   Staff Scientist
                                   Information
Steven R. Gullans, Ph.D.           Harvard Institutes of Medicine      Associate Professor of Medicine
Paul S. Meltzer, M.D., Ph.D.       National Human Genome Research      Head, Section of Molecular
                                   Institute                           Genetics, Cancer Genetics Branch
William R. Pearson, Ph.D.          University of Virginia              Professor of Biochemistry
NEUROLOGY AND DEGENERATIVE
DISORDERS
Robert Edwards, M.D.               University of California San        Professor, Departments of
                                   Francisco                           Neurology and Physiology
Rudolph E. Tanzi, Ph.D.            Harvard Medical School              Associate Professor of Neurology
                                                                       (Neuroscience)
Jeffrey L. Noebels, M.D., Ph.D.    Baylor College of Medicine          Professor, Department of
                                                                       Neurology
Laurence Tecott, M.D., Ph.D.       University of California San        Assistant Professor, Department
                                   Francisco                           of Psychiatry

                                       33
   36

                                   MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS
- --------------------------------------------------------------------------------

NAME                                              AGE                        POSITION
- ----------------------------------------------------------------------------------------------------------
                                                   
Arthur T. Sands, M.D., Ph.D...................... 38     President and Chief Executive Officer and
                                                         Director
Julia P. Gregory................................. 47     Executive Vice President and Chief Financial
                                                         Officer
Jeffrey L. Wade, J.D............................. 35     Executive Vice President and General Counsel
James R. Piggott, Ph.D........................... 45     Senior Vice President of Pharmaceutical Biology
Randall B. Riggs................................. 33     Senior Vice President of Business Development
Brian P. Zambrowicz, Ph.D........................ 37     Senior Vice President of Genomics
Lance K. Ishimoto, J.D., Ph.D.................... 40     Vice President of Intellectual Property
Christophe Person................................ 33     Vice President of Informatics
Ray B. Webb...................................... 54     Vice President of Finance and Administration
C. Thomas Caskey, M.D............................ 61     Chairman of the Board of Directors
William A. McMinn................................ 69     Director
Stephen J. Banks................................. 59     Director
Sam L. Barker, Ph.D. ............................ 57     Director
Gordon A. Cain................................... 87     Director
Patricia M. Cloherty............................. 57     Director
Paul Haycock, M.D................................ 53     Director

Arthur T. Sands, M.D., Ph.D. co-founded our company and has been our President
and Chief Executive Officer and a director since September 1995. From 1992 to
September 1995, Dr. Sands served as an American Cancer Society postdoctoral
fellow in the Department of Human and Molecular Genetics at Baylor College of
Medicine, where he studied the function of the p53 gene in cancer formation and
created the XPC knockout mouse, a model for skin cancer. He received his B.A. in
Economics and Political Science from Yale University and his M.D. and Ph.D. from
Baylor College of Medicine.

Julia P. Gregory has been our Executive Vice President and Chief Financial
Officer since February 2000. Since 1998, Ms. Gregory has served as the Head of
Investment Banking for Punk, Ziegel & Company, L.P. and since 1996, the Head of
the firm's Life Sciences practice. From 1980 to 1996, Ms. Gregory was an
investment banker with Prime Charter Ltd. and then Dillon, Read & Co., Inc. She
has represented life sciences companies since 1986. Ms. Gregory is a member of
the Emerging Companies Section Governing Body of the Biotechnology Industry
Organization and a member of the Executive Committee of the Lauder Foundation's
Institute for the Study of Aging, Inc. She received her B.A. in International
Affairs from George Washington University and her M.B.A. from the Wharton School
of the University of Pennsylvania.

Jeffrey L. Wade, J.D. has been our Executive Vice President and General Counsel
since February 2000 and was our Senior Vice President and Chief Financial
Officer from January 1999 to February 2000. From 1988 through December 1998, Mr.
Wade was a corporate securities and finance attorney with the law firm of
Andrews & Kurth L.L.P., for the last two years as a partner, where he
represented companies in the biotechnology, information technology and energy
industries. Mr. Wade is a member of the boards of directors of the Texas
Healthcare and Bioscience Institute and the Texas Life Sciences Foundation. He
received his B.A. and J.D. from The University of Texas.

James R. Piggott, Ph.D. has been our Senior Vice President of Pharmaceutical
Biology since January 2000. From 1990 through October 1999, Dr. Piggott worked
for ZymoGenetics, Inc., a subsidiary of Novo Nordisk, most recently as Senior
Vice President--Research Biology. Dr. Piggott's pharmaceutical research
experience also includes service at the Smith Kline & French Laboratories Ltd.
unit of SmithKline Beecham plc and the G.D. Searle & Co. unit of Monsanto
Company. Dr. Piggott received his B.A. and Ph.D. from Trinity College, Dublin.

Randall B. Riggs has been our Senior Vice President of Business Development
since February 2000 and served as our Vice President of Business Development
from December 1998 to February 2000. From January through November 1998, Mr.
Riggs was director of Business Development for the Infectious Disease Business
Unit of GENEMEDICINE, INC. From 1992 to January 1998, Mr. Riggs was employed by
Eli Lilly and Company, for the last two years as Manager, Corporate Business
Development at Eli Lilly's Indianapolis, Indiana headquarters. Before joining
Eli Lilly, Mr. Riggs' experience included service as a business analyst for the
National Aeronautics and Space Administration and a subsidiary of Amoco
Production Company. He received his B.B.A. from Texas A&M University and his
M.B.A. from The University of Houston.

                                       34
   37

Brian P. Zambrowicz, Ph.D. has been our Senior Vice President of Genomics since
February 2000. Dr. Zambrowicz served as our Vice President of Research from
January 1998 to February 2000 and as Senior Scientist from April 1996 to January
1998. From 1993 to April 1996, Dr. Zambrowicz served as an NIH postdoctoral
fellow at The Fred Hutchinson Cancer Center in Seattle, Washington, where he
studied gene trapping and gene targeting technology. Dr. Zambrowicz received his
B.S. in Biochemistry from the University of Wisconsin. He received his Ph.D.
from the University of Washington, where he studied tissue-specific gene
regulation using transgenic mice.

Lance K. Ishimoto, J.D., Ph.D. has been our Vice President of Intellectual
Property since July 1998. From 1994 to July 1998, Dr. Ishimoto was a
biotechnology patent attorney at the Palo Alto, California office of Pennie &
Edmonds LLP. Dr. Ishimoto received his B.A. and Ph.D. from U.C.L.A., where he
studied molecular mechanisms of virus assembly and the regulation of virus
ultrastructure. After receiving his Ph.D., Dr. Ishimoto served as an NIH
postdoctoral fellow at University of Washington School of Medicine. He received
his J.D. from Stanford University.

Christophe Person has been our Vice President of Informatics since November 1999
and served as our Director of Informatics from May 1997 to November 1999. From
1994 to May 1997, Mr. Person was the Senior Scientific Programmer for the Center
for Theoretical Neurosciences at Baylor College of Medicine. From 1990 to 1994,
Mr. Person was the CEPH Database Manager at the Human Polymorphism Studies
Center in Paris, France. Mr. Person received his degree in Electrical
Engineering from Groupe ESTE/ESIEE (Ecole Superieure de Technologie
Electronique/Ecole Superieure d'Ingenieurs en Electrotechnique et Electronique).

Ray B. Webb has been our Vice President of Finance and Administration since
January 1998 and was Director of Finance and Administration from September 1995
to January 1998. Before joining us, Mr. Webb was Director of Finance and
Administration of Triplex Pharmaceutical Corporation, a biotechnology company
founded out of Baylor College of Medicine, from 1989 until its merger with
Aronex Pharmaceuticals, Inc. in 1995. He received his B.A. in Economics and
Political Science from Brigham Young University.

C. Thomas Caskey, M.D. became Chairman of the Board of Directors in April 2000.
Dr. Caskey served as Senior Vice President, Research at Merck Research
Laboratories from 1995 to March 2000 and as President of the Merck Genome
Research Institute from 1996 to March 2000. Before joining Merck, Dr. Caskey
served 25 years at Baylor College of Medicine in a series of senior positions,
including Chairman, Department of Human and Molecular Genetics and Director,
Human Genome Center. He is a member of the National Academy of Science. Dr.
Caskey received his B.A. from the University of South Carolina and his M.D. from
Duke University Medical School.

William A. McMinn has been a director since September 1997 and was the Chairman
of the Board of Directors from July 1999 until April 2000. Mr. McMinn has served
as Chairman of the Board of Texas Petrochemicals Corporation since 1996. He was
Corporate Vice President and Manager of the Industrial Chemical Group of FMC
Corporation, a manufacturer of machinery and chemical products, from 1973
through 1985. He became President and Chief Executive Officer of Cain Chemical
Inc. in 1987, and served in that capacity until its acquisition by Occidental
Petroleum in May 1988. He became Chairman of the board of directors of Arcadian
Corporation in August 1990 and served in that capacity until it was sold in
April 1997. Mr. McMinn received his B.S. from Vanderbilt University.

Stephen J. Banks has been a director since our inception in September 1995. Mr.
Banks has served as President of BCM Technologies, Inc., Baylor College of
Medicine's technology transfer subsidiary, since January 1988. Mr. Banks was
employed with The Hillman Company from 1969 to 1987 and was Vice President from
1980 to 1987, with responsibility for venture capital activities. He is a
director of BCM Technologies, several private companies and Lark Technologies,
Inc., a publicly-held company. He also serves as an Adjunct Professor of
Administration at Rice University. Mr. Banks received his B.S. in Physics from
Massachusetts Institute of Technology and his M.B.A. from Harvard Graduate
School of Business Administration.

Sam L. Barker, Ph.D. has been a director since March 2000. Dr. Barker served in
a series of senior domestic and international management positions at
Bristol-Myers Squibb until his retirement in 1998. His positions at
Bristol-Myers Squibb included service as Executive Vice President, Worldwide
Franchise Management and Strategy during 1998, President, U.S. Pharmaceutical
Group from 1995 to 1997 and President, U.S. Pharmaceuticals from 1992 to 1995.
Dr. Barker received his B.S. from Henderson State College, his M.S. from the
University of Arkansas and his Ph.D. from Purdue University.

Gordon A. Cain has been a director since September 1995 and served as Chairman
of our board of directors from September 1995 until July 1999. Mr. Cain also
serves as Chairman of the Board of Agennix Inc., another biotechnology company
in which he is a principal investor. From August 1982 until his retirement in
December 1992, he was Chairman of the Board of The Sterling Group, Inc. Mr. Cain
was the Chairman of the Board of Sterling Chemicals, Inc. from 1986 until it was
sold in August 1996 and was a member of the board of directors of Arcadian
Corporation from May 1989 until it was sold in April 1997.
                                       35
   38

Prior to organizing The Sterling Group, Mr. Cain was involved in the purchase of
a variety of businesses and provided consulting services to these and other
companies. Mr. Cain was also Chairman of the Board of UltraAir, Inc. from 1991
to 1994, Chairman of the Board of Cain Chemical Inc. from its organization in
March 1987 until its acquisition by Occidental Petroleum Corporation in May 1988
and the Chairman of the Board of Vista Chemical Company from 1984 until 1986.
Mr. Cain presently serves as a director of Texas Petrochemicals Corporation. He
received a B.S. in Chemical Engineering from Louisiana State University.

Patricia M. Cloherty has been a director since May 1998. Ms. Cloherty is a
Special Limited Partner of Patricof & Co. Ventures, Inc., a venture capital
company. From 1988 through 1999, she was General Partner and, successively,
Senior Vice President, President and Co-Chairman of that company. Ms. Cloherty
served as deputy administrator of the U.S. Small Business Administration from
1977 to 1978 and has served as Chairman of the U.S. Russia Investment Fund since
1995. She is past president and chairman of the National Venture Capital
Association. Ms. Cloherty serves as a director of Diversa Corporation and
several private companies. She holds a B.A. from the San Francisco College for
Women and an M.A. and an M.I.A. from Columbia University.

Paul Haycock, M.D. has been a director since May 1998. Dr. Haycock has been a
director of Apax Partners & Co., a U.K. venture investment company since 1996.
From January 1992 to October 1996, Dr. Haycock was Chief Executive of Cantab
Pharmaceuticals, a public biotechnology company quoted on Nasdaq and the London
Stock Exchange. Prior to such time, Dr. Haycock held various positions in the
pharmaceutical and biotechnology industries, including the managing
directorships of Duphar Laboratories and Novo-Laboratories U.K. and senior
medical and management positions in Europe and the United States with
NovoIndustri A/S and Squibb-Novo Inc. Dr. Haycock graduated in medicine from
London University and completed post-graduate studies at the University of
British Columbia, and holds a diploma in pharmaceutical medicine and an M.B.A.
from the Cranfield School of Management.

BOARD COMPOSITION

We currently have eight directors. Upon the closing of this offering the terms
of office of the board of directors will be divided into three classes. As a
result, a portion of our board of directors will be elected each year. The
division of the three classes, the initial directors and their respective
election dates are as follows:

     - the class I directors will be Stephen J. Banks and Paul Haycock, M.D. and
       their term will expire at the annual meeting of stockholders to be held
       in 2001;

     - the class II directors will be Sam L. Barker, Ph.D., Patricia M. Cloherty
       and Gordon A. Cain and their term will expire at the annual meeting of
       stockholders to be held in 2002; and

     - the class III directors will be C. Thomas Caskey, M.D., William A. McMinn
       and Arthur T. Sands, M.D., Ph.D. and their term will expire at the annual
       meeting of stockholders to be held in 2003.

At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms are to expire will be elected to serve from
the time of election and qualification until the third annual meeting following
election. The authorized number of directors may be changed only by resolution
of the board of directors. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
directors. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management of our company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1999, Paul Haycock, M.D., Stephen J. Banks and Patricia M. Cloherty
served as members of the compensation committee of our board of directors. No
member of the compensation committee serves as a member of the board of
directors or compensation committee of any other entity that has one or more
executive officers serving as a member of our board of directors or compensation
committee. Prior to the formation of the compensation committee in January 1999,
our board of directors as a whole made decisions relating to compensation of our
executive officers.

BOARD COMMITTEES

Audit Committee.  Our audit committee reviews our internal accounting procedures
and consults with, and reviews the services provided by, our independent public
accountants. Current members of our audit committee are William A. McMinn,
Stephen J. Banks and Patricia M. Cloherty.

                                       36
   39

Compensation Committee.  Our compensation committee reviews and recommends to
the board of directors the compensation and benefits of all our officers and
reviews general policy relating to compensation and benefits of our employees.
The compensation committee also administers the issuance of stock options and
other awards under our stock plans. Current members of the compensation
committee are Paul Haycock, M.D., Stephen J. Banks and Patricia M. Cloherty.

DIRECTOR COMPENSATION

Directors currently receive no cash compensation from us for their services as
members of the board or for attendance at committee meetings. Directors may be
reimbursed for expenses in connection with attendance at board of directors and
committee meetings.

In February 2000, we adopted the 2000 non-employee directors' stock option plan
to provide for the automatic grant of options to purchase shares of common stock
to our directors who are not employees of us or of any of our affiliates. Any
non-employee director elected after the closing of this offering will receive an
initial option to purchase 30,000 shares of common stock. Starting at the annual
stockholder meeting in 2001, all non-employee directors will receive an annual
option to purchase 6,000 shares of common stock. All options granted under the
non-employee directors' plan will have an exercise price equal to the fair
market value of our common stock on the date of grant. See "--Employee Benefit
Plans--2000 Non-Employee Directors' Stock Option Plan" for a more detailed
explanation of the terms of these stock options.

LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY

Our amended and restated certificate of incorporation and bylaws provide that we
will indemnify our directors and officers and may indemnify our other employees
and other agents to the fullest extent permitted by Delaware law. We may also
enter into indemnification contracts with our directors and officers and
purchase insurance on behalf of any person we are required or permitted to
indemnify. We have entered into indemnification agreements with each of our
directors and officers.

We intend to obtain officer and director liability insurance to cover
liabilities our officers and directors may incur in connection with their
services to us, including matters arising under the federal securities laws. In
addition, our amended and restated certificate of incorporation provides that,
to the fullest extent permitted by Delaware law, our directors will not be
liable for monetary damages for breach of the directors' fiduciary duty of care
to us and our stockholders. This provision does not eliminate the duty of care,
and in appropriate circumstances, equitable remedies including an injunction or
other forms of non-monetary relief would remain available under Delaware law.
Under current Delaware law, a director's liability to us or our stockholders may
not be limited:

     - for any breach of the director's duty of loyalty to our company or our
       stockholders;

     - for acts or omissions not in good faith or involving intentional
       misconduct;

     - for knowing violations of law;

     - for any transaction from which the director derived an improper personal
       benefit;

     - for improper transactions between the director and our company; or

     - for improper distributions to stockholders and loans to directors and
       officers.

This provision also does not affect a director's responsibilities under any
other laws, including the federal securities laws and state and federal
environmental laws.

There is no pending litigation or proceeding involving any of our directors or
officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.

                                       37
   40

EXECUTIVE COMPENSATION

The following table presents summary information for the year ended December 31,
1999, regarding the compensation of each of our most highly compensated
executive officers.

Summary Compensation Table

                                                              ------------------------------------------
                                                                                             LONG-TERM
                                                                                            COMPENSATION
                                                                                               AWARDS
                                                                     ANNUAL COMPENSATION     SECURITIES
                                                                     --------------------    UNDERLYING
NAME AND POSITION                                             YEAR    SALARY      BONUS       OPTIONS
- -----------------                                             ----   ---------   --------   ------------
                                                                                
Arthur T. Sands, M.D., Ph.D.................................  1999.. $200,000    $50,000           --
  President, Chief Executive Officer and Director
Jeffrey L. Wade, J.D........................................  1999.. $170,000    $25,000      390,000
  Executive Vice President and General Counsel
Randall B. Riggs............................................  1999.. $160,000         --      270,000
  Senior Vice President of Business Development
Brian P. Zambrowicz, Ph.D...................................  1999.. $175,000         --           --
  Senior Vice President of Genomics
Lance K. Ishimoto, J.D., Ph.D...............................  1999   $160,000..       --           --
  Vice President of Intellectual Property

Option Grants in 1999

The following table presents each grant of stock options in 1999 to each of the
individuals listed in the summary compensation table.

                                          -----------------------------------------------------------------------------
                                                                                            POTENTIAL REALIZABLE VALUE
                                                                                              AT ASSUMED ANNUAL RATES
                                          NUMBER OF    PERCENTAGE                                 OF STOCK PRICE
                                          SECURITIES    OF TOTAL    EXERCISE                  APPRECIATION FOR OPTION
                                          UNDERLYING    OPTIONS      PRICE                             TERM
                                           OPTIONS     GRANTED IN     PER      EXPIRATION   ---------------------------
NAME                                       GRANTED        1999       SHARE        DATE          5%             10%
- ----                                      ----------   ----------   --------   ----------   -----------   -------------
                                                                                        
Arthur Sands, M.D., Ph.D................        --          --          --            --           --              --
Jeffrey L. Wade, J.D....................   390,000        36.6%      $2.50     1/13/2009     $613,172      $1,553,899
Randall B. Riggs........................   270,000        25.4%      $2.50     1/13/2009     $424,504      $1,075,776
Brian P. Zambrowicz, Ph.D...............        --          --          --            --           --              --
Lance K. Ishimoto, J.D., Ph.D...........        --          --          --            --           --              --

The exercise price of each option was equal to the fair market value of our
common stock as determined by the board of directors on the date of grant. In
determining the fair market value of our common stock on the date of grant our
board of directors considered many factors, including:

     - the option grants involved illiquid securities in a nonpublic company;

     - prices of preferred stock issued by us to outside investors in
       arm's-length transactions;

     - the rights, preferences and privileges of the preferred stock over the
       common stock;

     - our performance and operating results at the time of grant;

     - our stage of development and business strategy; and

     - the likelihood of achieving a liquidity event for the shares of common
       stock underlying these options, such as an initial public offering or a
       sale of our company.

The exercise price for each option may be paid in cash, promissory notes, in
shares of our common stock valued at fair market value on the exercise date or
through a cashless exercise procedure involving a same-day sale of the purchased
shares.

                                       38
   41

The potential realizable value of these options is calculated based on the
ten-year term of the option at the time of grant. Stock price appreciation of 5%
and 10% is assumed pursuant to rules promulgated by the SEC and does not
represent our prediction of our stock price performance.

Percentages shown under "Percentage of Total Options Granted in 1999" are based
on an aggregate of 1,064,700 options granted to our employees, consultants and
directors under our stock option plans during 1999.

Option Values at December 31, 1999

The following table presents the number and value of securities underlying
unexercised options that are held by each of the individuals listed in the
Summary Compensation Table as of December 31, 1999. No shares were acquired on
the exercise of stock options by these individuals during the year ended
December 31, 1999.

Amounts shown under the column "Value of Unexercised In-the-Money Options at
December 31, 1999" are based on the assumed initial public offering price of
$23.00 per share, without taking into account any taxes that may be payable in
connection with the transaction, multiplied by the number of shares underlying
the option, less the exercise price payable for these shares.

                                                        ---------------------------------------------------------
                                                           NUMBER OF SECURITIES
                                                          UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                                                OPTIONS AT              IN-THE-MONEY OPTIONS AT
                                                             DECEMBER 31, 1999             DECEMBER 31, 1999
                                                        ---------------------------   ---------------------------
NAME                                                    EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
- ----                                                    -----------   -------------   -----------   -------------
                                                                                        
Arthur T. Sands, M.D., Ph.D...........................    1,195,035         724,965   $26,458,750    $14,951,250
Jeffrey L. Wade, J.D. ................................       97,500         292,500   $ 1,930,362    $ 6,064,638
Randall B. Riggs......................................       67,500         202,500   $ 1,383,689    $ 4,151,312
Brian P. Zambrowicz, Ph.D.............................      325,644         364,386   $ 7,481,340    $ 7,012,260
Lance K. Ishimoto, J.D., Ph.D.........................       37,191          67,809   $   762,416    $ 1,390,085

EMPLOYMENT AGREEMENTS

In October 1999, we entered into an employment agreement with Arthur T. Sands,
M.D., Ph.D., our President and Chief Executive Officer. Under the agreement, Dr.
Sands receives a base salary of $200,000 a year, subject to adjustment, with an
annual discretionary bonus based upon specific objectives to be determined by
the compensation committee. Dr. Sands' current annual salary is $250,000. The
employment agreement is at-will and contains a non-competition agreement. The
agreement also provides that if we terminate Dr. Sands' employment without cause
or Dr. Sands voluntarily terminates his employment for good reason, we will pay
him his then-current salary for 12 months.

In February 2000, we entered into an employment agreement with Julia P. Gregory
to serve as our Executive Vice President and Chief Financial Officer starting in
February 2000. Under the agreement, Ms. Gregory receives a base salary of
$200,000 a year, subject to adjustment, with an annual discretionary bonus based
upon specific objectives to be determined by the compensation committee. The
employment agreement is at-will and contains a non-competition agreement. The
agreement also provides that during the first year, if we terminate Ms.
Gregory's employment without cause or Ms. Gregory voluntarily terminates her
employment for good reason, we will pay her then-current salary for twelve
months; if we terminate Ms. Gregory's employment without cause or Ms. Gregory
voluntarily terminates her employment for good reason after such time, we will
pay her then-current salary for six months. If any such termination follows a
change in control of our company, we will pay Ms. Gregory her then-current
salary for 12 months.

In December 1998, we entered into an employment agreement with Jeffrey L. Wade,
J.D. to serve as our Senior Vice President and Chief Financial Officer starting
in January 1999. In February 2000, Mr. Wade was named Executive Vice President
and General Counsel. Under the agreement, Mr. Wade receives a base salary of
$170,000 a year, subject to adjustment, with an annual discretionary bonus based
upon specific objectives to be determined by the compensation committee. Mr.
Wade's current annual salary is $190,000. The employment agreement is at-will
and contains a non-competition agreement. The agreement also provides that if we
terminate Mr. Wade's employment without cause or Mr. Wade voluntarily terminates
his employment for good reason, we will pay him his then-current salary for six
months. If any such termination follows a change in control of our company, we
will pay Mr. Wade his then-current salary for 12 months.

In December 1998, we entered into an employment agreement with Randall B. Riggs
to serve as our Vice President of Business Development. In February 2000, Mr.
Riggs was named Senior Vice President of Business Development. Under the

                                       39
   42

agreement, Mr. Riggs receives a base salary of $160,000 a year, subject to
adjustment, with an annual discretionary bonus based upon specific objectives to
be determined by the compensation committee. Mr. Riggs's current annual salary
is $180,000. The employment agreement is at-will and contains a non-competition
agreement. The agreement also provides that if we terminate Mr. Riggs's
employment without cause or Mr. Riggs voluntarily terminates his employment for
good reason, we will pay him his then-current salary for six months. If any such
termination follows a change in control of our company, we will pay Mr. Riggs
his then-current salary for 12 months.

In January 2000, we entered into an employment agreement with James R. Piggott,
Ph.D. to serve as our Senior Vice President of Pharmaceutical Biology. Under the
agreement, Dr. Piggott receives a base salary of $200,000 a year, subject to
adjustment, with an annual discretionary bonus based upon specific objectives to
be determined by the compensation committee. The employment agreement is at-will
and contains a non-competition agreement. The agreement also provides that if we
terminate Dr. Piggott's employment without cause or Dr. Piggott voluntarily
terminates his employment for good reason, we will pay him his then-current
salary for six months. If any such termination follows a change in control of
our company, we will pay Dr. Piggott his then-current salary for 12 months.

In February 2000, we entered into an employment agreement with Brian P.
Zambrowicz, Ph.D., our Senior Vice President of Genomics. Under the agreement,
Dr. Zambrowicz receives a base salary of $200,000 a year, subject to adjustment,
with an annual discretionary bonus based upon specific objectives to be
determined by the compensation committee. The employment agreement is at-will
and contains a non-competition agreement. The agreement also provides that if we
terminate Dr. Zambrowicz employment without cause or Dr. Zambrowicz voluntarily
terminates his employment for good reason, we will pay him his then-current
salary for six months. If any such termination follows our change in control, we
will pay Dr. Zambrowicz his then-current salary for 12 months.

EMPLOYEE BENEFIT PLANS

2000 Equity Incentive Plan

We adopted our 2000 Equity Incentive Plan in February 2000. The 2000 Equity
Incentive Plan is an amendment and restatement of our 1995 Stock Option Plan and
will terminate in 2010 unless the board terminates it sooner. The 2000 Equity
Incentive Plan provides for the grant of incentive stock options to employees
and nonstatutory stock options to our employees, directors and consultants and
our affiliates. The plan also provides for stock bonuses and restricted stock
purchase awards. Incentive stock options will have an exercise price of 100% or
more of the fair market value of our common stock on the date of grant.
Nonstatutory stock options may have an exercise price as low as 85% of fair
market value on the date of grant. The purchase price of other stock awards may
not be less than 85% of fair market value. However, the board may award stock
bonuses in consideration of past services without a purchase payment. Shares may
be subject to a repurchase option in the discretion of the board. The 2000
Equity Incentive Plan provides that it will be administered by the board, or a
committee appointed by the board, which determines recipients and types of
options to be granted, including number of shares under the option and the
exercisability of the shares.

Shares Reserved.  We have reserved an aggregate of 11,250,000 shares of our
common stock for issuance under the 2000 Equity Incentive Plan. On January 1 of
each year for ten years, beginning in 2001, the number of shares reserved for
issuance under the 2000 Equity Incentive Plan will be automatically increased by
the greater of:

     - 5% of our outstanding shares on a fully-diluted basis; or

     - that number of shares that could be issued under awards granted under the
       incentive plan during the prior 12-month period.

The total number of shares reserved for issuance under the 2000 Equity Incentive
Plan may not exceed 60,000,000 shares over the ten-year period.

Effect of Merger on Options.  If we dissolve or liquidate, then outstanding
options will terminate immediately prior to the event. If we sell, lease or
dispose of all or substantially all of our assets, or are acquired pursuant to a
merger or consolidation, all outstanding options will become immediately vested
and exercisable in full.

Options Issued.  As of March 15, 2000, options to purchase 8,473,134 shares of
common stock were outstanding under the equity incentive plan and options for
344,865 shares had been exercised.

                                       40
   43

2000 Non-Employee Directors' Stock Option Plan

In February 2000, the board of directors adopted the 2000 Non-Employee
Directors' Stock Option Plan to provide for the automatic grant of options to
purchase shares of common stock to our non-employee directors. The board of
directors administers the plan, unless it delegates administration to a
committee.

Shares Reserved.  We have reserved a total of 600,000 shares of our common stock
for issuance under the directors' plan. On the day after each annual meeting of
our stockholders, for 10 years, starting in 2001, the total number of shares
reserved for issuance under the non-employee directors' plan will be increased
by a number of shares equal to the greater of:

     - 0.3% of our outstanding shares on a fully-diluted basis; or

     - that number of shares that could be issued under options granted under
       the directors' plan during the prior 12-month period.

If an optionholder does not purchase the shares under the option before the
option expires or otherwise terminates, the shares that are not purchased again
become available for issuance under the non-employee directors' plan.

Initial Grants.  Each person who is first elected or appointed as a non-employee
director after our initial public offering will automatically receive an option
for 30,000 shares, effective on the later of the approval of the non-employee
directors' plan by the stockholders at the annual meeting or the date the
director first becomes a member of our board.

Annual Grants.  In addition, on the date of each of our annual meetings of
stockholders, beginning with the annual meeting in 2000, each non-employee
director who has been a director for at least six months will automatically be
granted an option to purchase 6,000 shares of common stock.

Vesting and Exercise Terms.  Initial option grants under the non-employee
directors' plan will vest and become exercisable over a period of five years.
Annual option grants will vest and become exercisable during the year following
the grant. All options granted under the non-employee directors' plan will have
an exercise price equal to the fair market value of our common stock on the date
of grant. The option term is ten years.

Effect of a Merger on Options.  If we dissolve or liquidate, outstanding options
will terminate immediately prior to the event. If we sell, lease or dispose of
all or substantially all of our assets, or are acquired pursuant to a merger or
consolidation, the surviving entity will either assume or replace all
outstanding options under the 2000 Non-Employee Directors' Stock Option Plan. If
it declines to do so, all outstanding options will become immediately vested and
exercisable in full. If an option is assumed or replaced but the option holder
is not elected to the board of directors of the acquiring or surviving
corporation at the first meeting of the board after the event, the vesting of
that option will accelerate by 18 months.

Options Issued.  The non-employee directors' plan will not be effective until
the closing of the initial public offering of our stock. Therefore, we have not
issued any options under the directors' plan.

Other Plans

We maintain a retirement and deferred savings plan for our employees that is
intended to qualify as a tax-qualified plan under the Internal Revenue Code. The
401(k) Plan provides that each participant may contribute up to a statutory
limit, which was $10,000 in 1999. In addition, we have a profit sharing plan
pursuant to which we may grant cash bonuses out of our profits to our employees.

                                       41
   44

              TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND
                           FIVE PERCENT STOCKHOLDERS

From January 1, 1997 through March 15, 2000, the following executive officers,
directors or holders of more than five percent of our voting securities
purchased securities in the amounts as of the dates shown below.

                                                              ------------------------------------
                                                                DATE(S)       COMMON     PRICE PER
NAME                                                           PURCHASED       STOCK       SHARE
- ----                                                          -----------    ---------   ---------
                                                                                
Gordon A. Cain..............................................  1/97 - 7/97    1,770,000       $1.67
William A. McMinn...........................................         8/97      135,000(1)        --
Patricof & Co. Ventures Inc. ...............................         5/98    3,000,000(2)     $2.50
Apax Partners & Co..........................................         5/98    3,000,000(2)     $2.50

- ---------------
(1) Represents a warrant to purchase common stock at a price of $2.50 per share.
    Please read "--Indebtedness to Director" below.

(2) Represents shares of common stock that will be issued upon the conversion of
    1,000,000 shares of series A convertible preferred stock concurrent with the
    closing of this offering.

We have entered into the following agreements with our executive officers,
directors and holders of more than five percent of our voting securities.

Amended and Restated Registration Rights Agreement.  The stockholders described
above have entered into an agreement with us, pursuant to which these and other
stockholders will have registration rights with respect to their shares of
common stock following this offering. Please read "Description of Capital
Stock--Registration Rights" for a further description of the terms of that
agreement.

Executive Employment Agreements.  We have entered into employment contracts with
Arthur T. Sands, M.D., Ph.D., our President and Chief Executive Officer, Julia
P. Gregory, our Executive Vice President and Chief Financial Officer, Jeffrey L.
Wade, J.D., our Executive Vice President and General Counsel, James R. Piggott,
Ph.D., our Senior Vice President of Pharmaceutical Biology, and Brian P.
Zambrowicz, Ph.D., our Senior Vice President of Genomics. Please read
"Management -- Employment Agreements" for a description of the terms of these
agreements.

Indebtedness to Director.  In August 1997, we entered into a loan agreement with
William McMinn, the chairman of our board of directors. Under the terms of the
promissory note, we borrowed a principal amount of $1,000,000 at an interest
rate of 8.0% to be repaid in 36 monthly installments of $16,666.67 each. The
monthly installments commenced on August 31, 1999, and the outstanding principal
balance of the loan is due, together with all accrued but unpaid interest, on
August 31, 2002. The note may be prepaid, in whole or in part, at any time
without penalty. In connection with this loan agreement, we issued to Mr. McMinn
a warrant to purchase 135,000 shares of our common stock at an exercise price of
$2.50 per share.

We believe that all of the transactions described above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors, and will continue to be on terms no less favorable to
us than could be obtained from unaffiliated third parties.

Indemnification Agreements.  We have entered into indemnification agreements
with our directors and officers for the indemnification of these persons to the
full extent permitted by law. We also intend to execute these agreements with
our future directors and officers.

                                       42
   45

                             PRINCIPAL STOCKHOLDERS

The following table presents information regarding the beneficial ownership of
our common stock as of March 15, 2000, and as adjusted to reflect the sale of
our common stock offered by this prospectus, by:

     - each of the individuals listed in the "Summary Compensation Table" above;

     - each of our directors;

     - each person, or group of affiliated persons, who is known by us to own
       beneficially five percent or more of our common stock; and

     - all current directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock under options held by that
person that are currently exercisable or exercisable within 60 days of March 15,
2000 are considered outstanding. These shares, however, are not considered
outstanding when computing the percentage ownership of each other person.

Except as indicated in the footnotes to this table and pursuant to state
community property laws, each stockholder named in the table has sole voting and
investment power for the shares shown as beneficially owned by them. Percentage
of ownership is based on 37,515,051 shares of common stock outstanding on March
15, 2000 and 47,515,051 shares of common stock outstanding after completion of
this offering. Unless otherwise indicated in the footnotes, the address of each
of the individuals named below is: c/o Lexicon Genetics Incorporated, 4000
Research Forest Drive, The Woodlands, Texas 77381.

                                                         ----------------------------------------------------------
                                                               BENEFICIAL OWNERSHIP
                                                                PRIOR TO OFFERING
                                                         --------------------------------
                                                                          SHARES ISSUABLE
                                                                            PURSUANT TO
                                                                            OPTIONS AND
                                                                             WARRANTS              PERCENTAGE
                                                                            EXERCISABLE           BENEFICIALLY
                                                          NUMBER OF           WITHIN                  OWNED
                                                            SHARES          60 DAYS OF        ---------------------
                                                         BENEFICIALLY        MARCH 15,         BEFORE       AFTER
                                                            OWNED              2000           OFFERING     OFFERING
                                                         ------------     ---------------     --------     --------
                                                                                               
Baylor College of Medicine(1)..........................    5,981,412                --          15.9%        12.0%
Apax Partners & Co.(2).................................    3,000,000                --           8.0%         6.3%
Patricof & Co. Ventures, Inc.(3).......................    3,000,000                --           8.0%         6.3%
Arthur T. Sands, M.D., Ph.D.(4)........................    1,017,300         1,466,004           6.4%         5.1%
Jeffrey L. Wade, J.D...................................           --           151,548              *            *
Lance K. Ishimoto, Ph.D., J.D..........................           --            59,301              *            *
Randall B. Riggs.......................................           --           128,694              *            *
Brian P. Zambrowicz, Ph.D..............................           --           447,354           1.2%            *
Sam L. Barker, Ph.D.(5)................................           --               999              *            *
C. Thomas Caskey, M.D..................................           --             3,125              *            *
William A. McMinn......................................    1,402,011           135,000           4.1%         3.2%
Stephen J. Banks(6)....................................      481,461                --           1.3%         1.0%
Gordon A. Cain.........................................   14,001,000                --          37.3%        29.5%
Patricia M. Cloherty(7)................................    3,000,000                --           8.0%         6.3%
Paul Haycock, M.D.(8)..................................    3,000,000                --           8.0%         6.3%
All directors and executive officers as a group (16
  persons)(4)(5)(6)(7)(8)..............................   22,945,742         2,661,762          63.7%        51.0%

- ---------------
 * Represents beneficial ownership of less than 1 percent.

(1) The address for Baylor College of Medicine is c/o BCM Technologies, Inc.,
    1709 Dryden Road, Suite 901, Medical Towers Building, Houston, Texas 77030.
    The number of shares beneficially owned includes 481,461 shares owned by BCM
    Technologies, Inc., the technology transfer subsidiary of Baylor College of
    Medicine, and 1,162,431 shares held by Baylor College of Medicine as escrow
    agent. Mr. Banks, one of our directors, is President of BCM Technologies,
    Inc.

(2) Entities associated with Apax Partners & Co. are Apax UK VI-A-E, LPs. Dr.
    Haycock, one of our directors, is a director of Apax Partners & Co. The
    address of Apax Partners & Co. is 15 Portland Place, London, England WIN
    3AA.

                                       43
   46

(3) Entities affiliated with Patricof & Co. Ventures, Inc. include APA Excelsior
    IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund III, LP and Patricof
    Private Investment Club, L.P. Ms. Cloherty, one of our directors, is a
    Special Limited Partner of Patricof & Co. Ventures, Inc. The address for
    Patricof & Co. Ventures, Inc. is 445 Park Avenue, New York, New York 10022.

(4) The number of shares beneficially owned by Dr. Sands includes 45,000 shares
    held in the name of minor children.

(5) Does not include 4,200 shares which Dr. Barker has indicated an interest to
    purchase under our directed share program. See "Underwriting." These shares
    have not been allocated and may not ultimately be purchased by Dr. Barker.

(6) The number of shares owned by Mr. Banks consists of 481,461 shares owned by
    BCM Technologies, Inc., of which Mr. Banks is President. Mr. Banks disclaims
    beneficial ownership of these shares.

(7) The number of shares owned by Patricia M. Cloherty consists of 3,000,000
    shares owned by Patricof & Co. Ventures, Inc., of which Ms. Cloherty is a
    Special Limited Partner. Ms. Cloherty disclaims beneficial ownership of
    these shares.

(8) The number of shares owned by Paul Haycock, M.D. consists of 3,000,000
    shares owned by Apax Partners & Co., of which Dr. Haycock is a director. Dr.
    Haycock disclaims beneficial ownership of these shares.

                                       44
   47

                          DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, our authorized capital stock will consist of
120,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.01 par value.

COMMON STOCK

As of March 15, 2000, there were 37,515,051 shares of common stock outstanding
held of record by 97 stockholders. The holders of common stock are entitled to
one vote for each share held of record on all matters submitted to a vote of the
stockholders. The holders of common stock are entitled to receive ratably any
dividends as may be declared by the board of directors out of legally available
funds, after the superior rights of the holders of preferred stock have been
satisfied. Please read "Dividend Policy." Upon a liquidation, dissolution or
winding up of our company, holders of the common stock are entitled to share
ratably in all assets remaining after payment of liabilities and amounts due to
the holders of preferred stock as described below. Holders of common stock have
no preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions that apply to the
common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of this offering will be, fully
paid and non-assessable.

PREFERRED STOCK

The board of directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon the preferred stock,
including dividend rights, conversion rights, terms of redemption, liquidation
preference, sinking fund terms and the number of shares constituting any series
or the designation of a series, without any further vote or action by the
stockholders. The board of directors, without stockholder approval, can issue
preferred stock with voting and conversion rights that could adversely affect
the voting power of the holders of common stock. The issuance of preferred stock
could have the effect of delaying, deferring or preventing a change in control
of our company. We have no present plan to issue any shares of preferred stock.

WARRANTS

As of March 15, 2000, we had three outstanding warrants entitling their holders
to purchase an aggregate of 990,000 shares of common stock at an exercise price
of $2.50 per share. The warrants contain provisions for the adjustment of the
exercise price and the aggregate number of shares that may be issued upon the
exercise of the warrant if a stock dividend, stock split, reorganization,
reclassification or consolidation occurs.

REGISTRATION RIGHTS

On the date 180 days after the completion of this offering, the holders of
37,170,186 shares of common stock and warrants exercisable for 740,001
additional shares of common stock have rights which enable them to sell shares
in transactions registered under the Securities Act of 1933. If we propose to
register any of our securities under the Securities Act, either for our own
account or for the account of other securityholders, the holders of these shares
will be entitled to notice of the registration and will be entitled to include,
at our expense, their shares of common stock. In addition, the holders of these
shares may require us, at our expense and on not more than three occasions at
any time beginning approximately six months from the date of the closing of this
offering, to file a registration statement under the Securities Act covering
their shares of common stock, and we will be required to use our best efforts to
have the registration statement declared effective. These rights shall terminate
on the earlier of five years after the effective date of this offering, or when
a holder is able to sell all its shares pursuant to Rule 144 under the
Securities Act in any 90-day period. These registration rights are subject to
certain conditions and limitations, including the right of the underwriters to
limit the number of shares included in the registration statement.

                                       45
   48

ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS

Delaware Law

In general, Section 203 of the Delaware General Corporation Law prohibits a
publicly held Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that the stockholder became an interested stockholder unless:

     - prior to the date, the board of directors of the corporation approved
       either the business combination or the transaction that resulted in the
       stockholder becoming an interested stockholder;

     - upon consummation of the transaction that resulted in the stockholder's
       becoming an interested stockholder, the interested stockholder owned at
       least 85% of the voting stock of the corporation outstanding at the time
       the transaction commenced, excluding those shares owned by persons who
       are directors and also officers, and employee stock plans in which
       employee participants do not have the right to determine confidentially
       whether shares held under the plan will be tendered in a tender or
       exchange offer; or

     - on or subsequent to the date, the business combination is approved by the
       board of directors and authorized at an annual or special meeting of
       stockholders, and not by written consent, by the affirmative vote of at
       least two-thirds of the outstanding voting stock that is not owned by the
       interested stockholder.

Section 203 defines "business combination" to include:

     - any merger or consolidation involving the corporation and the interested
       stockholder;

     - any sale, transfer, pledge or other disposition involving the interested
       stockholder of 10% or more of the assets of the corporation;

     - in general, any transaction that results in the issuance or transfer by
       the corporation of any stock of the corporation to the interested
       stockholder; or

     - the receipt by the interested stockholder of the benefit of any loans,
       advances, guarantees, pledges or other financial benefits provided by or
       through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.

Charter Provisions

Our amended and restated certificate of incorporation and bylaws include a
number of provisions that may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of our company. First,
our certificate of incorporation provides that all stockholder actions following
completion of this offering must be effected at a duly called meeting of holders
and not by written consent. Second, our bylaws provide that special meetings of
the holders may be called only by the chairman of the board of directors, the
chief executive officer or our board of directors pursuant to a resolution
adopted by a majority of the total number of authorized directors. Third, our
certificate of incorporation provides that our board of directors can issue up
to 5,000,000 shares of preferred stock, as described under "--Preferred Stock"
above. Fourth, our certificate of incorporation and bylaws provide for a
classified board of directors, in which approximately one-third of the directors
would be elected each year. Consequently, any potential acquiror would need to
successfully complete two proxy contests in order to take control of the board
of directors. Finally, our bylaws establish procedures, including advance notice
procedures, with regard to the nomination of candidates for election as
directors and stockholder proposals. These provisions of our certificate of
incorporation and bylaws could discourage potential acquisition proposals and
could delay or prevent a change in our control or management.

TRANSFER AGENT AND REGISTRAR

ChaseMellon Shareholder Services has been appointed as the transfer agent and
registrar for our common stock.

Our shares of common stock have been approved for quotation on the Nasdaq
National Market under the symbol "LEXG".

                                       46
   49

                  MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR
                        NON-U.S. HOLDERS OF COMMON STOCK

The following is a general discussion of certain material U.S. federal income
and estate tax consequences of the ownership and disposition of our common stock
by a beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder"
is a person or entity that, for U.S. federal income tax purposes, is a
non-resident alien individual, a foreign corporation or a foreign estate or
trust.

This discussion is based on the U.S. Internal Revenue Code of 1986, as amended,
and administrative interpretations as of the date of this prospectus, all of
which are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to Non-U.S. Holders in light of their particular
circumstances (including, without limitation, Non-U.S. Holders who are
pass-through entities or who hold their common stock through pass-through
entities) and does not address any tax consequences arising under the laws of
any state, local or foreign jurisdiction. Prospective holders should consult
their tax advisors with respect to the particular tax consequences under the
laws of any state, local or foreign jurisdiction.

DIVIDENDS

Subject to the discussion below, dividends, if any, paid to a Non-U.S. Holder of
our common stock generally will be subject to withholding tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty. For
purposes of determining whether tax is to be withheld at a 30% rate or at a
reduced rate as specified by an income tax treaty, we ordinarily will presume
that dividends paid on or before December 31, 2000 to an address in a foreign
country are paid to a resident of such country absent knowledge that such
presumption is not warranted.

Under U.S. Treasury Regulations applicable to dividends paid after December 31,
2000 (the "New Regulations"), to obtain a reduced rate of withholding under a
treaty, a Non-U. S. Holder generally will be required to provide an Internal
Revenue Service Form W-8 BEN certifying such Non-U.S. Holder's entitlement to
benefits under a treaty. The New Regulations also provide special rules to
determine whether, for purposes of determining the applicability of a tax
treaty, dividends paid to a Non-U.S. Holder that is an entity should be treated
as paid to the entity or those holding an interest in that entity.

There will be no withholding tax on dividends paid to a Non-U.S. Holder that are
effectively connected with the Non-U.S. Holder's conduct of a trade or business
within the United States if a Form 4224, or, after December 31, 2000, a Form W-8
ECI, stating that the dividends are so connected is filed with us. Instead, the
effectively connected dividends will be subject to regular U.S. income tax in
the same manner as if the Non-U.S. Holder were a U.S. resident unless a specific
treaty exemption applies. A non-U.S. corporation receiving effectively connected
dividends may also be subject to an additional "branch profits tax" which is
imposed, under certain circumstances, at a rate of 30% (or such lower rate as
may be specified by an applicable treaty) of the non-U.S. corporation's
effectively connected earnings and profits, subject to certain adjustments.

Generally, we must report to the U.S. Internal Revenue Service the amount of
dividends paid, the name and address of the recipient, and the amount, if any,
of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or certain other agreements, the U.S. Internal Revenue Service may make
its reports available to tax authorities in the recipient's country of
residence.

Dividends paid to a Non-U.S. Holder at an address within the United States may
be subject to backup withholding imposed at a rate of 31% if the Non-U.S. Holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and certain other information to us.

Under current U.S. federal income tax law, backup withholding generally does not
apply to dividends paid on or before December 31, 2000 to a Non-U.S. Holder at
an address outside the United States, unless the payer has knowledge that the
payee is a U.S. person. Under the New Regulations however, a Non-U.S. Holder
will be subject to backup withholding unless applicable certification
requirements are met.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to U.S. federal income tax with
respect to gain realized on a sale or other disposition of our common stock
unless (i) the gain is effectively connected with a trade or business of such
holder in the United States and a specific treaty exemption does not apply, (ii)
in the case of certain Non-U.S. Holders who are nonresident alien individuals
and hold our common stock as a capital asset, such individuals are present in
the United States for 183 or more days in the taxable year of the disposition,
(iii) the Non-U.S. Holder is subject to tax pursuant to the provision of the

                                       47
   50

U.S. Internal Revenue Code regarding the taxation of U.S. expatriates, or (iv)
we are or have been a "U.S. real property holding corporation" within the
meaning of Section 897(c)(2) of the U.S. Internal Revenue Code at any time
within the shorter of the five-year period preceding such disposition or such
holder's holding period. We believe that we are not, and do not anticipate
becoming, a U.S. real property holding corporation. Even if we are treated as a
U.S. real property holding corporation, gain realized by a Non-U.S. Holder on a
disposition of our common stock will not be subject to U.S. federal income tax
so long as (i) the Non-U.S. Holder is considered to have beneficially owned no
more than five percent of the common stock at all times within the shorter of
(a) the five year period preceding the disposition or (b) the holder's holding
period and (ii) our common stock is regularly traded on an established
securities market (within the meaning of section 897(c)(3) of the U.S. Internal
Revenue Code and the temporary Treasury Regulations thereunder) at some time
during the calendar year in which the disposition occurs. There can be no
assurance that our common stock will continue to qualify as regularly traded on
an established securities market.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK

Under current U.S. federal income tax law, information reporting and backup
withholding imposed at a rate of 31% will apply to the proceeds of a disposition
of our common stock effected by or through a U.S. office of a broker unless the
disposing holder certifies as to its non-U.S. status or otherwise establishes an
exemption. Generally, U.S. information reporting and backup withholding will not
apply to a payment of disposition proceeds where the transaction is effected
outside the United States through a non-U.S. office of a non-U.S. broker.
However, U.S. information reporting requirements (but not backup withholding)
will apply to a payment of disposition proceeds where the transaction is
effected outside the United States by or through an office outside the United
States of a broker that fails to maintain documentary evidence that the holder
is a Non-U.S. Holder and that certain conditions are met, or that the holder
otherwise is entitled to an exemption, and the broker is (i) a U.S. person, (ii)
a foreign person which derived 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, (iii) a
"controlled foreign corporation" for U.S. federal income tax purposes, or (iv)
effective after December 31, 2000, a foreign partnership (a) at least 50% of the
capital or profits interest in which is owned by U.S. persons, or (b) that is
engaged in a U.S. trade or business.

Effective after December 31, 2000, backup withholding will apply to a payment of
those disposition proceeds if the broker has actual knowledge that the holder is
a U.S. person.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.

FEDERAL ESTATE TAX

An individual Non-U.S. Holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in our common stock will be required
to include the value thereof in his gross estate for U.S. federal estate tax
purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.

                                       48
   51

                        SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Upon completion of this
offering, we will have outstanding an aggregate of 47,515,051 shares of common
stock. Of these shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by affiliates. The remaining 37,515,051 shares
of common stock held by existing stockholders are restricted securities.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under the Securities Act.

Our executive officers, directors and certain stockholders have agreed pursuant
to "lock-up" agreements that, with limited exceptions, for a period of 180 days
from the date of this prospectus, they will not sell any shares of common stock
without the prior written consent of J.P. Morgan Securities Inc.

As a result of these "lock-up" agreements and the rules under the Securities
Act, the restricted shares will be available for sale in the public market,
subject, to certain volume and other restrictions, as follows:
- --------------------------------------------------------------------------------

DAYS AFTER THE     NUMBER OF SHARES
EFFECTIVE DATE     ELIGIBLE FOR SALE                                COMMENT
- --------------     -----------------                                -------
                                
On Effectiveness   --                 Shares not locked-up and eligible for sale under Rule 144
90 days            --                 Shares not locked-up and eligible for sale under Rules 144 and 701
180 days           34,972,551         Lock-up released; shares eligible for sale under Rules 144 and 701

Additionally, of the 8,473,134 shares that may be issued upon the exercise of
options outstanding as of March 15, 2000, approximately 4,093,161 shares are
subject to options which will be vested and exercisable 180 days after the date
of this prospectus.

Registration Rights

On the date 180 days after the completion of this offering, the holders of
37,170,186 shares of our common stock and warrants exercisable for 740,001
additional shares of common stock will have rights to require us to register
their shares under the Securities Act. Upon the effectiveness of a registration
statement covering these shares, the shares would become freely tradable.

Stock Options

Immediately after this offering, we intend to file a registration statement
under the Securities Act covering approximately 11,505,135 shares of common
stock reserved for issuance under our stock option plans. We expect the
registration statement to be filed and become effective as soon as practicable
after the closing of this offering. Accordingly, shares registered under such
registration statement will be available for sale in the open market after the
effectiveness of the registration statement, unless they are held by persons
that have signed a "lock-up" agreement.

                                       49
   52

                                  UNDERWRITING

J.P. Morgan Securities Inc. and Credit Suisse First Boston Corporation are
acting as joint lead managers for this offering. J.P. Morgan Securities Inc. is
acting as book running lead manager for this offering.

We and the underwriters named below have entered into an underwriting agreement
covering the common stock to be offered in this offering. J.P. Morgan Securities
Inc., Credit Suisse First Boston Corporation, CIBC World Markets Corp. and Punk,
Ziegel & Company, L.P. are acting as representatives of the underwriters. Each
underwriter has agreed to purchase the number of shares of common stock set
forth opposite its name in the following table.

                                                              ----------------
                                                              NUMBER OF SHARES
                                                              ----------------
                                                           
UNDERWRITERS
J.P. Morgan Securities Inc..................................
Credit Suisse First Boston Corporation......................
CIBC World Markets Corp.....................................
Punk, Ziegel & Company, L.P.................................

                                                                -----------
          Total.............................................     10,000,000
                                                                ===========

The underwriting agreement provides that if the underwriters take any of the
shares presented in the table above, then they must take all of these shares. No
underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.

The underwriters are offering the shares of common stock, subject to the prior
sale of shares, and when, as and if such shares are delivered to and accepted by
them. The underwriters will initially offer to sell shares to the public at the
initial public offering price shown on the cover page of this prospectus. The
underwriters may sell shares to securities dealers at a discount of up to $
per share from the initial public offering price. Any such securities dealers
may resell shares to certain other brokers or dealers at a discount of up to
$     per share from the initial public offering price. After the initial public
offering, the underwriters may vary the public offering price and other selling
terms.

If the underwriters sell more shares than the total number shown in the table
above, the underwriters have the option to buy up to an additional 1,500,000
shares of common stock from us to cover such sales. They may exercise this
option during the 30-day period from the date of this prospectus. If any shares
are purchased with this option, the underwriters will purchase shares in
approximately the same proportion as shown in the table above.

The following table shows the per share and total underwriting discounts and
commissions that we will pay to the underwriters. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.

                                                              ---------------------------
                                                              NO EXERCISE   FULL EXERCISE
                                                              -----------   -------------
                                                                      
Per share...................................................    $              $
          Total.............................................    $              $

The underwriters may purchase and sell shares of common stock in the open market
in connection with this offering. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
slowing a decline in the market price of the common stock while this offering is
in progress. The underwriters may also impose a penalty bid, which means that an
underwriter must repay to the other underwriters a portion of the underwriting
discount received by it. An underwriter may be subject to a penalty bid if the
representatives of the underwriters, while engaging in stabilizing or short
covering transactions, repurchase shares sold by or for the account of that
underwriter. These activities may stabilize, maintain or otherwise affect the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them

                                       50
   53

at any time. The underwriters may carry out these transactions on the Nasdaq
National Market, in the over-the-counter market or otherwise.

A prospectus in electronic format will be made available on an Internet site
maintained by one or more of the underwriters participating in this offering.

We estimate that the total expenses of this offering, excluding underwriting
discounts, will be $1,000,000.

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.

We and our executive officers, directors and certain stockholders have agreed
that, with limited exceptions, during the period beginning from the date of this
prospectus and continuing to and including the date 180 days after the date of
this prospectus, none of us will, directly or indirectly, offer, sell, offer to
sell, contract to sell or otherwise dispose of any shares of common stock or any
of our securities which are substantially similar to the common stock, including
but not limited to any securities that are convertible into or exchangeable for,
or that represent the right to receive, common stock or any such substantially
similar securities or enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of common stock or any securities substantially similar to the common
stock, other than pursuant to employee stock option plans existing on the date
of this prospectus, without the prior written consent of J.P. Morgan Securities
Inc.

At our request, the underwriters have reserved shares of common stock for sale
to our directors, officers, employees, consultants and family members of the
foregoing. We expect these persons to purchase no more than five percent, or
500,000 shares, of the common stock offered in this offering. The number of
shares available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares.

Our shares of common stock have been approved for quotation on the Nasdaq
National Market under the symbol "LEXG".

It is expected that delivery of the shares will be made to investors on or about
            , 2000.

There has been no public market for the common stock prior to this offering. We
and the underwriters will negotiate the initial offering price. In determining
the price, we and the underwriters expect to consider a number of factors in
addition to prevailing market conditions, including:

     - the history of and prospects for our industry and for biotechnology
       companies generally;

     - an assessment of our management;

     - our present operations;

     - our historical results of operations;

     - the trend of our revenues and earnings; and

     - our earnings prospects.

We and the underwriters will consider these and other relevant factors in
relation to the price of similar securities of generally comparable companies.
Neither we nor the underwriters can assure investors that an active trading
market will develop for the common stock, or that the common stock will trade in
the public market at or above the initial offering price.

From time to time in the ordinary course of their respective businesses, certain
of the underwriters and their affiliates have engaged in and may in the future
engage in commercial banking and/or investment banking transactions with us and
our affiliates. In addition, Punk, Ziegel & Company, L.P. and its affiliates
beneficially own common stock, convertible preferred stock that will convert
into common stock upon completion of this offering and warrants to purchase
common stock at $2.50 per share, which represents 1.3% of our outstanding common
stock assuming completion of this offering and exercise of the warrants. Of
these securities, two affiliates of Punk, Ziegel & Company L.P. own an aggregate
of 28,311 shares of common stock that are presumed to be underwriting
compensation in connection with this offering pursuant to the conduct rules of
the National Association of Securities Dealers, Inc. Accordingly, these
affiliates have executed lock-up agreements with us prohibiting them from
selling, transferring, assigning, pledging or hypothecating these shares for a
period of one year following the effective date of this offering, except to
officers or partners of the underwriters and members of the selling group and
their officers or partners. To comply with other provisions of the conduct rules
of the National Association of Securities Dealers, Inc., Punk, Ziegel & Company
L.P. and its affiliates have agreed not to sell, transfer, assign, pledge or
hypothecate all other securities of ours owned by them for a period of 90 days
following the effective date of this offering, except in certain limited
circumstances.

                                       51
   54

                                 LEGAL MATTERS

The validity of the common stock offered by this prospectus will be passed upon
for us by Andrews & Kurth L.L.P., Houston, Texas. Legal matters in connection
with the offering will be passed upon for the underwriters by Cahill Gordon &
Reindel, New York, New York.

                                    EXPERTS

The financial statements, as of December 31, 1998 and 1999, and for each of the
three years in the period ended December 31, 1999, included in this prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.

                      WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 regarding the shares of common stock offered by us. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information contained in the registration statement, some
items of which are contained in exhibits to the registration statement as
permitted by the rules and regulations of the SEC. For further information on us
and the common stock we are offering, reference is made to the registration
statement, including the exhibits, and the financial statements and notes filed
as a part of the registration statement. A copy of the registration statement,
including the exhibits and the financial statements and notes filed as a part of
it, may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from the SEC upon the payment of fees prescribed by it. The SEC
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding companies that file
electronically with it.

As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will file
periodic reports, proxy statements and other information with the SEC. You may
inspect any of these documents as described in the preceding paragraph. These
reports, proxy statements and other information may also be inspected at the
offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.

                                       52
   55

                         INDEX TO FINANCIAL STATEMENTS

                                                           

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

Balance Sheets..............................................  F-3

Statements of Operations....................................  F-4

Statements of Stockholders' Equity (Deficit)................  F-5

Statements of Cash Flows....................................  F-6

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

                                       F-1
   56

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Lexicon Genetics Incorporated:

We have audited the accompanying balance sheets of Lexicon Genetics Incorporated
(a Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of Lexicon's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lexicon Genetics Incorporated
as of December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 4, 2000 (except with
     respect to the matter discussed
     in the first paragraph of Note 6,
     as to which the date is March 16, 2000)

                                       F-2
   57

                         LEXICON GENETICS INCORPORATED

                                 BALANCE SHEETS

                                                              ------------------------------------------------
                                                                                               PRO FORMA
                                                                                             STOCKHOLDERS'
                                                                 AS OF DECEMBER 31,       EQUITY (DEFICIT) AT
                                                              -------------------------       DECEMBER 31,
                                                                 1998          1999               1999
                                                              -----------   -----------   --------------------
                                                                                              (UNAUDITED)
                                                                                 
ASSETS
Current assets
  Cash and cash equivalents.................................  $ 3,022,201   $ 2,025,585
  Marketable securities.....................................   16,400,158     7,130,848
  Accounts receivable.......................................    1,673,479     3,391,648
  Prepaid expenses and other current assets.................       17,471        76,257
                                                              -----------   -----------
          Total current assets..............................   21,113,309    12,624,338
Property, plant and equipment...............................    8,326,683    12,476,021
Accumulated depreciation....................................   (1,185,951)   (3,087,397)
                                                              -----------   -----------
                                                                7,140,732     9,388,624
Other assets, net...........................................      261,962       281,605
                                                              -----------   -----------
          Total assets......................................  $28,516,003   $22,294,567
                                                              ===========   ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities
  Accounts payable and accrued liabilities..................  $ 1,593,446   $ 1,192,276
  Current portion of related party note payable.............       83,335       200,004
  Current portion of long-term debt.........................           --       874,174
  Current portion of capital lease obligations..............      196,085       127,119
  Current portion of deferred revenue.......................    1,138,750     8,209,574
                                                              -----------   -----------
          Total current liabilities.........................    3,011,616    10,603,147
Related party note payable, net of current portion..........      916,665       716,663
Long-term debt, net of current portion......................           --     2,854,365
Capital lease obligations, net of current portion...........      107,114         6,279
Deferred revenue, net of current portion....................    4,000,000            --
                                                              -----------   -----------
          Total liabilities.................................    8,035,395    14,180,454

Commitments and contingencies

Redeemable convertible Series A preferred stock, $.01 par
  value, 10,000,000 shares authorized 4,244,664, 4,244,664
  and no shares issued and outstanding, respectively;
  aggregate liquidation preference of $31,834,980 at
  December 31, 1999 (none pro forma)........................   29,514,820    30,050,236       $         --

Stockholders' equity (deficit)
  Common stock, $.001 par value, 120,000,000 shares
     authorized, 24,490,695, 24,540,201 and 37,274,193
     shares issued and outstanding, respectively............       24,491        24,540             37,274
  Additional paid-in capital................................    7,374,843     7,863,392         37,900,894
  Deferred stock compensation...............................           --      (915,422)          (915,422)
  Accumulated deficit.......................................  (16,433,546)  (28,908,633)       (28,908,633)
                                                              -----------   -----------       ------------
          Total stockholders' equity (deficit)..............   (9,034,212)  (21,936,123)      $  8,114,113
                                                              -----------   -----------       ------------
          Total liabilities and stockholders' equity
            (deficit).......................................  $28,516,003   $22,294,567
                                                              ===========   ===========

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

                                       F-3
   58

                         LEXICON GENETICS INCORPORATED

                            STATEMENTS OF OPERATIONS

                                                              ----------------------------------------
                                                                      YEAR ENDED DECEMBER 31,
                                                              ----------------------------------------
                                                                 1997          1998           1999
                                                              -----------   -----------   ------------
                                                                                 
Revenues
  Subscription and license fees.............................  $   336,875   $   761,950   $  2,197,696
  Collaborative research....................................      486,416     1,072,205      2,120,016
  Reagents..................................................      144,451       204,445        229,967
  Grants....................................................           --       203,242        190,024
                                                              -----------   -----------   ------------
          Total revenues....................................      967,742     2,241,842      4,737,703
Operating expenses
  Research and development..................................    4,970,488     8,409,770     14,645,773
  General and administrative................................    1,472,966     2,024,322      2,913,121
                                                              -----------   -----------   ------------
          Total operating expenses..........................    6,443,454    10,434,092     17,558,894
                                                              -----------   -----------   ------------
Loss from operations........................................   (5,475,712)   (8,192,250)   (12,821,191)
Interest income.............................................      133,004       838,110        648,906
Interest expense............................................       58,861       126,665        302,802
                                                              -----------   -----------   ------------
Net loss....................................................   (5,401,569)   (7,480,805)   (12,475,087)
Accretion on redeemable convertible preferred stock.........  --.........      (356,946)      (535,416)
                                                              -----------   -----------   ------------
Net loss attributable to common stockholders................  $(5,401,569)  $(7,837,751)  $(13,010,503)
                                                              ===========   ===========   ============
Net loss per common share, basic and diluted................  $     (0.23)  $     (0.32)  $      (0.53)
                                                              ===========   ===========   ============
Shares used in computing net loss per common share, basic
  and diluted...............................................   23,988,969    24,445,422     24,530,427
Pro forma net loss per common share, basic and diluted......                              $      (0.33)
                                                                                          ============
Shares used in computing pro forma net loss per common
  share, basic and diluted..................................                                37,264,419

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

                                       F-4
   59

                         LEXICON GENETICS INCORPORATED

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                               ------------------------------------------------------------------------------------
                                                          STOCKHOLDERS' EQUITY (DEFICIT)
                               ------------------------------------------------------------------------------------
                                    COMMON STOCK        ADDITIONAL     DEFERRED                         TOTAL
                               ----------------------    PAID-IN        STOCK       ACCUMULATED     STOCKHOLDERS'
                                 SHARES     PAR VALUE    CAPITAL     COMPENSATION     DEFICIT      EQUITY (DEFICIT)
                               ----------   ---------   ----------   ------------   ------------   ----------------
                                                                                 
Balance at December 31,
  1996.......................  22,652,694    $22,653    $4,049,238   $        --    $ (3,551,172)    $    520,719
Issuance of common stock for
  cash ($1.75 per share).....   1,770,000      1,770     2,948,230            --              --        2,950,000
Net loss.....................          --         --            --            --      (5,401,569)      (5,401,569)
                               ----------    -------    ----------   -----------    ------------     ------------
Balance at December 31,
  1997.......................  24,422,694     24,423     6,997,468            --      (8,952,741)      (1,930,850)
Common stock warrants issued
  with debt agreement........          --         --        24,750            --              --           24,750
Warrants issued in
  conjunction with redeemable
  convertible Series A
  preferred stock............          --         --       498,597            --              --          498,597
Common stock warrants issued
  for lease option...........          --         --       195,855            --              --          195,855
Exercise of common stock
  options....................      68,001         68        15,119            --              --           15,187
Accretion on redeemable
  convertible preferred stock
  to redemption value........          --         --      (356,946)           --              --         (356,946)
Net loss.....................          --         --            --            --      (7,480,805)      (7,480,805)
                               ----------    -------    ----------   -----------    ------------     ------------
Balance at December 31,
  1998.......................  24,490,695     24,491     7,374,843            --     (16,433,546)      (9,034,212)
Exercise of common stock
  options....................      49,506         49        22,910            --              --           22,959
Accretion on redeemable
  convertible preferred stock
  to redemption value........          --         --      (535,416)           --              --         (535,416)
Deferred stock
  compensation...............          --         --     1,001,055    (1,001,055)             --               --
Amortization of deferred
  stock compensation.........          --         --            --        85,633              --           85,633
Net loss.....................          --         --            --            --     (12,475,087)     (12,475,087)
                               ----------    -------    ----------   -----------    ------------     ------------
Balance at December 31,
  1999.......................  24,540,201    $24,540    $7,863,392   $  (915,422)   $(28,908,633)    $(21,936,123)
                               ==========    =======    ==========   ===========    ============     ============

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

                                       F-5
   60

                         LEXICON GENETICS INCORPORATED

                            STATEMENTS OF CASH FLOWS

                                                              -----------------------------------------
                                                                       YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 1997           1998           1999
                                                              -----------   ------------   ------------
                                                                                  
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss..................................................  $(5,401,569)  $ (7,480,805)  $(12,475,087)
  Adjustments to reconcile net loss to net cash used in
     operating activities
     Depreciation...........................................      315,929        756,600      1,901,446
     Loss on sale of asset..................................           --         21,819             --
     Amortization of deferred stock compensation............           --             --         85,633
     Amortization of lease option...........................           --         17,180         41,232
     Amortization of deferred financing costs...............           --         24,750             --
     Changes in operating assets and liabilities
       Increase in accounts receivable......................     (444,618)    (1,070,309)    (1,718,169)
       (Increase) decrease in prepaid expenses and other
          current assets....................................       22,321        (12,875)       (58,786)
       Increase in other assets.............................      (43,135)        (3,736)       (60,875)
       Increase (decrease) in accounts payable and accrued
          liabilities.......................................      354,581        800,410       (401,170)
       Increase in deferred revenue.........................    4,500,000        638,750      3,070,824
                                                              -----------   ------------   ------------
          Net cash used in operating activities.............     (696,491)    (6,308,216)    (9,614,952)
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment.......................   (1,289,438)    (5,658,953)    (4,100,286)
  Sale of marketable securities.............................           --     24,026,708     21,818,363
  Purchase of marketable securities.........................           --    (40,426,865)   (12,549,053)
  Proceeds from sale of asset...............................           --         47,000             --
                                                              -----------   ------------   ------------
          Net cash provided by (used in) investing
            activities......................................   (1,289,438)   (22,012,110)     5,169,024
CASH FLOWS FROM FINANCING ACTIVITIES
  Principal payments of capital lease obligations...........      (83,633)      (209,569)      (218,853)
  Proceeds from issuance of common stock....................    2,950,000         15,187         22,959
  Proceeds from issuance of redeemable convertible Series A
     preferred stock........................................           --     29,656,471             --
  Proceeds from debt borrowings.............................    1,100,000             --      4,168,060
  Repayment of debt borrowings..............................           --       (100,000)      (522,854)
                                                              -----------   ------------   ------------
          Net cash provided by financing activities.........    3,966,367     29,362,089      3,449,312
                                                              -----------   ------------   ------------
Net increase (decrease) in cash and cash equivalents........    1,980,438      1,041,763       (996,616)
Cash and cash equivalents at beginning of year..............           --      1,980,438      3,022,201
                                                              -----------   ------------   ------------
Cash and cash equivalents at end of year....................  $ 1,980,438   $  3,022,201   $  2,025,585
                                                              ===========   ============   ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid for interest....................................  $    29,528   $     49,331   $    409,469
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
  ACTIVITIES
  Purchases of equipment under capital lease obligations....  $   407,047   $     58,297   $     49,052
  Warrants issued in conjunction with lease option..........  $        --   $    195,855   $         --
  Warrants issued in conjunction with debt borrowings.......  $    24,750   $         --   $         --

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

                                       F-6
   61

                         LEXICON GENETICS INCORPORATED

                         NOTES TO FINANCIAL STATEMENTS

                               DECEMBER 31, 1999

1. ORGANIZATION AND OPERATIONS

Lexicon Genetics Incorporated is a Delaware corporation incorporated on July 7,
1995. Lexicon was organized to research, develop and market products and
services related to functional genomics and drug target identification.

Lexicon has financed its operations from inception primarily through private
financing transactions, contract and milestone payments related to subscription
and collaboration agreements, and certain equipment financing arrangements.
Lexicon's future success is dependent upon many factors, including, but not
limited to, its ability to use gene sequence databases and knockout mice to
select promising candidates for drug target or therapeutic protein development,
reliance on subscriptions to its databases, compliance with state and federal
regulatory restrictions, favorable public perception regarding ethical and
social issues, reliance on collaborative research and development arrangements
with corporate and academic affiliates and the obtaining of the funds necessary
to complete these activities. As a result of the aforementioned factors and the
related uncertainties, there can be no assurance of Lexicon's future success.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Cash, Cash Equivalents and Marketable Securities: Lexicon considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Management determines the appropriate classification of its cash
equivalents and marketable securities at the time of purchase. Marketable
securities consist of U.S. Government agency debt obligations and investment
grade commercial paper that mature one to six months after December 31, 1999.
Management has classified Lexicon's marketable securities as held-to-maturity
securities in the accompanying financial statements. Held-to-maturity securities
are carried at purchase cost plus accrued interest, which approximates fair
value.

Concentration of Credit Risk: Lexicon's cash equivalents and marketable
securities represent potential concentrations of credit risk. Lexicon minimizes
potential concentrations of risk in cash equivalents by placing investments in
high-quality financial instruments. At December 31, 1999, management believes
that Lexicon has no significant concentrations of credit risk and has incurred
no impairments in the carrying values of its cash equivalents and marketable
securities.

Significant Customers: For the years ended December 31, 1997, 1998 and 1999,
six, three and three entities represented 55%, 48% and 58% of Lexicon's
revenues, respectively.

Property and Equipment: Property and equipment are carried at cost and
depreciated using the straight-line method over the estimated useful life of the
assets which ranges from three to seven years.

Revenue Recognition: Revenues are earned from services performed pursuant to
database subscription and access agreements, and collaborations for the
development and, in some cases, analysis of knockout mice. Subscription and
access fees received are recognized ratably over the subscription or access
period. Payments received in advance under these arrangements are recorded as
deferred revenue until earned. Collaborative research payments are
non-refundable, regardless of the success of the research effort, and are
recognized as revenue as Lexicon performs its obligations related to such
research. Milestone based fees are recognized upon completion of specified
milestones according to contract terms. Revenues for the supply of reagents to
collaboration partners and customers are recognized upon shipment.
Non-refundable sublicense fees are recognized as revenues upon the transfer of
the sublicense to third parties, when performance is complete and there is no
continuing involvement. Grant revenue is recognized as the related costs are
incurred.

Research and Development Expenses: Research and development expenses consist of
costs incurred for company-sponsored as well as collaborative research and
development activities. These costs include direct and research-related overhead
expenses and are expensed as incurred. Research and development expenses also
include certain costs associated with the production of custom knockout mice
associated with specific collaborative research agreements. Through December 31,
1999, total production costs incurred have not been significant. Patent costs
and technology license fees, which are utilized in research and development and
have no alternative future use, are expensed when incurred.
                                       F-7
   62
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Net Loss Per Share: Net loss per share is computed using the weighted average
number of shares of common stock outstanding. Shares associated with stock
options and warrants and the convertible preferred stock are not included
because they are antidilutive.

Pro Forma Net Loss Per Share (Unaudited): Pro forma net loss per share is
computed using the weighted average number of common shares outstanding,
including pro forma effects of the automatic conversion of outstanding
redeemable convertible preferred stock into shares of Lexicon's common stock
effective upon the closing of Lexicon's initial public offering as if such
conversion occurred on the date of original issuance.

The following table sets forth the computation of basic and diluted, and pro
forma basic and diluted, net loss per share for the respective periods.

                                                          ------------------------------------------
                                                                   YEAR ENDED DECEMBER 31,
                                                          ------------------------------------------
                                                              1997           1998           1999
                                                          ------------   ------------   ------------
                                                                                         
Basic and diluted
Net loss................................................  $ (5,401,569)  $ (7,480,805)  $(12,475,087)
Accretion on redeemable convertible preferred stock.....            --       (356,946)      (535,416)
                                                          ------------   ------------   ------------ ---
Net loss attributable to common stockholders............  $ (5,401,569)  $ (7,837,751)  $(13,010,503)
                                                          ============   ============   ============ ===
Shares used to compute net loss per common share........    23,988,969     24,445,422     24,530,427
                                                          ============   ============   ============ ===
Net loss per common share...............................  $      (0.23)  $      (0.32)  $      (0.53)
                                                          ============   ============   ============ ===
Pro forma basic and diluted
Net loss................................................                                $(12,475,087)
                                                                                        ============
Shares used to compute net loss per share...............                                  24,530,427
Adjustment to reflect weighted-average effect of assumed
  conversion of redeemable convertible preferred
  stock.................................................                                  12,733,992
                                                                                        ------------
Weighted-average shares used in pro forma basic and
  diluted net loss per share............................                                  37,264,419
                                                                                        ============
Pro forma net loss per share............................                                $      (0.33)
                                                                                        ============

Recent Accounting Pronouncements: In December 1999, the SEC issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB
101), which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
first fiscal quarter of fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation. Lexicon's
management believes that its revenue recognition policy is in accordance with
SAB 101 and does not believe that adoption of this SAB will have a material
impact on Lexicon's financial position or results of operations.

3. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1998 and 1999, are as follows:

                                                       --------------------------------------
                                                                        AS OF DECEMBER 31,
                                                       USEFUL LIVES   -----------------------
                                                         IN YEARS        1998         1999
                                                       ------------   ----------   ----------
                                                                                  
Computers and software...............................     3           $1,188,007   $2,275,528
Furniture and fixtures...............................    5-7             300,224      386,760
Laboratory equipment.................................     7            3,275,454    4,678,492
Leasehold improvements...............................     7            3,562,998    5,135,241
                                                                      ----------   ----------
                                                                       8,326,683   12,476,021
Less: Accumulated depreciation.......................                 (1,185,951)  (3,087,397)
                                                                      ----------   ----------
  Net property and equipment.........................                 $7,140,732   $9,388,624
                                                                      ==========   ==========

                                       F-8
   63
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 1999, approximately $133,398 of the above equipment is held
under capital leases.

4. FINANCING AND DEBT OBLIGATIONS

In June 1999, Lexicon entered into a $5.0 million financing arrangement for the
purchase of property and equipment. As of December 31, 1999, Lexicon had drawn
down approximately $4.2 million and had $831,940 remaining available under this
arrangement. As of December 31, 1999, $3.7 million of the amount outstanding was
secured by the equipment financed. This facility accrues interest at a weighted
average rate of 11.7% and is due in monthly installments of $106,054 through the
year 2003. In addition, as of December 31, 1999, the balance of this obligation
was $3,728,539.

In August 1997, Lexicon entered into two notes payable in the amount of $1
million and $100,000, respectively. During 1998, Lexicon paid off the entire
balance of the $100,000 note. The remaining unsecured $1 million note is payable
to a member of the board of directors and bears interest at the rate of 8
percent. The note is paid in monthly installments of $16,667 plus any accrued
and unpaid interest with the balance due August 2002. As of December 31, 1999,
the balance of this obligation was $916,667.

5. INCOME TAXES

Lexicon recognizes deferred tax liabilities and assets for the expected future
tax consequences of events that have been recognized differently in the
financial statements and tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of liabilities and assets
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation should be
provided.

The components of Lexicon's deferred tax assets (liabilities) at December 31,
1998 and 1999, are as follows:

                                                              -------------------------------
                                                                  AS OF DECEMBER 31,
                                                              ---------------------------
                                                                 1998            1999
                                                              ----------      -----------
                                                                                 
Net operating loss carryforwards...........................   $5,436,001      $ 9,466,857
Technology license.........................................      125,001          114,293
Research and development tax credits.......................      359,034          670,663
Accrued expenses not yet deductible........................      (12,680)         (21,853)
Start-up and organizational costs..........................       71,188           38,332
Property and equipment.....................................     (281,160)        (234,490)
Prepaid expenses...........................................        1,309          (20,459)
                                                              ----------      ----------- ---
          Total deferred tax assets (liabilities)..........    5,698,693       10,013,343
Less: Valuation allowance..................................   (5,698,693)     (10,013,343)
                                                              ----------      ----------- ---
          Net deferred tax assets..........................   $       --      $        --
                                                              ==========      =========== ===

As of December 31, 1999, Lexicon has generated net operating loss (NOL)
carryforwards of approximately $27.0 million and research and development tax
credits of approximately $671,000 available to reduce future income taxes. These
carryforwards begin to expire in 2011. A change in ownership, as defined by
federal income tax regulations, could significantly limit Lexicon's ability to
utilize its carryforwards. Lexicon's ability to utilize its current and future
NOLs to reduce future taxable income and tax liabilities may be limited.
Additionally, because federal tax laws limit the time during which these
carryforwards may be applied against future taxes, Lexicon may not be able to
take full advantage of these attributes for federal income tax purposes. As
Lexicon has had cumulative losses and there is no assurance of future taxable
income, valuation allowances have been established to fully offset the deferred
tax assets of $5,698,693 and $10,013,343 at December 31, 1998 and 1999,
respectively. The valuation allowance increased approximately $4,314,650 million
during 1999, primarily due to Lexicon's net loss.

                                       F-9
   64
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND CAPITAL STOCK

Stock Dividend: In March 2000, Lexicon's Board of Directors declared a stock
dividend to effect a stock split of 3 shares for every 1 share of common stock
then outstanding. The stock split will become effective immediately prior to the
effectiveness of the Registration Statement relating to the public offering of
common stock. Accordingly, the accompanying financial statements and footnotes
have been restated to reflect the stock split, including an assumed increase in
authorized shares of common stock. The par value of the shares of common stock
to be issued in connection with the stock dividend was credited to common stock
and a like amount charged to additional paid-in capital.

Redeemable Convertible Series A Preferred Stock: During May 1998, a private
placement was completed in which Lexicon issued 4,244,664 shares of redeemable
convertible Series A preferred stock (Series A Preferred Stock) for proceeds of
approximately $29.6 million net of placement agent fees and offering costs of
approximately $2.2 million. The Series A Preferred Stock has the right to
receive dividends in the form of cash, common stock or any combination of cash
and common stock at Lexicon's discretion. Any dividends declared to junior
securities must be matched or exceeded with dividends to the Series A Preferred
Stock. As of December 31, 1999, no dividends had been declared. The Series A
Preferred Stock has voting rights equal to one vote for each full share of
common stock into which the Series A Preferred Stock held by such holder could
then be converted.

The Series A Preferred Stock is convertible into common stock at the discretion
of the stockholder after the stock's issuance and prior to the mandatory
redemption date outlined below at a price of $2.50 per share of common stock. In
addition, the Series A Preferred Stock will be automatically converted into
common stock if (a) Lexicon receives the written consent of the holders of at
least 66 2/3 percent of the Series A Preferred Stock then outstanding or (b)
Lexicon consummates an underwritten public offering of its common stock with
gross proceeds, net of underwriting discounts and commissions, exceeding $20
million and at a price of at least $6.25 per share. At December 31, 1999, a
total of 12,733,992 shares of common stock were issuable upon conversion of the
Series A Preferred Stock.

The Series A Preferred Stock will be automatically redeemable on May 7, 2003,
for a sum of the following: (a) the greater of $2.50 per share or the fair
market value of the number of shares of common stock into which a share of
Series A Preferred Stock could then be converted and (b) an amount per share
equal to all declared but unpaid dividends. The Series A Preferred Stock is
being accreted to its redemption value of $31,834,980 on May 7, 2003. The Series
A Preferred Stock balance has not been included as a component of total
stockholders' equity (deficit) in the accompanying financial statements due to
its redemption features.

Pro Forma Stockholders' Equity Information: Upon the effective date of Lexicon's
proposed initial public offering all of the preferred stock outstanding will
automatically be converted into 12,733,992 shares of common stock. The unaudited
pro forma redeemable convertible preferred stock and stockholders' equity at
December 31, 1999 has been adjusted for the assumed conversion of preferred
stock based on the shares of preferred stock outstanding at December 31, 1999.

Common Stock: In 1996, Lexicon entered into a subscription agreement with an
individual investor through which Lexicon agreed to issue 2,400,000 shares of
common stock at a price of $1.67 per share. Total cash consideration of
$4,000,000 was received and the related shares issued at various dates from
September 1996 through July 1997.

On September 14, 1995, Lexicon entered into a stockholders' agreement with its
stockholders providing for certain restrictions on the transfer of shares of
Lexicon's capital stock and certain preemptive rights with respect to new
securities offered by Lexicon. The agreement was subsequently extended to other
stockholders and holders of warrants and was amended and restated as of May 7,
1998. As amended and restated, the stockholders' agreement (a) requires any
stockholder who desires to sell shares of Company stock to first offer to sell
such shares to Lexicon and to the remaining stockholders, (b) permits holders of
Series A Preferred Stock, at their option, to participate on a pro rata basis in
certain sales of Company stock by selling stockholders, (c) grants certain
preemptive rights to a director and founding stockholder of Lexicon and to the
holders of Series A Preferred Stock with respect to new securities offered by
Lexicon and (d) contains voting agreements with respect to the election of
directors and certain other matters, in each case subject to certain exceptions.
The agreement terminates upon the earlier to occur of (a) the closing of a
qualifying initial public offering of Lexicon's common stock or (b) the written
approval of Lexicon and the holders of at least 75 percent of the outstanding
capital stock of Lexicon subject to the agreement.

                                      F-10
   65
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

On September 14, 1995, Lexicon entered into a registration rights agreement with
its founding stockholders. The agreement was subsequently extended to other
stockholders and holders of warrants and was amended and restated as of May 7,
1998. As amended and restated, the registration rights agreement provides
holders of registrable securities with the right to require Lexicon to register
the offering of their shares under the Securities Act of 1933, as amended, under
certain circumstances and subject to certain exceptions. Such rights may be
exercised by holders of registrable securities who, in the aggregate, hold (a)
at least 25 percent of the then-outstanding registrable securities that were
originally issued to a director and founding stockholder of Lexicon or (b) 25
percent of the then-outstanding registrable securities issued or issuable upon
conversion of the Series A Preferred Stock. The registration rights agreement
also provides holders of registrable securities with the right to include their
shares in offerings registered under the Securities Act of 1933, as amended, for
the account of Lexicon or for the account of other holders of registration
rights, subject to certain exceptions. The registration rights agreement
provides that Lexicon shall pay the expenses associated with all such
registrations.

7. STOCK OPTIONS AND WARRANTS

Stock Options: In September 1995, Lexicon's board of directors approved the 1995
Stock Option Plan (the Plan). Under the Plan, as amended, a total of 6,000,000
shares of common stock have been reserved for issuance upon exercise of stock
options granted to employees, consultants or directors. The option price may not
be less than the fair market value per share on the date of grant for incentive
stock options. All of the options issued by Lexicon through December 31, 1999,
vest in accordance with grant provisions (typically four years) and are
exercisable for a period of 10 years subsequent to the date of grant.

Lexicon follows Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," which permits one of two methods for
accounting for stock options. Lexicon has elected the method that only requires
note disclosure of stock-based compensation. Because of this election, Lexicon
is required to account for its employee stock-based compensation plan under
Accounting Principles Board (APB) Opinion No. 25 and its related
interpretations. In accordance with APB No. 25, deferred compensation is
recorded for stock-based compensation grants based on the excess of the
estimated fair value of the common stock on the measurement date over the
exercise price. The deferred compensation is amortized over the vesting period
of each unit of stock-based compensation grant, which is generally four years.
If the exercise price of the stock-based compensation grants is equal to the
estimated fair value of Lexicon's stock on the date of grant, no compensation
expense is recorded.

Lexicon records the fair value of options issued to non-employee consultants,
including Scientific Advisory Board members, at the fair value of the options
issued. Lexicon has not incurred significant compensation expense relating to
non-employee consultant grants. Options to purchase 45,000 shares of common
stock were issued to non-employees in 1999, and none were issued in 1997 or
1998. The fair values of the issuances in 1999 were estimated using the
Black-Scholes pricing model with the assumptions noted in the following
paragraph, resulting in an aggregate fair value of $57,000. Any expense is
recognized over the service period or at the date of issuance if the options are
fully vested and no performance obligation exists.

The following pro forma information regarding net loss is required by SFAS No.
123, and has been determined as if Lexicon had accounted for its employee stock
options under the fair-value method as defined by SFAS No. 123. The fair value
of these options was estimated at the date of grant using the Black-Scholes
method and the following assumptions for 1997, 1998, and 1999: volatility of
29%, risk-free interest rate of 8%, expected option lives of seven years, three
percent expected turnover, and no dividends.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options using the
straight-line method. Lexicon's pro forma information follows:

                                                     ----------------------------------------
                                                             YEAR ENDED DECEMBER 31,
                                                     ----------------------------------------
                                                        1997          1998           1999
                                                     -----------   -----------   ------------
                                                                                  
Net loss
  As reported......................................  $(5,401,569)  $(7,480,805)  $(12,475,087)
  Pro forma........................................  $(5,888,118)  $(8,484,922)  $(14,117,799)
Net loss per common share, basic and diluted
  As reported......................................  $     (0.23)  $     (0.32)  $      (0.53)
  Pro forma........................................  $     (0.25)  $     (0.36)  $      (0.60)

                                      F-11
   66
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The following is a summary of option activity under this plan:

                                                              --------------------------------
                                                                               WEIGHTED
                                                                OPTIONS        AVERAGE
                                                              OUTSTANDING   EXERCISE PRICE
                                                              -----------   --------------
                                                                                  
Balance at December 31, 1996................................    1,938,300            $0.32
Granted.....................................................      916,350             1.67
Exercised...................................................           --               --
Canceled....................................................      (53,100)            1.59
                                                              -----------
Balance at December 31, 1997................................    2,801,550            $0.74
Granted.....................................................    2,128,650             2.48
Exercised...................................................      (68,001)            0.22
Canceled....................................................     (123,225)            1.32
                                                              -----------
Balance at December 31, 1998................................    4,738,974            $1.51
Granted.....................................................    1,064,700             2.50
Exercised...................................................      (49,506)            0.46
Canceled....................................................     (557,613)            2.03
                                                              -----------
Balance at December 31, 1999................................    5,196,555            $1.67
                                                              -----------
Exercisable at December 31, 1999............................    2,807,424            $1.06
                                                              -----------

The weighted average fair values of options granted during the years ended
December 31, 1997, 1998, and 1999 were $0.84, $1.25 and $1.26, respectively. As
of December 31, 1999, 685,938 shares of common stock were available for grant
under the Plan.

The following table summarizes information about stock options outstanding at
December 31, 1999:

- --------------------------------------------------------------------------------------------------------------------------
                                OPTIONS OUTSTANDING                                           OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------   ------------------------------------
                                             WEIGHTED AVERAGE
      RANGE OF         OUTSTANDING AS OF   REMAINING CONTRACTUAL   WEIGHTED AVERAGE   EXERCISABLE AS OF   WEIGHTED AVERAGE
   EXERCISE PRICES     DECEMBER 31, 1999      LIFE (IN YEARS)       EXERCISE PRICE    DECEMBER 31, 1999    EXERCISE PRICE
- ---------------------  -----------------   ---------------------   ----------------   -----------------   ----------------
                                                                                           
       $0.0003 -$0.22      1,501,500                5.8                 $0.11             1,408,121            $0.11
           0.22 -1.67        854,523                6.7                  1.67               581,069             1.67
           1.67 -2.50      2,840,532                8.8                  2.50               687,221             2.50
                          ----------                                                      ---------
       $0.0003 -$2.50      5,196,555                7.6                 $1.67             2,676,411            $1.06
                          ==========                                                      =========

Lexicon recorded approximately $1.0 million in deferred compensation expense,
relating to options issued during the year ended December 31, 1999, for the
excess of the estimated fair value of the common stock on the date of grant over
the exercise price. The fair value of the common stock on the date of grant was
determined based on valuations in relation to Lexicon's preferred stock
financing and the development of Lexicon's gene trapping technology. The
deferred compensation will be amortized over the four-year vesting period of the
options. During the year ended December 31, 1999, Lexicon recognized $85,633 in
compensation expense relating to these options.

Warrants: In August 1997, Lexicon issued warrants to acquire 13,500 shares and
135,000 shares of common stock in connection with certain loan agreements (see
Note 4). The warrants are exercisable for a period of three years at a price of
$2.50 per share. Management estimated the value of these warrants at $24,750 and
recorded them as deferred financing costs and additional paid-in capital. The
warrant values were estimated by management taking into consideration the term
of the warrant, the exercise price that was greater than the estimated fair
value of the common stock at issuance and a rate of return of 8.0 percent.
Amortization of these costs is reflected as additional interest expense in the
accompanying financial statements.

On May 7, 1998, simultaneous with the completion of the Series A Preferred Stock
private placement, Lexicon issued a warrant to acquire 605,001 shares of common
stock in conjunction with the sale of the Series A Preferred Stock (the 1998
Warrant). The 1998 Warrant is exercisable at the following prices: (a) an
exercise price of $2.50 per share or (b) a "cashless"

                                      F-12
   67
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

purchase of the common stock calculated based upon the difference between fair
market value and exercise price. The warrant expires on the fifth anniversary of
the date of grant. Management estimated the value of this warrant at
approximately $498,000. The warrant values were estimated by management taking
in to consideration the term of the warrant, the exercise price that equaled the
estimated fair value of the common stock at issuance and a rate of return of 8
percent. Upon consummation of the private placement, this amount was recorded as
a reduction of the Series A Preferred Stock balance and an increase to
additional paid-in capital. The value of the warrant, along with the offering
costs associated with the private placement, are being accreted back to the
Series A Preferred Stock over a five-year period.

In July 1998, Lexicon issued a warrant to acquire 249,999 shares of common stock
for the option to lease additional facility space. The warrant is exercisable
for a period of three years at a price of $2.50 per share. Management estimated
the value of this warrant at approximately $196,000. The warrant values were
estimated by management taking in to consideration the term of the warrant, the
exercise price that equaled the estimated fair value of the common stock at
issuance and a rate of return of 8 percent. As this warrant has been treated as
consideration for the option to lease certain facility space (lease option),
Lexicon has recorded the warrant's value as a long-term asset and additional
paid-in capital. Amortization of the lease option, $17,180 and $41,232 during
1998 and 1999, respectively, has been recorded as additional lease expense in
the accompanying financial statements.

8. COLLABORATION AND LICENSE AGREEMENTS

In October 1999, Lexicon entered into an initial agreement with Millennium
Pharmaceuticals, Inc. ("Millennium") for non-exclusive access to Lexicon's human
and mouse gene sequence databases. Under the agreement Lexicon receives
subscription fees for database access, and may receive license fees for
full-length genes, validated drug targets and protein therapeutics. Lexicon may
also receive milestones and royalty payments from future licenses and products.

In July 1998, Lexicon entered into a license agreement with DuPont
Pharmaceuticals Company (DuPont), which grants Lexicon a nonexclusive, worldwide
license to use DuPont's Cre/lox technology. The agreement also grants Lexicon
certain worldwide, royalty-bearing licenses to use the Cre/lox technology
together with gene trapping techniques in research collaborations. No royalties
have been paid to date under the license agreement.

In March 1997, Lexicon entered into an agreement with Merck Genome Research
Institute (MGRI) under which Lexicon received an initial cash payment of $4
million. This payment is recognized as revenue as Lexicon performs its
obligations related to such agreement. Under the terms of the subscription
agreement with MGRI, Lexicon has agreed to develop, produce and deliver certain
knockout mice over a period of three or more years. To date, deferred revenue
has been recorded for all cash received from MGRI. Management believes Lexicon's
obligations will be satisfied during 2000, and has classified the corresponding
deferred revenue amount as a current liability at December 31, 1999.

On September 14, 1995, Lexicon entered into a royalty-bearing, worldwide,
exclusive license agreement with Baylor College of Medicine which permits
Lexicon to use the technology under said license to grant sublicenses and to
make and sell licensed products incorporating or utilizing the technology as
defined in the agreement. The agreement requires that Lexicon pay a royalty
equal to 2 percent of net sales. For each of the three years in the period ended
December 31, 1999, royalties paid under this agreement were less than $6,000.

                                      F-13
   68
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES

Lease Obligations: Lexicon leases office space and certain equipment under
operating leases and has financed the acquisition of certain equipment through
capital leases with various parties. Rental expense was $410,355, $672,523 and
$1,111,039 during the years ended December 31, 1997, 1998 and 1999,
respectively. At December 31, 1999, the present value of future minimum capital
lease payments and future minimum lease payments under non-cancelable operating
leases are as follows:

                                                              -----------------------
                                                              CAPITAL      OPERATING
                                                               LEASES       LEASES
                                                              --------    -----------
                                                                    
2000........................................................  $138,295    $ 1,078,143
2001........................................................     6,876      1,078,143
2002........................................................        --      1,078,143
2003........................................................        --      1,172,876
2004........................................................        --      1,172,876
Thereafter..................................................        --     11,852,120
                                                              --------    -----------
          Total.............................................   145,171    $17,432,301
                                                                          -----------
Less: Amount representing interest (implicit rates ranging
  from 7% to 19%)...........................................    11,773
                                                              --------
     Present value of remaining lease payments..............   133,398
Less: Amount due within one year............................   127,119
                                                              --------
     Capital lease obligations, net of current portion......  $  6,279
                                                              ========

Employment Agreements: In December 1998, October 1999, January 2000 and February
2000, Lexicon entered into employment agreements with some of its corporate
officers. Under the agreements, each officer receives a set base salary, subject
to adjustment, with an annual discretionary bonus based upon specific objectives
to be determined by the compensation committee. The employment agreements are
at-will and contain non-competition agreements. The agreements also provide for
a termination clause, which requires either a six or 12-month payment based on
the officer's salary, in the event of termination or change in corporate
control.

10. BENEFIT PLANS

Lexicon has established an Annual Profit Sharing Incentive Plan (the Profit
Sharing Plan). The purpose of the Profit Sharing Plan is to provide for the
payment of incentive compensation out of the profits of Lexicon to some of its
employees. Participants in the Profit Sharing Plan are entitled to a cash bonus
equal to their proportionate share (based on salary) of 15 percent of Lexicon's
fiscal year pretax income, if any.

Lexicon maintains a retirement and deferred savings plan for its employees that
is intended to qualify as a tax-qualified plan under the Internal Revenue Code.
The 401(k) Plan provides that each participant may contribute up to a statutory
limit, which was $10,000 in 1999.

11. SUBSEQUENT EVENTS (UNAUDITED)

During January and February 2000, Lexicon issued 3,495,900 options to purchase
common stock to certain employees and consultants. Lexicon anticipates that
additional deferred compensation totaling approximately $60.5 million will be
recorded for options granted in the first quarter of 2000. The additional
deferred compensation expense will be amortized over the vesting periods of the
individual stock options issued. Lexicon expects to record additional
amortization expense for deferred compensation as follows: $21.4 million during
2000, $12.7 million during 2001, $12.7 million during 2002, $12.7 million during
2003 and $1.0 million during 2004.

In February 2000, Lexicon adopted the 2000 Equity Incentive Plan (the 2000
Equity Incentive Plan). The 2000 Equity Incentive Plan is an amendment and
restatement of the 1995 Stock Option Plan and will terminate in 2010 unless the
board terminates it sooner. The board authorized and reserved an aggregate of
11,250,000 shares of common stock for issuance under the 2000 Equity Incentive
Plan. The 2000 Equity Incentive Plan provides for the grant of incentive stock
options to employees

                                      F-14
   69
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

and nonstatutory stock options to employees, directors and consultants of
Lexicon. The plan also provides for stock bonuses and restricted stock purchase
awards. Incentive stock options will have an exercise price of 100% or more of
the fair market value of our common stock on the date of grant. Nonstatutory
stock options may have an exercise price as low as 85% of fair market value on
the date of grant. The purchase price of other stock awards may not be less than
85% of fair market value. However, the board may award bonuses in consideration
of past services without a purchase payment. Shares may be subject to a
repurchase option in the discretion of the board. The 2000 Equity Incentive Plan
provides that it will be administered by the board, or a committee appointed by
the board, which determines recipients and types of options to be granted,
including number of shares under the option and the exercisability of the
shares. On the day after each annual meeting of Lexicon's stockholders for ten
years, beginning in 2001, the number of shares in the reserve automatically will
be increased by the greater of:

     - 5% of Lexicon's outstanding shares on a fully-diluted basis; or

     - that number of shares that could be issued under awards granted under the
       incentive plan during the prior 12-month period.

The total number of shares reserved in the aggregate may not exceed 60,000,000
shares over the ten-year period. As of March 15, 2000, options to purchase
8,473,134 shares of common stock were outstanding under the equity incentive
plan and 344,865 options had been exercised.

In February 2000, Lexicon adopted the 2000 Non-Employee Directors' Stock Option
Plan (the "directors' plan") to provide for the automatic grant of options to
purchase shares of common stock to non-employee directors of Lexicon. Lexicon
reserved a total of 600,000 shares of its common stock for issuance under the
directors' plan. Non-employee directors elected after the closing of Lexicon's
initial public offering will receive an initial option to purchase 30,000 shares
of common stock. In addition, on the date of each of Lexicon's annual meetings
of stockholders, beginning with the annual meeting in 2001, each non-employee
director who has been a director for at least six months will automatically be
granted an option to purchase 6,000 shares of common stock. On the day after
each annual meeting of our stockholders, for 10 years, starting in 2001, the
share reserve will automatically be increased by a number of shares equal to the
greater of:

     - 0.3% of Lexicon's outstanding shares on a fully-diluted basis; or

     - that number of shares that could be issued under options granted under
       the directors' plan during the prior 12-month period.

Options granted under the directors' plan will become vested and exercisable
over a period of five years. All options granted under the non-employee
directors' plan will have an exercise price equal to the fair market value of
our common stock on the date of grant. The option term is ten years. The
directors' plan will not be effective until the date of this initial public
offering of Lexicon's stock. Therefore, Lexicon has not issued any options under
the directors' plan.

In February 2000, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission permitting Lexicon to sell
shares of its common stock to the public.

Lexicon sent a written memorandum to its employees informing them that its
underwriters would conduct a directed share program as part of this offering and
asking that they identify members of their families whom they wished the
underwriters to contact in connection with that program. Lexicon did not request
any indication from its employees or their family members as to their interest
in buying shares in this offering, nor did Lexicon send any communication
regarding this offering or the directed share program to their family members.
If the memorandum were found to be a prospectus that did not comply with the
requirements of the Securities Act, Lexicon could have liability under the
Securities Act to persons who received the memorandum and who purchase stock in
this offering. This liability could include the right of such persons, for a
period of one year from the date of purchase of the common stock, to obtain
recovery of the consideration paid for the common stock or if they had already
sold the common stock, sue Lexicon for damages resulting from their purchase of
common stock. Assuming these persons purchase all of the shares in the directed
share program, these refunds or damages could total up to approximately $11.5
million based on the assumed initial public offering price of $23.00, in the
event that investors suffer a total loss of their investment during this period
and seek refunds or damages. Such recovery of damages could adversely impact
Lexicon's liquidity during the period in which a refund is paid. Although there
can be no assurance as to the ultimate

                                      F-15
   70
                         LEXICON GENETICS INCORPORATED

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

disposition of this matter, it is the opinion of Lexicon's management, based
upon the information available at this time, that the expected outcome of this
matter would not have a material adverse effect on the results of operations and
financial conditions of Lexicon. Lexicon's management has not classified any
amounts outside of permanent equity as it has concluded that the successful
assertion of a claim for recission for this potential violation is remote.

                                      F-16
   71

                                 [LEXICON LOGO]

Until           , 2000, all dealers that effect transactions in the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
   72

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses payable by the Registrant in connection with the issuance
and distribution of the securities being registered (other than underwriting
discounts and commissions) are as follows:

                                                           
SEC Registration Fee........................................  $   72,864
NASD Filing Fee.............................................      28,100
NASDAQ Listing Fee..........................................      95,000
Printing Expenses...........................................     180,000
Accounting Fees and Expenses................................     200,000
Legal Fees and Expenses.....................................     250,000
Transfer Agent and Registrar Fees...........................      10,000
Miscellaneous Expenses......................................     164,036
                                                              ----------
          Total.............................................  $1,000,000
                                                              ==========

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.

Lexicon's certificate of incorporation and bylaws provide that indemnification
shall be to the fullest extent permitted by the DGCL for all current or former
directors or officers. As permitted by the DGCL, the certificate of
incorporation provides that directors of Lexicon shall have no personal
liability to Lexicon or its stockholders for monetary damages for breach of
fiduciary duty as a director, except (1) for any breach of the director's duty
of loyalty to Lexicon or its stockholders, (2) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law, (3)
under Section 174 of the DGCL or (4) for any transaction from which a director
derived an improper personal benefit.

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES.

Set forth in chronological order below is information regarding the number of
shares of common and preferred stock issued, and the number of options granted,
by the Registrant since January 1, 1997. Further included is the consideration,
if any, received by the Registrant for such shares and options, and information
relating to the section of the Securities Act, or rule of the SEC, under which
exemption from registration was claimed. All awards of options did not involve
any sale under the Securities Act and none of these securities were registered
under the Securities Act.

1. In the past three years, the Registrant has issued options to purchase an
aggregate of 5,572,461 shares of common stock at a weighted average exercise
price of $1.68 per share. During this same time period, the Registrant has
issued a total of 119,883 shares of common stock pursuant to the exercise of
options previously granted.

                                      II-1
   73

2. On January 6, 1997, Lexicon sold to Gordon A. Cain 240,000 shares of common
stock pursuant to a June 1996 subscription agreement at a purchase price of
$1.67 per share.

3. On January 27, 1997, Lexicon sold to Gordon A. Cain 240,000 shares of common
stock pursuant to a June 1996 subscription agreement at a purchase price of
$1.67 per share.

4. In February 1997, Lexicon sold to Gordon A. Cain 240,000 shares of common
stock pursuant to a June 1996 subscription agreement at a purchase price of
$1.67 per share.

5. In March 1997, Lexicon sold to Gordon A. Cain 240,000 shares of common stock
pursuant to a June 1996 subscription agreement at a purchase price of $1.67 per
share.

6. In April 1997, Lexicon sold to Gordon A. Cain 240,000 shares of common stock
pursuant to a June 1996 subscription agreement at a purchase price of $1.67 per
share.

7. In May 1997, Lexicon sold to Gordon A. Cain 240,000 shares of common stock
pursuant to a June 1996 subscription agreement at a purchase price of $1.67 per
share.

8. In June 1997, Lexicon sold to Gordon A. Cain 240,000 shares of common stock
pursuant to a June 1996 subscription agreement at a purchase price of $1.67 per
share.

9. In July 1997, Lexicon sold to Gordon A. Cain 90,000 shares of common stock
pursuant to a June 1996 subscription agreement at a purchase price of $1.67 per
share.

10. In August 1997, Lexicon issued to William A. McMinn 135,000 warrants with an
exercise price of $2.50 per share in connection with a $1,000,000 note.

11. In August 1997, Lexicon issued to Carter Interests Ltd. 13,500 warrants with
an exercise price of $2.50 share in connection with a $100,000 note.

12. In May 1998, Lexicon sold 4,244,664 shares of series A convertible preferred
stock to 30 accredited investors in connection with venture capital financing at
a purchase price of $7.50 per share.

13. In May 1998, Lexicon issued to Punk, Ziegel & Company 605,001 warrants with
an exercise price of $2.50 per share in connection with venture capital
financing.

14. In July 1998, Lexicon issued to The Woodlands Commercial Properties, L.P.
249,999 warrants with an exercise price of $2.50 per share in connection with a
lease option.

Except as described above, no underwriters were engaged in connection with the
foregoing sales of securities. The sales of shares of common stock, series A
preferred stock and other securities listed above were made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder for transactions not involving a
public offering and all purchasers were accredited investors as such term is
defined in Rule 501(a) of Regulation D. Issuances of options to the company's
employees and directors were made pursuant to Rule 701 promulgated under the
Securities Act. All of the foregoing securities are deemed restricted securities
for purposes of the Securities Act.

ITEM 16. EXHIBITS.

a. Exhibits:

                      
          1.1**          -- Form of Underwriting Agreement
          3.1**          -- Restated Certificate of Incorporation
          3.2**          -- Restated Bylaws
          5.1**          -- Opinion of Andrews & Kurth L.L.P.
         10.1**          -- Employment Agreement with Arthur T. Sands, M.D., Ph.D.
         10.2**          -- Employment Agreement with James R. Piggott, Ph.D.
         10.3**          -- Employment Agreement with Jeffrey L. Wade, J.D.
         10.4**          -- Employment Agreement with Brian P. Zambrowicz, Ph.D.
         10.5**          -- Employment Agreement with Julia P. Gregory
         10.6**          -- Employment Agreement with Randall B. Riggs
         10.7**          -- Form of Indemnification Agreement with Officers and
                            Directors
         10.8**          -- 2000 Equity Incentive Plan
         10.9**          -- 2000 Non-Employee Directors' Stock Option Plan

                                      II-2
   74

                       
          10.10*          -- Database Access Agreement, dated October 5, 1999, between Lexicon and Millennium Pharmaceuticals, Inc.
          10.11+          -- Agreement, dated March 21, 1997, between Lexicon and Merck Genome Research Institute
          10.12**         -- Master Loan and Security Agreement dated May 21, 1999, with FINOVA Capital Corporation
          10.13**         -- Lease Agreement, dated September 22, 1995 between Lexicon and The Woodlands Corporation
          21.1**          -- Subsidiaries of Lexicon
          23.1**          -- Consent of Arthur Andersen LLP
          23.2**          -- Consent of Andrews & Kurth L.L.P. (contained in Exhibit 5.1)
          24.1**          -- Power of Attorney (contained in signature page)
          27.1**          -- Financial Data Schedule

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

** Previously filed.

+ Confidential treatment has been requested for a portion of this exhibit.

* The Database Access Agreement will terminate in April 2000 and is no longer
  material to the Company. Therefore, this Exhibit 10.10 has been withdrawn.

b. Financial Statement Schedules

ITEM 17.  UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

          (a) Insofar as indemnification for liabilities arising under the
     Securities Act of 1933 may be permitted to directors, officers and
     controlling persons of the Registrant pursuant to the provisions described
     in Item 14, or otherwise, the Registrant has been advised that in the
     opinion of the Securities and Exchange Commission such indemnification is
     against public policy as expressed in the Act and is, therefore,
     unenforceable. In the event that a claim for indemnification against such
     liabilities (other than the payment by the Registrant of expenses incurred
     or paid by a director, officer or controlling person of the Registrant in
     the successful defense of any action, suit or proceeding) is asserted by
     such director, officer or controlling person in connection with the
     securities being registered, the Registrant will, unless in the opinion of
     its counsel the matter has been settled by controlling precedent, submit to
     a court of appropriate jurisdiction the question whether such
     indemnification by it is against public policy as expressed in the Act and
     will be governed by the final adjudication of such issue.

          (b) To provide to the underwriter(s) at the closing specified in the
     underwriting agreements, certificates in such denominations and registered
     in such names as required by the underwriter(s) to permit prompt delivery
     to each purchaser.

          (c) For purpose of determining any liability under the Securities Act
     of 1933, the information omitted from the form of prospectus filed as part
     of this Registration Statement in reliance upon Rule 430A and contained in
     the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
     or (4) or 497(h) under the Securities Act shall be deemed to be part of
     this Registration Statement as of the time it was declared effective.

          (d) For the purpose of determining any liability under the Securities
     Act of 1933, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new registration statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.

                                      II-3
   75

                                   SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of The
Woodlands, in the State of Texas, on April 6, 2000.

                                        LEXICON GENETICS INCORPORATED

                                        By:                   *
                                         ---------------------------------------
                                              Arthur T. Sands, M.D., Ph.D.
                                          President and Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED BELOW.

                      SIGNATURE                                           TITLE                           DATE
                      ---------                                           -----                           ----

                          *                                     President, Chief Executive           April 6, 2000
- -----------------------------------------------------              Officer and Director
            Arthur T. Sands, M.D., Ph.D.                      (principal executive officer)

                          *                                    Executive Vice President and          April 6, 2000
- -----------------------------------------------------            Chief Financial Officer
                  Julia P. Gregory                               (principal financial and
                                                                   accounting officer)

              /s/ JEFFREY L. WADE, J.D.                        Executive Vice President and          April 6, 2000
- -----------------------------------------------------                General Counsel
                Jeffrey L. Wade, J.D.

             /s/ C. THOMAS CASKEY, M.D.                     Chairman of the Board of Directors       April 6, 2000
- -----------------------------------------------------
               C. Thomas Caskey, M.D.

                          *                                              Director                    April 6, 2000
- -----------------------------------------------------
                  William A. McMinn

                          *                                              Director                    April 6, 2000
- -----------------------------------------------------
                  Stephen J. Banks

                          *                                              Director                    April 6, 2000
- -----------------------------------------------------
                   Gordon A. Cain

                          *                                              Director                    April 6, 2000
- -----------------------------------------------------
                Patricia M. Cloherty

                          *                                              Director                    April 6, 2000
- -----------------------------------------------------
                 Paul Haycock, M.D.

                          *                                              Director                    April 6, 2000
- -----------------------------------------------------
                Sam L. Barker, Ph.D.

*By:    /s/ JEFFREY L. WADE, J.D.
     --------------------------------

          Jeffrey L. Wade, J.D.
      Pursuant to powers-of-attorney
                filed with
      the Registration Statement on
                 Form S-1
     (333-96469) on February 9, 2000,

      March 1, 2000, March 17, 2000
            and April 6, 2000.

                                      II-4
   76

                               POWER OF ATTORNEY

The person whose signature appears below appoints Arthur T. Sands and Jeffrey L.
Wade, and each of them, any of whom may act without the joinder of the other, as
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any Registration Statement (including any
amendment thereto) for this offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or would do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them or their or his
substitute and substitutes, may lawfully do or cause to be done by virtue
hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSON IN THE
CAPACITIES AND ON THE DATE INDICATED BELOW.

                                        By:       /s/ C. THOMAS CASKEY

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

                                                    C. Thomas Caskey

                                                        Director

                                      II-5
   77

                                 EXHIBIT INDEX

      EXHIBIT NO.        DESCRIPTION
      -----------        -----------
                      
          1.1**          -- Form of Underwriting Agreement
          3.1**          -- Restated Certificate of Incorporation
          3.2**          -- Restated Bylaws
          5.1**          -- Opinion of Andrews & Kurth L.L.P.
         10.1**          -- Employment Agreement with Arthur T. Sands, M.D., Ph.D.
         10.2**          -- Employment Agreement with James R. Piggott, Ph.D.
         10.3**          -- Employment Agreement with Jeffrey L. Wade, J.D.
         10.4**          -- Employment Agreement with Brian P. Zambrowicz, Ph.D.
         10.5**          -- Employment Agreement with Julia P. Gregory
         10.6**          -- Employment Agreement with Randall B. Riggs
         10.7**          -- Form of Indemnification Agreement with Officers and
                            Directors
         10.8**          -- 2000 Equity Incentive Plan
         10.9**          -- 2000 Non-Employee Directors' Stock Option Plan
         10.10*          -- Database Access Agreement, dated October 5, 1999, between
                            Lexicon and Millennium Pharmaceuticals, Inc.
         10.11+          -- Agreement, dated March 21, 1997, between Lexicon and
                            Merck Genome Research Institute
         10.12**         -- Master Loan and Security Agreement dated May 21, 1999,
                            with FINOVA Capital Corporation
         10.13**         -- Lease Agreement, dated September 22, 1995 between Lexicon
                            and The Woodlands Corporation
         21.1**          -- Subsidiaries of Lexicon
         23.1**          -- Consent of Arthur Andersen LLP
         23.2**          -- Consent of Andrews & Kurth L.L.P. (contained in Exhibit
                            5.1)
         24.1**          -- Power of Attorney (contained in signature page)
         27.1**          -- Financial Data Schedule

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

** Previously filed.

+ Confidential treatment has been requested for a portion of this exhibit.

* The Database Access Agreement will terminate in April 2000 and is no longer
  material to the Company. Therefore, this Exhibit 10.10 has been withdrawn.

   1
CONFIDENTIAL TREATMENT REQUESTED                                   EXHIBIT 10.11

                                    AGREEMENT

         This Agreement (the "AGREEMENT") is made as of March 21, 1997 (the
"EFFECTIVE DATE"), by and among Lexicon Genetics, Inc., a Delaware corporation
having its principal offices at 4000 Research Forest Drive, The Woodlands, Texas
77381 ("LEXICON") and Merck Genome Research Institute, a Delaware not-for-profit
corporation having its principal offices at 770 Sumneytown Pike, West Point,
Pennsylvania 19486 ("MGRI").

                              PRELIMINARY STATEMENT

         WHEREAS, MGRI is a non-profit corporation dedicated to the support of
research regarding the genome, and in furtherance of such research provides
support to various nonprofit research organizations which are doing research
with regard to the genome; and

         WHEREAS, Lexicon is conducting research to develop a proprietary
library of embryonic stem cell clones containing mutations in genes designed to
accelerate genomic research which it calls "OmniBankTM "; and

         WHEREAS, Lexicon owns or has rights to, and expertise in, certain
methods of producing "Mutant Mice", as defined herein, derived from OmniBankTM;
and

         WHEREAS, MGRI intends to distribute or contribute the Mutant Mice to
one or more not-for-profit organizations ("NFP") which will distribute the
Mutant Mice for "Research" as defined herein; and

         WHEREAS, MGRI is willing to pay Lexicon to produce Mutant Mice for such
distribution and Lexicon is willing to produce such Mutant Mice;

         NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained in this Agreement, the parties agree as follows:

                                    ARTICLE I

1.       DEFINITIONS

         Capitalized terms used in this Agreement, both in the singular and the
plural, which are not otherwise defined herein shall have the following
respective meanings:

- --------------------
***** denotes confidential information with respect to which a separate
      confidential treatment request has been filed with the Securities and
      Exchange Commission.

   2

1.1      "CLAIM" means any pending or threatened claim, demand, investigation,
         cause of action, suit, default, assessment, litigation, third party
         action, arbitration proceeding or proceeding by or before any
         governmental authority or any other Person.

1.2      "CONFIDENTIAL INFORMATION" shall mean any information which either
         party or a member ("Member") of the Mutation Selection Committee has
         treated as confidential, including but not limited to information
         relating to OmniBankTM , which information is disclosed by either party
         or a Member to MGRI and/or Lexicon, as necessary or useful to the
         parties under this Agreement and which has been designated in writing
         by the disclosing party as Confidential Information at the time of such
         disclosure. Confidential Information shall specifically include any
         information disclosed by or among the parties or their agents during
         the negotiations for this Agreement. Confidential Information does not
         include, however, any information which (i) was rightfully in the
         possession of the receiving party prior to the date of disclosure to
         it, (ii) was in the public domain prior to the date of disclosure,
         (iii) becomes part of the public domain by publication or by other
         means, except through an unauthorized act or omission on the part of
         the receiving party or any other Person, (iv) is supplied to the
         receiving party without restriction by a Third Party who is under no
         obligation to the disclosing party to maintain such information in
         confidence or (v) any information developed independently by or for the
         receiving party, provided, however, that it is conclusively established
         that such information was independently developed.

1.3.     "LEXICON INTELLECTUAL PROPERTY" shall mean all trade secrets, know-how,
         patents, patent applications, trademarks, copyrights and other
         intellectual property of any type owned or controlled by Lexicon as of
         the Effective Date or in the future, including, without limitation,
         Confidential Information, which is necessary or useful to the parties
         in performing the work required or permitted under this Agreement.

1.4      "LIABILITY" means, with respect to any Person, any indebtedness,
         obligation and other liability of such Person, whether absolute,
         accrued, contingent, fixed or otherwise, or whether due or to become
         due.

1.5      "LOSSES" means any and all damages (including consequential, punitive
         and exemplary), fines, penalties, judgments, deficiencies, losses,
         costs and expenses, including court costs, reasonable fees of
         attorneys, accountants and other experts and other reasonable expenses
         associated with any Claim.

1.6      "MUTANT MICE" shall mean a line of mice heterozygous for a Standard
         Mutation, chosen by the Mutation Selection Committee, wherein such mice
         transmit the Standard Mutation, in the form of a mutant allele, through
         the germ line.

                                       -2-

   3

1.7      "MUTATION SELECTION COMMITTEE" and "COMMITTEE" shall mean *****.

1.8      "OMNIBANK(TM)" shall mean Lexicon's proprietary library of embryonic
         stem cell clones containing mutations in particular genes, which genes
         are identified by DNA sequence.

1.9      "RESEARCH" shall mean research which does not relate to the sale,
         lease, license or other transfer of the Mutant Mice or to the sale of
         services involving the use of the Mutant Mice.

1.10     "PERSON" means any individual, firm, corporation, trust, association,
         company, limited liability company, joint stock company, partnership,
         joint venture, governmental authority or other entity or enterprise.

1.11     "SET" shall mean up to ***** of Mutant Mice which are heterozygous for
         one selected Standard Mutation.

1.12     "STANDARD MUTATION" shall mean a gene trap insertion generated as part
         of Lexicon's OmniBankTM program for a specific gene.

1.13     "THIRD PARTY" shall mean any Person other than Lexicon, MGRI or NFP.

                                   ARTICLE II

2.       DEVELOPMENT

2.1      DEVELOPMENT. Lexicon hereby agrees to generate and develop 150
         different Sets of Mutant Mice (i.e., each Set shall have a different
         Standard Mutation) pursuant to the terms herein.

2.2      GENERATION OF STANDARD MUTATIONS. Upon the Effective Date, Lexicon will
         commence the generation of Standard Mutations in embryonic stem cells
         for the production of the Mutant Mice from OmniBankTM. Lexicon will
         generate Standard Mutations for the production of Mutant Mice no later
         than the date of the first meeting of the Mutation Selection Committee.
         Lexicon will continue to generate Standard Mutations for no less than
         two years after the first annual anniversary of the Effective Date
         unless such work is completed earlier.

                                       -3-

   4

2.3      SELECTION OF THE STANDARD MUTATIONS. The Mutation Selection Committee
         shall meet to select the Standard Mutations to be included in each
         group of Mutant Mice to be produced by Lexicon hereunder. Such meetings
         shall be coordinated by Lexicon and called and administered by MGRI.
         The first meeting shall be held no sooner than ***** after the
         Effective Date, and subsequent meetings shall be held no more
         frequently than every ***** thereafter unless otherwise agreed to by
         the parties hereto. Sufficiently in advance of each such meeting to
         enable Committee review and preparation, Lexicon shall provide the
         Committee with all information, including Confidential Information,
         necessary or useful to the Committee in performing its selections of
         Standard Mutations and concerning the Standard Mutations that have been
         generated by Lexicon up to that time. MGRI shall designate a
         Chairperson of the Committee. At each meeting Lexicon shall report to
         the Committee all of the Standard Mutations that have been generated up
         to that time; provided, however, Lexicon shall not be required to
         include in such report Standard Mutations for which Lexicon has, at
         such time, entered into an agreement with a Third Party for the
         production of Mutant Mice with such Standard Mutations. The Committee
         shall discuss the Standard Mutations listed in the report and choose
         from that list those Standard Mutations to be included in the next
         group of Mutant Mice to be produced by Lexicon as provided in Section
         2.4; provided, however, that the Committee shall not knowingly select a
         Standard Mutation which has already been the subject of published data
         from Third Parties including, without limitation, patents, published
         patent applications, or presented or published research. Subject in all
         cases to the confidentiality provisions herein, the Committee may, in
         its discretion, solicit advice from Third Parties regarding the
         appropriate fields of research and Standard Mutations to consider for
         selection.

         2.3.1    At each meeting, the Mutation Selection Committee shall choose
                  that number of Standard Mutations equal to ***** in accordance
                  with Section 2.4. The Committee shall determine the process by
                  which it selects the Standard Mutations to be incorporated in
                  the Mutant Mice. In addition to the selected Standard
                  Mutations, the Committee shall provide Lexicon with a list of
                  not fewer than ***** alternate Standard Mutations. If Lexicon
                  is unable to produce a Mutuant Mouse with a given selected
                  Standard Mutation due to third party rights, as provided in
                  Section 4.4 or nonviability of the heterozygous Mutant Mice,
                  as provided in Section 2.4, the next listed alternate Standard
                  Mutation shall become a selected Standard Mutation in lieu of
                  the original selected Standard Mutation.

         2.3.2    The Committee shall immediately notify Lexicon in writing of
                  its selections. A Committee selection may not be withdrawn or
                  modified if Lexicon has begun working on such selection,
                  except with the written consent of Lexicon, which may be
                  withheld in its sole reasonable discretion.

                                       -4-

   5

         2.3.3    If for any reason the Committee fails to meet and notify
                  Lexicon of its selections within the time provided above, the
                  delivery date for the corresponding group of Mutant Mice shall
                  be delayed an equivalent amount of time.

2.4      PRODUCTION OF MUTANT MICE. Lexicon will commence production of each
         group of Mutant Mice within ***** of receiving notification of the
         Mutation Selection Committee's decisions. Lexicon will complete the
         production of ***** selected by the Mutation Selection Committee, no
         later than ***** anniversary of the Effective Date, an additional group
         of ***** no later than the ***** anniversary of the Effective Date and
         ***** no later than each of ***** anniversaries of the Effective Date.
         If the nature of any of the Standard Mutations chosen prevents the
         production of a living Mutant Mouse heterozygous for such Standard
         Mutation, the parties hereto shall evaluate such conclusion and shall
         agree that either an alternate Standard Mutation shall be substituted
         for such selected Standard Mutation or Lexicon shall be deemed to have
         met its obligations hereunder by production and delivery of an
         embryonic stem cell with the original Standard Mutation.

2.5      SELECTION OF NFP. MGRI will select, after consultation with Lexicon,
         one or more not-for-profit organizations to act as the NFP. Such
         selection shall be made no later than the first anniversary of the
         Effective Date.

2.6      DELIVERY OF MUTANT MICE. Upon the birth of the first generation of any
         type of Mutant Mouse hereunder and provided such litter contains at
         least ***** Mutant Mice, Lexicon shall deliver one-half of such litter,
         dividing the males and females as evenly as possible, to MGRI or NFP.
         Delivery shall be in accordance with MGRI's, NFP's and Lexicon's mouse
         transfer policies. Lexicon shall certify to MGRI and NFP that each
         Mutant Mouse is heterozygous for the identified Standard Mutation. If
         the first generation litter does not include ***** Lexicon shall
         deliver breeding pairs from the second generation. Lexicon shall not be
         obligated to deliver a full Set for any Standard Mutation unless NFP or
         MGRI requests such a delivery. Normal packing and shipping costs for
         delivery by public carrier to MGRI and NFP shall be at Lexicon's
         expense. MGRI or NFP may elect, at its sole expense, to provide for an
         alternative delivery method.

2.7      BACK-UP COLONY. Lexicon shall maintain a back-up colony of ***** for
         each Standard Mutation for a minimum of *****.

2.8      PROJECT MANAGERS. Each party shall identify an employee who is the
         Project Manager for the work contemplated by this Agreement. The
         Project Managers shall be responsible for the coordination of his or
         her employer's efforts hereunder with the other parties and resolving,
         if possible, any issues or problems which arise. A party may replace
         its Project Manager at any time in its sole discretion.

                                       -5-

   6

2.9      OWNERSHIP/LICENSE GRANT.

         2.9.1    Subject to the license granted below, Lexicon shall own and
                  retain all rights to the Mutant Mice, including, but not
                  limited to, the rights to produce, breed, sell or license the
                  Mutant Mice and Lexicon Intellectual Property, as well as all
                  inventions or discoveries made solely by its employees in the
                  course of producing the Mutant Mice.

         2.9.2    Lexicon hereby grants to MGRI a worldwide exclusive license
                  under the Lexicon Intellectual Property, sublicensable by it
                  consistent with its not-for-profit status, to use and breed,
                  have bred, and to distribute the Mutant Mice for Research.
                  MGRI and/or NFP shall notify all recipients of the Mutant Mice
                  in writing of the restrictions on use of the Mutant Mice under
                  Section 4.2 and shall upon delivering any Mutant Mice to a
                  Third Party provide Lexicon with the name and address of such
                  party and the type of Mutant Mouse delivered. Notwithstanding
                  the foregoing license grant, Lexicon reserves to itself and
                  its "Collaborators", as hereinafter defined, a personal,
                  nontransferable right to breed, have bred and use (but not
                  distribute) Mutant Mice for Research. "Collaborator" shall
                  mean any Third Party with whom Lexicon enters into an
                  agreement to perform cooperative Research. Collaborators shall
                  agree to use the Mutant Mice only in performing the
                  collaborative Research with Lexicon and shall acknowledge in
                  writing the limitations of Section 4.2(i) and 4.2(ii). Lexicon
                  shall not enter into any cooperative Research agreement for a
                  particular Mutant Mouse with a Collaborator prior to the date
                  on which MGRI or NFP makes such Mutant Mouse publicly
                  available.

         2.9.3    Except for the license granted in this Section 2.9, Lexicon
                  does not grant to MGRI or NFP any license under the Lexicon
                  Intellectual Property.

2.10     DISTRIBUTION. MGRI shall use, and agrees to require NFP to use,
         reasonable efforts to ensure wide spread availability and distribution
         of the Mutant Mice for Research.

                                   ARTICLE III

3.       PAYMENT.

3.1      PAYMENT TO LEXICON. Subject to the terms and conditions set forth in
         this Agreement, in consideration of the development, production and
         delivery to MGRI and/or NFP of the Mutant Mice as provided herein, MGRI
         agrees to pay Lexicon a total of Eight Million Dollars in accordance
         with the schedule set forth in Exhibit A.

                                       -6-

   7

         3.1.1    All payments which are required to be made to Lexicon upon
                  delivery of Mutant Mice to MGRI or NFP shall occur only after
                  receipt of certification from Lexicon that each delivered Set
                  of Mutant Mice is heterozygous for the selected Standard
                  Mutation and, in the event of delivery to NFP, after NFP
                  certifies in writing to MGRI that it has received the Mutant
                  Mice and Lexicon's certification. NFP shall send its
                  certification to MGRI as promptly as possible after receipt of
                  the Mutant Mice, with a copy to Lexicon, but in no event later
                  than ***** after NFP has physically received the Mutant Mice.

         3.1.2    All payments may be made by check delivered to Lexicon at its
                  principal offices at The Woodlands, Texas, or by wire transfer
                  to an account identified in writing sufficiently in advance by
                  Lexicon.

3.2      COSTS INCURRED BY COMMITTEE. MGRI shall reimburse all reasonable
         costs incurred by the Mutation Selection Committee in performing its
         duties hereunder, including, without limitation, Members' reasonable
         travel costs and other reasonable Committee meeting expenses. In
         determining whether costs are reasonable, MGRI shall apply the same
         standards that it applies to consultants and employees working for MGRI
         who travel at MGRI's request. To avoid misunderstandings, the
         Chairperson of the Mutation Selection Committee shall advise MGRI in
         writing of any expenses that the Committee anticipates incurring in
         connection with a meeting other than travel, hotel and meals at least
         30 days prior to the meeting.

3.3      LATE PAYMENT. If any payment due hereunder is not made when due,
         Lexicon shall notify MGRI and NFP by letter, advising them that, at
         Lexicon's option, upon the expiration of ***** from the date of such
         letter, Lexicon may cease work on the production of Mutant Mice and/or
         cease delivery of Mutant Mice until such late payment has been made by
         MGRI.

                                   ARTICLE IV

4.       COVENANTS AND CONDITIONS

4.1      BEST COMMERCIALLY REASONABLE EFFORTS. Lexicon shall use its best
         commercially reasonable efforts to produce and deliver the Mutant Mice
         in accordance with the terms of this Agreement. MGRI recognizes that
         the production of the Mutant Mice involves a number of technologically
         complex steps and that technical obstacles from time to time on
         occasion may prevent Lexicon from producing some of the Mutant Mice on
         the schedule provided for herein. Lexicon shall immediately notify the
         Committee, MGRI and NFP of any such technical obstacle encountered and
         its analysis of whether the obstacle can be overcome and the time
         required to do so. If, after consultation with NFP and MGRI, Lexicon
         determines that production of such Mutant Mice within the time periods
         provided

                                       -7-

   8

         for herein is not feasible using its best commercially reasonable
         efforts, Lexicon may notify MGRI and NFP in writing that it is
         extending the relevant delivery date to a date that can be accomplished
         using its best commercially reasonable efforts. Such amended delivery
         date shall then be substituted for the original date currently provided
         in Section 2.2, provided however that under no circumstances shall any
         date be extended for more than one year from its original date
         currently provided in Section 2.2.

4.2      RESTRICTIONS ON USE OF MUTANT MICE. MGRI agrees to use the Mutant Mice
         only for Research and otherwise only as is consistent with MGRI's
         not-for-profit status. NFP and MGRI may provide any of the Mutant Mice
         that NFP receives to Third Party researchers for use in Research,
         provided that each such Third Party acknowledges in writing that (i) no
         right is granted to further sell, lease, license or otherwise transfer
         the Mutant Mice provided or any of their progeny, however produced; and
         (ii) the Mutant Mice are provided for Research purposes only. NFP
         and/or MGRI shall require each recipient of Mutant Mice to agree to
         indemnify, defend and hold harmless all the parties hereto from and
         against any and all claims, losses, liabilities and damages arising
         from or related to the recipient's use of the Mutant Mice.

4.3      NO INFRINGEMENT OF THIRD PARTY RIGHTS. Lexicon shall not be obligated
         to generate any Standard Mutation or produce or deliver any Mutant
         Mouse or embryonic stem cell if Lexicon reasonably believes, with the
         advice of its patent counsel and after consultation with NFP and the
         Committee, such action would infringe upon the intellectual property
         rights of a Third Party. In such event, Lexicon shall consult with NFP
         and the Committee to achieve an acceptable solution including but not
         limited to the generation of a non-infringing Standard Mutation and the
         production of non-infringing Mutant Mice. If no acceptable solution is
         reasonably available, MGRI may exercise its right to terminate this
         Agreement pursuant to Section 8.3.

                                    ARTICLE V

5.       CONFIDENTIALITY

5.1      In the course of producing and delivering the Mutant Mice, the parties
         hereto and the Members of the Committee may disclose Confidential
         Information to a party, NFP and/or to the Members of the Committee as
         necessary and useful to the performance of the parties' obligations and
         to enable the parties to realize their respective benefits under this
         Agreement. The parties receiving Confidential Information shall not
         disclose any of the Confidential Information to any Third Party or use
         any of the Confidential Information for their own benefit or any Third
         Party's benefit except as expressly permitted hereunder. Members shall
         not further disclose Confidential Information; provided however that
         Members who are also employees of NFP may disclose such Confidential
         Information to other employees and

                                       -8-

   9

         consultants who have a need to know such Confidential Information in
         order to perform this Agreement, provided that such other NFP employees
         and consultants agree in writing to maintain such Confidential
         Information in confidence in accordance with the terms of this
         Agreement.

5.2      NFP and Members shall sign a Confidentiality Agreement in a form
         satisfactory to Lexicon and MGRI.

5.3      Except as otherwise provided or permitted herein, upon expiration or
         termination of this Agreement, NFP, the Members and any party receiving
         Confidential Information shall destroy or deliver to the disclosing
         party any and all documents (including all copies) containing
         Confidential Information which are then in their possession (if any),
         and, at the disclosing party's request, shall certify that all such
         documents have been destroyed or delivered to the disclosing party and
         that they do not retain any such documents or any copies thereof;
         provided, however, that Lexicon, NFP and MGRI may retain one copy of
         each such document for record purposes only. The confidentiality
         obligations set forth in this Section will remain in effect for ten
         (10) years.

5.4      Lexicon may require any Third Party receiving a Mutant Mouse to agree
         in writing to similar confidentiality provisions prior to being given
         any Confidential Information.

5.5      The terms of this Agreement shall be treated as Confidential
         Information and shall not be disclosed to anyone (except for the
         parties' respective employees, consultants, agents and attorneys
         assisting in the review and negotiation of this Agreement who have a
         need to know the terms of this Agreement) without the written
         permission of MGRI and Lexicon. Notwithstanding the foregoing, the
         parties intend to jointly announce the execution of this Agreement and
         the results of other activities pursuant to this Agreement. Such
         announcements shall first be agreed upon by the parties in writing and
         may include disclosure of the amounts paid or to be paid to Lexicon
         hereunder and the number of Mutant Mice to be produced hereunder. If
         either party desires to release a separate announcement relating to
         this Agreement, it shall first allow the other party to approve in
         writing such proposed announcement; such approval shall not be
         unreasonably delayed or denied.

                                   ARTICLE VI

6.       WARRANTIES AND LIMITATIONS

6.1      Lexicon represents and warrants to MGRI that as of the Effective Date:

         6.1.1    to the best of Lexicon's knowledge, Lexicon Intellectual
                  Property existing as of the Effective Date is subsisting and
                  are not invalid or unenforceable, in whole or in part;

                                       -9-

   10

         6.1.2    it has the full right, power and authority to enter into this
                  Agreement;

         6.1.3    to the best of Lexicon's knowledge, Lexicon Intellectual
                  Property practiced as anticipated herein for the creation of
                  Mutant Mice does not infringe on any intellectual property
                  rights owned by any Third Party, and does not result from a
                  misappropriation by Lexicon of any property owned by any Third
                  Party;

         6.1.4    to the best of Lexicon's knowledge, there are no claims,
                  liabilities, losses, judgments or settlements by or against
                  Lexicon relating to OmniBank or affecting the Lexicon
                  Intellectual Property or that would operate to prevent Lexicon
                  from fulfilling its obligations in whole or in part under this
                  Agreement;

         6.1.5    to the best of Lexicon's knowledge, the information Lexicon
                  has provided to MGRI during the negotiation of this Agreement
                  is true and correct as of the Effective Date;

         6.1.6    during the course of producing the Standard Mutations and
                  Mutant Mice, Lexicon will not knowingly infringe any valid
                  patents; provided, however, Lexicon shall not be obligated to
                  undertake any review or investigation to confirm that no such
                  infringement exists;

         6.1.7    each Mutant Mouse delivered to NFP shall be heterozygous for
                  one of the selected Standard Mutations and, subject to the
                  terms and conditions of this Agreement, it shall deliver a Set
                  of the Mutant Mice for each selected Standard Mutation.

6.2.     MGRI represents and warrants to Lexicon that as of the Effective Date
         it has the full right, power and authority to enter into this
         Agreement.

6.3      EXCEPT FOR THOSE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS
         SECTION 6, LEXICON MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER,
         EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
         WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE,
         REGARDING THE MUTANT MICE. NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO
         THE CONTRARY, LEXICON MAKES NO REPRESENTATION OR WARRANTY THAT ALL
         PATENT RIGHTS OF THIRD PARTIES WHICH MAY BE REQUIRED TO MAKE OR USE
         MUTANT MICE, IF ANY, HAVE BEEN SECURED. NOTWITHSTANDING THE ABOVE,
         LEXICON AGREES TO DISCLOSE TO NFP AND MGRI ANY THIRD PARTY RIGHTS,
         INCLUDING WITHOUT LIMITATION INTELLECTUAL PROPERTY RIGHTS, WHICH BECOME
         KNOWN TO LEXICON WHICH MAY BE REQUIRED TO AVOID CONFLICT WITH THE TERMS
         OF THIS AGREEMENT OR WHICH WOULD OBSTRUCT OR PREVENT

                                      -10-

   11

         USE OF THE MUTANT MICE BY NFP, MGRI OR THIRD PARTIES. LEXICON SHALL NOT
         BE LIABLE FOR, OR RESPONSIBLE FOR, OBTAINING OR PAYING THE COSTS OF ANY
         LICENSE FROM ANY THIRD PARTY WHICH MAY BE REQUIRED TO PRODUCE OR USE
         ANY OF THE MUTANT MICE. IF LEXICON DETERMINES SUCH A LICENSE IS
         REQUIRED, IT MAY TERMINATE PRODUCTION OF SUCH MUTANT MOUSE WITHOUT
         PENALTY UNLESS NFP OR MGRI OBTAINS THE REQUIRED LICENSE AT ITS SOLE
         EXPENSE.

6.4      NONE OF THE PARTIES HERETO SHALL HAVE ANY LIABILITY WITH REGARD TO ANY
         CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT EXCEPT FOR A CLAIM
         OF A MATERIAL BREACH OF ITS OBLIGATIONS HEREUNDER.

                                   ARTICLE VII

7.       INDEMNIFICATION

         Each party (the "Indemnifying Party") agrees to indemnify, defend and
         hold harmless, to the fullest extent permitted by law, the other party,
         their affiliates, directors, officers, shareholders, employees, agents,
         attorneys and each of the Members (collectively, the "Indemnified
         Persons"), from and against any and all Claims, Liabilities and Losses
         which may be imposed on, incurred by or asserted against any
         Indemnified Person arising out of or resulting from, directly or
         indirectly any material breach of this Agreement by the Indemnifying
         Party; provided, however, that an Indemnifying Party shall not be
         liable for any portion of any Claims, Liabilities or Losses resulting
         from a material breach by the Indemnified Person of its obligations
         under this Agreement or from the gross negligence, fraud or intentional
         misconduct of the Indemnified Person or related Indemnified Persons.

                                  ARTICLE VIII

8.       TERMINATION AND RIGHTS UPON TERMINATION

8.1      MGRI shall have the right to terminate this Agreement on 60 days
         written notice in the event that:

         8.1.1    Lexicon fails or is unable to provide the Committee with at
                  least 500 Standard Mutations to consider for selection at
                  the first Committee Meeting, and 1,000 Standard Mutations to
                  consider for selection at each subsequent meeting of the
                  Committee;

         8.1.2    Lexicon fails or is unable to deliver at least 40 sets of
                  Mutant Mice with the selected Standard Mutations acceptable to
                  NFP in accordance with this Agreement within three years of
                  the Effective Date;

                                      -11-

   12

         8.1.3    Lexicon has failed or has been unable to deliver 150 sets of
                  Mutant Mice acceptable to NFP in accordance with this
                  Agreement by the sixth annual anniversary of the Effective
                  Date;

         8.1.4    Lexicon's delivery of Mutant Mice fail to comply with the
                  delivery procedures, to be agreed upon by Lexicon, NFP and
                  MGRI, on more than three occasions; or

         8.1.5    Lexicon materially breaches this Agreement and fails to cure
                  such breach within thirty (30) days or, if such breach cannot
                  reasonably be cured within thirty (30) days commences to cure
                  such breach within thirty (30) days and diligently completes
                  such cure.

         Termination pursuant to this provision shall be effective on the
         sixtieth day after notice to Lexicon ("Termination Date").

8.2      Lexicon may terminate this Agreement effective thirty (30) days after
         notice has been given to each of NFP and MGRI in the event that Lexicon
         has performed all of its obligations under this Agreement and MGRI
         fails to make the payments required in accordance with the terms of
         this Agreement.

8.3      MGRI shall have the right to terminate this Agreement on thirty (30)
         days notice if either (a) MGRI and the Committee determine that they
         cannot identify, from the list of Standard Mutations reported by
         Lexicon, any Standard Mutations of scientific interest to use in the
         production of Mutant Mice, or (b) MGRI determines, in its sole
         discretion and after consultation with Lexicon and NFP, that
         performance of the Agreement by any party infringes on the intellectual
         property rights of a third party and MGRI also determines, in its sole
         discretion and after consultation with Lexicon and NFP, that a license
         to such rights is not available on economically reasonable terms.

8.4      In the event of a termination of this Agreement pursuant to Section 8.1
         or 8.3(a), the amount due to Lexicon pursuant to this Agreement shall
         be calculated as follows: ((number of Sets and partial Sets accepted
         under Section 2.6 delivered to and accepted by NFP) divided by 120) x
         ($8,000,000) (the "Total Payment"). If Lexicon has received more than
         the Total Payment from MGRI, it shall return the balance within 30 days
         after the Termination Date to MGRI. If Lexicon has received less than
         the Total Payment, MGRI shall pay Lexicon the difference between the
         amount already paid to Lexicon and the Total Payment within 30 days of
         the Termination Date.

8.5      In the event of termination of this Agreement pursuant to Section
         8.3(b) the parties shall review the status of the work hereunder at the
         time of termination and the costs expended and negotiate in good faith
         the amounts to be paid or re-paid, as the case may be, by one party to
         the other.

                                      -12-

   13

8.6      In the event of termination of this Agreement pursuant to Section 9.7,
         Lexicon shall provide MGRI with a written accounting of funds expended
         pursuant to this Agreement (the "Total Costs"). If Lexicon has received
         payments hereunder in excess of the Total Costs Lexicon shall with such
         written accounting refund to MGRI the amount of such excess.

8.7      The rights and obligations under Sections 2.7, 4.3, Article 5, Sections
         6.3, 6.4, Article 7, Sections 8.4, 8.5, 8.6, 9.6 and 9.11 shall survive
         termination of this Agreement by any party for any reason, delivery and
         payment for all of the Mutant Mice to be delivered hereunder and any
         expiration of this Agreement.

                                   ARTICLE IX

9.       MISCELLANEOUS

9.1      COMPLIANCE WITH LAWS. Lexicon acknowledges, and NFP shall acknowledge,
         that it is subject to and agrees to abide by all laws (including the
         Export Administration Act of 1979 and Arms Export Control Act)
         controlling the export of technical data, computer software, laboratory
         prototypes, biological material and other commodities. The transfer
         and/or export of any of such items may require a license from
         Governmental Authorities or written assurances by NFP, Lexicon or a
         Third Party requesting a Mutant Mouse that it shall not export such
         items to certain foreign countries without prior approval of such
         Governmental Authorities. MGRI acknowledges and agrees that Lexicon is
         not making any representation or warranty herein as to the existence or
         absence of any such requirement or that, if any such requirement
         exists, that it will be issued.

9.2      NOTICES. Any and all notices, requests or other communications
         hereunder shall be given in writing and delivered by (a) regular,
         overnight or registered or certified mail (return receipt requested),
         with first class postage prepaid, (b) hand delivery, (c) facsimile
         transmission or (d) overnight courier service, to the parties at the
         addresses or facsimile numbers provided on the signature page hereto,
         or at such other addresses or numbers as shall be designated by any
         party in a notice to the other parties given in accordance with this
         Section 9.2. Except as otherwise provided in this Agreement, all such
         communications shall be deemed to have been duly given, (A) in the case
         of a notice sent by regular mail, on the date actually received by the
         addressee, (B) in the case of a notice sent by registered or certified
         mail, on the date received (or refused) as shown on the return receipt,
         (C) in the case of a notice delivered by hand, when personally
         delivered, (D) in the case of a notice sent by facsimile, upon
         transmission subject to telephone confirmation of receipt, and (E) in
         the case of a notice sent by overnight mail or overnight courier
         service, the date delivered at the designated address, in each case
         given or addressed as aforesaid.

                                      -13-

   14

9.3      BENEFIT AND BURDEN. This Agreement shall inure to the benefit of, and
         shall be binding upon, the parties and their respective successors and
         any permitted assigns.

9.4      NO THIRD PARTY RIGHTS. Nothing in this Agreement shall be deemed to
         create any right in any creditor or other Person other than the
         Indemnified Parties pursuant to Article VII, and this Agreement shall
         not be construed in any respect to be a contract in whole or in part
         for the benefit of any third party (other than the Indemnified
         Parties).

9.5      AMENDMENTS AND WAIVER. No amendment, modification, restatement or
         supplement of this Agreement shall be valid unless the same is in
         writing and signed by the parties hereto. No waiver of any provision of
         this Agreement shall be valid unless in writing and signed by the party
         against whom that waiver is sought to be enforced. No failure or delay
         on the part of any party in exercising any right, power or privilege
         hereunder and no course of dealing between or among any of the parties
         shall operate as a waiver of any right, power or privilege hereunder.
         No single or partial exercise of any right, power or privilege
         hereunder shall preclude any other or further exercise thereof or the
         exercise of any other right, power or privilege hereunder. No notice to
         or demand on any party in any case shall entitle such party to any
         other or further notice or demand in similar or other circumstances or
         constitute a waiver of the rights of any party to any other or further
         action in any circumstances without notice or demand.

9.6      ASSIGNMENTS. Neither this Agreement nor any right, interest or
         obligation hereunder may be assigned by either of the parties without
         the prior written consent of all parties hereto and any attempt to do
         so shall be null and void.

9.7      FORCE MAJEURE. A non-performing party shall not be liable in damages
         for any delay or default in its performance, if such delay or default
         is caused by conditions beyond its control, including acts of God, war
         or insurrection, strikes, fire, or floods; provided, however, that any
         party shall have the right to terminate this Agreement upon thirty (30)
         days prior written notice if the other party is unable to fulfill its
         obligations under this Agreement due to any of the above-mentioned
         causes and such inability continues for a period of six (6) months.

9.8      COUNTERPARTS. This Agreement may be executed in counterparts and by the
         different parties in separate counterparts, each of which when so
         executed shall be deemed an original and all of which taken together
         shall constitute one and the same agreement.

9.9      SEVERABILITY. Should any clause, sentence, paragraph, subsection,
         Section or Article of this Agreement be judicially declared to be
         invalid, unenforceable or void, such decision will not have the effect
         of invalidating or voiding the remainder of this Agreement, and the
         part or parts of this Agreement so held to be invalid, unenforceable or
         void will be deemed to have been stricken herefrom by the parties, and
         the remainder will have the same force and

                                      -14-

   15

         effectiveness as if such stricken part or parts had never been included
         herein, provided however that in lieu of such invalid, unenforceable or
         void clause, sentence, paragraph, subsection, Section or Article, the
         parties working together in good faith are able to include as a
         negotiated part of this Agreement a valid and enforceable provision as
         similar in terms as may be possible which preserves the economic
         benefits to the parties.

9.10     APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
         PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
         THE LAWS OF THE STATE OF NEW JERSEY, WITHOUT GIVING EFFECT TO THE
         CONFLICT OF LAW PRINCIPLES THEREOF.

9.11     ARBITRATION. All disputes and disagreements between or among any or all
         of the parties hereto (each, a "Dispute") arising in connection with or
         related to this Agreement shall be resolved by binding arbitration
         administered by the American Arbitration Association (the "AAA") in New
         Jersey in accordance with, and in the following order of priority, (i)
         the terms of these arbitration provisions, (ii) the Commercial
         Arbitration Rules of the AAA, (iii) the Federal Arbitration Act (Title
         9 of the United States Code) and (iv) to the extent the foregoing are
         inapplicable, unenforceable or invalid, the laws of the State of New
         Jersey. The validity and enforceability of these arbitration provisions
         shall be determined in accordance with this same order of priority. In
         the event of any inconsistency between these arbitration provisions and
         such rules and statutes, these arbitration provisions shall control.
         Each of the parties may bring any action in any court of competent
         jurisdiction to (A) compel arbitration of any Dispute, (B) obtain
         interim measures of protection pending arbitration of any Dispute
         and/or (C) enforce any decision of the arbitrators, including the final
         award. If either of the parties fails or refuses to submit to binding
         arbitration following a lawful demand by the other, the party so
         failing or refusing shall bear all costs and expenses incurred by the
         other in compelling arbitration of such Dispute.

9.12     EXPENSES. Each of the parties shall pay its own legal and accounting
         expenses incident to the negotiation and administration and performance
         of this Agreement and the transactions contemplated hereby.

9.13     CAPTIONS. The captions and headings contained in this Agreement shall
         not be considered or given any effect in construing the provisions
         hereof if any question of intent should arise.

9.14     CONSTRUCTION. No provision of this Agreement shall be interpreted or
         construed against any of the parties solely because that party or its
         legal representative drafted such provision.

9.15     ENTIRE AGREEMENT. This Agreement sets forth all of the promises,
         agreements, conditions, understandings, warranties and representations
         among the parties with respect to the transactions contemplated hereby,
         and supersedes all prior agreements, arrangements and

                                      -15-

   16

         understandings among the parties, whether written, oral or otherwise.
         There are no promises, agreements, conditions, understandings,
         warranties or representations, oral or written, express or implied,
         among the parties concerning the subject matter hereof except as set
         forth herein.

         IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed as of the Effective Date.

                                       LEXICON GENETICS, INC.

                                       By: /s/ Arthur T. Sands
                                           -------------------------------------
                                           Arthur T. Sands, M.D., Ph.D.
                                           President

                                       Address:  4000 Research Forest Drive
                                                 The Woodlands, Texas 77381
                                                 Attention: President
                                                 Facsimile No: 281-364-0155
                                                 Telephone No: 281-364-0100

                                       MERCK GENOME RESEARCH INSTITUTE

                                       By:  /s/ C. Thomas Caskey
                                            ------------------------------------
                                            C. Thomas Caskey, M.D., F.A.C.P.
                                            President

                                       Address:  700 Sumneytown Pike
                                                 P.O. Box 4, WP26-207
                                                 West Point, Pennsylvania 19486
                                                 Attention:  President
                                                 Facsimile No: 215-652-4538
                                                 Telephone No: 215-652-7399

                                      -16-

   17
                                    EXHIBIT A
                               (PAYMENT SCHEDULE)

        Payment Due Date                                                                  Amount
                                                                                    
1.      Within ***** of signing this Agreement                                            $4,000,000
2.      Within ***** of NFP's acceptance of the ***** of Mutant Mice                      $1,000,000
        delivered by Lexicon
3.      Within ***** of NFP's acceptance of the ***** of Mutant Mice                      $1,000,000
        delivered by Lexicon
4.      Within ***** of NFP's acceptance of the ***** of Mutant Mice                      $1,000,000
        delivered by Lexicon
5.      Within ***** of NFP's acceptance of the ***** of Mutant Mice                      $1,000,000
        delivered by Lexicon