EX-13.4 10 a2105085zex-13_4.htm EXHIBIT 13.4

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FINANCIAL STATEMENTS GENZYME MOLECULAR ONCOLOGY A Division of Genzyme Corporation

EXHIBIT 13.4

FINANCIAL STATEMENTS
GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

		Page No.
Combined Selected Financial Data		GMO-2
Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations		GMO-4
Combined Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000		GMO-17
Combined Balance Sheets as of December 31, 2002 and 2001		GMO-18
Combined Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000		GMO-19
Notes to Combined Financial Statements		GMO-20
Report of Independent Accountants		GMO-36

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GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

Combined Selected Financial Data

These selected financial data have been derived from the audited, combined financial statements of Genzyme Molecular Oncology. You should read the following information in conjunction with the audited financial statements and related notes of Genzyme Molecular Oncology and Genzyme contained elsewhere in this annual report. These selected financial data may not be indicative of Genzyme Molecular Oncology's future financial condition due to the risks and uncertainties described under the caption "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations—Factors Affecting Future Operating Results" included in this annual report.

Genzyme Molecular Oncology is our operating division that is developing a new generation of cancer products focused on cancer vaccines and angiogenesis inhibitors through the integration of its genomics, gene and cell therapy, small molecule drug discovery and protein therapeutic capabilities.

A series of our common stock, Genzyme Molecular Oncology Division common stock, which we refer to as "Molecular Oncology Stock," is designed to reflect the value and track the performance of this division. Molecular Oncology Stock is common stock of Genzyme Corporation, not of Genzyme Molecular Oncology; Genzyme Molecular Oncology is a division, not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause Molecular Oncology Stock to "track" the performance of Genzyme Molecular Oncology are provisions in our charter governing dividends and distributions. These provisions factor the assets and liabilities and income or losses attributable to a division into the determination of the amount available to pay dividends on the associated tracking stock.

To determine earnings per share, we allocate our earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Molecular Oncology Stock is defined in our charter as the net income or loss of Genzyme Molecular Oncology determined in accordance with accounting principles generally accepted in the U.S., and as adjusted for tax benefits allocated to or from Genzyme Molecular Oncology in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in interpreting and changing the methods of allocating earnings to each series of common stock without shareholder approval. As market or competitive conditions warrant, we may create a new series of tracking stock, combine existing tracking stocks or change our earnings allocation methodology. Because the earnings allocated to Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we provide financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance.

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COMBINED STATEMENTS OF OPERATIONS DATA

			For the Years Ended December 31,
			2002			2001			2000			1999			1998
			(Amounts in thousands)
Revenues:
	Service revenue		$	300		$	700		$	—		$	1,920		$	2,229
	Service revenue—related party			185			—			—			50			466
	Revenue from research and development contracts			6,048			3,412			584			—			3,256
	Revenue from research and development contracts—related party			—			—			—			496			2,177
	Licensing revenue			2,819			2,302			4,936			2,125			11,275
	Royalty revenue			37			148			151			28			4

		Total revenues		9,389			6,562			5,671			4,619			19,407

Operating costs and expenses:
	Cost of services sold			287			273			—			620			1,374
	Cost of revenue from research and development contracts and licensing revenue			4,568			2,803			826			698			4,073
	Selling, general and administrative			7,402			7,552			5,851			5,529			7,155
	Research and development			21,557			26,540			18,908			15,997			12,743
	Amortization of intangibles(1)			—			—			5,420			11,825			11,983

		Total operating costs and expenses		33,814			37,168			31,005			34,669			37,328

Operating loss				(24,425	)		(30,606	)		(25,334	)		(30,050	)		(17,921	)

Other income (expenses):
	Equity in net loss of unconsolidated affiliate(2)			—			—			—			(1,870	)		(1,647	)
	Investment income			791			945			1,211			469			782
	Interest expense			(80	)		(57	)		(187	)		(28	)		(2,968	)

		Total other income (expenses)		711			888			1,024			(1,429	)		(3,833	)

Loss before income taxes				(23,714	)		(29,718	)		(24,310	)		(31,479	)		(21,754	)
Tax benefit				—			—			1,214			2,647			2,647

Division net loss			$	(23,714	)	$	(29,718	)	$	(23,096	)	$	(28,832	)	$	(19,107	)

COMBINED BALANCE SHEET DATA

	December 31,
	2002		2001		2000		1999			1998
	(Amounts in thousands)
Cash and investments	$	13,112	$	41,135	$	30,151	$	3,587		$	11,900
Working capital		3,528		28,807		22,100		(5,889	)		9,189
Total assets		13,981		42,419		30,752		9,692			35,952
Division equity		3,554		26,813		19,526		(1,215	)		23,364

(1): SFAS No. 142, "Goodwill and Other Intangible Assets," which we adopted effective January 1, 2002, requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill for impairment and that other intangible assets be amortized over their useful lives unless these useful lives are determined to be indefinite. As of January 1, 2002, Genzyme Molecular Oncology had no goodwill or other intangible assets, therefore, adoption of SFAS No. 142 had no effect on its combined financial statements for the year ended December 31, 2002. Genzyme Molecular Oncology had no amortization expense in 2001. Amortization of intangibles in 2000 includes $2.2 million of goodwill amortization.
(2): StressGen/Genzyme LLC was dissolved in 1999.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME MOLECULAR
ONCOLOGY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under "Factors Affecting Future Operating Results" below as well as in Exhibit 99.2 to this annual report. These risks and uncertainties could cause actual results to differ materially from those forecast in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward looking statements under "Note Regarding Forward Looking Statements." These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements in light of future developments.

INTRODUCTION

We prepare the combined financial statements of Genzyme Molecular Oncology in accordance with accounting principles generally accepted in the U.S. We present financial information and accounting policies specific to Genzyme Molecular Oncology in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should, therefore, read our consolidated financial statements in conjunction with the combined financial statements of Genzyme Molecular Oncology. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains a summary of our accounting policies.

Genzyme Molecular Oncology Division common stock, which we refer to as "Molecular Oncology Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Molecular Oncology. Molecular Oncology Stock is common stock of Genzyme Corporation, not of Genzyme Molecular Oncology; Genzyme Molecular Oncology is a division, not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause Molecular Oncology Stock to "track" the performance of Genzyme Molecular Oncology are provisions in our charter governing dividends and distributions. The provisions governing dividends provide that our board of directors has discretion to decide if and when to declare dividends, subject to certain limitations. To the extent that the following amount does not exceed the funds that would be legally available for dividends under Massachusetts law, the dividend limit for a stock corresponding to a division is the greater of:

•: the amount that would be legally available for dividends under Massachusetts law if the division were a separate corporation; or
•: the amount by which the greater of the fair value of the division's allocated net assets, or its allocated paid-in capital plus allocated earnings, exceeds its corresponding stock's par value, preferred stock preferences and debt obligations.

The provisions in our charter governing dividends and distributions factor the assets and liabilities and income or losses attributable to a division into the determination of the amount available to pay dividends on the associated tracking stock.

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determined in accordance with accounting principles generally accepted in the U.S. and as adjusted for tax benefits allocated to or from Genzyme Molecular Oncology in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in interpreting and changing the methods of allocating earnings to each series of common stock without shareholder approval. As market or competitive conditions warrant, we may create a new series of tracking stock, combine existing tracking stocks or change our earnings allocation methodology. Because the earnings allocated to Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we provide financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance.

While Molecular Oncology Stock is designed to reflect Genzyme Molecular Oncology's performance, it is common stock of Genzyme Corporation and not Genzyme Molecular Oncology; Genzyme Molecular Oncology is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Molecular Oncology Stock have no specific rights to assets allocated to Genzyme Molecular Oncology. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Molecular Oncology and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to Genzyme Molecular Oncology. Holders of Molecular Oncology Stock, as common stockholders, are therefore subject to the risks of investing in the businesses, assets and liabilities of Genzyme as a whole. For instance, the assets allocated to Genzyme Molecular Oncology are subject to company-wide claims of creditors, product liability plaintiffs and stockholder litigation. Also, in the event of a Genzyme liquidation, insolvency or similar event, holders of Molecular Oncology Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme.

Our charter requires us to manage and account for transactions between Genzyme Molecular Oncology and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which are filed as Exhibit 99.1 to this annual report. Our charter requires that all of our assets and liabilities be allocated among our divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitude and extent of allocations to each series of common stock without shareholder approval.

We present earnings per share data for Genzyme Molecular Oncology Stock in our consolidated financial statements. We present financial information and accounting policies specific to Genzyme Molecular Oncology in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should, therefore, read this discussion and analysis of Genzyme Molecular Oncology's financial position and results of operations in conjunction with the combined financial statements and related notes of Genzyme Molecular Oncology, the discussion and analysis of Genzyme's financial position and results of operations, and the consolidated financial statements and related notes of Genzyme, all of which are included in this annual report.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

The preparation of the combined financial statements of Genzyme Molecular Oncology in accordance with accounting principles generally accepted in the U.S. requires us to make certain estimates and judgments that affect reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities in our financial statements. Actual results could differ from these estimates under different assumptions and conditions. We believe that the following critical

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accounting policies affect the more significant judgments and estimates used in the preparation of Genzyme Molecular Oncology's combined financial statements:

•: Policies Relating to Tracking Stocks; and
•: Revenue Recognition.

Policies Relating to Tracking Stocks

Allocation of Revenue, Expenses, Assets and Liabilities

Our charter sets forth which operations and assets were initially allocated to Genzyme Molecular Oncology and states that going forward the division will also include all business, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Molecular Oncology and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our management and accounting policies, which are filed as Exhibit 99.1 to this annual report. Our charter requires that all of our assets and liabilities be allocated among our divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitude and extent of allocations to each series of common stock without shareholder approval.

Allocations to our divisions are based on one of the following methodologies:

•: specific identification—assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred in activities which directly benefit a division are allocated to that division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to that division;
•: actual usage—expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours;
•: proportionate usage—costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or
•: board directed—programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. Our board also allocates long-term debt and strategic investments.

Any future changes that our board of directors may make to the methods for allocating revenue, expenses, assets, and liabilities among our divisions could materially change the results of operations or the financial condition of Genzyme Molecular Oncology and the income allocated to one or more series of our stock.

Income Tax Allocation Policy

If at the end of any fiscal quarter, a division cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we allocate the tax benefit to other divisions in proportion to their taxable income without any compensating payments or

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allocation to the division generating the benefit. Genzyme Molecular Oncology has not yet generated taxable income, and thus has not had the ability to use any projected annual tax benefits. Genzyme General has generated taxable income, providing it with the ability to utilize the tax benefits generated by Genzyme Molecular Oncology. Consistent with our policy, we have allocated the tax benefits generated by Genzyme Molecular Oncology to Genzyme General without any compensating payments or allocations to Genzyme Molecular Oncology. Income tax benefits allocated from Genzyme Molecular Oncology to Genzyme General are recorded as a reduction of Genzyme Molecular Oncology's division equity and do not impact Genzyme Molecular Oncology's division net loss.

Determination of Available Dividend Amounts

The chief mechanisms intended to cause Molecular Oncology Stock to "track" the performance of Genzyme Molecular Oncology are provisions in our charter governing dividends and distributions. The provisions governing dividends provide that our board of directors has discretion to decide if and when to declare dividends, subject to certain limitations. To the extent that the following amount does not exceed the funds that would be legally available for dividends under Massachusetts law, the dividend limit for a stock corresponding to a division is the greater of:

•: the amount that would be legally available for dividends under Massachusetts law if the division were a separate corporation; or
•: the amount by which the greater of the fair value of the division's allocated net assets, or its allocated paid-in capital plus allocated earnings, exceeds its corresponding stock's par value, preferred stock preferences and debt obligations.

Within these parameters, and other general limits under our charter and Massachusetts law, the amount of any dividend payment will be at the board of directors' discretion. To date, we have never paid or declared a cash dividend on shares of any of our series of common stock, nor do we anticipate doing so in the foreseeable future. Unless declared, no dividends accrue on our tracking stocks.

Determining the dividend limit for each series of our stock can involve significant judgment, including assessing the amount that would be legally available for dividends under Massachusetts law. If we concluded that a division would be unable to pay dividends under Massachusetts law as a separate corporation, we would be unable to allocate losses to the corresponding series of our stock. This could materially impact the allocation of income and losses among our three series of tracking stock.

Revenue Recognition

Genzyme Molecular Oncology recognizes revenue from service sales when it has finished providing the service and collection from customers is reasonably assured. Genzyme Molecular Oncology recognizes revenue from contracts to perform research and development services over the term of the applicable contract and as we complete our obligations under that contract. Genzyme Molecular Oncology recognizes non-refundable up-front license fees over the related performance period or at the time it has no remaining performance obligations.

Revenue from milestone payments for which Genzyme Molecular Oncology has no continuing performance obligations is recognized upon achievement of the related milestone. When Genzyme Molecular Oncology has continuing performance obligations, it recognizes milestone payments as revenue upon the achievement of the milestone only if all of the following conditions are met:

•: the milestone payments are non-refundable;
•: achievement of the milestone was not reasonably assured at the inception of the arrangement;
•: there is a substantial effort involved in achieving the milestone; and

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•: the amount of the milestone is reasonable in relation to the level of effort associated with achievement of the milestone.

If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as Genzyme Molecular Oncology completes its performance obligations.

Genzyme Molecular Oncology receives royalties related to the manufacture, sale or use of products or technologies under license arrangements with third parties. For those arrangements where royalties are reasonably estimable, revenue is recognized based on estimates of royalties earned during the applicable period and adjusted for differences between the estimated and actual royalties in the following quarter. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, Genzyme Molecular Oncology recognizes revenue upon receipt of royalty statements from the licensee.

Genzyme Molecular Oncology maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Genzyme Molecular Oncology's customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

RESULTS OF OPERATIONS

The following discussion summarizes the key factors management believes are necessary for an understanding of Genzyme Molecular Oncology's combined financial statements.

REVENUES

	2002		2001		2000		02/01 Increase/ (Decrease) % Change		01/00 Increase/ (Decrease) % Change
	(Amounts in thousands, except percentage data)
Service revenue	$	485	$	700	$	—	(31	)%	N/A
Research and development revenue		6,048		3,412		584	77	%	484	%
Licensing revenue		2,819		2,302		4,936	22	%	(53	)%
Royalty revenue		37		148		151	(75	)%	(2	)%

Total revenues	$	9,389	$	6,562	$	5,671	43	%	16	%

2002 As Compared to 2001

Genzyme Molecular Oncology's service revenue for the years ended December 31, 2002 and 2001 consist of revenues from the provision of services related to the SAGE genomics technology. Genzyme Molecular Oncology provides these services sporadically as customers request them. The focus of its SAGE business remains directed to granting licenses to the technology.

Research and development revenue for the year ended December 31, 2002 consists of $6.0 million of revenue for research performed on behalf of:

•: Purdue Pharma L.P. under the cancer antigen discovery agreement that was initiated in October 2000; and
•: Kirin Brewery Co., Ltd. under a collaboration agreement related to the tumor endothelial marker (TEM) program that was initiated in November 2001.

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Research and development revenue increased in 2002, as compared to 2001, primarily as a result of the performance of a full year of research under the Kirin agreement and an increase in revenue from research performed under the Purdue agreement.

Licensing revenue for 2002 consisted primarily of technology access fees Genzyme Molecular Oncology received from Purdue and Kirin upon entry into those collaborations. Genzyme Molecular Oncology is amortizing these fees over the course of the associated research programs. Licensing revenue increased in 2002 primarily as a result of the recognition of a full year of revenue related to the technology access fee from Kirin. Genzyme Molecular Oncology also recognizes licensing revenue from licenses of rights to the SAGE technology and, prior to the transfer of its non-core in vitro cancer diagnostic assets to Genzyme General in December 2001, licenses associated with these assets. As a result of the asset transfer, Genzyme Molecular Oncology will not receive license revenue from those assets in the future.

Royalty revenue consists of royalties received under licenses to the SAGE technology and, through December 2001, under Genzyme Molecular Oncology's diagnostic assets. Because Genzyme Molecular Oncology transferred its in vitro cancer diagnostic assets to Genzyme General in December 2001, it will not receive royalty revenue generated by those assets in the future.

2001 As Compared to 2000

Genzyme Molecular Oncology's service revenue is comprised of amounts received under an agreement with a pharmaceutical company around the LongSAGE technology. No such revenues were recorded in 2000.

Research and development revenue in 2001 is attributable to research performed on behalf of Purdue and Kirin. Research and development revenue increased in 2001 as compared to 2000 as a result of the performance of a full year of research under the Purdue agreement and the commencement of work under the Kirin agreement.

Licensing revenue in 2001 consisted primarily of the amortized portions of the technology access fees Genzyme Molecular Oncology received from Purdue and Kirin. Genzyme Molecular Oncology also recognized licensing revenue in 2001 from licenses of rights to the SAGE technology and under its diagnostic patent estate. Licensing revenue decreased in 2001 compared to 2000, notwithstanding the fact that Genzyme Molecular Oncology recognized a larger portion of the Purdue technology access fee, as a result of a $2.0 million milestone payment it received from Schering-Plough Ltd. in 2000.

Royalty revenue in both periods consisted of royalties received under licenses to the SAGE technology and under Genzyme Molecular Oncology's diagnostic assets.

COST OF REVENUES

		2002		2001		2000		02/01 Increase/ (Decrease) % Change		01/00 Increase/ (Decrease) % Change
		(Amounts in thousands, except percentage data)
Cost of services sold		$	287	$	273	$	—	5	%	N/A
Cost of research and development contracts and licensing revenue			4,568		2,803		826	63	%	239	%

	Total cost of revenues	$	4,855	$	3,076	$	826	58	%	272	%

Genzyme Molecular Oncology's cost of services sold in both 2002 and 2001 consists solely of $0.3 million of costs associated with the performance of services using the SAGE technology.

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Genzyme Molecular Oncology's cost of research and development contracts and licensing revenue for 2002 includes:

•: $4.5 million of costs associated with work performed under funded research and development agreements, including those with Purdue and Kirin; and
•: $0.1 million of costs associated with royalties payable to third parties, most notably The Johns Hopkins University, for technology that Genzyme Molecular Oncology has licensed from them.

Cost of research and development contracts and licensing revenue increased in 2002 compared to 2001 primarily due to completion of a full year of work under the Kirin collaboration, combined with an increase in resources applied to the Purdue collaboration.

OPERATING EXPENSES

2002 As Compared to 2001

Selling, General and Administrative Expenses

Genzyme Molecular Oncology's selling, general and administrative expenses decreased 2% to $7.4 million in 2002, as compared to 2001, due to normal business fluctuations.

Research and Development Expenses

Genzyme Molecular Oncology's research and development expenses decreased 19% to $21.6 million for 2002, as compared to 2001, primarily due to:

•: a planned increase in the amount of research and development funded by collaborators. These collaborator-funded research expenses are included in Genzyme Molecular Oncology's cost of research and development contracts and licensing revenues rather than as a research and development expense;
•: non-recurring expenses incurred in the patient-specific vaccine program during the second quarter of 2001 for which there were no comparable amounts in 2002, and
•: the initiation of efforts in late 2002 to conserve available cash by reducing research and development expenses, principally by delaying the start of a planned clinical trial of a patient-specific cancer vaccine.

2001 As Compared to 2000

Selling, General and Administrative Expenses

Genzyme Molecular Oncology's selling, general and administrative expenses increased as a result of enhanced business development efforts and increased expenses related to information technology, legal, accounting and general management services.

Research and Development Expenses

Genzyme Molecular Oncology's research and development expense increased as a result of:

•: the expansion of preclinical and clinical efforts in its antigen-specific and patient-specific cancer vaccine programs;
•: enhanced support for its antigen discovery program, particularly for its strategic collaboration with Purdue; and
•: increased spending in support of its antiangiogenesis program, including the initiation of its strategic collaboration with Kirin.

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Research and Development Programs

Before we can commercialize our development-stage products, we will need to:

•: conduct substantial research and development;
•: undertake preclinical and clinical testing; and
•: pursue regulatory approvals.

This process is risky, expensive, and may take several years. We cannot guarantee that we will be able to successfully develop any product, or that we would be able to recover our development costs upon commercialization of a product that we successfully develop.

Below is a brief description of our significant research and development programs that have been allocated to Genzyme Molecular Oncology:

Program		Program Description or Indication		Development Status at December 31, 2002		Year of Expected Product Launch
Dendritic/tumor cell fusion vaccines		Multiple cancer indications		Phase 1-2 clinical trials ongoing		2007 through 2009
Melan-A/MART-1 and gp-100 antigen-specific cancer vaccines		Melanoma		Phase 1-2 clinical trials completed		2008 through 2010

The aggregate actual and estimated research and development expense for the above programs is as follows (amounts in millions):

Costs incurred for the year ended December 31, 2001		$12.6
Costs incurred for the year ended December 31, 2002		$9.6
Cumulative costs incurred as of December 31, 2002		$37.9
Estimated cost to complete as of December 31, 2002		$125.0 to $175.0

Our current estimates of the time and investment required to develop these products may change depending on the approach we take to pursue them, the results of preclinical and clinical studies, and the content and timing of decisions made by the FDA and other regulatory authorities, and cash resources available to fund our development programs. We cannot provide assurance that any of these programs will ever result in products that can be marketed profitably. In addition, we cannot guarantee that we will be able to develop and commercialize products before our competitors develop and commercialize products for the same indication. If certain of our development-stage programs do not result in commercially viable products, our results of operations could be materially affected.

Amortization of Intangibles

Genzyme Molecular Oncology's amortization of intangibles is attributable to intangible assets acquired in connection with the acquisition of PharmaGenics, Inc. in June 1997. These assets were fully amortized by June 2000.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives unless these useful lives are determined to be indefinite. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and thus has been adopted by Genzyme Molecular Oncology

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effective at the beginning of fiscal year 2002. As of January 1, 2002, Genzyme Molecular Oncology had no goodwill or other intangible assets, therefore, adoption of the standard had no effect on Genzyme Molecular Oncology's combined financial statements for the year ended December 31, 2002.

The following table presents the impact that SFAS No. 142 would have had on Genzyme Molecular Oncology's amortization expense and division net loss had the standard been in effect for the year ended December 31, 2000 (amounts in thousands):

	Year Ended December 31, 2000
	As Reported			Goodwill Amortization Adjustment			As Adjusted
Amortization of intangibles	$	5,420		$	(2,227	)	$	3,193

Division net income (loss)	$	(23,096	)	$	2,227		$	(20,869	)

Other Income and Expenses

2002 As Compared to 2001

Genzyme Molecular Oncology's other income decreased $0.2 million in 2002, as compared to 2001, primarily due to a $0.2 million decrease in investment income and a slight increase in interest expense. The decrease in investment income is attributable to lower average cash balances throughout the year. The increase in interest expense is attributable to an increase in the commitment fees allocated to Genzyme Molecular Oncology under the corporate revolving credit facility. The investment income for 2003 is expected to decrease as compared to 2002 as a result of the continued use of cash and investments to fund ongoing operations and research and development programs.

2001 As Compared to 2000

Genzyme Molecular Oncology's other income decreased in 2001 due to a decrease in investment income that is attributable to lower average cash balances during most of the year. Interest expense decreased in 2001 in comparison to 2000 due to the repayment, in May 2000, of $5.0 million that Genzyme Molecular Oncology borrowed under our revolving credit facility in 1999.

Liquidity and Capital Resources

At December 31, 2002, Genzyme Molecular Oncology had cash, cash equivalents and short-term investments of approximately $13.1 million, a decrease of $28.0 million from cash and cash equivalents of $41.1 million at December 31, 2001.

Genzyme Molecular Oncology's operating activities used $28.4 million of cash for the year ended December 31, 2002 as compared to $26.0 million for the year ended December 31, 2001. Net cash utilized by operating activities was impacted primarily by Genzyme Molecular Oncology's division net loss of $23.7 million for the year ended December 31, 2002 and $4.9 million attributable to the net increase in working capital.

Genzyme Molecular Oncology's investing activities used $11.5 million of cash in 2002, for the net purchases, sales and maturities of investments. In 2002, Genzyme Molecular Oncology received $0.3 million of allocated proceeds from the issuance of Molecular Oncology Stock attributable to the exercise of stock options and shares issued under our stock purchase program.

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plus an applicable margin, which was, in the aggregate, 2.5% at December 31, 2002. We intend to refinance our revolving credit facility during 2003.

Our board of directors has made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under this arrangement, Genzyme Molecular Oncology is able to draw down funds as needed in exchange for designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. Genzyme Molecular Oncology has made the following draws during the past three fiscal years:

•: In 2000—$15.0 million in exchange for a reserve of approximately 0.7 million Molecular Oncology designated shares;
•: In 2001—$4.0 million in exchange for an additional reserve of approximately 0.3 million Molecular Oncology designated shares.
•: In 2002—None.

At December 31, 2002, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement.

Genzyme Molecular Oncology has obligations of approximately $1.4 million in 2003 under significant research and development programs and will be required to pay additional amounts in support of its clinical trial activities as expenses are incurred.

We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available from the following sources, will be sufficient to fund its operations through the end of 2003:

•: committed research funding from collaborators;
•: the $11.0 million remaining under the interdivisional financing arrangement with Genzyme General; and
•: amounts available to Genzyme Molecular Oncology under our revolving credit facility.

Genzyme Molecular Oncology plans to spend substantial amounts of funds on, among other things:

•: research and development;
•: preclinical and clinical testing;
•: pursuing regulatory approvals; and
•: working capital.

Genzyme Molecular Oncology's cash needs may differ from those planned, however, because of many factors, including the:

•: results of research and development and clinical testing;
•: achievement of milestones under existing licensing arrangements;
•: ability to establish and maintain additional strategic collaborations and licensing arrangements;
•: costs involved in enforcing patent claims and other intellectual property rights;
•: market acceptance of novel approaches and therapies;
•: development of competing products and services; and
•: ability to satisfy regulatory requirements of the FDA and other government authorities.

Genzyme Molecular Oncology will require significant additional financing to continue operations at anticipated levels. We cannot guarantee that Genzyme Molecular Oncology will be able to obtain any

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additional financing, extend any existing financing arrangement, or obtain either on terms that we consider favorable. To this end, management is managing its cash reserves closely by focusing its research and development spending on programs that it believes have the greatest potential for successful commercialization or valuable collaboration. If Genzyme Molecular Oncology has insufficient funds or is unable to raise additional funds, it may delay, reduce or eliminate certain of its programs. Genzyme Molecular Oncology may also have to sell or give to third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself.

New Accounting Pronouncements and Market Risk

See "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" included in this annual report.

Factors Affecting Future Operating Results

The future operating results of Genzyme Molecular Oncology could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations—Factors Affecting Future Operating Results" included in this annual report.

Genzyme Molecular Oncology may never be able to successfully develop or commercialize any of its cancer therapies.

Genzyme Molecular Oncology does not have any cancer therapies on the market and its only therapies in clinical development are at an early stage. Before commercializing any cancer therapies, Genzyme Molecular Oncology will need to conduct substantial additional research and development, including, in some cases, the replication of studies performed by third parties, undertake preclinical and clinical testing and obtain regulatory approvals. This process involves a high degree of uncertainty and may take several years. Its product development efforts may fail for many reasons, including: the product fails in preclinical studies; clinical trials may not support the safety or effectiveness of the product; or we fail to obtain the required regulatory approvals. We cannot guarantee that Genzyme Molecular Oncology will successfully develop any particular product or that any product it successfully develops will gain market acceptance.

Genzyme Molecular Oncology anticipates future losses and may never become profitable.

Genzyme Molecular Oncology has not generated significant revenues to date and does not expect to do so for several years. As of December 31, 2002, Genzyme Molecular Oncology had an accumulated deficit of approximately $145.5 million. We expect Genzyme Molecular Oncology to have significant operating losses for the next several years. Genzyme Molecular Oncology plans to spend substantial amounts of money on, among other things: research and development; preclinical and clinical testing; and pursuing regulatory approvals. We cannot guarantee that the efforts underlying these expenditures will be successful or that Genzyme Molecular Oncology's operations will ever be profitable.

Genzyme Molecular Oncology may not receive significant payments from collaborators due to unsuccessful results in existing collaborations or a failure to enter into future collaborations.

Genzyme Molecular Oncology's strategy to develop and commercialize some of its products and services includes entering into various arrangements with academic and corporate collaborators and licensees. It depends on the success of these parties in performing research, preclinical and clinical testing and marketing. These arrangements may require Genzyme Molecular Oncology to transfer important rights to its corporate collaborators and licensees. These collaborators and licensees could

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choose not to devote resources to these arrangements or, under certain circumstances, may terminate them early. In addition, these collaborators and licensees, outside of their arrangements with Genzyme Molecular Oncology, may develop technologies or products that are competitive with those that Genzyme Molecular Oncology is developing. As a result, we cannot guarantee that Genzyme Molecular Oncology will receive revenues from these relationships or that any of its strategic collaborations will continue or not terminate early. In addition, we cannot guarantee that Genzyme Molecular Oncology will be able to enter into collaborations in the future.

Genzyme Molecular Oncology may be required to license technology from competitors or others in order to develop and commercialize some of its products and services, and it is uncertain whether these licenses will be available.

Third party patent rights and pending patent applications filed by third parties, if issued, may cover some of the products Genzyme Molecular Oncology is developing or testing. As a result, Genzyme Molecular Oncology may be required to obtain licenses from the holders of these patents in order to use or sell certain products and services. We cannot guarantee that these licenses will be made available on acceptable terms or at all. If these licenses are not available, Genzyme Molecular Oncology's ability to commercialize its products and services may be impaired.

In its cancer vaccine program, Genzyme Molecular Oncology is in the process of evaluating the therapeutic administration of peptide products and genes that encode specific tumor antigens, including MART-1 and gp100. Genzyme Molecular Oncology is aware of two issued U.S. patents directed to the gene that encodes MART-1. While it has obtained rights under one of these patents, Genzyme Molecular Oncology is still in the process of evaluating the scope and validity of the other to determine whether it needs to obtain a license. Genzyme Molecular Oncology is also evaluating an issued U.S. patent covering the gene that encodes gp100 and three published Patent Cooperation Treaty applications by three different applicants that may cover antigens derived from gp100. Genzyme Molecular Oncology is in the process of evaluating the scope and validity of these patents and patent applications to determine whether it needs to obtain licenses.

Genzyme Molecular Oncology may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

If Genzyme Molecular Oncology or one of its strategic collaborators initiates litigation to enforce Genzyme Molecular Oncology's patent or license rights, or is required to defend these rights in response to third party claims, its business or financial position may be negatively affected. Genzyme Molecular Oncology has licensed its p53 gene therapy rights to Schering-Plough. These patent rights are the subject of an interference proceeding in the U.S. and an opposition proceeding in Europe. Adverse determinations in these proceedings may negatively affect Genzyme Molecular Oncology's ability to receive future milestones and product royalties under its agreement with Schering-Plough.

Adverse events in the field of gene therapy may negatively affect regulatory approval or public perception of Genzyme Molecular Oncology's gene therapy products.

Recent adverse events in gene therapy clinical trials may result in greater governmental regulation, increased development costs and potential regulatory delays relating to the testing or approval of Genzyme Molecular Oncology's gene therapy products. The commercial success of any gene therapy products that Genzyme Molecular Oncology develops will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in:

•: greater government regulation;

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•: stricter clinical trial oversight;
•: tighter commercial product labeling requirements of gene therapies; and
•: a decrease in the demand for any gene therapy product that Genzyme Molecular Oncology may develop.

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GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

Combined Statements of Operations

			For the Years Ended December 31,
			2002			2001			2000
			(Amounts in thousands)
Revenues:
	Service revenue		$	300		$	700		$	—
	Service revenue—related party			185			—			—
	Revenue from research and development contracts			6,048			3,412			584
	Licensing revenue			2,819			2,302			4,936
	Royalty revenue			37			148			151

		Total revenues		9,389			6,562			5,671

Operating costs and expenses:
	Cost of services sold			287			273			—
	Cost of revenue from research and development contracts and licensing revenue			4,568			2,803			826
	Selling, general and administrative			7,402			7,552			5,851
	Research and development			21,557			26,540			18,908
	Amortization of intangibles			—			—			5,420

		Total operating costs and expenses		33,814			37,168			31,005

Operating loss				(24,425	)		(30,606	)		(25,334	)

Other income (expenses):
	Investment income			791			945			1,211
	Interest expense			(80	)		(57	)		(187	)

		Total other income (expenses)		711			888			1,024

Loss before income taxes				(23,714	)		(29,718	)		(24,310	)
Tax benefit				—			—			1,214

Division net loss			$	(23,714	)	$	(29,718	)	$	(23,096	)

Comprehensive loss, net of tax:
	Division net loss		$	(23,714	)	$	(29,718	)	$	(23,096	)
	Other comprehensive income (loss), net of tax:
		Foreign currency translation adjustments		3			(1	)		—
		Unrealized gains (losses) on securities, net		133			—			—

	Other comprehensive income (loss)			136			(1	)		—

Comprehensive loss			$	(23,578	)	$	(29,719	)	$	(23,096	)

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

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GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

Combined Balance Sheets

			DECEMBER 31,
			2002		2001
			(Amounts in thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	1,459	$	41,135
	Short-term investments			11,653		—
	Accounts receivable, net			229		463
	Prepaid expenses and other current assets			614		702

		Total current assets		13,955		42,300
Equipment, net				26		119

		Total assets	$	13,981	$	42,419

LIABILITIES AND DIVISION EQUITY
Current liabilities:
	Accrued expenses		$	760	$	1,400
	Due to Genzyme General			5,494		7,086
	Deferred revenue—current portion			4,173		5,007

		Total current liabilities		10,427		13,493
Deferred revenue—long-term portion				—		2,113

		Total liabilities		10,427		15,606

Contingencies (Note K)
Division equity				3,554		26,813

		Total liabilities and division equity	$	13,981	$	42,419

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

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GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

Combined Statements of Cash Flows

					For The Years Ended December 31,
					2002			2001			2000
					(Amounts in thousands)
Cash Flows from Operating Activities:
	Division net loss				$	(23,714	)	$	(29,718	)	$	(23,096	)
	Reconciliation of division net loss to net cash used in operating activities:
		Depreciation and amortization				93			125			5,572
		Provision for bad debts				—			113			—
		Deferred income tax benefit				—			—			(1,214	)
		Other				29			6			(142	)
		Increase (decrease) in cash from working capital changes:
			Accounts receivable			234			(345	)		(231	)
			Prepaid expenses and other current assets			88			(576	)		92
			Accrued expenses and deferred revenue			(3,587	)		1,954			5,665
			Due to Genzyme General			(1,592	)		2,426			938

				Cash flows from operating activities		(28,449	)		(26,015	)		(12,416	)

Cash Flows from Investing Activities:
	Purchases of investments					(31,613	)		—			(30,175	)
	Sales and maturities of investments					20,069			7,942			22,383

				Cash flows from investing activities		(11,544	)		7,942			(7,792	)

Cash Flows from Financing Activities:
	Allocated proceeds from issuance of Molecular Oncology Stock					315			959			28,830
	Repayments of debts					—			—			(5,000	)
	Net cash allocated from Genzyme General					—			36,040			15,000

				Cash flows from financing activities		315			36,999			38,830

Effect of exchange rate changes on cash						2			—			—

Increase (decrease) in cash and cash equivalents						(39,676	)		18,926			18,622
Cash and cash equivalents at beginning of period						41,135			22,209			3,587

Cash and cash equivalents at end of period					$	1,459		$	41,135		$	22,209

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

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GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation

Notes to Combined Financial Statements

NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Basis of Presentation

The combined financial statements of Genzyme Molecular Oncology for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme Molecular Oncology. We also allocate a portion of our corporate operations to Genzyme Molecular Oncology using methods described in our allocation policy below. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this annual report.

We prepare the financial statements of Genzyme Molecular Oncology in accordance with accounting principles generally accepted in the U.S. We present financial information and accounting policies specific to Genzyme Molecular Oncology in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read our consolidated financial statements in conjunction with the financial statements of Genzyme Molecular Oncology. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains a summary of our accounting policies. We incorporate that information into this note by reference.

Tracking Stock

Genzyme Molecular Oncology Division common stock, which we refer to as "Molecular Oncology Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Molecular Oncology. The chief mechanisms intended to cause Molecular Oncology Stock to "track" the financial performance of Genzyme Molecular Oncology are provisions in our charter governing dividends and distributions. Under these provisions, our charter:

•: factors the assets and liabilities and income or losses attributable to Genzyme Molecular Oncology into the determination of the amount available to pay dividends on Molecular Oncology Stock; and
•: requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock if all or substantially all of the assets allocated to Genzyme Molecular Oncology are sold to a third party. A dividend or redemption payment must equal in value the net after-tax proceeds from the sale. An exchange must be for Genzyme General Stock at a 10% premium to the average market price of Molecular Oncology Stock calculated over a ten day period beginning on the first business day following the announcement of the sale.

The provisions governing dividends provide that our board of directors has discretion to decide if and when to declare dividends, subject to certain limitations. To the extent that the following amount

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does not exceed the funds that would be legally available for dividends under Massachusetts law, the dividend limit for a stock corresponding to a division is the greater of:

•: the amount that would be legally available for dividends under Massachusetts law if the division were a separate corporation; or
•: the amount by which the greater of the fair value of the division's allocated net assets, or its allocated paid-in capital plus allocated earnings, exceeds its corresponding stock's par value, preferred stock preferences and debt obligations.

Within these parameters, and other general limits under our charter and Massachusetts law, the amount of any dividend payment will be at the board of directors' discretion. Unless declared, no dividends accrue on our tracking stocks.

To determine earnings per share, we allocate our earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Molecular Oncology Stock is defined in our charter as the net income or loss of Genzyme Molecular Oncology determined in accordance with accounting principles generally accepted in the U.S., and as adjusted for tax benefits allocated to or from Genzyme Molecular Oncology in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in interpreting and changing the methods of allocating earnings to each series of common stock without shareholder approval. As market or competitive conditions warrant, we may create a new series of tracking stock, combine existing tracking stocks or change our earnings allocation methodology. Because the earnings allocated to Molecular Oncology Stock are based on the income or losses attributable to Genzyme Molecular Oncology, we include financial statements and management's discussion and analysis of Genzyme Molecular Oncology to aid investors in evaluating its performance.

Allocation Policy

Our charter sets forth what operations and assets were initially allocated to Genzyme Molecular Oncology and states that going forward the division will also include all businesses, products or programs, developed by or acquired for the division, as determined by our board of directors. We then

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manage and account for transactions between Genzyme Molecular Oncology and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors.

Our charter requires that all of our assets and liabilities be allocated among our divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitude and extent of allocations to each series of common stock without shareholder approval.

Allocations to our divisions are based on one of the following methodologies:

•: specific identification—assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred in activities which directly benefit a division are allocated to that division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to that division;
•: actual usage—expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours;
•: proportionate usage—costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or
•: board directed—programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board of directors also allocates long-term debt and strategic investments.

Note B., "Policies Governing the Relationship of Genzyme's Operating Divisions," further describes our policies concerning interdivisional transactions and income tax allocations.

We believe that the divisional allocations are reasonable and have been consistently applied. However, a division's results of operations may not be indicative of what would have been realized if the division was a stand-alone entity.

Revenue Recognition

We recognize revenue from service sales when we have finished providing the service and collection from the customer is reasonably assured. We recognize revenue from contracts to perform research and development services over the term of the applicable contract and as we complete our obligations under that contract. We recognize non-refundable up-front license fees over the related performance period or at the time when we have no remaining performance obligations.

Revenue from milestone payments for which we have no continuing performance obligations is recognized upon achievement of the related milestone. When we have continuing performance

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obligations, we recognize milestone payments as revenue upon the achievement of the milestone only if all of the following conditions are met:

•: the milestone payments are non-refundable;
•: achievement of the milestone was not reasonably assured at the inception of the arrangement;
•: there is a substantial effort involved in achieving the milestone; and
•: the amount of the milestone is reasonable in relation to the level of effort associated with achievement of the milestone.

If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations.

We receive royalties related to the manufacture, sale or use of products or technologies under license arrangements with third parties. For those arrangements where royalties are reasonably estimable, revenue is recognized based on estimates of royalties earned during the applicable period and adjusts for differences between the estimated and actual royalties in the following quarter. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, we recognize revenue upon receipt of royalty statements from the licensee.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

Revenue from milestone payments for which we have no continuing performance obligations is recognized upon achievement of the related milestone. When we have continuing performance obligations, we recognize milestone payments as revenue upon the achievement of the milestone only if all of the following conditions are met:

•: the milestone payments are non-refundable;
•: achievement of the milestone was not reasonably assured at the inception of the arrangement;
•: there is a substantial effort involved in achieving the milestone; and
•: the amount of the milestone is reasonable in relation to the level of effort associated with achievement of the milestone.

If any of these conditions are not met, the milestone payments are deferred and recognized as revenue over the term of the arrangement as we complete our performance obligations.

Net Income (Loss) Per Share

We calculate earnings per share for each series of our stock using the two-class method, as further described in the notes to our consolidated financial statements included elsewhere in this annual report. We present earnings per share data only in our consolidated financial statements because Genzyme Corporation is the issuer of the securities. Our divisions do not and cannot issue securities because they are not companies or legal entities.

GMO-23

Accounting for Stock Based Compensation

On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123." This standard amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for those companies that voluntarily change to the fair value based method of accounting for stock-based employee compensation. In addition, this standard amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. We have not adopted the fair value method of accounting for stock-based compensation and will continue to apply the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. We do not recognize compensation expense for options granted under the provisions of these plans with fixed terms and an exercise price greater than or equal to the fair market value of the underlying series of our common stock on the date of grant. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123, as amended, and EITF Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

In accordance with the disclosure requirements of SFAS No. 148, the following table sets forth Genzyme Molecular Oncology's net income (loss) data as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS No. 123 as amended, based on the fair value at the grant dates of the awards. The resulting compensation expense would be allocated to each division in accordance with our allocation policies:

		For the Years Ended December 31,
		2002			2001			2000
		(Amounts in thousands)
Division net loss:
	As reported	$	(23,714	)	$	(29,718	)	$	(23,096	)
	Deduct: pro forma stock-based compensation, net of tax		(3,742	)		(4,794	)		(2,927	)

	Pro forma	$	(27,456	)	$	(34,512	)	$	(26,023	)

Note A., "Summary of Significant Accounting Policies—Accounting for Stock-Based Compensation," to our consolidated financial statements contains information regarding the assumptions we made in calculating pro forma compensation expense in accordance with SFAS No. 123. The effects of applying SFAS No. 123 are not likely to be representative of the effects on reported division net income (loss) in future years.

NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS

Because each of our operating divisions is a part of a single company, our board of directors has adopted policies to address issues that may arise among divisions and to govern the management of

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and the relationships between each division. With some exceptions that are mentioned specifically in this note, our board of directors may modify or rescind these policies, or adopt additional policies, in its sole discretion without stockholder approval, subject only to our board of directors' fiduciary duty to stockholders. Accounting principles generally accepted in the U.S. require that any change in policy be preferable (in accordance with these principles) to the previous policy.

Interdivisional Asset Transfers

Our board of directors may at any time reallocate any program, product or other asset from one division to any other division, except in the case of certain enumerated key programs allocated to Genzyme Molecular Oncology, which may not be transferred out of Genzyme Molecular Oncology without a class vote of Molecular Oncology Stock unless such program has application outside of oncology, in which case it may be transferred out only for the non-oncology applications. We account for interdivisional asset transfers at book value. The consideration paid for an asset transfer generally must be fair value as determined by our board of directors. The difference between the consideration paid and the book value of the assets transferred is recorded in division equity. Our board of directors determines fair value using either a risk-adjusted discounted cash flow model or a comparable transaction model.

The risk-adjusted discounted cash flow model estimates fair value by taking the discounted value of all the cash inflows and outflows related to a program or product over a specified period of time, generally the economic life of the project, adjusted for the probabilities of certain outcomes occurring or not occurring. In performing this analysis, we consider various factors that could affect the success or failure of the program including:

•: the duration, cost and probability of success of each phase of development;
•: the current and potential size of the market and barriers to entry into the market;
•: the maximum number of patients likely to be treated with the product and the speed with which that maximum number will be reached;
•: reimbursement policies and pricing limitations;
•: current and potential competitors;
•: the net proceeds received by us upon the sale of the program or product; and
•: the costs of manufacturing and marketing the product or program.

The comparable transaction model estimates fair value through comparison to valuations established for other transactions within the biotechnology and biosurgical areas involving similar programs and products having similar terms and structure. In identifying comparable transactions, we consider, among other factors, the following:

•: the similarity of market opportunity;
•: the comparability of the medical needs addressed;
•: the similarity of the regulatory, reimbursement and competitive environment;

GMO-25

•: the stage of product or program development; and
•: the risk profile of successfully commercializing the product or program.

We customarily use the comparable transaction model to corroborate valuations derived under the risk-adjusted discounted cash flow model.

When determining the fair value of a program under development using either model, our board of directors also takes into account the following criteria:

•: the commercial potential of the program;
•: the phase of clinical development of the program;
•: the expenses associated with realizing any income from the program and the likelihood and time of the realization; and
•: other matters that our board of directors and its financial advisors, if any, deem relevant.

One division may compensate another division for a reallocation with cash or other consideration having a value equal to the fair market value of the reallocated assets. In the case of a reallocation of assets from Genzyme General to Genzyme Molecular Oncology, our board of directors may elect instead to account for the reallocation as an increase in Molecular Oncology designated shares in accordance with the provisions of our charter. Molecular Oncology designated shares are authorized but unissued shares of Molecular Oncology Stock that our board of directors may from time to time issue, sell or otherwise distribute without allocating the proceeds to Genzyme Molecular Oncology. No gain or loss is recognized as a result of these transfers.

Our policy regarding transfers of assets between divisions may not be changed by our board without the approval of the holders of Molecular Oncology Stock voting as a separate class unless the policy change does not affect Genzyme Molecular Oncology.

Other Interdivisional Transactions

Our divisions may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. These transactions may include agreements by one division to provide products and services for use by another division, license agreements and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. The division providing these products and services does not recognize revenue on any of these transactions unless it provides them to unrelated third parties in the ordinary course of business. These transactions are subject to the conditions described below:

•: We charge research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for another division to the division for which the services are performed on a cost basis. We charge direct costs to the division for which we incur them. We allocate direct labor and indirect costs in reasonable and consistent manners based on the use by a division of relevant services.

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•: We charge the manufacturing of goods and performance of services by one division exclusively for another division to the division for which it is performed on a cost basis. We allocate direct labor and indirect costs in reasonable and consistent manners based on the benefit received by a division of related goods and services.
•: Other than transactions involving research and development, manufacturing, distribution, sales, marketing, general and administrative services, which are addressed above, all interdivision transactions are performed on terms and conditions obtainable in arm's length transactions with third parties.
•: Each division bills the other division on a monthly basis for the services and costs incurred on the other division's behalf. Payment by the other division is due within 45 days. To the extent asset impairment charges are recorded by a division and allocated to another division in accordance with the allocation policies described in Note A., "Summary of Significant Accounting Policies," payment of such charge is to be made monthly by the other division in an amount equal to the monthly depreciation or amortization that would have been allocated to the other division using the assets original useful life.
•: Our board of directors must approve interdivision transactions that are performed on terms and conditions other than as described above and are material to one or more of the participating divisions. In giving its approval, our board of directors must determine that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each participating division.
•: Divisions may make loans to other divisions. Any loan of $1.0 million or less matures within 18 months and accrues interest at the best borrowing rate available to the corporation for a loan of like type and duration. Our board of directors must approve any loan in excess of $1.0 million. In giving its approval, our board of directors must determine that the material terms of the loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing each such division.
•: All material interdivision transactions are set forth in a written agreement that is signed by an authorized member of the management team of each division involved in the transaction.

On December 31, 2002, Genzyme Molecular Oncology owed Genzyme General approximately $5.5 million in connection with these services. On December 31, 2001, approximately $7.1 million was owed to Genzyme General.

Tax Allocations

We file a consolidated tax return and allocate income taxes to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to it under accounting principles generally accepted in the U.S., as if it were a separate taxpayer. We assess the realizability of our deferred tax assets at the division level. As a result, our consolidated tax provision may not equal the sum of the divisions' tax provision. As of the end of any fiscal quarter, however, if a division cannot use any projected annual tax benefit attributable to it to offset or reduce its current or

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deferred income tax expense, we allocate the tax benefit to the other divisions in proportion to their taxable income without any compensating payment or allocation.

Access to Technology and Know-How

Genzyme Molecular Oncology has access to all technology and know-how owned or controlled by Genzyme Corporation that may be useful in its business, subject to any obligations or limitations that apply to the corporation generally.

NOTE C. NET INCOME (LOSS) PER SHARE

Note B., "Net Income (Loss) Per Share," to our consolidated financial statements contains information regarding the calculation of earnings per share for each series of our stock using the two-class method. We present earnings per share data only in our consolidated financial statements because Genzyme Corporation is the issuer of the securities. Our divisions do not and cannot issue securities because they are not companies or legal entities.

NOTE D. ACCOUNTS RECEIVABLE

Genzyme Molecular Oncology's trade receivables primarily represent amounts due from third party collaborators. Genzyme Molecular Oncology performs credit evaluations of its customers on an on going basis and generally does not require collateral. Genzyme Molecular Oncology states accounts receivable at fair value after reflecting an allowance for doubtful accounts. This allowance was approximately $75,000 at December 31, 2002 and $431,000 at December 31, 2001.

NOTE E. EQUIPMENT

	December 31,
	2002			2001
	(Amounts in thousands)
Equipment	$	824		$	824
Furniture and fixtures		13			13

		837			837
Less accumulated depreciation		(811	)		(718	)

Equipment, net	$	26		$	119

Genzyme Molecular Oncology's depreciation expense was $93,000 in 2002, $125,000 in 2001 and $152,000 in 2000.

NOTE F. GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with

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periodic tests of the goodwill for impairment and that other intangible assets be amortized over their useful lives unless these useful lives are determined to be indefinite. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and thus has been adopted by Genzyme Molecular Oncology effective at the beginning of fiscal year 2002. As of January 1, 2002, Genzyme Molecular Oncology had no goodwill or other intangible assets, therefore, adoption of the standard had no effect on Genzyme Molecular Oncology's combined financial statements for the year ended December 31, 2002.

The following table presents the impact that SFAS No. 142 would have had on Genzyme Molecular Oncology's amortization of intangibles expense and division net loss had the standard been in effect for the year ended December 31, 2000 (amounts in thousands):

	Year Ended December 31, 2000
	As Reported			Goodwill Amortization Adjustment			As Adjusted
Amortization of intangibles	$	5,420		$	(2,227	)	$	3,193

Division net income (loss)	$	(23,096	)	$	2,227		$	(20,869	)

NOTE G. RESEARCH AND DEVELOPMENT AGREEMENTS

Kirin

In November 2001, we entered into a collaboration with Kirin Brewery Co., Ltd. of Japan to develop and commercialize human monoclonal antibodies to be used as therapies in the areas of antiangiogenesis and vascular targeted cancer drug delivery. Product candidates will be generated using Genzyme Molecular Oncology's portfolio of proprietary tumor endothelial markers as targets. Upon entering into the agreement, we received a $2.0 million up-front fee, along with committed funding to support a research program for two years. Because Genzyme Molecular Oncology is amortizing the up-front fee over the course of the research program, approximately 50% of the fee was recognized as licensing revenue in 2002 and 6% of the fee was recognized in 2001. Genzyme Molecular Oncology will receive milestone payments from Kirin upon satisfaction of certain research milestones during the two-year research period.

Purdue Pharma

In October 2000, we entered into an arrangement with Purdue Pharma L.P. relating to the discovery and development of cancer antigens. Under this arrangement, we received approximately $12.0 million in cash, in the form of an up-front fee, research funding and an equity investment. We will receive approximately $9.0 million in committed research funding over the course of a research period expiring in 2003. The equity portion of this arrangement provided for two affiliates of Purdue Pharma to purchase an aggregate of 532,066 shares of Molecular Oncology Stock at a premium to the market price for those shares.

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NOTE H. INVESTMENTS

Marketable Securities

		December 31,
		2002				2001
		Cost		Market Value		Cost		Market Value
		(Amounts in thousands)
Cash equivalents(1):
	Money market fund	$	1,197	$	1,197	$	40,392	$	40,392

Short-term:
	Corporate notes(2)	$	10,747	$	10,871	$	—	$	—
	U.S. Governmental agencies		773		782		—		—

		$	11,520	$	11,653	$	—	$	—

Total cash equivalents and short-term investments		$	12,717	$	12,850	$	40,392	$	40,392

(1): Cash equivalents are included as part of cash and cash equivalents on our balance sheets.
(2): Short-term corporate notes includes $4.5 million of long-term corporate notes that mature in more than one year because Genzyme Molecular Oncology will need to utilize these investments within the next twelve months to fund its operating activities.

Realized and unrealized gains and losses on marketable securities and Investments in Equity Securities

Genzyme Molecular Oncology records gross unrealized holding gains and losses in division equity.

The following table contains information regarding the range of contractual maturities of Genzyme Molecular Oncology's investments in debt securities:

	December 31,
	2002				2001
	Cost		Market Value		Cost		Market Value
	(Amounts in thousands)
Within 1 year	$	8,223	$	8,311	$	40,392	$	40,392
1-2 years(1)		1,063		1,070		—		—
2-10 years(1)		3,431		3,469		—		—

	$	12,717	$	12,850	$	40,392	$	40,392

(1): These investments are classified as short-term investments as of December 31, 2002 because Genzyme Molecular Oncology will need to utilize these investments within the next twelve months to fund operating activities.

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NOTE I. LONG-TERM DEBT INSTRUMENTS

Genzyme Molecular Oncology, together with our other operating divisions, has access to our $350.0 million revolving credit facility that matures in December 2003, of which $66.0 million remained available for borrowing at December 31, 2002. At December 31, 2002, no amounts borrowed under this facility were allocated to Genzyme Molecular Oncology. Borrowings under this facility bear interest at LIBOR plus an applicable margin, which was, in the aggregate, 2.5% at December 31, 2002.

NOTE J. DIVISION EQUITY

The following table contains the components of division equity for Genzyme Molecular Oncology for the periods presented:

	December 31,
	2002			2001			2000
	(Amounts in thousands)
Balance at beginning of period	$	26,813		$	19,526		$	(1,215	)
Division net loss		(23,714	)		(29,718	)		(23,096	)
Allocated proceeds from issuance of Molecular Oncology Stock under stock plans		315			959			1,833
Allocation of cash from Genzyme General for Molecular Oncology designated shares(1)		—			4,040			15,000
Allocation of cash from Genzyme General in exchange for the reallocation of diagnostic assets from Genzyme Molecular Oncology to Genzyme General		—			32,000			—
Allocated proceeds from sale of Molecular Oncology Stock		—			—			27,001
Allocated unrealized gain on investments		133			—			—
Allocated foreign currency adjustment		3			(1	)		—
Allocated equity adjustments		4			7			3

Balance at end of period	$	3,554		$	26,813		$	19,526

(1): Molecular Oncology designated shares are shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Molecular Oncology. As of December 31, 2002, there were approximately 1.7 million Molecular Oncology designated shares.

Stock Compensation Plans

The disclosure regarding how we account for our four stock-based compensation plans: the 1997 Equity Incentive Plan, the 2001 Equity Incentive Plan, the 1998 Director Stock Option Plan (each of which are stock option plans) and the 1999 Employee Stock Purchase Plan is included in Note A., "Significant Accounting Policies—Accounting for Stock-Based Compensation," to Genzyme Molecular Oncology's combined financial statements.

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Interdivisional Financing Arrangement

Our board of directors has made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology. Under this arrangement, Genzyme Molecular Oncology is able to draw down funds as needed each quarter in exchange for designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. Genzyme Molecular Oncology has made the following draws during the past three fiscal years:

•: In 2000—$15.0 million in exchange for a reserve of approximately 0.7 million Molecular Oncology designated shares;
•: In 2001—$4.0 million in exchange for an additional reserve of approximately 0.3 million Molecular Oncology designated shares; and
•: In 2002—none.

At December 31, 2002, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement.

Offering of Molecular Oncology Stock

In July 2000, we sold approximately 1.6 million shares of Molecular Oncology Stock to a limited number of purchasers at a price of $12.91 per share. We received approximately $20.8 million in net proceeds from the offering, which we allocated to Genzyme Molecular Oncology.

Asset Reallocation

In December 2001, we reallocated certain intellectual property rights and licenses related to in vitro cancer diagnostics from Genzyme Molecular Oncology to Genzyme General. In exchange for the reallocation, Genzyme General paid to Genzyme Molecular Oncology $32.0 million in cash and will pay an additional $1.0 million if a specified milestone is met.

NOTE K. OTHER COMMITMENTS AND CONTINGENCIES

We periodically become subject to legal proceedings and claims arising in connection with our business. We do not believe that there were any asserted claims against us as of December 31, 2002 which, if adversely decided, would have a material adverse effect on Genzyme Molecular Oncology's results of operations, financial condition, or liquidity.

Guarantees

In November 2002, the FASB issued FIN 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." The adoption of FIN 45 did not have a material effect on our consolidated financial statements or the combined financial statements of Genzyme Molecular Oncology for the year ended December 31, 2002. For more information, we suggest you read Note O., "Other Commitments and Contingencies," to our consolidated financial statements. We incorporate that information into this note by reference.

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NOTE L. INCOME TAXES

There was no provision for income taxes due to Genzyme Molecular Oncology's continuing operating losses. As part of the acquisition of PharmaGenics, Genzyme Molecular Oncology recorded a deferred tax liability of $7.6 million resulting from the difference between the book and tax basis of the completed technology computed at a 38% incremental tax rate. This amount was amortized over three years consistent with the life of the completed technology. Genzyme Molecular Oncology recorded deferred tax benefits of $1.2 million in 2000. Amortization of this deferred tax benefit was completed in 2000.

The following summarizes Genzyme Molecular Oncology's benefit from income taxes:

			December 31,
			2002		2001		2000
			(Amounts in thousands)
Deferred:
	Federal		$	—	$	—	$	(1,118	)
	State			—		—		(96	)

		Total income tax benefit	$	—	$	—	$	(1,214	)

The differences between the effective tax rates and the U.S. federal statutory tax rates were as follows:

	2002		2001		2000
Tax provision (benefit) at U.S. statutory rate	(35.0	)%	(35.0	)%	(35.0	)%
State income taxes, net of federal benefit	(1.8	)	(1.8	)	(0.9	)
Tax credits	(2.4	)	(3.2	)	(3.1	)
Nondeductible amortization	—		—		3.2
Deductions subject to deferred tax valuation allowance	39.2		40.0		30.8

Effective tax rate	0.0	%	0.0	%	(5.0	)%

The components of net deferred tax assets were as follows:

		December 31,
		2002			2001
		(Amounts in thousands)
Deferred tax assets:
Net operating loss carryforwards		$	39,053		$	31,108
Reserves and other			372			269
Tax credits			5,273			4,411

Gross deferred tax asset			44,698			35,788
Valuation allowance			(44,698	)		(35,788	)

	Net deferred tax assets	$	—		$	—

As a result of uncertainty surrounding our ability to realize certain tax benefits that primarily relate to operating loss carryforwards and capital losses from the purchase of IPR&D, we placed

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valuation allowances of $44.7 million in 2002 and $35.8 million in 2001 against otherwise recognizable deferred tax assets.

As Genzyme Molecular Oncology recognizes these deferred tax assets in accordance with accounting principles generally accepted in the U.S., the benefits of those assets will be reflected in its tax provision. However, the benefit of these deferred tax assets has previously been allocated to Genzyme General in accordance with our management and accounting policies, and will be reflected as a reduction of Genzyme Molecular Oncology's net income (loss) to determine net income (loss) attributable to Molecular Oncology Stock.

The federal and various state income tax returns are currently under examination. While the ultimate results of such examinations cannot be predicted with certainty, we believe that the examinations will not have a material adverse effect on future operating results of Genzyme Molecular Oncology.

NOTE M. BENEFIT PLANS

Note Q., "Benefit Plans," to our consolidated financial statements contains information regarding our 401(k) plan. We incorporate that information into this note by reference.

NOTE N. SIGNIFICANT CUSTOMERS

Genzyme Molecular Oncology has four significant pharmaceutical customers. The following table describes the revenue for each customer in comparison to total revenue:

	2002		% of Total Revenue		2001		% of Total Revenue		2000		% of Total Revenue
	(Amounts in thousands, except percentage data)
Customer A	$	5,517	59	%	$	4,692	72	%	$	908	16	%
Customer B	$	3,244	35	%	$	407	6	%		—	—
Customer C		—	—		$	700	11	%	$	1,280	23	%
Customer D		—	—			—	—		$	2,000	35	%

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NOTE O. QUARTERLY RESULTS (UNAUDITED)

	1st Quarter 2002			2nd Quarter 2002			3rd Quarter 2002			4th Quarter 2002
	(Amounts in thousands)
Total revenue	$	2,422		$	2,346		$	2,282		$	2,339
Gross profit		1,168			1,011			1,131			1,224
Net loss		(6,031	)		(6,237	)		(6,305	)		(5,141	)

	1st Quarter 2001			2nd Quarter 2001			3rd Quarter 2001			4th Quarter 2001
	(Amounts in thousands)
Total revenue	$	1,412		$	1,279		$	1,224		$	2,647
Gross profit		868			794			556			1,268
Net loss		(6,274	)		(8,331	)		(7,494	)		(7,619	)

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Genzyme Corporation:

In our opinion, the accompanying combined balance sheets and the related combined statements of operations and of cash flows present fairly, in all material respects, the financial position of Genzyme Molecular Oncology at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As more fully described in Note A to these combined financial statements, Genzyme Molecular Oncology is a division of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Molecular Oncology should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 7, 2003

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