As filed with the Securities and Exchange Commission on June 15, 2001

Registration No. 333-51954

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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CONTROL DELIVERY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

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Delaware 2834 06-1357485
(State or other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)

313 Pleasant Street
Watertown, Massachusetts 02472
(617) 926-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Thomas J. Smith, Chairman
Paul Ashton, President and CEO
Control Delivery Systems, Inc.
313 Pleasant Street
Watertown, Massachusetts 02472
(617) 926-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

Copies to:
Mary E. Weber, Esq. R. W. Smith, Jr., Esq.
Ropes & Gray Piper Marbury Rudnick & Wolfe LLP
One International Place 6225 Smith Avenue
Boston, Massachusetts 02110 Baltimore, Maryland 21209
(617) 951-7000 (410) 580-3000
(617) 951-7050 (fax) (410) 580-3001 (fax)

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE

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Title of Proposed Proposed
each class maximum maximum Amount of
of securities Amount to offering price aggregate registration
to be registered be registered(1) per share(2) offering price fee (3)
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Common Stock, $0.01 par
value per share........ 6,210,000 $15.00 $93,150,000 $24,425

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(1) Includes 810,000 shares of Common Stock issuable upon exercise of the
underwriters' over-allotment option.

(2) Estimated solely for the purpose of calculating the amount of the
registration fee; based on a bona fide estimate of the maximum offering
price per share of the securities being registered in accordance with Rule
457(a) of the Securities Act of 1933.

(3) Of this amount, $22,770 has been previously paid.

The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.

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Subject to Completion, Dated , 2001

Control Delivery Systems, Inc.

[LOGO OF CDS APPEARS HERE]

[LOGO]

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5,400,000 Shares

Common Stock

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This is the initial public offering of Control Delivery Systems, Inc. We are
offering 5,400,000 shares of our common stock. We anticipate that the initial
public offering price will be between $13.00 and $15.00 per share. We have
applied to list our common stock on the Nasdaq National Market under the
symbol "CDSY."

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.

Per Share Total

Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds, before expenses, to Control Delivery Systems, Inc. $ $

We have granted the underwriters the right to purchase up to 810,000
additional shares of common stock to cover over-allotments.

Deutsche Banc Alex. Brown
Banc of America Securities LLC
SG Cowen

The date of this prospectus is , 2001.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

+ +
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is declared effective. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

[The inside front cover of the prospectus will include the following
graphics.

The background of this page is blue. The upper right portion of the page
displays two photographs of our Aeon implant. The photograph to the left shows
the Aeon next to a pencil and the photograph to the right shows the Aeon
sitting on a human thumb. Immediately below the photographs, on the right half
of the page, is the following text: "Control Delivery Systems' products are
designed to increase the efficacy of drugs and eliminate side effects caused by
systemic drug administration by delivering a drug directly to a target site, at
a controlled rate, for a predetermined, extended period of time." To the left
of these words, in the background, are the letters "CDS."

Across the bottom two-thirds of the page, in the background, is an outline
of an eye. The bottom third of the page contains our logo. The following text
appears along the bottom of the page, set off from the rest of the page by a
green background: "Improving therapeutic results through advances in drug
delivery."]

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TABLE OF CONTENTS

Page
----

Business................................................................... 27
Management................................................................. 40
Related Party Transactions................................................. 47
Principal Stockholders..................................................... 48
Description of Capital Stock............................................... 50
Shares Eligible for Future Sale............................................ 53
Underwriting............................................................... 55
Validity of Common Stock................................................... 58
Experts.................................................................... 58
Where You Can Find More Information About Us............................... 58
Index to Financial Statements.............................................. F-1

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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.

Until , 2001 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to unsold allotments or subscriptions.

PROSPECTUS SUMMARY

This summary highlights information described more fully elsewhere in this
prospectus. You should read the entire prospectus, including "Risk Factors" and
the financial statements and related notes, before making an investment
decision.

Our Business

We design, develop and manufacture innovative, sustained-release drug
delivery products. Our products are designed to treat severe and chronic
diseases that have limited or no effective treatment options and represent
significant market opportunities. We design our products to deliver the
appropriate quantity of approved drugs directly to a target site at a
controlled rate for a predetermined period of time ranging from days to years.
We have developed proprietary technologies that serve as platforms for our
products. We believe these platform technologies will allow us to extend the
therapeutic value of a wide variety of drugs while virtually eliminating the
variations in drug concentration at the target site and adverse side effects
characteristic of most traditional drug treatments.

We have obtained Food and Drug Administration approval for and
commercialized one product based on our patented Aeon platform technology and
are using this technology to develop four additional products currently in
advanced clinical trials. Vitrasert, our Aeon product for the treatment of CMV
retinitis, a blinding eye disease afflicting late-stage AIDS patients, has been
sold since 1996 and is currently one of the most effective approved treatments
for this disease. We have additional Aeon products in clinical trials for the
treatment of diabetic macular edema, uveitis and age-related macular
degeneration, three leading causes of blindness that affect over one million
eyes in the United States. Two of these products commenced pivotal clinical
trials in December 2000 and have been granted an expedited review by the FDA
called "fast track" status. We expect that our third ophthalmic product, as
well as our Aeon product for the treatment of brain tumors, will enter multi-
center Phase II clinical trials in 2001. Our pipeline also includes products in
pre-clinical development for the treatment of severe osteoarthritis and post-
surgical pain.

We have agreements with Bausch & Lomb Incorporated for the development and
marketing of our products to treat eye diseases. Bausch & Lomb markets
Vitrasert and has committed approximately $77 million to the joint development
of our three ophthalmic product candidates, including milestone and license fee
payments to us. In addition, Bausch & Lomb has agreed to pay us royalties on
sales of our ophthalmic products. Bausch & Lomb is publicizing our Aeon
platform technology under the Envision TD brand name.

Drawbacks of Traditional Drug Delivery

Severe and chronic diseases, such as blinding eye diseases, cancer, severe
osteoarthritis, multiple sclerosis and Alzheimer's disease, afflict millions of
people each year and are becoming more prevalent as the population ages.
Despite continuing advances in medical and pharmaceutical technologies, current
treatment options for many of these diseases are inadequate. Where drug
treatments for these diseases exist, the drugs are usually delivered by oral
ingestion or injection, which require the drugs to travel throughout the body
to the intended site. This type of treatment typically offers only temporary or
limited therapeutic benefits and causes harmful side effects. Some drugs are
too potent to be delivered systemically in the quantities necessary for
treatment, while others are theoretically effective but are unable to penetrate
the natural barriers that surround some areas of the body. For drug treatment
to be effective, the appropriate amount of drug must be delivered to the
intended site in the body and be maintained there for an adequate period of
time. The manner in which a drug is delivered can be as important to the
ultimate therapeutic value of the treatment as the intrinsic properties of the
drug itself.

Advantages of Our Proprietary Platform Technologies

Our proprietary platform technologies are designed to solve the problems
posed by traditional drug delivery methods. Our lead platform technology, the
Aeon system, consists of a drug core coated in a series of polymer layers. Our
second platform technology, the Codrug system, chemically links two or more
drugs together. Key advantages of our platform technologies include:

. Localized Delivery. We design our products to be implanted directly at a
target site, using the natural barriers of the body to isolate and
maintain high concentrations of drug at the site, thereby maximizing
therapeutic value and minimizing adverse side effects.

. Controlled Release Rate. We design our products to release drugs at a
controlled rate in order to maintain the optimal dosage level at a target
site and virtually eliminate variability in drug concentration over time.

. Extended Delivery. We design our products to deliver drugs for extended,
predetermined periods of time ranging from days to years, eliminating the
risk of inconsistent administration.

In addition, because our products in clinical trials deliver drugs already
approved by the FDA for the treatment of other diseases and are based on the
technology used in our already-commercialized Vitrasert product, we believe we
can develop these and future products in less time, at a lower cost and with
less risk than is typically associated with drug discovery and development.

Our Strategy

Our objective is to revolutionize the treatment of the severe and chronic
diseases that we target and to develop products that become the standard of
care for these diseases. In order to achieve this objective, we intend to:

. Focus on severe and chronic diseases that represent significant market
opportunities,

. Rapidly commercialize our products for blinding eye diseases,

. Extend our platform technologies into additional therapeutic areas,

. Develop additional marketing alliances and independent marketing
capabilities for the distribution of our products, and

. Expand our manufacturing, sales and marketing capabilities.

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Control Delivery Systems, Inc. is located at 313 Pleasant St., Watertown,
Massachusetts 02472. Our telephone number is (617) 926-5000 and our web site
address is www.controldelivery.com. The information on our web site is not
incorporated as a part of this prospectus.

Aeon(TM) and Ceredur(TM) are our trademarks. Vitrasert(R) and Envision
TD(TM) are trademarks of Bausch & Lomb Incorporated. Each trademark, trade name
or service mark of any other company appearing in this prospectus belongs to
its holder.

The Offering

Common stock offered by Control Delivery
Systems....................................... 5,400,000 shares

Common stock to be outstanding after this
offering...................................... 28,394,775 shares

Use of proceeds............................
For research, development and
commercialization of our
products, expansion of our
manufacturing facilities and
general corporate purposes,
including working capital.

Proposed Nasdaq National Market symbol..... CDSY

The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares of common stock outstanding as
of May 31, 2001. This number assumes the conversion into common stock of all
our preferred stock outstanding on that date. It excludes:

. 2,292,003 shares of common stock issuable upon exercise of stock options
outstanding as of May 31, 2001 with a weighted average exercise price of
$4.56 per share, and

. 336,618 shares of common stock issuable upon exercise of warrants
outstanding as of May 31, 2001 with a weighted average exercise price of
$5.97 per share.

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Except as otherwise indicated, all information in this prospectus assumes:

. a nine-for-one split of our common stock immediately prior to the date
of this prospectus and a corresponding adjustment in the conversion rate
of our convertible preferred stock,

. the conversion of all outstanding shares of our convertible preferred
stock into shares of common stock upon the closing of this offering,

. no exercise of the underwriters' over-allotment option, and

. the filing of an amended and restated certificate of incorporation
immediately prior to the date of this prospectus.

Summary Consolidated Financial Data

(in thousands, except per share data)

Three Months
Ended
Year Ended December 31, March 31,
-------------------------------------- -------------
1996 1997 1998 1999 2000 2000 2001
------ ------ ------ ------ ------- ------ ------

Consolidated Statement
of Operations Data:
Revenues:
License fees and
collaborative research
and development -
related party........ $ 928 $ -- $ -- $1,889 $ 4,025 $ 937 $2,577
Royalties - related
party................. 1,076 1,109 638 496 380 92 120
Government research
grants................ 217 240 477 400 731 300 200
------ ------ ------ ------ ------- ------ ------
Total revenues....... 2,221 1,349 1,115 2,785 5,136 1,329 2,897
------ ------ ------ ------ ------- ------ ------
Operating expenses:
Research and
development .......... 1,075 845 1,156 1,550 7,033 665 1,999
Royalties.............. 110 492 315 496 356 46 60
General and
administrative ....... 289 413 513 872 1,955 399 1,226
------ ------ ------ ------ ------- ------ ------
Total operating
expenses............ 1,474 1,750 1,984 2,918 9,344 1,110 3,285
------ ------ ------ ------ ------- ------ ------
Income (loss) from
operations ............ 747 (401) (869) (133) (4,208) 219 (388)
Interest income, net.... 1 7 3 39 804 16 439
------ ------ ------ ------ ------- ------ ------
Net income (loss) before
income taxes........... 748 (394) (866) (94) (3,404) 235 51
Provision for income
taxes.................. -- -- -- -- 192 -- --
------ ------ ------ ------ ------- ------ ------
Net income (loss)....... 748 (394) (866) (94) (3,596) 235 51
------ ------ ------ ------ ------- ------ ------
Accretion on redeemable
convertible preferred
stock and warrants..... -- -- -- -- (197) -- (118)
------ ------ ------ ------ ------- ------ ------
Net income (loss)
attributable to common
stockholders........... $ 748 $ (394) $ (866) $ (94) $(3,793) $ 235 $ (67)
====== ====== ====== ====== ======= ====== ======
Net income (loss) per
share:
Basic.................. $ 0.04 $(0.02) $(0.05) $(0.01) $ (0.21) $ 0.01 $(0.00)
Diluted................ 0.04 (0.02) (0.05) (0.01) (0.21) 0.01 (0.00)
Shares used in computing
net income (loss) per
share:
Basic.................. 18,000 18,000 18,453 19,056 17,758 19,022 17,205
Diluted................ 18,000 18,000 18,453 19,056 17,758 20,123 17,205
Unaudited pro forma net
income (loss) per
share(1):
Basic.................. $ (0.15) $ 0.00
Diluted................ (0.15) 0.00
Shares used in computing
unaudited pro forma net
income (loss) per
share(1):
Basic.................. 23,533 22,980
Diluted................ 23,533 24,546

March 31, 2001
--------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (2)
------- ------------- ---------------

Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $21,053 $21,053 $ 90,361
Working capital......... 26,800 26,800 96,108
Total assets............ 34,655 34,655 103,963
Redeemable convertible
preferred stock........ 31,494 -- --
Total stockholders'
(deficit) equity....... (2,521) 28,973 98,281

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(1) Gives effect to the conversion of all outstanding shares of convertible
preferred stock into common stock at the beginning of the period.

(2) As adjusted to reflect the net proceeds from the sale of 5,400,000 shares
of common stock in this offering, at an assumed initial public offering
price of $14.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together with
the other information contained in this prospectus, before you decide whether
to buy our common stock. If any of the following risks actually occur, our
business and prospects could suffer significantly. In any of these cases, the
market price of our common stock could decline, and you could lose all or part
of your investment in our common stock.

We have a history of losses and, if we do not generate sufficient revenue from
sales of our proposed products, we may not achieve or maintain significant
profitability.

We have incurred operating losses in each of our last three years and, as of
March 31, 2001, we had an accumulated deficit of approximately $7.2 million. We
expect to continue to incur losses over at least the next several years as we
continue to incur increasing costs for research and development, clinical
trials and other purposes. Royalties from sales of Vitrasert, our one
commercial product, have declined in each of the past three years, and we
expect that they will not comprise a significant portion of our future revenue.
As a result, our ability to achieve consistent profitability depends upon our
ability, alone or with others, to complete development of, obtain required
regulatory clearances for and manufacture and market our proposed products.

If we experience difficulty raising needed capital in the future, the growth of
our company may be curtailed.

We have expended and will continue to expend substantial funds to complete
the research, development, clinical testing, manufacturing and
commercialization of our proposed products. We believe our current level of
cash and anticipated future revenues under our existing agreements, together
with the net proceeds from this offering, will be sufficient to support our
current operating plan for at least the next two years. However, we may require
additional funds if the research, development and marketing of our products and
the development of internal manufacturing, marketing and sales capabilities
take longer or cost more than we expect, or if our 1999 agreement with Bausch &
Lomb is terminated. During 2001, we expect to incur research and development
expenses of approximately $19.0 million, of which approximately $13.0 million
relates to our three proposed eye products and will be funded by Bausch & Lomb
under our 1999 license agreement. However, we do not have any third-party
funding for the development of any other products and we may require additional
funds to pursue their development. We expect research and development costs
associated with non-ophthalmic products to significantly increase in the
future. Additional financing may not be available on acceptable terms, if at
all, and we may need to delay, reduce the scope of, or eliminate one or more of
our development programs, which could materially curtail the growth of our
business.

If we do not successfully complete clinical trials necessary to obtain
regulatory approval of our proposed products, we will be unable to market them.

Before we can obtain approval from the Food and Drug Administration, or FDA,
and foreign regulatory authorities to manufacture and market our proposed
products, we must demonstrate through pre-clinical studies and clinical trials
that each of these products is safe and effective for human use for its
targeted disease. Of our products, only Vitrasert has been approved for sale in
the United States and foreign countries. Our other products are in various
stages of pre-clinical and clinical testing. If we do not successfully complete
clinical trials of these products, we will not be able to market them and we
may be unable to generate future revenues sufficient to achieve profitability.

We estimate that clinical trials for our product candidates for diabetic
macular edema, uveitis and age-related macular degeneration will take at least
two years to complete. Our clinical trials may fail or be delayed by many
factors, including the following:

. our inability to attract clinical investigators for our trials,

. our inability to recruit patients at the expected rate,

. failure of the trials to demonstrate a product's safety or efficacy,

. our inability to follow patients adequately after treatment,

. our inability to manufacture sufficient quantities of materials to use
for clinical trials, and

. unforeseen governmental or regulatory delays.

Results from pre-clinical testing and early clinical trials often do not
accurately predict results of later clinical trials. Data obtained from pre-
clinical and clinical activities are susceptible to varying interpretations
which may delay, limit or prevent regulatory approval. We have tested our
product candidates on only a small number of patients. Despite the promising
results in the pre-clinical testing and clinical trials of our proposed
products, further trials may not be undertaken or may ultimately fail to
establish the safety and efficacy of these products, and we may not receive
regulatory approval to manufacture and sell the products.

Our proposed products may cause unacceptable side effects, which could
delay, limit or prevent their regulatory approval. Drugs being utilized in our
proposed ophthalmic products have known dose-related localized side effects
including cataracts and elevated intraocular pressure. Some patients in our
trials have experienced these side effects, as well as intra-retinal bleeding
and optic nerve swelling. In some cases, these side effects were alleviated by
glaucoma surgery, but in others it was necessary to remove the implant. No
patients suffered loss of vision due to these effects. We cannot be sure that
these or other side effects will not occur or be more serious in other
patients.

Because our currently proposed products for the treatment of eye disease
employ the same technology platform and deliver the same drug, the failure of
one of our products to demonstrate safety and efficacy in clinical trials may
delay or prevent development or approval of other products and hinder our
ability to conduct related pre-clinical testing and clinical trials.

If Bausch & Lomb terminates its agreements with us or does not successfully
manufacture, market, distribute and sell our ophthalmic products, we may not
generate revenue or achieve profitability.

Bausch & Lomb has exclusive rights to sell any products we develop to treat
conditions of the eye, including Vitrasert and our three ophthalmic products
currently in clinical trials. Bausch & Lomb is also funding development of
these three products. We derived 57.2% of our total revenues in 1998, 85.7% of
our total revenues in 1999, 85.8% of our total revenues in 2000 and 93.1% of
our total revenues in the first quarter of 2001 from our agreements with Bausch
& Lomb. Bausch & Lomb can terminate its agreements with us at any time without
cause and on short notice. In addition, Bausch & Lomb may change its strategic
focus, pursue alternative technologies, develop competing products or take
other action which could result in its termination of the agreements. Since we
do not currently have the manufacturing or sales and marketing capabilities to
fully commercialize all of our proposed products, any breach or termination of
these agreements by

Bausch & Lomb could delay or stop the development or commercialization of our
drug delivery products for the treatment of eye disease. If Bausch & Lomb fails
to successfully manufacture, market or sell our products on a timely basis, we
may not generate revenue or achieve or maintain profitability.

If we increase our estimates of the costs of completing research and
development activities under our 1999 Bausch & Lomb agreement, we may recognize
significantly less revenue than anticipated during a reporting period.

We use the percentage of completion method of accounting for revenues from
research and development activities. We recognize revenues from nonrefundable
license fees, milestone payments and collaborative research and development
under our 1999 Bausch & Lomb agreement based on the actual costs incurred in
relation to total estimated costs to complete research and development
activities at each reporting period. We may need to change our estimates of the
costs associated with completing research and development activities under the
1999 Bausch & Lomb agreement due to unforeseen events and circumstances.
Because we receive such a large percentage of our total revenues from
activities under this agreement, revisions in these cost estimates may require
us to recognize significantly less revenue than anticipated for a particular
period, or in some cases, even recognize negative revenue for the period, which
could result in a negative reaction from the investment community and decline
in our stock price.

If we do not successfully develop adequate manufacturing capabilities, we may
be unable to produce our products in sufficient quantities or at an acceptable
cost, if at all.

We have limited manufacturing experience and have no experience
manufacturing our products on a commercial scale. While Bausch & Lomb has
agreed to fund our development of the capacity to manufacture commercial
quantities of our proposed ophthalmic products, we intend to develop the
capacity to manufacture all of our products at an acceptable cost from early
clinical trials through commercialization. However, we may be unable to develop
this manufacturing capability in a cost-effective, timely fashion, or at all.
If we are unable to develop an independent manufacturing capability, we will be
dependent on third parties to manufacture our commercial products and may be
unable to obtain these products in sufficient quantities or at an acceptable
cost.

We currently anticipate that in 2001 we will have adequate space and
equipment to support the commercial manufacture of our proposed products.
However, the FDA and other regulators generally do not approve a facility for
the manufacture of a pharmaceutical product until that product has itself been
approved. The FDA or other regulators may not approve our facility or, once
approved, may not continue to certify its compliance with FDA or other
manufacturing standards. If these approvals are not obtained and maintained,
the regulatory authorities could prevent us from manufacturing products at the
facility, impose restrictions on the products we manufacture at the facility or
require us to withdraw those products from the market.

If we do not successfully develop marketing and sales capabilities, we may be
unable to market and commercialize our non-ophthalmic products successfully.

We do not have any internal marketing or sales capabilities and currently
depend entirely on the marketing efforts of Bausch & Lomb. However, a key part
of our strategy is to develop these capabilities to reduce our dependence on
third parties. If we do not successfully develop sales and

marketing capabilities, we may be unable to compete effectively against our
competitors, many of whom have extensive and well-funded marketing and sales
operations, and we may have to rely on arrangements with third parties. This
may result in unexpected delays or failures to market and commercialize non-
ophthalmic products successfully.

If users of our proposed products are unable to obtain adequate reimbursement
from third-party payors, market acceptance of our proposed products may be
limited.

Our ability to commercialize our products successfully will depend in part
on the extent to which health care providers receive appropriate reimbursement
levels from governmental authorities, private health insurers and other
organizations for our products and related treatments. Third-party payors are
increasingly challenging the prices charged for medical products and services.
If health care providers do not receive adequate reimbursement for our
products, they or their patients may not use them.

If we cannot retain our key personnel or hire additional qualified personnel,
we may experience delays or failures in product development or approval, loss
of sales and diversion of management resources.

Our success will depend to a significant degree upon the continued services
of key management, technical and scientific personnel, including Thomas Smith,
our Chairman, and Paul Ashton, our President and Chief Executive Officer.
Although we have obtained key man life insurance policies for each of Drs.
Smith and Ashton, this insurance may not adequately compensate us for the loss
of their services. In addition, we must attract and retain other highly skilled
personnel. Competition for qualified personnel in our industry is intense, and
the process of hiring and integrating qualified personnel is often lengthy. We
may not recruit qualified personnel on a timely basis, if at all. Our
management and other employees may voluntarily terminate their employment with
us at any time. The loss of the services of key personnel, or the inability to
attract and retain additional qualified personnel, could result in delays or
failures in product development or approval, loss of sales and diversion of
management resources.

We expect intense competition from alternative treatments for our targeted
diseases that may reduce or eliminate the demand for our products.

We expect that our proposed products, if approved, will compete with
existing therapies for our targeted diseases as well as new drugs, therapies,
drug delivery systems or technological approaches that may be developed to
treat these diseases or their underlying causes. We believe that academic
institutions, government agencies, research institutions and biotechnology and
pharmaceutical companies, including other drug delivery companies, are working
to develop other drugs, therapies, drug delivery products, technological
approaches and methods of preventing or treating diseases on which we focus.
Any of these drugs, therapies, products, approaches or methods may receive
government approval or gain market acceptance more rapidly than our proposed
products, may offer therapeutic or cost advantages or may cure our targeted
diseases or their underlying causes completely. This would reduce demand for
our proposed products and could render them noncompetitive or obsolete. For
example, sales of our Vitrasert product for the treatment of CMV retinitis, a
disease which affects people with late-stage AIDS, have declined significantly
because of new treatments that delay the onset of late-stage AIDS.

For many of our targeted diseases, competitors have already commercialized,
or are in advanced stages of development of, alternative therapies. For
example, Eli Lilly and Company is in advanced

trials for its PKC beta inhibitor for the treatment of diabetic macular edema.
Novartis AG and QLT Inc. are currently marketing their Visudyne(TM)
photodynamic therapy for the treatment of age-related macular degeneration.
Novartis also markets a cyclosporine product for the treatment of uveitis.
Guilford Pharmaceuticals Inc. has developed its Gliadel(R) wafer implant for
the treatment of brain tumors. Various cyclooxygenase 2, or COX-2, inhibitors,
such as VIOXX(R) marketed by Merck & Co., Inc. and Celebrex(R) co-marketed in
the United States by Pharmacia Corporation and Pfizer Inc., are used for the
treatment of osteoarthritis. Oculex Pharmaceuticals, Inc. and Allergan, Inc.
have announced that they have entered into a collaboration agreement to develop
products to treat diseases occurring in the retina and the back of the eye
based on Oculex's drug delivery technologies.

The capital resources, manufacturing and marketing experience, research and
development resources and production facilities of many of our competitors and
potential competitors are much greater than ours. Many of them also have much
more experience in pre-clinical testing and clinical trials and in obtaining
FDA and foreign approvals. In addition, they may succeed in obtaining patents
that would make it difficult or impossible for us to compete with their
products.

Patent protection for our products is important and uncertain. If we do not
protect our intellectual property, we will be subject to increased competition.

The following factors are important to our success:

. protecting and maintaining our proprietary rights to our intellectual
property,

. protecting our proposed products with our current or new patents,

. not infringing the proprietary rights of others,

. maintaining our trade secrets, and

. preventing others from infringing our proprietary rights.

We will be able to protect our proprietary products and processes from
unauthorized use by third parties only to the extent that our proprietary
products and processes are covered by valid and enforceable patents or are
effectively maintained as trade secrets.

We try to protect our proprietary technology by filing United States and
foreign patent applications related to the proprietary technology, inventions
and improvements that are important to the development of our business and hold
exclusive licenses of patent rights that are important to our business. Because
patents involve complex legal and factual questions, we cannot predict their
enforceability with certainty. Our patents may be challenged, invalidated or
circumvented.

Our patent position, like that of other biotechnology, pharmaceutical or
medical device companies, is highly uncertain. The standards which the United
States Patent and Trademark Office and its foreign counterparts use to grant
patents are not always applied predictably or uniformly and can change. There
is no uniform worldwide policy among patent offices regarding the subject
matter and scope of claims granted or allowable in medical device or
pharmaceutical patents. Consequently, we cannot be certain as to the type and
scope of patent claims that may be issued to us or our licensors in the future.
Further, there is no uniform worldwide jurisprudence regarding the scope of
claims granted or allowable in medical device or pharmaceutical patents. As a
result, we cannot be certain as to the type and scope of patent claims that may
be upheld or enforceable by a court of law. Even if we or our licensors are
able to develop commercially significant patent positions, these patents may
not be upheld or may be substantially narrowed in litigation.

Pre-existing patents or prior art may reduce the scope or the value of, or
even invalidate, our patents or those to which we have exclusive rights and
affect our ability to market and sell our

products. Others may hold conflicting patents or have conducted research or
made published discoveries of compounds or processes that precede our
discoveries and prevent us from obtaining patent protection for our own
technologies or narrow the scope of any protection obtained. There could be a
material adverse effect on our business and future prospects if third-party
patents or patent applications have priority over any of our patents or patent
applications. Any reduction in scope or invalidation of our patents may prevent
us from extending our products into new therapeutic areas or enable other
companies to develop products that compete with ours on the basis of similar
technology. As a result, any patents that we own or license from others may not
provide any or sufficient protection against competitors. Our pending patent
applications, those we may file in the future, or those we may license from
third parties, may not result in patents being issued. If issued, they may not
provide us with proprietary protection or competitive advantages against
competitors with similar technology. The laws of some foreign countries do not
protect intellectual property rights to the same extent as do the laws of the
United States.

We have exclusive licenses with the University of Kentucky Research
Foundation. The University of Kentucky Research Foundation can terminate these
licenses if we fail to perform our duties under the agreements. If we breach
these license agreements and lose the ability to employ the technology licensed
to us under these agreements, we may have to stop marketing some or all of our
products. Any disputes that arise out of these license agreements may be very
costly to litigate.

We also rely on trade secrets, know-how and technology, which are not
protected by patents, to maintain our competitive position. We try to protect
this information by entering into confidentiality agreements with parties that
have access to it, such as our corporate partners, collaborators, employees,
and consultants. Any of these parties may breach the agreements and disclose
our confidential information, or our competitors might learn of the information
in some other way. If any trade secret, know-how or other technology not
protected by a patent were to be disclosed to or independently developed by a
competitor, our competitive position could be materially harmed.

Obtaining and protecting patent and proprietary rights can be expensive. If
a competitor files a patent application claiming technology also invented by us
or our licensors, we may have to participate in a proceeding before the United
States Patent and Trademark Office to determine who invented the technology.
We, or our licensors, may also need to participate in proceedings involving our
issued patents, or patents of our licensors, and pending applications of
another entity. Our participation in such a proceeding would require us to
spend significant amounts of time and money. Proceedings challenging the
validity of our patents in Europe may lead to the limitation or revocation of
the challenged patents. An unfavorable outcome in either of these proceedings
could require us to cease using the technology or to license rights from
prevailing third parties. A prevailing third party may only offer us a license
on terms that are unacceptable to us.

We may need to resort to litigation to enforce a patent issued to us or to
determine the scope and validity of third-party proprietary rights. We could
incur substantial costs in connection with any litigation and our management's
efforts would be diverted, regardless of the results of the litigation. An
unfavorable result in litigation could subject us to significant liabilities to
third parties, require us to cease manufacturing or selling the affected
products or using the affected processes, or require us to license the disputed
rights from third parties. Our business will be harmed if we cannot obtain a
license, can obtain a license only on terms we consider to be unacceptable, or
if we are unable to redesign our products or processes to avoid infringement.

If others assert that our technology infringes their intellectual property
rights, we may have to expend significant time and money, and we may be unable
to manufacture and sell our proposed products.

We cannot be certain that there are no issued patents or pending
applications that, if issued, would restrict our ability to manufacture and
sell our proposed products. While we do not believe that the technologies
employed in our proposed products infringe the patents of any third party, we
may be subject to infringement claims in the future based on current or later
granted patents. The defense of any claims of infringement made against us by
third parties could involve significant legal costs and require our management
to divert time and attention from our business, regardless of the outcome of
the litigation. If we are unsuccessful in defending against any claims of
infringement, we may be forced to obtain licenses or to pay royalties to
manufacture or sell our proposed products. We may not be able to obtain
necessary licenses on commercially reasonable terms, or at all. If we fail to
obtain necessary licenses or other rights, or if these licenses are too costly,
we may be unable to manufacture or sell our products or we may incur increased
costs to license third-party technology.

Because of the nature of our products, we could be exposed to significant
product liability claims which could be time-consuming and costly, divert
management attention and adversely affect our ability to obtain and maintain
insurance coverage.

Because our proposed products are designed to be implanted in the body, and
because medical outcomes are inherently uncertain, the testing, manufacture,
marketing and sale of these products involve an inherent risk that product
liability claims will be asserted against us. We intend to obtain insurance to
insure against claims that may be brought against us in connection with
clinical trials and commercial sales of our products. However, this insurance
may not fully cover the costs of claims or damages we might be required to pay.
Product liability claims or other claims related to our products, regardless of
their outcome, could require us to spend significant time and money in
litigation, divert management time and attention, require us to pay significant
damages, harm our reputation or hinder acceptance of our products. Any
successful product liability claim may prevent us from obtaining adequate
product liability insurance in the future on commercially desirable or
reasonable terms. Product liability coverage may cease to be available in
sufficient amounts or at an acceptable cost. An inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of our products. A product liability claim could also
significantly harm our reputation and delay or prevent market acceptance of our
products.

The market price of our common stock after this offering may fluctuate widely
and rapidly and may fall below the initial public offering price.

There is currently no public market for our common stock, and an active
trading market may not develop or be sustained after this offering. We and the
underwriters' representatives will negotiate an initial public offering price
that may not be indicative of the market price for our common stock after this
offering. As a result, the market price of our stock could fall below the
initial public offering price. In addition, the securities of many
pharmaceutical companies have experienced extreme price and trading volume
fluctuations in recent years, often unrelated or disproportionate to the
companies' operating performances. The market price of our common stock could
fluctuate significantly as a result of many factors including:

. the results of our clinical trials,

. the receipt and timing of FDA approvals of our products, if granted,

. the receipt of payments from collaborative development partners,
including Bausch & Lomb,

. our financial performance,

. failure to meet analysts' or investors' expectations,

. economic and stock market conditions,

. changes in evaluation and recommendation by securities analysts following
our stock,

. earnings and other announcements by, and changes in market evaluations
of, other companies in our industry,

. changes in business or regulatory conditions,

. announcements or implementation by us or our competitors of technological
innovations or new products,

. the trading volume of our common stock, or

. other factors unrelated to our company or industry.

Following periods of volatility in the market price of a company's
securities, stockholders often have instituted securities class action
litigation against that company. If we become involved in a class action suit,
it could divert the attention of management, and, if adversely determined,
could require us to pay significant damages.

If we or our stockholders sell substantial amounts of our common stock after
the offering, the market price of our common stock may decline.

Our sale or the resale by our stockholders of shares of our common stock
after this offering could cause the market price of our common stock to
decline. After this offering, we will have 28,394,775 shares of common stock
outstanding. All of the shares sold in this offering will be freely
transferable without restriction.

As of May 31, 2001, options to purchase 2,292,003 shares of our common stock
were outstanding. Many of these options are subject to vesting that generally
occurs over a period of up to five years following the date of grant. We intend
to file a registration statement following this offering to permit the sale of
shares of our common stock issuable upon exercise of these options. In
addition, as of May 31, 2001, warrants to purchase 336,618 shares of our common
stock were outstanding and exercisable. The shares received upon exercise of
these warrants may become freely tradable as early as 2002, depending upon the
method of exercise.

The holders of the common stock issuable upon conversion of our preferred
stock and holders of a substantial portion of our outstanding common stock have
registration rights with respect to the resale of their shares to the public.
Please read our discussion of registration rights under "Description of Capital
Stock."

Substantially all of our stockholders will have signed lock-up agreements
before the commencement of this offering. Under these lock-up agreements, these
stockholders have agreed, subject to certain limited exceptions, not to sell
any shares owned by them as of the effective date of this prospectus for a
period of 180 days after that date, unless they first obtain the written
consent of Deutsche Banc Alex. Brown Inc. At the end of 180 days, unless
earlier waived by Deutsche Banc Alex. Brown Inc., lock-up restrictions covering
approximately 22,994,775 shares of our common stock will end.

You will experience immediate and substantial dilution.

If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result, you will experience immediate and substantial dilution of approximately
$10.54 per share, representing the difference between our net tangible book
value per share after giving effect to this offering and the initial public
offering price. For more information, see "Dilution."

Provisions of our certificate of incorporation, our by-laws and Delaware law
may delay or prevent a change in our management.

Provisions of our certificate of incorporation, our by-laws and Delaware law
could delay or prevent a change in our management, even if the stockholders
desire such a change. Our certificate of incorporation and by-laws contain the
following provisions, among others, which may inhibit a change in our
management:

. a board of directors that is staggered in three classes,

. advance notification procedures for matters to be brought before
stockholder meetings,

. a limitation on who may call stockholder meetings,

. a prohibition on stockholder action by written consent, and

. an authorization of 20,000,000 shares of undesignated preferred stock
that we may issue with special rights, preferences and privileges and
that we could use, for example, to implement a rights plan or poison
pill.

These provisions can make it more difficult for common stockholders to
replace members of the board of directors and our current management team. We
are also subject to provisions of Delaware law that prohibit us from engaging
in any business combination with any "interested stockholder," meaning
generally a stockholder who beneficially owns more than 15% of our stock, for a
period of three years from the date this person became an interested
stockholder, unless various conditions are met, such as approval of the
transaction by our board of directors. These provisions could have the effect
of delaying or preventing a change in control. For a more complete discussion
of these provisions of Delaware law, please see "Description of Capital Stock--
Anti-Takeover Provisions--Delaware Law."

If they act together, our affiliates and entities associated with them can
control matters requiring stockholder approval because they beneficially own a
large percentage of our common stock, and they may vote this common stock in a
way with which you do not agree.

After this offering, our affiliates and entities associated with them will
beneficially own approximately 61.9% of the outstanding shares of our stock. As
a result, if these persons act together, they will have the ability to exercise
substantial control over our affairs and corporate actions requiring
stockholder approval, including the election of directors, a sale of
substantially all our assets, a merger with another entity or an amendment to
our certificate of incorporation. If they act together, these stockholders
could use their ownership position to delay, deter or prevent a change in
control. Also, their aggregate ownership could adversely affect the price that
investors might be willing to pay in the future for shares of our common stock.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements, principally in the sections entitled
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," regarding our
expectations about our future performance. Generally, you can identify these
statements by words such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
other similar terminology. These statements discuss our future expectations,
contain projections of our future results or financial position or provide
other "forward-looking" information that may involve risks and uncertainties.
Our actual results could differ significantly from the results discussed in
these statements. Factors that could cause or contribute to these differences
include those discussed in "Risk Factors." You should carefully consider that
information before you make an investment decision. We may not update these
forward-looking statements after the date of this prospectus, even if our
prospects change. You should not place undue reliance on these statements.
Although we believe that the expectations reflected in these statements are
reasonable, we cannot guarantee our future results, performance or
achievements.

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of
approximately $69.3 million, at an assumed initial public offering price of
$14.00 per share, net of estimated underwriting discounts and commissions and
estimated offering expenses payable by us. If the underwriters exercise their
over-allotment option in full, we estimate our net proceeds will be
approximately $79.9 million.

We expect to use the net proceeds from this offering as follows:

. approximately $46 million for research, development and
commercialization of our proposed products,

. approximately $10 million for expansion of our manufacturing facilities
and other capital expenditures,

. approximately $4 million for sales and marketing activities, and

. approximately $9 million for general corporate purposes, including
working capital.

As of the date of this prospectus, we cannot specify with certainty all of
the particular uses for the net proceeds we will have upon completion of the
offering. Accordingly, our management will have broad discretion in the
application of the net proceeds.

Pending these uses, we intend to invest the net proceeds in interest-
bearing, investment-grade instruments, certificates of deposit, or direct or
guaranteed obligations of the United States.

DIVIDEND POLICY

We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying any dividends in the foreseeable future. We
currently intend to retain any future earnings for the expansion of our
business.

CAPITALIZATION

The following table sets forth the following information as of March 31,
2001:

. our actual capitalization,

. our pro forma capitalization after giving effect to the conversion of all
outstanding convertible preferred stock into common stock and the filing
of an amendment to our certificate of incorporation immediately prior to
the closing of this offering to authorize 100,000,000 shares of common
stock, eliminate all existing series of preferred stock and authorize
20,000,000 shares of undesignated preferred stock, and

. our pro forma as adjusted capitalization, reflecting the sale of
5,400,000 shares of common stock in this offering at an assumed initial
public offering price of $14.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by us.

As of March 31, 2001 (1)
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands)

Series A redeemable convertible preferred stock,
$0.01 par value; 650,000 shares authorized,
641,642 shares issued and outstanding, actual;
no shares authorized, issued and outstanding,
pro forma and pro forma as adjusted ........... $31,494 $ -- $ --
======= ======= =======
Stockholders' equity (deficit):
Undesignated preferred stock, $0.01 par value;
1,350,000 shares authorized, no shares issued
and outstanding, actual; 20,000,000 shares
authorized, no shares issued and outstanding,
pro forma and pro forma as adjusted.......... -- -- --
Common stock, $0.01 par value; 27,000,000
shares authorized, 17,219,997 shares issued
and outstanding, actual; 100,000,000 shares
authorized, 22,994,775 shares issued and
outstanding pro forma; 100,000,000 shares
authorized, 28,394,775 shares issued and
outstanding, pro forma as adjusted........... 172 230 284
Additional paid-in capital.................... 4,866 36,302 105,556
Deferred compensation......................... (355) (355) (355)
Accumulated other comprehensive income ....... 4 4 4
Accumulated deficit........................... (7,208) (7,208) (7,208)
------- ------- -------
Total stockholders' (deficit) equity........ (2,521) 28,973 98,281
------- ------- -------
Total capitalization...................... $28,973 $28,973 $98,281
======= ======= =======

- --------

(1) Excludes 2,292,003 shares subject to outstanding options with a weighted
average exercise price of $4.56 per share and 336,618 shares of common
stock issuable upon the exercise of outstanding warrants with a weighted
average exercise price of $5.97 per share, in each case as of March 31,
2001.

DILUTION

Our pro forma net tangible book value as of March 31, 2001 was $29.0
million, or $1.26 per share, assuming conversion of all outstanding shares of
convertible preferred stock into shares of our common stock on the closing of
this offering. Pro forma net tangible book value per share represents the
amount of our total tangible assets, reduced by the amount of our total
liabilities, and then divided by the total number of shares of common stock
outstanding after giving effect to the conversion of all shares of outstanding
preferred stock upon closing of this offering. Dilution in pro forma net
tangible book value per share represents the difference between the amount paid
per share by purchasers of shares of common stock in this offering and the pro
forma net tangible book value per share of common stock immediately after the
completion of this offering. After giving effect to the sale of the 5,400,000
shares of common stock offered by us at an assumed initial public offering
price of $14.00 per share, and after deducting the underwriting discounts and
commissions and estimated offering expenses payable, our pro forma net tangible
book value at March 31,2001 would have been $98.3 million or $3.46 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $2.20 per share to existing stockholders and an immediate
dilution of $10.54 per share to new investors purchasing shares at the initial
public offering price. The following table illustrates this dilution on a per
share basis:

Assumed public offering price.................................. $14.00
------
Pro forma net tangible book value as of March 31, 2001....... $1.26
Increase attributable to new investors....................... 2.20
-----
Pro forma net tangible book value after the offering........... 3.46
------
Dilution to new investors...................................... $10.54
======

If the underwriters exercise their option to purchase additional shares in
the offering, the pro forma net tangible book value per share after the
offering would be $3.73 per share, the increase in pro forma net tangible book
value per share to existing stockholders would be $2.47 per share and the
dilution to new investors purchasing shares in this offering would be $10.27
per share.

The following table summarizes, as of March 31, 2001, the differences
between the existing stockholders and new investors with respect to the number
of shares of common stock purchased from us, the total consideration paid to us
and the average price paid per share:

Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------

Existing stockholders......... 22,994,775 81.0% $ 38,071,345 33.5% $ 1.66
New investors................. 5,400,000 19.0 75,600,000 66.5 14.00
---------- ----- ------------ -----
Totals.................... 28,394,775 100.0% $113,671,345 100.0%
========== ===== ============ =====

The preceding tables assume no issuance of shares of common stock under our
stock plans after March 31, 2001. As of March 31, 2001, 2,292,003 shares were
subject to outstanding options at a weighted average exercise price of $4.56
per share. This table also assumes no exercise of the warrants outstanding as
of March 31, 2001 for 336,618 shares of common stock at a weighted average
exercise price of $5.97 per share. If all of these options and warrants were
exercised, then the total dilution per share to new investors would be $10.43.

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected consolidated financial data set forth below in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1998, 1999 and 2000 and the
consolidated balance sheet data at December 31, 1999 and 2000 are derived
from financial statements included elsewhere in the prospectus that have been
audited by PricewaterhouseCoopers LLP, independent accountants. The statement
of operations data for the year ended December 31, 1997 and the balance sheet
data as of December 31, 1997 and 1998 have been derived from our audited
financial statements which are not included in this prospectus. The statement
of operations data for the three months ended March 31, 2000 and 2001, and the
balance sheet data at March 31, 2000 and 2001, have been taken from our
unaudited financial statements that are included elsewhere in this prospectus
and which include, in our opinion, all adjustments necessary for a fair
presentation of such data. The consolidated statement of operations data for
the year ended December 31, 1996 and the balance sheet data at December 31,
1996 are derived from our unaudited financial statements that are not included
in this prospectus and which include, in our opinion, all adjustments necessary
for a fair presentation of such data. Historical results are not necessarily
indicative of results to be expected for any future period. Pro forma
information reflects the conversion of 641,642 shares of our Series A
convertible preferred stock into 5,774,778 shares of common stock upon the
closing of this offering (as if converted at the beginning of the period).

Three Months
Year Ended December 31, Ended March 31,
------------------------------------------- -----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- ------- --------
(in thousands, except per share data)

Consolidated Statement of Operations Data:
Revenues:
License fees and collaborative research
and development - related party......... $ 928 $ -- $ -- $ 1,889 $ 4,025 $ 937 $ 2,577
Royalties - related party................ 1,076 1,109 638 496 380 92 120
Government research grants............... 217 240 477 400 731 300 200
------- ------- ------- ------- ------- ------- --------
Total revenues ........................ 2,221 1,349 1,115 2,785 5,136 1,329 2,897
------- ------- ------- ------- ------- ------- --------
Operating expenses:
Research and development................. 1,075 845 1,156 1,550 7,033 665 1,999
Royalties................................ 110 492 315 496 356 46 60
General and administrative............... 289 413 513 872 1,955 399 1,226
------- ------- ------- ------- ------- ------- --------
Total operating expenses............... 1,474 1,750 1,984 2,918 9,344 1,110 3,285
------- ------- ------- ------- ------- ------- --------
Income (loss) from operations............. 747 (401) (869) (133) (4,208) 219 (388)
Interest income, net...................... 1 7 3 39 804 16 439
------- ------- ------- ------- ------- ------- --------
Net income (loss) before income taxes 748 (394) (866) (94) (3,404) 235 51
Provision for income taxes................ -- -- -- -- 192 -- --
------- ------- ------- ------- ------- ------- --------
Net income (loss)......................... 748 (394) (866) (94) (3,596) 235 51
Accretion on redeemable convertible
preferred stock and warrants............. -- -- -- -- (197) -- (118)
------- ------- ------- ------- ------- ------- --------
Net income (loss) attributable to common
stockholders............................. $ 748 $ (394) $ (866) $ (94) $(3,793) $ 235 $ (67)
======= ======= ======= ======= ======= ======= ========
Net income (loss) per share:
Basic.................................... $ 0.04 $ (0.02) $ (0.05) $ (0.01) $ (0.21) $ 0.01 $ (0.00)
Diluted.................................. 0.04 (0.02) (0.05) (0.01) (0.21) 0.01 (0.00)
Shares used in computing net income (loss)
per share:
Basic.................................... 18,000 18,000 18,453 19,056 17,758 19,022 17,205
Diluted.................................. 18,000 18,000 18,453 19,056 17,758 20,123 17,205
Unaudited pro forma net income (loss) per
share:
Basic.................................... $ (0.15) $ 0.00
Diluted.................................. (0.15) 0.00
Shares used in computing unaudited pro
forma net income (loss) per share:
Basic.................................... 23,533 22,980
Diluted.................................. 23,533 24,546

December 31, March 31,
------------------------------------------- -----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- ------- --------
(in thousands)

Consolidated Balance Sheet Data:
Cash and cash equivalents................. $ 176 $ 124 $ 129 $ 1,144 $18,788 $ 1,082 $ 21,053
Working capital........................... (2) (535) (485) (522) 23,933 (485) 26,800
Total assets.............................. 568 375 286 1,525 34,304 1,608 34,655
Redeemable convertible preferred stock.... -- -- -- -- 31,376 -- 31,494
Total stockholders' deficit............... (207) (597) (449) (253) (5,987) (51) (2,521)

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

You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
appearing elsewhere in this prospectus.

Overview

We design, develop and manufacture innovative sustained-release drug
delivery products. Since our founding in 1991, we have been primarily engaged
in the research and development of products using our proprietary platform
technologies. To date, we have developed one commercial product, Vitrasert, for
the treatment of CMV retinitis, a blinding eye disease that affects late-stage
AIDS patients, which has been sold since 1996. We have four additional products
in advanced clinical trials. Our revenues have consisted primarily of
royalties, license fees and payments for research and development under our two
collaborative licensing and development agreements. We have also earned revenue
from government research grants.

We have licensed a number of key patents relating to aspects of our platform
technologies from the University of Kentucky Research Foundation, or the UKRF,
and will owe royalties to the UKRF for products which use technology covered by
these patents.

In December 1992, we entered into a licensing and development agreement with
Chiron Vision Corporation for the development and commercialization of
Vitrasert. Chiron Vision began selling Vitrasert in 1996 following Food and
Drug Administration approval, and paid us royalties on those sales. Bausch &
Lomb acquired this agreement in connection with its acquisition of Chiron
Vision in 1997. Bausch & Lomb has continued to market and sell Vitrasert and
pay us royalties on those sales. We derived 57.2% of our total revenues in
1998, 17.8% of our total revenues in 1999, 7.4% of our total revenues in 2000
and 4.1% of our total revenues for the three months ended March 31, 2001 from
sales of Vitrasert. Improvements in the treatment of AIDS/HIV have
significantly decreased the incidence of CMV retinitis in the more developed
nations that have the resources to provide advanced medical care, and, as a
result, our royalty revenue from sales of Vitrasert has declined each year
since 1997. The royalties we pay to the UKRF on these sales have declined
proportionately.

In June 1999, we entered into a licensing and development agreement with
Bausch & Lomb to develop and market products for the treatment of other eye
diseases. Under this agreement, Bausch & Lomb is funding the joint development
of our three proposed products for the treatment of blinding eye diseases and
has paid us collaborative research and development payments, license fees and
milestone payments. Bausch & Lomb has agreed to make additional payments to us
if we achieve milestones with respect to the development of these products.
Bausch & Lomb has an exclusive license to market and sell our products for the
treatment of eye disease and has agreed to pay us royalties on sales of these
products.

We derived 57.2% of our total revenues in 1998, 85.7% of our total revenues
in 1999, 85.8% of our total revenues in 2000 and 93.1% of our total revenues
for the three months ended March 31, 2001 from our agreements with Bausch &
Lomb.

We have also received government research grants that fund the cost of
research and development relating to aspects of our proposed products. The
government reimburses us for actual expenditures made for research authorized
under these grants. Through March 31, 2001, we have received $2.3 million in
government research grants.

Revenue Recognition Policy

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which clarifies the Securities and Exchange Commission's views
regarding recognition of revenue. We adopted SAB 101 retroactively to 1993.

We recognize nonrefundable license fees, milestone payments and
collaborative research and development payments under licensing and development
agreements as revenue on a percentage of completion basis. Our cost of the
total effort to complete our expected research and development activities under
an agreement is estimated from the commencement date. At each reporting period,
we determine the cost of the effort that we have incurred to date under that
agreement and divide this amount by the amount of our total expected research
and development costs under that agreement at that time. Revenue recognized for
a reporting period for license fees, milestone payments and collaborative
research and development payments is determined by multiplying the resulting
percentage completed by the total license, milestone and research and
development revenues we expect to receive under that agreement, and deducting
revenue previously recognized. The remaining unrecognized revenue is spread
over the remaining performance period in a similar manner. We include
contingent payments in total revenues we expect to receive under an agreement
only when all contingencies related to a milestone have been removed and the
collaborative partner becomes obligated to make the payment. Payments received
in advance of being earned are recorded as deferred revenue.

We evaluate collaborative agreements periodically to determine the
appropriate revenue recognition for that period. The evaluation includes all of
the potential revenue components from each collaborative agreement.

In contrast to our recognition of a portion of license fees over the
remainder of the underlying contract, we recognize any corresponding royalty
due to the UKRF as expense in full at the time a contingency has been removed
and the collaborative partner becomes obligated to make the payment to us.
Consequently, we will generally recognize royalty expense for license fees in
earlier periods than we recognize the corresponding revenue.

Royalty revenue is recognized based on actual sales of licensed products in
licensed territories as reported by licensees and is generally recognized in
the period the sales occur. If a portion of the royalty revenue relates to
sponsored research and development, it is deferred and amortized consistent
with percentage of completion for that contract.

Government research grants are nonrefundable and are recognized as revenue
when the related expense is incurred. Revenue recorded under government
research grants is recorded consistent with guidelines issued by the governing
body issuing the grant.

Results of Operations

Three months ended March 31, 2001 and 2000

Revenues. Total revenues increased $1.6 million, or 118.0%, to $2.9 million
for the three months ended March 31, 2001, from $1.3 million for the three
months ended March 31, 2000.

License fees and collaborative research and development revenue increased
$1.6 million, or 175.0%, to $2.6 million for the three months ended March 31,
2001, from $937,124 for the three months ended March 31, 2000. The increase was
due to both increased research and development activities and an additional
milestone payment under our 1999 agreement with Bausch & Lomb.

Royalties revenue increased $28,305, or 30.9%, to $119,841 for the three
months ended March 31, 2001, from $91,536 for the three months ended March 31,
2000. The increase was due to an immaterial increase in Vitrasert royalties
paid to us.

Government research grants revenue decreased $100,000, or 33.3%, to
$200,000, for the three months ended March 31, 2001, from $300,000 for the
three months ended March 31, 2000. This decrease was caused by a decrease in
our research and development activities associated with and funded by these
grants.

Research and Development. Research and development expenses increased $1.3
million, or 200.6%, to $2.0 million for the three months ended March 31, 2001,
from $665,189 for the three months ended March 31, 2000. The increase was due
to increased pre-clinical and clinical trial activity and the hiring of
additional research and development personnel. We believe that our research and
development expenses will continue to increase as we fund late-stage clinical
trials and continue to hire additional manufacturing personnel. We also expect
that research and development expenses will increase substantially as we expand
our development efforts on non-ophthalmic products, which we plan to fund from
either our own resources or through strategic partnerships.

Royalties. Royalties expense increased $13,789, or 30.1%, to $59,648 for the
three months ended March 31, 2001, from $45,859 for the three months ended
March 31, 2000. The increase was attributable to slightly higher Vitrasert
royalty income which increased our royalty payments to the UKRF.

General and Administrative. General and administrative expenses increased
$827,019, or 207.3%, to $1.2 million for the three months ended March 31, 2001,
from $399,021 for the three months ended March 31, 2000. The increase was due
to the hiring of administrative staff to manage and support the growth of our
business and increased costs of outside professional services associated with
our intellectual property. We believe that general and administrative expenses
will increase in the future as we hire additional personnel and incur increased
costs of outside professional services as a public company.

Interest Income. Interest income increased $423,360 to $439,490 for the
three months ended March 31, 2001, from $16,130 for the three months ended
March 31, 2000. The increase was due to increased interest earned from our
higher average outstanding balances of cash and cash equivalents and short-term
investments following our sale of Series A redeemable convertible preferred
stock in August 2000.

Years ended December 31, 2000 and 1999

Revenues. Total revenues increased $2.4 million, or 84.4%, to $5.1 million
for the year ended December 31, 2000, from $2.8 million for the year ended
December 31, 1999.

License fees and collaborative research and development revenue increased
$2.1 million, or 113.0%, to $4.0 million for the year ended December 31, 2000,
from $1.9 million for the year ended December 31, 1999. The increase was due to
both increased research and development activities and additional license fee
and milestone payments under our 1999 agreement with Bausch & Lomb.

Royalties revenue decreased $116,565, or 23.5%, to $379,813 for the year
ended December 31, 2000, from $496,378 for the year ended December 31, 1999.
This decrease was due to a decrease in Vitrasert royalties paid to us.

Government research grants revenue increased $331,604, or 83.0%, to $731,116
for the year ended December 31, 2000, from $399,512 for the year ended December
31, 1999. This increase was caused by an increase in our research and
development activities associated with and funded by these grants.

Research and Development. Research and development expenses increased $5.5
million, or 354.0%, to $7.0 million for the year ended December 31, 2000, from
$1.5 million for the year ended December 31, 1999. The increase was due to our
conducting an increased number of pre-clinical and clinical trials, hiring of
additional research and development personnel and a $3.4 million compensation
charge related to common stock grants.

Royalties. Royalties expense decreased $140,347, or 28.3%, to $355,817 for
the year ended December 31, 2000, from $496,164 for the year ended December 31,
1999. The decrease was attributable to decreased royalty payments to the UKRF
as the result of lower Vitrasert sales and decreased license fees received from
Bausch & Lomb.

General and Administrative. General and administrative expenses increased
$1.1 million, or 124.1%, to $2.0 million for the year ended December 31, 2000,
from $872,223 for the year ended December 31, 1999. The increase was due to our
hiring of additional administrative staff to manage and support the growth of
our business, increased costs of outside professional services associated with
our intellectual property and increased stock-based compensation.

Interest Income. Interest income, net of interest expense, increased
$765,216 to $803,864 for the year ended December 31, 2000, from $38,648 for the
year ended December 31, 1999. The increase was due to increased interest earned
from our higher average outstanding balances of cash and cash equivalents
following our sale of Series A redeemable convertible preferred stock in August
2000. The increase was partially offset by interest expense on a note payable
related to a repurchase of our common stock.

Years ended December 31, 1999 and 1998

Revenues. Total revenues increased $1.7 million, or 149.9%, to $2.8 million
for the year ended December 31, 1999, from $1.1 million for the year ended
December 31, 1998.

License fees and collaborative research and development revenue increased to
$1.9 million for the year ended December 31, 1999, from $0 for the year ended
December 31, 1998. The increase was due to the initiation of collaborative
research and development activities and an initial license fee under our 1999
agreement with Bausch & Lomb.

Royalties revenue decreased $141,627, or 22.2%, to $496,378 for the for the
year ended December 31, 1999, from $638,005 for the year ended December 31,
1998. This decrease was due to a decrease in Vitrasert royalties paid to us.

Government research grants revenue decreased $77,090, or 16.2%, to $399,512
for the year ended December 31, 1999, from $476,602 for the year ended December
31, 1998. The decrease was due to a decrease in our research and development
activities associated with and funded by government grants.

Research and Development. Research and development expenses increased
$393,798, or 34.1%, to $1.6 million for the year ended December 31, 1999, from
$1.2 million for the year ended December 31, 1998. The increase was due to our
conducting an increased number of pre-clinical and clinical trials and our
hiring of additional research and development personnel.

Royalties. Royalties expense increased $180,979, or 57.4%, to $496,164 for
the year ended December 31, 1999, from $315,185 for the year ended December 31,
1998. The increase in royalties expense was attributable to payment of
royalties by us to the UKRF for license fees we received under our 1999
agreement with Bausch & Lomb. This increase was partially offset by reduced
royalty payments we made to the UKRF as a result of lower Vitrasert sales.

General and Administrative. General and administrative expenses increased
$358,676, or 69.8%, to $872,223 for the year ended December 31, 1999, from
$513,547 for the year ended December 31, 1998. The increase was due to our
hiring of additional administrative staff and an increase in the costs of
outside professional services to manage and support the growth of our business.

Interest Income. Interest income increased $35,253 to $38,648 for the year
ended December 31, 1999, from $3,395 for the year ended December 31, 1998. The
increase was due to higher cash balances as a result of payments we received
under our 1999 agreement with Bausch & Lomb.

Liquidity and Capital Resources

For the period from January 1, 1998 through March 31, 2001, we financed our
operations through sales of common and preferred stock, which totaled $33.8
million, payments received under collaborative research and development
agreements and royalties received, which totaled $14.1 million, and funding
under government research grants, which totaled $1.8 million.

Cash used in operating activities was $1.0 million for the year ended
December 31, 1998, cash provided by operating activities was $1.2 million for
the year ended December 31, 1999, cash used in operating activities was
$276,426 for the year ended December 31, 2000 and cash provided by operating
activities was $1.7 million for the three months ended March 31, 2001. The
increase in cash provided by operating activities from the year ended
December 31, 1998 to the year ended December 31, 1999 was primarily due to a
smaller net loss and the receipt of a license fee under our 1999 agreement with
Bausch & Lomb. The decrease in cash provided by operating activities from the
year ended December 31, 1999 to the year ended December 31, 2000 was primarily
due to an increase in accounts receivable due to the achievement of a milestone
under our 1999 agreement with Bausch & Lomb and an increase in other assets
caused by our deferral of the costs of this offering until its completion. The
cash provided by operating activities for the three months ended March 31, 2001
was due primarily to the receipt of collaborative research and development
payments and a milestone payment under our 1999 agreement with Bausch & Lomb.

Cash used in investing activities was $5,093 for the year ended December 31,
1998, $252,160 for the year ended December 31, 1999 and $12.1 million for the
year ended December 31, 2000, and cash provided by investing activities was
$505,443 for the three months ended March 31, 2001. The changes were due to
increased capital expenditures in each period and, for the year ended December
31, 2000, the purchase of $10.9 million in short-term investments. The cash
provided by investing activities for the three months ended March 31, 2001 was
primarily due to net maturities of short-term investments, which were partially
offset by capital expenditures and a deposit made on a manufacturing facility.

Cash provided by financing activities was $1.0 million for the year ended
December 31, 1998, $34,304 for the year ended December 31, 1999, $30.0 million
for the year ended December 31, 2000 and $62,133 for the three months ended
March 31, 2001. The decrease in cash provided by financing activities from the
year ended December 31, 1998 to the year ended December 31, 1999 was primarily
due to reduced proceeds from the sale of common stock and the payment of
accrued payroll to officers. The increase of approximately $30.0 million in
cash provided by financing activities from the year ended December 31, 1999 to
the year ended December 31, 2000 was primarily due to the issuance of Series A
convertible preferred stock in August 2000, partially offset by the repayment
of a note payable.

We had working capital deficits of $484,552 at December 31, 1998 and
$522,231 at December 31, 1999 and working capital of $23.9 million at December
31, 2000 and $26.8 million at March 31, 2001. The increase in the working
capital deficit between 1998 and 1999 was due to an increase in deferred
revenue under our 1999 agreement with Bausch & Lomb. The increase in working
capital between 1999 and 2000 was primarily due to the sale of Series A
convertible preferred stock in August 2000, partially offset by the repayment
of a note payable. The increase in working capital for the three months ended
March 31, 2001 was primarily due to the reduction of accrued expenses, related
to accrued stock compensation, which resulted from the issuance of common stock
during the first quarter.

We had cash and cash equivalents of $129,319 at December 31, 1998, $1.1
million at December 31, 1999, $18.8 million at December 31, 2000 and $21.1
million at March 31, 2001. The increase of approximately $1.0 million in cash
and cash equivalents from December 31, 1998 to December 31, 1999 was due to the
receipt of a license fee under our 1999 agreement with Bausch & Lomb and the
sale of our common stock, partially offset by the payment of deferred payroll
compensation and acquisition of capital equipment. The increase of
approximately $17.6 million in cash and cash equivalents from December 31, 1999
to December 31, 2000 was primarily due to the sale in August 2000 of our Series
A convertible preferred stock for gross proceeds of approximately $34.5
million. We also repurchased 2,514,015 shares of our common stock for
approximately $3.5 million and acquired $10.8 million of short-term investments
in 2000. The increase in cash and cash equivalents for the three months ended
March 31, 2001 was primarily due to net sales of short-term investments.

We anticipate that we will increase our use of cash in the future as we
continue to research, develop and manufacture our proposed products. We have
committed to expend an additional $4.0 million in late 2001 to acquire a
manufacturing facility. We believe that our existing cash and investment
securities and anticipated cash flow from existing collaborations together with
the net proceeds of this offering will be sufficient to support our current
operating plan for at least the next two years. Our future capital requirements
will depend on many factors, including:

. the number, rate and progress of our research programs and pre-clinical
and clinical trials,

. the achievement of the milestones under the Bausch & Lomb agreement and
any future collaborations,

. the results of clinical trials,

. our ability to establish and maintain strategic alliances, including our
collaboration with Bausch & Lomb,

. the success of Bausch & Lomb and future marketing partners in
commercializing our products, and

. costs incurred in enforcing and defending our patent claims and other
intellectual property rights.

If we require additional capital, it may not be available on favorable
terms, if at all. If adequate funds are not available on acceptable terms, we
may be required to significantly reduce or refocus our operations or to obtain
funds through arrangements that may require us to relinquish rights to our
products, technologies or potential markets, which could have a material
adverse effect on our business. To the extent that we raise additional capital
through the sale of equity or convertible debt securities, our stockholders
could be diluted.

Disclosure About Market Risk

Our exposure to market risk is principally confined to our cash and cash
equivalents, which consist of money market accounts and short-term investments.
We do not use derivative instruments to hedge interest rate exposure. Due to
the nature of our investments, we believe we are not subject to material market
risk.

BUSINESS

Overview

We have obtained Food and Drug Administration approval for and
commercialized one product based on our patented Aeon platform technology and
are using this technology to develop four additional products currently in
advanced clinical trials. Vitrasert, our Aeon product for the treatment of CMV
retinitis, a blinding eye disease afflicting late-stage AIDS patients, has been
sold since 1996 and is currently one of the most effective approved treatments
for this disease. Since 1996, we have focused our efforts primarily on research
and development of additional products based on our Aeon technology. We
currently have Aeon products in clinical trials for the treatment of diabetic
macular edema, uveitis and age-related macular degeneration, three leading
causes of blindness that affect over one million eyes in the United States. The
Food and Drug Administration has agreed to review two of these products on an
expedited basis called "fast track" status. Both of these products commenced
pivotal clinical trials in December 2000. We expect that our third ophthalmic
product, as well as our Aeon product for the treatment of brain tumors, will
enter multi-center Phase II clinical trials in 2001. Our pipeline also includes
products in pre-clinical development for the treatment of severe osteoarthritis
and post-surgical pain.

Industry Background

The therapeutic value of a drug depends on its distribution throughout the
body, reaction with the targeted site, reaction with other tissues and organs
in the body, and elimination from the body. In an ideal treatment, the
appropriate amount of drug is delivered to the intended site in the body and
maintained there for an adequate period of time without adversely affecting
other tissues and organs. Accordingly, the manner in which a drug is delivered
can be as important to the ultimate therapeutic value of the treatment as the
intrinsic properties of the drug itself.

Drugs are typically administered systemically by oral dosing or by injection
and then disperse throughout the body. In many cases, this administration
method does not deliver drugs to the intended site at an adequate concentration
for a sufficient period of time, fails to achieve the maximum potential
therapeutic benefit and results in adverse side effects.

Because systemically delivered drugs disperse throughout the body, they
often must be administered at high dosage levels in order to achieve sufficient
concentrations at the intended site. Some areas of the body, such as the eyes,
joints, brain and nervous system, have natural barriers that impede the
movement of drugs to those areas, requiring the administration of even higher
systemic doses. These high dosage levels can cause harmful side effects, called
systemic side effects, when the drug interacts with other tissues and organs.

Most systemic delivery methods also result in variability in drug
concentration over the course of each dose. The high drug concentration
immediately after dosing can cause toxicity and harmful side effects. As time
elapses after dosing, the drug concentration can rapidly diminish to levels too
low to provide any therapeutic benefit. In many cases, the optimal
concentration of drug is present at the target site for only a small period of
time.

Timely and repeated administration of drugs by the patient is often
necessary to maintain therapeutic drug levels over an extended period of time.
However, patients often fail to take drugs as prescribed and, as a result, do
not receive the potential therapeutic benefit. The risk of patient
noncompliance increases if multiple drugs are required, the dosing regimen is
complicated or the patient is elderly or cognitively impaired.

Due to the drawbacks of traditional drug delivery, the development of novel
methods to deliver drugs to patients in a more precise, controlled fashion over
sustained periods of time has become a multibillion dollar industry. Recently
developed drug delivery methods include oral and injectable controlled-release
products and skin patches. These methods seek to improve the consistency of the
dosage over time and extend the duration of delivery. However, most of these
methods cannot provide linear, controlled dosage or deliver drugs for a
sufficiently long duration. This reduces their effectiveness for diseases that
are chronic or require precise dosing. In addition, most of these methods still
deliver drugs systemically and, as a result, can still cause adverse systemic
side effects.

The CDS Advantage

We design our innovative sustained-release drug delivery products to provide
extended, controlled, localized delivery of approved drugs for the treatment of
severe and chronic diseases. Key advantages of our proprietary platform
technologies include:

. Localized Delivery. We design our products to be implanted directly at a
target site. By using the natural barriers of the body to isolate and
maintain appropriate concentrations of drug at the target site, we
believe our products will maximize the therapeutic effect of a drug,
while minimizing unwanted systemic side effects.

. Controlled Release Rate. We design our products to release drugs at a
linear or other controlled rate. We believe this will allow our products
to maintain the optimal drug concentration at a target site and eliminate
variability in dosing over time. By controlling the quantity of drug
delivered over the duration of treatment, we believe our products will
significantly improve the therapeutic benefits of treatment.

. Extended Delivery. We design our products to deliver drugs to target
sites for predetermined periods of time ranging from days to years. We
believe this uninterrupted, sustained delivery will reduce the need for
repeat applications, eliminate the risk of patient noncompliance and
provide more effective treatments.

. Reduced Development Risk. Vitrasert demonstrated the commercial viability
of our Aeon platform technology. Our products in clinical trials use this
same technology to deliver drugs already approved by the FDA for the
treatment of other diseases. As a result, we believe we can develop these
and future products in less time, at a lower cost and with less risk than
is typically associated with drug discovery and development.

. Cost-effective Therapy. We believe that by delivering the appropriate
amount of drug for an extended period of time, our products will reduce
the need for costly repeat treatments, hospitalizations and chronic care.
In addition, we believe that by virtually eliminating adverse systemic
side effects, our products will further reduce the cost of treating the
diseases we target.

Our Strategy

Our proprietary platform technologies employ novel therapeutic approaches
designed to treat severe and chronic diseases that have limited or no effective
treatment options. Our objective is to revolutionize the treatment of the
severe and chronic diseases that we target and to develop products that become
the standard of care for these diseases. In order to achieve this objective, we
intend to:

. Focus on Severe and Chronic Diseases that Represent Significant Market
Opportunities. We focus our product development on severe and chronic
diseases that we believe would be treatable with drugs already approved
by the FDA for the treatment of other diseases if those drugs could be
delivered safely and effectively to the disease site. These diseases
represent significant market opportunities because they have limited or
no currently effective treatments and affect large numbers of people. We
are currently developing products to treat blinding eye diseases, brain
tumors and severe osteoarthritis. In the future, we plan to target such
diseases as Alzheimer's disease, multiple sclerosis, post-surgical pain
and prostate cancer.

. Rapidly Commercialize Our Products for Blinding Eye Diseases. We plan to
aggressively pursue the development of our products for blinding eye
diseases. We believe that the FDA approval and the commercial acceptance
of Vitrasert, our product for the treatment of CMV retinitis, validated
our Aeon platform technology for the treatment of eye disease. We are
using the same technology to develop products for the treatment of three
leading causes of blindness. The FDA has granted fast track status to two
of these products, each of which entered pivotal trials in December 2000.
We expect the third product to enter Phase II trials in 2001. We have
selected Bausch & Lomb to market our products for the treatment of
blinding eye diseases, and it is publicizing our platform technology
under the Envision TD brand name.

. Extend Our Technology Platforms into Additional Therapeutic Areas. We
believe that we can easily adapt our existing platform technologies to
treat additional diseases by modifying the design of the product or
varying the drug delivered. For example, we are modifying our Aeon
implant designed to treat eye diseases to develop a product to treat
severe osteoarthritis. By using drugs already approved by the FDA for the
treatment of other diseases in our adaptable platform technologies, we
believe we will be able to develop products more rapidly and with lower
risk than conventional drug discovery and development.

. Develop Multiple Distribution Channels. In order to distribute our
products effectively, we expect to either enter into joint marketing or
license arrangements with established, industry-leading marketing
partners or independently commercialize our products using a targeted
sales force. Our commercialization strategy for each product will depend
upon many factors, including the market size, the expected cost and
duration of the regulatory approval process and the projected costs and
complexity of marketing the product. We expect to retain our rights to
the underlying technology in any licensing arrangements.

. Expand Internal Capabilities. To date, we have primarily been a research
and development company. We intend to broaden our strengths to gain
increased control over product development and greater flexibility in our
commercialization strategy by hiring additional personnel to oversee our
clinical trials, developing our commercial manufacturing capacity and
adding sales and marketing capabilities.

Our Proprietary Platform Technologies

Our two proprietary platform technologies are the Aeon system and the Codrug
system. Our one commercial product and all of our products currently in
clinical trials are based on our Aeon technology. Applications of our Codrug
technology are in pre-clinical trials.

Aeon Platform Technology

The Aeon system consists of a drug core surrounded by a series of polymer
layers. Several of these polymer layers are permeable, allowing the drug to
pass through them into the target site at a controlled rate for a predetermined
period of time ranging from days to years. We believe our Aeon technology can
be used to deliver almost any drug that is stable at body temperature for the
expected duration of delivery. By changing the implant design, we can control
both the rate and duration of release to meet different therapeutic needs. We
are currently using our Aeon platform technology to develop products for the
treatment of blinding eye diseases, severe osteoarthritis and brain tumors. We
are currently testing two implants with two different dosages of the same drug
for the treatment of three eye diseases. Results of clinical trials may
indicate that the same implant is appropriate for all three diseases, allowing
us to use one product for these three diseases.

Blinding Eye Diseases

Our first commercial product, Vitrasert, demonstrated the feasibility and
effectiveness of our Aeon platform technology by providing sustained, localized
treatment of CMV retinitis. We are now extending our Aeon technology to treat
diabetic macular edema, uveitis and age-related macular degeneration, three
leading causes of blindness.

CMV Retinitis. Cytomegalovirus, or CMV, retinitis, a blinding eye disease,
is a viral infection of the eye that frequently occurs in individuals with
AIDS. Although common in the early 1990s, improvements in the treatment of
AIDS/HIV have significantly decreased the incidence of CMV retinitis in more
developed countries. Our Vitrasert implant for CMV retinitis has been sold
since 1996 and provides sustained treatment of the disease for six to eight
months. Our implant gained greater than a 20% market share in its first year of
commercialization and has been used in over 10,000 eyes since 1996. Studies
show that Vitrasert is one of the most effective approved treatments for CMV
retinitis.

Diabetic Macular Edema. Diabetic retinopathy is a disease that causes the
blood vessels in the eyes of diabetics to progressively deteriorate and leak
fluid, causing the retina to swell. Diabetic macular edema, a form of diabetic
retinopathy, is a blinding eye disease that occurs when diabetic retinopathy
affects the macula, the most sensitive part of the retina. Diabetic macular
edema is a major cause of vision loss in diabetics. We estimate that over
750,000 eyes in the United States and over 1.5 million eyes outside the United
States suffer from diabetic macular edema of sufficient severity to warrant
treatment. We are not aware of any approved drug treatment for this disease.
The only current treatments are laser therapy which burns the retina, either in
specific sites or in a grid, and vitrectomy, a major eye surgery which involves
the removal of the vitreous gel from the cavity of the eye and the surgical
dissection of the scar tissue membranes off the surface of the retina. Both
treatments only slow the progression of the disease, and at best temporarily
reverse vision loss in some patients.

We are developing a three-year Aeon implant to treat diabetic macular edema.
In our preliminary clinical trials, all treated eyes showed reversal of the
disease, and the average visual acuity of all treated eyes improved
dramatically, including patients who had been functionally blind prior to
treatment. This is the first study of which we are aware that demonstrated a
long-term improvement in the visual acuity of patients with diabetic macular
edema. Based on the results of our preliminary clinical trials, the FDA has
granted fast track status to our Aeon implant for diabetic macular edema, and
we started pivotal clinical trials in December 2000.

Uveitis. Uveitis is an autoimmune condition characterized by inflammation of
the inside of the eye that can cause sudden or gradual vision loss. We estimate
that over 175,000 eyes in the United States suffer from severe uveitis.
Treatments include steroidal eye drops, ocular injections of steroids, oral
systemic steroidal and non-steroidal anti-inflammatory medication and
chemotherapy. These treatments, if successful, generally only slow the
progression of uveitis. In addition, systemic treatment and chemotherapy often
cause severe side effects.

We are developing a three-year Aeon implant to treat severe uveitis. Our
Phase I/II clinical trials involved patients with severe, intractable uveitis
and significant vision loss who had previously received systemic therapy with
steroids or chemotherapy. In these trials, our Aeon implant completely
controlled the uveitis in the treated eyes and permitted the withdrawal of
systemic therapy, leading to a virtual elimination of adverse systemic side
effects. In the patients that were monitored for more than one year, the
average visual acuity of the treated eyes improved significantly.

Based on the results of our preliminary clinical trials, the FDA granted
fast track status to our Aeon implant for uveitis, and we started pivotal
clinical trials in December 2000. The FDA has designated our Aeon implant for
the treatment of uveitis as an orphan drug, qualifying us to receive exclusive
marketing rights for seven years.

Age-Related Macular Degeneration. Age-related macular degeneration, or ARMD,
is the leading cause of severe visual impairment and blindness in Americans
over 60 and affects more than five million people in the United States. ARMD
has two forms, dry and wet. With dry ARMD, the cells in the central retina die
slowly resulting in gradual central vision loss. Wet ARMD occurs when blood
vessels grow abnormally beneath the most sensitive part of the retina, the
macula. The abnormal blood vessels leak, bleed and form scar tissue under the
macula, resulting in sudden and severe loss of central vision. Approximately
10% to 15% of ARMD patients have wet ARMD, but it is responsible for 85% to 90%
of all vision loss resulting from ARMD. There are currently no approved
treatments for dry ARMD. Forms of therapy for wet ARMD include laser treatment
and photodynamic therapy, a treatment that employs a laser to activate a drug
administered intravenously. Only 10% to 15% of patients with wet ARMD can be
treated with laser therapy. Laser therapy generally causes an immediate and
substantial loss of vision, followed by a stabilization in vision at the
reduced level. Approximately 30% of patients with wet ARMD can be treated with
photodynamic therapy. The most favorable expected outcome of photodynamic
therapy is vision stabilization. However, photodynamic therapy achieves this
result in only approximately 15% of patients treated and must be performed
three to four times per year.

We are developing three-year Aeon implants to treat both wet and dry ARMD.
In our Phase I/II clinical trials, we treated patients suffering from various
forms of abnormal new blood vessel growth beneath the macula, including several
with wet ARMD. The average visual acuity of the patients in the trial
stabilized during the follow-up period. Based on this study, we expect to start
multi-center Phase II clinical trials of our Aeon implant for wet ARMD in 2001.
We also plan to commence a Phase I/II trial of our Aeon implant for dry ARMD in
2001.

Non-Ophthalmic Diseases

We believe our Aeon platform technology can be adapted to treat other parts
of the body which, like the eye, are difficult to treat.

Severe Osteoarthritis. Osteoarthritis is a disease that attacks cartilage.
Surfaces of joint cartilage and underlying bone compress and become irregular,
leading to pain, inflammation, bone spurs and limited movement. Osteoarthritis
is one of the most common disabilities in the United States, affecting
approximately 30 million Americans. As osteoarthritis progresses, serious joint
damage and chronic pain can result. The goal of treatment is to reduce joint
pain and inflammation while improving and maintaining joint function. Current
treatments for osteoarthritis are weight reduction, physical therapy and oral
anti-inflammatory and anti-pain medications. However,

there is no evidence that drug treatment changes the course of the disease. The
effectiveness of these treatments decreases as the disease progresses. In
severe osteoarthritis, joint replacement surgery is common, but sometimes is
forestalled with injections of steroids into the affected joint. Nevertheless,
in recent years, there have been in excess of 500,000 knee or hip replacement
surgeries in the United States annually, which we believe were mainly due to
osteoarthritis.

We are developing a three-year Aeon implant designed to treat severe
osteoarthritis and to delay and possibly eliminate the need for joint
replacement surgery. We are currently completing pre-clinical animal studies of
this implant.

Brain Tumors. Each year, over 20,000 people in the United States develop
primary brain tumors. Patients with brain tumors are generally treated with
surgery, radiation therapy and chemotherapy. Surgery usually cannot completely
remove tumor cells in the brain. Radiation and chemotherapy generally cause
significant systemic side effects and cannot be safely given at levels
sufficient to eradicate all malignant brain cells. As a result, in most cases,
these treatments cannot prevent brain tumors from recurring.

We have developed an Aeon implant, called Ceredur, that is designed to
increase the life expectancy of patients with primary brain tumors. Similar to
our other Aeon implants, our Ceredur implant releases a drug at a controlled
rate for a predetermined period of time. Ceredur is refillable from outside the
body and can deliver drugs such as proteins and peptides. During therapy, the
physician can change the release rate by changing the concentration of drug
used. Since Ceredur is refillable, it can potentially deliver drugs
indefinitely.

In our Phase II clinical trial with Ceredur implants, we studied patients
with recurrent glioblastoma, a serious form of brain cancer with an average
life expectancy for patients of eight weeks when left untreated. We observed no
significant safety issues in the Phase II trial. The Radiation Therapy Oncology
Group, a clinical trials group funded by the National Institutes of Health,
will conduct and fund a multi-center Phase II clinical trial using the Ceredur
implant to treat brain tumors.

Future Disease Targets

We are currently evaluating the feasibility of using Aeon products to treat
various forms of cancer, Alzheimer's disease and multiple sclerosis.

Codrug Platform Technology

Our proprietary Codrug platform technology allows the simultaneous release
of multiple drugs from the same product at the same, controlled rate over a
predetermined period of time. Using this technology, we link two or more drugs
together with a chemical bond, called a covalent bond, creating a new, inactive
compound. This compound can then be delivered to the target site by virtually
any delivery method. Once delivered, the compound dissolves at a predetermined
rate and separates into the original drugs as the chemical bond breaks apart.
We believe that most drugs can be chemically linked with our Codrug technology,
and we have synthesized a Codrug library of over 350 drug combinations. We are
currently evaluating a Codrug product for the treatment of post-surgical pain
through the sustained release of anti-inflammatory and pain-killing drugs
directly at the surgical site.

Strategic Collaborations

We have entered into agreements with two leading eye care companies to
develop and commercialize our initial products. In both of these agreements, we
retained our rights to the underlying technologies.

Chiron Vision Corporation

Our first collaboration was with Chiron Vision Corporation, a subsidiary of
Chiron Corporation. Under a 1992 licensing and development agreement, Chiron
financed the development of Vitrasert, and we granted Chiron a worldwide,
exclusive license to make and sell products based on the Aeon technology used
in Vitrasert for the treatment of conditions of the eye. Chiron commenced
commercial sales of Vitrasert following FDA approval in 1996. Bausch & Lomb
acquired Chiron Vision Corporation in 1997, assumed this agreement and
currently markets and sells Vitrasert. Bausch & Lomb pays us royalties on net
sales of Vitrasert under this agreement. Bausch & Lomb may terminate this
agreement at any time on 180 days' written notice.

Bausch & Lomb Incorporated

In 1999, we expanded our relationship with Bausch & Lomb by entering into a
licensing and development agreement for additional products for the treatment
of eye diseases. We granted Bausch & Lomb a worldwide, exclusive license for
the life of the relevant patents to use our technologies for the treatment,
prevention or diagnosis of any disease, disorder or condition of the eye in
humans or in animals.

Under our licensing and development agreement, Bausch & Lomb has agreed to
fund the development of our products for the treatment of diabetic macular
edema, uveitis and age-related macular degeneration. Bausch & Lomb has
committed to fund budgeted research and development performed by them and by
us, and to make license fee and milestone payments to us. This commitment
currently totals approximately $77 million. Under the agreement, we will
manufacture products for clinical trials and serve as a secondary manufacturing
source for commercial products.

A joint steering committee is responsible for managing and overseeing the
development process under the licensing and development agreement. The
agreement contains a research and development plan, a budget that governs the
amounts to be spent and reimbursed to us, and a marketing plan that sets forth
product-specific sales minimums for defined markets to be met by Bausch & Lomb.
The steering committee meets periodically to discuss and revise the budget and
the research and development and marketing plans.

Bausch & Lomb has agreed to pay us royalties on net sales of licensed
products. If Bausch & Lomb fails to achieve the product-specific sales minimums
for a defined market set forth in the marketing plan, Bausch & Lomb must pay us
the royalties due under those predetermined sales minimums or the license
becomes non-exclusive for the applicable product in the applicable market.
Bausch & Lomb may terminate the agreement at any time on 90 days' written
notice, subject to wind-down provisions, including payment of all milestone and
budgeted research and development payments due and payable to us within that
90-day period.

Bausch & Lomb has begun publicizing our Aeon platform technology under the
Envision TD brand name and has publicly identified our proposed ophthalmic
products as its highest development priority. As of May 31, 2001, Bausch & Lomb
owned approximately 23.5% of our outstanding common stock.

Sales and Marketing

Bausch & Lomb currently markets and sells Vitrasert and has the right to
market and sell the other ophthalmic products we are developing and may
develop. In the future, we expect to independently commercialize some of our
proposed non-ophthalmic products using a targeted sales force that we plan to
develop. In appropriate cases, we plan to enter into joint marketing or license
arrangements for non-ophthalmic products with established, industry-leading
marketing partners.

Because our products in clinical trials use a proven technology platform to
deliver drugs that have already been approved for the treatment of other
diseases by the FDA, we believe the development cycle for these products will
be shorter than traditional drug discovery and development. We believe this
will allow us to enter into marketing alliances at a later stage of clinical
development, when the product development risk is diminished, and retain
greater economic participation. When determining our commercialization strategy
for a product, we will consider the market size, the expected cost and duration
of the regulatory approval process, the projected costs and complexity of
marketing the product, competition and other factors. We expect to retain our
rights to the underlying technology in any licensing arrangements.

Reimbursement

The cost of the Vitrasert and the associated surgical fee are covered by
Medicaid and Medicare, most major health maintenance organizations and most
health insurance carriers. We believe that the Medicare reimbursement code for
the Vitrasert implantation procedure will cover the implantation procedure for
our other ophthalmic Aeon products once they are approved by the FDA. Based on
our experience with Vitrasert, we believe that we will be able to obtain
Medicare reimbursement codes for additional Aeon products. We believe our
success in obtaining coverage for Vitrasert and the success of our Vitrasert
pricing strategy will facilitate third-party payor reimbursement of our other
proposed Aeon products.

Manufacturing

We have a manufacturing facility located at our corporate headquarters in
Watertown, Massachusetts. We believe that manufacturing our products is a
complex process involving our proprietary know-how. All of the supplies we use
to manufacture our products in clinical trials are readily available from a
variety of sources and we are not dependent on any one supplier. We manufacture
implants for all of our ophthalmic clinical trials, and are developing the
production capacity to support initial commercialization of our Aeon products
for diabetic macular edema, uveitis and age-related macular degeneration. We
are expanding our manufacturing capabilities so that we can support full
commercialization of our products and have agreed to purchase a 34,000 square
foot facility which we expect to use for manufacturing and research and
development. We believe that we can achieve significant economies of scale by
producing several different products based on the same technology platforms.

Patents, Licenses and Intellectual Property

Intellectual Property Strategy

Our commercial success will depend, in part, on our ability to obtain patent
protection in the United States and elsewhere for our products or our
processes. We therefore seek, whenever possible, to obtain protection for these
products and processes. We also seek to expand our product and process
portfolio through collaborations, funded research and licensing technology from
others.

Patents and Patent Applications

We have filed and continue to file patent applications with respect to
multiple aspects of our technologies, products and processes. As of May 31,
2001, we had, or had exclusive rights to, eight United States patents and 20
foreign patents. In addition, as of that date, we had, or had exclusive rights
to, six patent applications pending in the United States and 42 patent
applications pending in foreign countries. Our patents expire at various dates
starting in 2012. We believe that our patent applications include novel
technologies of potential commercial significance. However, due to the extended
period of time for review of patent applications in the medical device and
pharmaceutical

field, we cannot be certain as to when decisions regarding our patent
applications will be made. Moreover, we do not know if any patents will be
granted to us or, if issued to us, will be sufficiently broad to provide a
competitive advantage. Any patent granted to us may be challenged or
circumvented by a competitor.

The University of Kentucky Research Foundation holds five United States
patents and related foreign patents on aspects of our Aeon and Codrug platform
technologies. We have exclusive licenses for these patents and related know-how
and are obligated to pay the University of Kentucky Research Foundation
royalties based on sublicensing of these patents and sales of products
utilizing these patents.

The enactment of the legislation implementing the General Agreement on
Tariffs and Trade resulted in changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed after June 8, 1995 is no longer a period of 17 years
from the date of grant. The new term of United States patents for applications
filed after June 8, 1995 commences on the date of issuance and terminates 20
years from the earliest effective filing date of the application in the United
States. Because the time from filing to issuance of medical device and
pharmaceutical patent applications is often more than three years, the 20-year
term from the effective date of filing may result in a substantially shortened
term of patent protection which may adversely impact our patent position.
However, legislation effective for patent applications filed on or after May
29, 2000 allows the opportunity to recover or adjust patent terms under limited
circumstances. The opportunity for recovery or adjustment of patent terms will
not be available for most of our patents and patent applications since the
filing dates of these patents and patent applications precede the effective
date of the legislation. If the patent term is shorter in the United States,
our business could be adversely affected to the extent that the duration and
level of the royalties we are entitled to receive from licenses of our
strategic patents are based on the existence of a valid patent.

Other Proprietary Rights

Some elements of our drug delivery devices, processes or methods of
manufacturing involve unpatented proprietary technology, processes, know-how or
data. With respect to proprietary technology, know-how and data which are not
patentable or potentially patentable or processes other than production
processes for which patents are difficult to enforce, we have chosen or may
chose to protect our interests by relying on trade secret protection and
confidentiality agreements with our employees, consultants and contractors. To
maintain the confidentiality of trade secrets and proprietary information, we
maintain a policy of requiring employees, scientific advisors, consultants and
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with us. These agreements are designed both
to enable us to protect our proprietary information by controlling the
disclosure and use of technology to which we have rights, and to provide for
our ownership of proprietary technology that we develop. However, we cannot
assure you that these agreements will provide meaningful protection for our
trade secrets in the event of unauthorized use or disclosure of such
information.

Competition

The pharmaceutical and drug delivery industries are highly competitive. Our
one commercial product, Vitrasert, primarily competes with treatments involving
the systemic delivery of ganciclovir, a Roche Holdings AG product, and other
drugs. We must obtain regulatory approval to market our proposed products in
order to compete. We expect that our proposed products, if approved, will
compete with existing therapies for our targeted diseases as well as new drugs,
therapies, drug delivery systems or technological approaches that may be
developed to treat these diseases or their

underlying causes. Any of these drugs, therapies or systems may receive
government approval or gain market acceptance more rapidly than our proposed
products, may offer therapeutic or cost advantages or may cure our targeted
diseases or their underlying causes completely. As a result, our proposed
products may become noncompetitive or obsolete.

We believe that pharmaceutical, drug delivery and biotechnology companies,
research organizations, governmental entities, universities, hospitals and
other nonprofit organizations and individual scientists are seeking to develop
therapies for our targeted diseases. For many of our targeted diseases,
competitors have already commercialized, or are in advanced stages of
development of, alternative therapies. For example, Eli Lilly and Company is in
advanced trials for its PKC beta inhibitor for the treatment of diabetic
macular edema. Novartis AG and QLT Inc. are currently marketing their
Visudyne(TM) photodynamic therapy for the treatment of age-related macular
degeneration. Novartis also markets a cyclosporine product for the treatment of
uveitis. Guilford Pharmaceuticals Inc. has developed its Gliadel(R) wafer
implant for the treatment of brain tumors. Various cyclooxygenase 2, or COX-2,
inhibitors, such as VIOXX(R) marketed by Merck & Co., Inc. and Celebrex(R) co-
marketed in the United States by Pharmacia Corporation and Pfizer Inc., are
used for the treatment of osteoarthritis. Oculex Pharmaceuticals, Inc. and
Allergan, Inc. have announced that they have entered into a collaboration
agreement to develop products to treat diseases occurring in the retina and the
back of the eye based on Oculex's drug delivery technologies.

Many competitors and potential competitors have greater research and
development, financial, regulatory, manufacturing, marketing, and sales
experience and resources than we do and represent significant potential
competition to us. We believe our ability to protect our intellectual property
from challenges by others and to enforce our patent rights against potential
infringement will be important to our competitive position.

Government Regulation

The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our drug delivery products.

The process required by the FDA under the new drug provisions of the Federal
Food, Drug and Cosmetics Act before our products may be marketed in the United
States generally involves the following:

. pre-clinical laboratory and animal tests,

. submission to the FDA of an investigational new drug application, or IND,
which must become effective before clinical trials may begin,

. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed pharmaceutical in our intended use,

. submission to the FDA of a new drug application, and

. FDA review and approval of the new drug application.

The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.

Pre-clinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. The results of the pre-clinical
tests, together with manufacturing information and analytical data, are
submitted to the FDA as part of an IND, which must become effective before we
may begin human clinical trials. The IND automatically becomes effective 30
days after receipt by the FDA, unless the FDA, within the 30-day time period,
raises concerns or questions about the conduct of the trials as outlined in the
IND and imposes a clinical hold. In such a case, the IND sponsor and the FDA
must resolve any outstanding concerns before clinical trials can begin. There
is no certainty that pre-clinical trials will result in the submission of an
IND or that submission of an IND will result in FDA authorization to commence
clinical trials.

Clinical trials involve the administration of the investigational product to
human subjects under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA
as part of the IND. Further, each clinical study must be conducted under the
auspices of an independent institutional review board at the institution where
the study will be conducted. The institutional review board will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution.

Human clinical trials are typically conducted in three sequential phases
which may overlap:

. PHASE I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion.

. PHASE II: Studies are conducted in a limited patient population to
identify possible adverse effects and safety risks, to determine the
efficacy of the product for specific targeted diseases and to determine
dosage tolerance and optimal dosage.

. PHASE III: Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety in an expanded patient
population, often at geographically dispersed clinical study sites. Phase
III or IIb/III trials are often referred to as pivotal trials, as the
data from these trials are used for the final approval of a product.

In the case of products for life-threatening diseases such as cancer, or
severe conditions such as blinding eye disease, the initial human testing is
often conducted in patients with the disease rather than in healthy volunteers.
Since these patients already have the targeted disease or condition, these
studies may provide initial evidence of efficacy traditionally obtained in
Phase II trials and so these trials are frequently referred to as Phase I/II
trials. If a product uses a combination of drugs, the FDA requires that
clinical trials demonstrate that the combination is safe and effective and that
each drug contributes to efficacy. We cannot be certain that we will
successfully complete Phase I, Phase II or Phase III testing of our product
candidates within any specific time period, if at all. Furthermore, we, the
FDA, the institutional review board or the sponsor may suspend clinical trials
at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.

The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application for approval
of the marketing and commercial shipment of the product. The FDA may deny a new
drug application if the applicable regulatory criteria are not satisfied or may
require additional clinical data. Even if the additional data is submitted, the
FDA may ultimately decide that the new drug application does not satisfy the
criteria for approval. Once issued, the FDA may withdraw product approval if
compliance with regulatory standards for production and distribution is not
maintained or if safety problems occur after the product reaches the market. In
addition, the FDA requires surveillance programs to monitor approved products
which

have been commercialized, and the agency has the power to require changes in
labeling or to prevent further marketing of a product based on the results of
these post-marketing programs.

The FDA has a fast track program intended to facilitate the development and
expedite the review of drugs that, based on a preliminary evaluation of
clinical data, demonstrate the potential to address unmet medical needs for
treatment of serious or life-threatening diseases. If the FDA grants fast track
status to a product, a company can submit portions of the new drug application
to the FDA for review before the entire application is complete. In addition,
the FDA undertakes to complete its review process within six months of the
filing of the complete new drug application. Vitrasert received fast track
status prior to its approval in 1996, and two more of our products received
fast track status in 2000. We may seek to have some of our other product
candidates designated as fast track products, with the goal of reducing the
development and review time. We cannot guarantee that the FDA will grant any of
our future requests for fast track designation, that any fast track designation
will affect the time of review, or that the FDA will approve the new drug
application submitted for any of our product candidates, whether or not the FDA
grants a fast track designation. Additionally, the FDA approval of a fast track
product can include restrictions on the product's use or distribution such as
permitting use only for specified medical procedures or limiting distribution
to physicians or facilities with special training or expertise. The FDA may
grant conditional approval of a product with fast track status and require
additional clinical studies following approval.

Satisfaction of FDA requirements or similar requirements of state, local and
foreign regulatory agencies typically takes several years and the actual time
required may vary substantially, based upon the type, complexity and novelty of
the pharmaceutical product. Government regulation may delay or prevent
marketing of potential products for a considerable period of time and impose
costly procedures upon our activities. Success in pre-clinical or early stage
clinical trials does not assure success in later stage clinical trials. Data
from pre-clinical and clinical activities is not always conclusive and may be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications. Further, even
after the FDA approves a product, later discovery of previously unknown
problems with a product may result in restrictions on the product or even
complete withdrawal of the product from the market.

Any products we manufacture or distribute under FDA clearances or approvals
are subject to pervasive and continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the
products. Drug manufacturers and their subcontractors are required to register
with the FDA and state agencies, and are subject to periodic unannounced
inspections by the FDA and state agencies for compliance with good
manufacturing practices, which impose procedural and documentation requirements
upon us and our third party manufacturers.

We are also subject to numerous other federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. We may incur significant costs to comply with
such laws and regulations now or in the future. In addition, we cannot predict
what adverse governmental regulations may arise from future United States or
foreign governmental action.

We also are subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products which we
sell outside the United States. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. Whether or not we obtain FDA approval, we must obtain
approval of a product by the comparable regulatory authorities of foreign
countries before manufacturing or marketing the product in those countries. The
approval process varies from country to country and the time required for these
approvals may differ substantially from that required for

FDA approval. We cannot assure you that clinical trials conducted in one
country will be accepted by other countries or that approval in one country
will result in approval in any other country. For clinical trials conducted
outside the United States, the clinical stages generally are comparable to the
phases of clinical development established by the FDA.

Employees

As of May 31, 2001, we had 53 full-time employees, including 19 in research
and development and 19 in general and administrative roles. Of the 53
employees, 20 hold Ph.D., M.D. or masters degrees. None of our employees is
represented by a collective bargaining unit, and we have never experienced a
work stoppage. We consider our relations with our employees to be good.

Facilities

We occupy an 18,000 square foot facility in Watertown, Massachusetts,
located approximately eight miles from downtown Boston. The facility is
composed of 10,000 square feet of laboratory space, including a Class 100,000
clean room, a synthetic chemistry laboratory, analytical laboratory, pre-
production laboratory and a pharmaceutical development laboratory. The
remaining 8,000 square feet is dedicated to general office space. We have
agreed to lease an additional 4,000 square feet of office space. Our leases
concurrently run through November 2003, with a three-year extension at our
option.

We have agreed to purchase a 34,000 square foot facility in Watertown,
Massachusetts for approximately $4.5 million in late 2001. We anticipate using
this space primarily for manufacturing and research and development. We are
currently leasing a portion of that space until we complete the acquisition.

MANAGEMENT

Officers and Directors

The following table sets forth information regarding our officers and
directors as of May 31, 2001.

Name Age Position
- ---- --- -------------------------------------------------

Paul Ashton, Ph.D. ..... 40 President, Chief Executive Officer and Director
Thomas J. Smith, M.D. .. 50 Chairman of the Board of Directors
Michael J. Soja......... 52 Vice President and Chief Financial Officer
Kathleen T. Karloff..... 46 Vice President of Operations
Michael D. Mays......... 34 Vice President and Treasurer
Robert W. Shimizu,
Ph.D. ................. 47 Vice President of Business Development
Kenneth A. Walters,
Ph.D................... 51 Senior Vice President of Research and Development
Alan L. Crane........... 37 Director
James L. Currie......... 64 Director
William S. Karol........ 44 Director
Stephen C. McCluski..... 49 Director

Paul Ashton, Ph.D. is one of our founders. He has served as a director since
our inception in 1991 and as President and Chief Executive Officer since 1996.
Since 1998, Dr. Ashton has been a Professor of Ophthalmology at the University
of Kentucky. From 1996 to 2000, he served on the faculty of Tufts University.
Dr. Ashton received a B.Sc. in Chemistry from Durham University, England and a
Ph.D. in Pharmaceutical Science from the University of Wales.

Thomas J. Smith, M.D. is one of our founders. He has served as a director
since our inception in 1991, as President from 1991 to 1992, as Medical
Director since 1992 and as Chairman of the Board of Directors from 1992 to the
present. Dr. Smith, a board-certified ophthalmologist, was a principal in the
Chandler-Simmons practice in Boston, Massachusetts from 1991 to 1996. Since
1997, Dr. Smith has been a Professor of Ophthalmology at the University of
Kentucky. From 1991 to 1996, he served on the faculty of Harvard University.
Dr. Smith received an M.D. from the University of Toronto.

Michael J. Soja has served as our Vice President and Chief Financial Officer
since February 2001. From 1974 through January 2001, Mr. Soja worked for XTRA
Corporation, a lessor of transportation equipment, serving since 1990 as Vice
President and Chief Financial Officer. Mr. Soja received a B.A. in Mathematics
from the College of the Holy Cross in 1970, an M.S. in Accounting from
Northeastern University in 1971 and an M.B.A. from Babson College in 1978.

Kathleen T. Karloff has served as our Vice President of Operations since
June 2000. From March 1998 through May 2000, Ms. Karloff worked for MacroChem
Corporation, a drug delivery development company, as Director of Chemistry,
Manufacturing and Controls. From 1984 to 1998, Ms. Karloff worked for Boston
Scientific Corporation, a medical device company, in various positions, most
recently as Director of Manufacturing. Ms. Karloff received her B.S. in
Microbiology from Montana State University.

Michael D. Mays has served as our Vice President and Treasurer since 1999
and served as our Vice President of Finance from 1999 through January 2001.
From 1995 to 1999, Mr. Mays worked for WSI, Inc., an environmental technology
company, as Corporate Controller, and most recently as Vice President, Mergers
and Acquisitions. From 1989 to 1995, Mr. Mays worked for KPMG-Peat Marwick. Mr.
Mays received an honors degree in business administration from the University
of Windsor, Ontario, Canada and is a Certified Management Accountant.

Robert W. Shimizu, Ph.D. has served as our Vice President of Business
Development since September 2000 and as Vice President of Development since
1997. From 1989 to 1997, Dr. Shimizu

worked at Chiron Vision Corporation, a subsidiary of Chiron Corporation, a
biotechnology company, in a variety of management roles, most recently serving
as Senior Director of Strategic Planning. Dr. Shimizu received a B.A. in
Bacteriology from the University of California at Davis and an M.S. and a Ph.D.
in Biology from New Mexico State University.

Kenneth A. Walters, Ph.D. has served as our Senior Vice President of
Research and Development since December 2000. From 1992 to 2000, Dr. Walters
was a Director of An-eX Ltd., a contract research organization based in Wales.
Dr. Walters obtained a Ph.D. in Pharmacology and Toxicology from the University
of Strathclyde, Scotland.

Alan L. Crane has served as a director since 1999. Mr. Crane is Senior Vice
President of Corporate Development at Millennium Pharmaceuticals, Inc., a
biopharmaceutical company, where he has worked since 1997. Mr. Crane joined
Millennium through its merger with ChemGenics Pharmaceuticals Inc., a
biotechnology company. From 1995 to 1997, Mr. Crane served as Vice President of
Business Development of ChemGenics. From 1994 to 1995, Mr. Crane served as the
Vice President, Business Development at Organogenesis Inc., a tissue
engineering company.

James L. Currie has served as a director since August 2000. Mr. Currie is a
Managing Director of Essex Woodlands Health Ventures, which he co-founded in
1985. He also serves as a director of Avax Technologies, Inc., a
biopharmaceutical company.

William S. Karol has served as a director since February 2001. Since 1989,
Mr. Karol has served as President and Chief Executive Officer of KODA
Enterprises Group, Inc., which he founded in 1989. Prior to 1989, Mr. Karol
managed the acquisition and strategic planning activities of HMK Enterprises,
Inc. Both KODA Enterprises and HMK Enterprises are privately held companies
with investments in a variety of industries.

Stephen C. McCluski has served as one of our directors since November 2000.
Since 1995, Mr. McCluski has served as Senior Vice President and Chief
Financial Officer of Bausch & Lomb Incorporated, one of our affiliates. Prior
to joining Bausch & Lomb in 1988, Mr. McCluski worked at PricewaterhouseCoopers
LLP. He currently serves as a director of Charles River Laboratories, Inc., a
provider of animal research models.

Officers

Each officer serves at the discretion of the board of directors and holds
office until his successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of our
directors or officers.

Employment Agreements

We intend to enter into three-year employment agreements with each of
Dr. Ashton, Dr. Smith and Mr. Soja, each agreement renewable for successive
one-year terms. Our agreement with Dr. Ashton requires that we employ him in
the position of Chief Executive Officer and pay him a salary of $250,000
annually, subject to increase from time to time by the board of directors, plus
an annual performance-based bonus. Our agreement with Dr. Smith requires that
we employ him in the position of Chairman and pay him a salary of $225,000
annually, subject to increase from time to time by the board of directors, plus
an annual performance-based bonus. Our agreement with Mr. Soja requires that we
employ him in the position of Chief Financial Officer and pay him a salary of
$250,000 annually, subject to increase from time to time by the board of
directors, plus an annual performance-based bonus.

Each agreement provides that we may terminate the executive's employment
upon 30 days' notice. If we terminate his employment without cause, or if he
terminates his employment for good reason, we must pay the executive 50% of his
base salary and a pro rated portion of his annual bonus for the year of
termination, within 30 days of termination, and continue to provide medical and
life insurance benefits for six months following termination. Also, any options
to purchase our

common stock held by that executive that were vested as of the termination date
will remain exercisable for six months (or three months in the case of
incentive stock options).

If we terminate Dr. Smith, Dr. Ashton or Mr. Soja without cause, or if any
of them terminates his employment for good reason during the two-year period
following a change of control, in lieu of the benefits outlined above, we must
pay that executive 200% of the sum of his base salary and his previous year's
bonus together with a pro-rated portion of his annual bonus for the year of
termination, within 30 days of termination, and continue to provide medical and
life insurance benefits for two years following termination. Also, at that time
all options to purchase our common stock or restricted stock held by that
executive will vest and remain exercisable for a period of one year. If change
of control payments and benefits to any of Dr. Smith, Dr. Ashton and Mr. Soja
were to result in an excise tax under the so-called "golden parachute"
provisions of the Internal Revenue Code, we would be obligated to pay the
executive a tax gross-up payment.

Board Composition

Our board of directors currently consists of six directors. Each of the
directors serves on the board of directors pursuant to the terms of an
agreement that will terminate upon the closing of this offering. Following this
offering, the board of directors will be divided into three classes, each of
whose members will serve for a three-year term. Dr. Ashton and Mr. McCluski
will serve in the class whose term expires in 2002, Dr. Smith and Mr. Currie
will serve in the class whose term expires in 2003 and Messrs. Karol and Crane
will serve in the class whose term expires in 2004. At each annual meeting of
stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring.

Board Committees

Our board of directors has established an audit committee and a compensation
committee. The audit committee, consisting of Messrs. Crane, Currie and Karol,
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent accountants. The compensation committee,
consisting of Messrs. Crane, Currie and Karol, reviews and determines the
compensation and benefits of all of our officers, establishes and reviews
general policies relating to the compensation and benefits of all of our
employees, and, upon the closing of this offering, will administer our 1997
Stock Option Plan, 2001 Incentive Plan and Employee Stock Purchase Plan.

Compensation Committee Interlocks and Insider Participation

Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of our current compensation committee has ever served as one of our
officers or employees. None of our executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or compensation committee.

Director Compensation

Under our 2001 Incentive Plan, upon joining our board of directors, each
non-employee director who owns or controls less than 5% of our outstanding
capital stock will receive options to purchase 18,000 shares of our common
stock upon joining our board of directors and options to purchase 4,950 shares
of our common stock at each annual meeting at which the director continues or
is reelected to serve. The initial grant will vest ratably yearly over the
course of three years, and each annual grant will vest after one year.

Our directors currently do not receive any cash compensation from us for
their services as members of the board of directors. We reimburse our directors
for out-of-pocket expenses in connection with attendance at board and committee
meetings. All of our directors, including non-employee directors, are eligible
to participate in our 2001 Incentive Plan and our 1997 Stock Option Plan.

In November 1999, we granted options to purchase 157,500 shares of common
stock to Mr. Crane for his services as a director. Options to purchase 67,500
shares vested immediately upon grant, and the remainder vest ratably each year
over the ensuing five-year period.

In June 2001, we granted options to purchase 18,000 shares of our common
stock to Mr. Karol. One third of the options initially vest one year from the
date of grant, and the remainder vest ratably yearly over the ensuing two-year
period.

Executive Compensation

The following table sets forth a summary of the compensation paid during the
fiscal year ended December 31, 2000 to our Chief Executive Officer and to all
of our other executive officers during 2000 whose salary and bonus exceeded
$100,000. We refer to these persons as the named executive officers.

Summary Compensation Table

Annual Long-term
Compensation Compensation
--------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation (1)
- --------------------------- ---- -------- ------ ------------ ----------------

Paul Ashton, Ph.D. .......... 2000 $202,333 $3,000 -- $5,077
President and
Chief Executive Officer
Thomas J. Smith, M.D. ....... 2000 176,842 3,000 -- 4,442
Chairman of the Board of
Directors
Michael D. Mays.............. 2000 102,135 3,000 90,000 2,538
Vice President and Treasurer
Robert W. Shimizu, Ph.D. .... 2000 144,397 3,000 90,000 3,659
Vice President of Business
Development

- --------
(1) Consists of contributions to our 408(k) plan made on behalf of the named
executive officers to match the deferral contributions made by each to the
plan.

Stock Option Grants

The following table contains summary information regarding stock option
grants made during the year ended December 31, 2000 by us to the named
executive officers. We granted these options at an exercise price equal to the
fair value of the common stock on the date of grant as determined by our board
of directors. The first option granted to Mr. Mays and the option granted to
Dr. Shimizu vest ratably over five years on the yearly anniversary of the date
of grant. The second option granted to Mr. Mays vests ratably over four years
on the yearly anniversary of the date of grant.

We calculated the potential realizable value of options in the table
assuming our initial public offering price appreciates at the indicated rate
from May 31, 2001 for the entire term of the option and that the option holder
exercises his option on the last day of its term at the appreciated price. All
options listed have a term of 10 years. We assumed stock price appreciation of
5% and 10% per year pursuant to the rules of the Securities and Exchange
Commission. We cannot assure you that our actual stock price will appreciate
over the 10-year option term at the assumed 5% and 10% levels, or at any other
rate.

Option Grants In Last Fiscal Year

% of
Total Potential Realizable
Options Value at Assumed
Number of Granted Rates at Stock
Securities to Price Appreciation
Name Underlying Employees Exercise for Option Term
- ---- Options in Fiscal Price Expiration --------------------
Granted Year Per Share Date 5% 10%
---------- --------- --------- ---------- --------- ----------

Michael D. Mays......... 45,000 5.2% $ 1.56 1/31/10 $ 891,585 $1,381,545
45,000 5.2 12.22 11/03/10 455,445 998,550
Robert
W. Shimizu, Ph.D. ..... 90,000 10.3 1.56 1/31/10 1,783,170 2,763,090

Year-End Option Values

The following table provides information about the number and value of
unexercised options to purchase common stock held on December 31, 2000 by the
named executive officers, as well as the value realized by the named executive
officers upon exercise of options during the year ended December 31, 2000.
There was no public market for our common stock on December 31, 2000 or on the
date of Mr. Mays' or Dr. Shimizu's exercises. Accordingly, we have calculated
the values of the unexercised options and the shares received by Mr. Mays and
Dr. Shimizu upon exercise on the basis of our assumed initial public offering
price per share, less the applicable exercise price, multiplied by the number
of shares underlying the option or acquired upon exercise.

Fiscal Year End Option Values

Number of Securities Value of Unexercised
Shares Underlying Unexercised In-The-Money Options at
Acquired Options at Fiscal Year End Fiscal Year End
Upon Value ------------------------------ -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- --------- ------------- -------------- ----------- -------------

Paul Ashton, Ph.D......... -- -- 131,256 93,744 $1,740,600 $1,235,651
Thomas J. Smith, M.D...... -- -- 67,500 22,500 896,125 299,375
Michael D. Mays........... 56,250 $ 787,500 9,000 249,750 112,000 2,740,500
Robert W. Shimizu, Ph.D... 180,000 2,520,000 14,994 210,006 196,588 2,788,412

Indemnification of Directors and Officers and Limitation on Liability

Our certificate of incorporation provides that our directors will not be
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty, except to the extent otherwise required by the Delaware General
Corporation Law. This provision will not prevent our stockholders from
obtaining injunctive or other relief against our directors nor does it shield
our directors from liability under federal or state securities laws.

Our certificate of incorporation also requires us to indemnify our directors
and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to a few very limited exceptions where indemnification
is not permitted by applicable law. Our certificate of incorporation also
requires us to advance expenses, as incurred, to our directors and officers in
connection with any legal proceeding to the fullest extent permitted by the
Delaware General Corporation Law. These rights are not exclusive.

In June 2001, we entered into indemnification agreements with our directors.

Incentive Plans

2001 Incentive Plan

Our 2001 Incentive Plan was adopted by our board of directors in June 2001
and will be submitted to our stockholders for approval before completion of
this offering. We have reserved 2,700,000 shares of common stock for issuance
under the plan. The plan terminates in June 2011, unless terminated earlier by
our board of directors.

The compensation committee of our board of directors administers the plan.
The compensation committee has authority to interpret the plan, grant awards
and make all other determinations necessary to administer the plan.

The plan provides for the grant of stock, stock options, stock appreciation
rights and performance awards. Stock may be granted with or without vesting
restrictions. Stock options may

be issued either as incentive stock options, commonly called ISOs, that qualify
under Section 422 of the Internal Revenue Code or as nonqualified stock
options, commonly called NQSOs. ISOs may be granted only to our employees or
employees of a parent or subsidiary. NQSOs may be granted to our employees,
directors and consultants. Generally, the exercise price of ISOs must be at
least equal to the fair market value of our common stock on the date of grant.
Any grant of an ISO to a holder of 10% or more of our outstanding shares of
common stock must have an exercise price of at least 110% of the fair market
value of our common stock on the date of grant. Options granted under the plan
have a maximum term of 10 years. Options granted under the plan may not be
transferred other than by will or by the laws of descent and distribution. They
generally also must be exercised during the lifetime of the optionee and only
by the optionee. Performance awards may be awarded upon attainment by employees
of performance criteria specified by the committee and may consist of cash or a
combination of cash and stock.

Options granted under the plan generally expire three months after the
termination of the optionee's service, except in the case of death, in which
case the options generally may be exercised up to 12 months following the date
of death. If we are dissolved or liquidated or experience a change in control,
the successor corporation, if any, may assume or substitute for outstanding
awards. If a successor corporation does not assume or substitute for the
awards, the compensation committee may accelerate the vesting of outstanding
options.

1997 Stock Option Plan

Our board of directors and shareholders adopted our 1997 Stock Option Plan
in July 1997. We have reserved 2,700,000 shares of common stock for issuance
under the plan. The plan terminates in July 2007, unless terminated earlier by
our board of directors.

Effective upon the closing of this offering, the compensation committee of
our board of directors will administer the plan. The compensation committee has
authority to interpret the plan, grant awards and make all other determinations
necessary to administer the plan.

The plan provides for the grant of stock appreciation rights, commonly
called SARs, and both ISOs and NQSOs, which are subject to the same
restrictions as ISOs and NQSOs granted under our 2001 Incentive Plan.

Options or SARs granted under the plan generally expire three months after
the termination of the optionee's service, except in the case of death or
disability, in which case the options or SARs generally may be exercised up to
12 months following the date of death. If we are dissolved or liquidated or
experience a "change in control," all options and SARs granted under the plan
will become exercisable, then terminate, unless the successor corporation, if
any, assumes or substitutes for outstanding awards.

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan was adopted by our board of directors in
June 2001 and will be submitted to our stockholders for approval before
completion of this offering. Under the purchase plan, eligible employees may
purchase shares of our common stock at a discount on a periodic basis.
Participation under the plan is open to all employees, except for those who own
5% or more of the combined voting power of all classes of our stock. Purchases
will occur at the end of option periods, each of six months' duration. However,
the first such option period will begin upon the completion of our initial
public offering and end on the first June 30 or December 1 that is more than
six months from the date of consummation of our initial public offering. The
purchase price of common stock under the purchase plan will be 85% of the
lesser of the fair market value of the stock on the first and the last day of
the option period. Participants may elect under the purchase

plan to have from 1% to 10% of their pay applied to the purchase of shares at
the end of the option period. No payroll authorizations shall be solicited or
accepted prior to the commencement of the first option period, and each
eligible employee will automatically be deemed a participant in the plan for
the first option period.

Subject to adjustment for stock splits and similar events, a total of
270,000 shares of common stock are reserved for issuance under the employee
stock purchase plan.

408(k) Plan

In 1997, we adopted a Salary Reduction Simplified Employee Pension Plan
under Section 408(k) of the Internal Revenue Code for all employees who earn at
least $3,000 in gross salary per year. A participant may contribute up to a
maximum of $6,000 of his or her salary annually, subject to some limitations.
We match employee contributions at a rate of 3% of the employee's annual
salary, up to a maximum of $6,000 per employee. For the year ended December 31,
2000, we contributed approximately $38,995 to the plan in matching
contributions. We and our employees stopped contributing to this plan effective
December 31, 2000.

401(k) Plan

Effective January 1, 2001, we established a savings plan for our employees
which is designed to be qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees are permitted to contribute to the 401(k) plan through
payroll deduction, subject to statutory and plan limits. We match 100% of the
employee contributions up to 5% of each employee's qualified compensation. We
contributed approximately $37,204 to the plan during the first three months of
2001.

RELATED PARTY TRANSACTIONS

Bausch & Lomb Incorporated, from which we have received a substantial
portion of our revenues, owns 5,400,000 shares of our common stock. In
addition, Stephen McCluski, a member of our board of directors, is the Chief
Financial Officer of Bausch & Lomb. Under a licensing and development agreement
we entered into on December 3, 1992, originally with Chiron Vision Corporation,
Bausch & Lomb has exclusive rights to market and sell our Vitrasert product and
pays us royalties on these sales. Under our 1999 agreement, Bausch & Lomb has
the exclusive right to market and sell any products we develop for the
treatment of eye disease, including our Aeon products under development for the
treatment of diabetic macular edema, uveitis and age-related macular
degeneration. Effective in January 2001, we amended this agreement to provide
that we will conduct clinical trials for our products for the treatment of
diabetic macular edema and age-related macular degeneration, manufacture Aeon
products for all clinical trials and expand our commercial manufacturing
capacity.

In June 1999, we entered into a Stock Option and Purchase Agreement with
Bausch & Lomb under which Bausch & Lomb had an option to purchase shares of
preferred stock. Bausch & Lomb never exercised its option to purchase these
shares. In June 2000, we terminated this agreement.

Under a bridge financing agreement, on the following dates, we issued the
indicated number of shares of our common stock to Bausch & Lomb, at the fair
market value on the date of issue, for aggregate consideration of $1,250,000:

Date of Issuance Number of Shares
---------------- ----------------

April 15, 1998.............................................. 367,200
June 10, 1998............................................... 225,900
September 10, 1998.......................................... 183,240
December 10, 1998........................................... 140,130
February 10, 1999........................................... 157,545

On June 9, 2000 we redeemed 1,074,015 shares of our common stock held by
Bausch & Lomb in exchange for aggregate consideration valued at $1,250,000,
consisting of cash and waivers of license fees otherwise due to us.

Vincent Manopoli is a former director and officer who held in excess of 5%
of our outstanding shares until June 15, 2000. On January 10, 1999, we redeemed
58,500 shares of our common stock held by Mr. Manopoli for $65,000. On June 15,
2000, we redeemed 1,381,500 shares of our common stock held by Mr. Manopoli in
exchange for $150,000 and a note in the amount of $2,065,005. We have satisfied
our obligations under this note.

Under agreements with the University of Kentucky Research Foundation, or the
UKRF, Drs. Ashton and Smith receive a portion of the royalties received by the
UKRF from us for technology we have licensed from the UKRF. These royalties
pertain to technology developed by Drs. Ashton and Smith while they were
performing research at the University of Kentucky. During 1998, these royalties
totaled $46,537 for Dr. Ashton and $46,537 for Dr. Smith. During 1999 these
royalties totaled $75,376 for Dr. Ashton and $25,376 for Dr. Smith. During
2000, these royalties totaled $27,596 for Dr. Ashton and $27,596 for Dr. Smith.
Drs. Ashton and Smith did not receive any royalties from the UKRF during the
three months ended March 31, 2001.

PRINCIPAL STOCKHOLDERS

The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of May 31, 2001 by the following
persons:

. each stockholder known by us to own beneficially more than 5% of our
common stock,

. each of our directors,

. each of the named executive officers, and

. all directors and executive officers as a group.

This table lists applicable percentage ownership based on 22,994,775 shares
of common stock outstanding as of May 31, 2001, and also lists applicable
percentage ownership based on 28,394,775 shares of common stock outstanding
after completion of this offering. Percentage ownership assumes conversion of
all shares of preferred stock outstanding as of May 31, 2001 into shares of
common stock, which will occur upon the closing of this offering.

We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of May 31, 2001 to be outstanding, but we have not deemed these
shares to be outstanding for computing the percentage ownership of any other
person. To our knowledge, except as set forth in the footnotes below, each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of common stock shown as beneficially owned by that
stockholder.

The address for each listed director and officer is c/o Control Delivery
Systems, Inc., 313 Pleasant Street, Watertown, Massachusetts 02472. The address
for Bausch & Lomb Incorporated is One Bausch & Lomb Place, Rochester, NY 14604.
The address for Essex Woodlands Health Ventures is 190 South LaSalle Street,
Suite 2800, Chicago, IL 60603.

Percentage of Shares
Outstanding
------------------------
Number of Shares Before After
Name of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------ ------------------ ---------- ----------

Bausch & Lomb Incorporated.......... 5,400,000 23.5% 19.0%
Paul Ashton (1)..................... 5,171,247 22.4 18.1
Thomas J. Smith (2)................. 5,026,500 21.8 17.7
Essex Woodlands Health Ventures
(3)................................ 1,674,729 7.3 5.9
Michael D. Mays (4)................. 107,442 * *
Robert W. Shimizu (5) .............. 374,994 1.6 1.3
Alan L. Crane (6)................... 85,500 * *
James L. Currie (7)................. 1,674,729 7.3 5.9
William S. Karol.................... 0 * *
Stephen C. McCluski (8)............. 5,400,000 23.5 19.0
All directors and officers as a
group
(11 persons)(1)(2)(4)(5)(6)(7)(8)... 17,851,662 76.2 61.9

- --------
* Less than 1% of the outstanding shares of common stock.

(1) Includes 249,480 shares held by the Paul Ashton Family Irrevocable Trust,
171,495 shares held by the Paul Ashton Children's Irrevocable Trust and
131,247 shares issuable upon the exercise of options that are or will
become exercisable within 60 days of May 31, 2001. In addition to these
shares, Dr. Ashton serves as trustee for the Thomas J. and Ellen Doble-
Smith Family Irrevocable Trust. Because the beneficiaries of these trusts
are family members of Dr. Smith, we have included them as beneficially
owned by Dr. Smith and not by Dr. Ashton.

(2) Includes 841,955 shares held by Thomas J. and Ellen Doble-Smith Family
Irrevocable Trust, 37,800 shares held by the Thomas J. and Ellen Doble-
Smith Trusts for Minors and 67,500 shares issuable upon the exercise of
options that are or will become exercisable within 60 days of May 31,
2001. In addition to these shares, Dr. Smith serves as trustee for the
Paul Ashton Family Irrevocable Trust and for the Paul Ashton Children's
Irrevocable Trust. Because the beneficiaries of these trusts are family
members of Dr. Ashton, we have included them as beneficially owned by Dr.
Ashton and not by Dr. Smith.

(3) Includes 1,339,785 shares held by Essex Woodlands Health Ventures Fund V,
LP and 334,944 shares held by Essex Woodlands Health Ventures Fund IV, LP.

(4) Includes 51,192 shares issuable upon the exercise of options that are or
will become exercisable within 60 days of May 31, 2001.

(5) Includes 167,994 shares issuable upon the exercise of options that are or
will become exercisable within 60 days of May 31, 2001.

(6) Includes 21,600 shares held by three family members of Mr. Crane, and
18,000 shares issuable upon the exercise of options that are or will
become exercisable within 60 days of May 31, 2001.

(7) Includes 1,674,729 shares held by entities affiliated with Essex Woodlands
Health Ventures, with which Mr. Currie is affiliated. Mr. Currie disclaims
beneficial ownership of those shares except to the extent of his pecuniary
interest therein.

(8) Includes 5,400,000 shares held by Bausch & Lomb Incorporated, of which Mr.
McCluski is an executive officer. Mr. McCluski disclaims beneficial
ownership of these shares.

DESCRIPTION OF CAPITAL STOCK

General

Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.01 par value per share, and 20,000,000
shares of undesignated preferred stock, $0.01 par value per share. The
following description of our capital stock does not purport to be complete and
is subject to, and qualified in its entirety by, our certificate of
incorporation and by-laws, which we have included as exhibits to the
registration statement of which this prospectus forms a part.

Preferred Stock

As of May 31, 2001 there were 641,642 shares of Series A convertible
preferred stock outstanding. Upon the closing of this offering, all outstanding
shares of Series A convertible preferred stock will convert into 5,774,778
shares of common stock. The board of directors will have the authority, without
further action by the stockholders, to issue up to 20,000,000 shares of
preferred stock in one or more series and to designate the rights, preferences,
privileges and restrictions of each series. The issuance of preferred stock
could have the effect of restricting dividends on the common stock, diluting
the voting power of the common stock, impairing the liquidation rights of the
common stock or delaying or preventing a change in control without further
action by the stockholders. We have no present plans to issue any shares of
preferred stock after the completion of this offering.

Common Stock

As of May 31, 2001 there were 17,219,997 shares of common stock outstanding,
held of record by 41 stockholders. In addition, as of May 31, 2001, there were
2,292,003 shares of common stock subject to outstanding options and 336,618
shares of common stock subject to outstanding warrants. Upon completion of this
offering, there will be 28,394,775 shares of common stock outstanding, assuming
no exercise of outstanding stock options or warrants and conversion of all
outstanding shares of preferred stock into common stock.

Each share of common stock entitles its holder to one vote on all matters to
be voted upon by stockholders. Subject to preferences that may apply to any
outstanding preferred stock, holders of common stock will receive ratably any
dividends that the board of directors may declare out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and any liquidation preference of
preferred stock that may be outstanding. The common stock has no preemptive
rights, conversion rights or other subscription rights or redemption or sinking
fund provisions. All outstanding shares of common stock are fully paid and non-
assessable, and the shares of common stock that we will issue upon completion
of this offering will be fully paid and non-assessable.

Warrants

In August 2000, we issued warrants to purchase 336,618 shares of common
stock at a weighted average exercise price of $5.97 per share which are
exercisable until April 7, 2002.

Registration Rights

We have granted demand registration rights to the holders of our Series A
convertible preferred stock and Bausch & Lomb. Beginning 180 days after this
offering, if the requisite percentage of these stockholders so request, we
must register their shares of common stock, provided the

aggregate value exceeds $10.0 million. We are not obligated to effect more than
two required registrations in total or more than one in any 12-month period. In
addition, these holders, together with Drs. Smith and Ashton, may require us to
register their shares any time we propose a registered offering, subject to our
right to decrease the number of shares included if market conditions prevent
the registration of all shares. Twelve months after this offering, holders of
registration rights may request that we register their shares on Form S-3,
provided that each proposed registration exceeds $2.5 million. Holders of
registration rights may not require us to register shares on Form S-3 more than
twice in any 12-month period or more than once in any six-month period.

If our board of directors determines that a registration would be materially
detrimental to us, we may suspend these rights for up to 180 days, but we may
not do so more than once in any one-year period. Registration rights are
transferable, provided the transferee agrees to be bound by the terms of our
registration rights agreement and is an affiliate of an existing holder of
registration rights or acquires at least 10% of the shares entitled to
registration rights initially held by the transferor. We must bear all expenses
associated with the filing of registration statements on behalf of holders of
registration rights except for underwriting discounts and selling commissions.

Anti-Takeover Provisions

Delaware Law

We are subject to Section 203 of the Delaware General Corporation Law, which
regulates acquisitions of some Delaware corporations. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person becomes an interested stockholder, unless:

. the corporation's board of directors approved the business combination or
the transaction in which the person became an interested stockholder
prior to the time the person attained this status,

. upon consummation of the transaction that resulted in the person becoming
an interested stockholder, the person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers, or

. at or subsequent to the time the person became an interested stockholder,
the corporation's board of directors approved the business combination
and the stockholders other than the interested stockholder authorized the
transaction at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder.

A "business combination" generally includes a merger, asset or stock sale or
other transaction with or caused by the interested stockholder. In general, an
"interested stockholder" is a person who, together with the person's affiliates
and associates, owns, or within three years prior to the determination of
interested stockholder status did own, 15% or more of a corporation's voting
stock.

This statute could prohibit or delay mergers or other takeover or change-in-
control attempts with respect to us and, accordingly, may discourage attempts
to acquire us.

Certificate of Incorporation and By-law Provisions

Board of Directors. Our certificate of incorporation divides our board of
directors into three classes with staggered three-year terms. In addition, our
certificate of incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of 75% of our shares

of capital stock entitled to vote. Under our certificate of incorporation, any
vacancy on our board of directors, including a vacancy resulting from an
enlargement of our board of directors, may only be filled by vote of a majority
of our directors then in office. The classification of our board of directors
and the limitations on the removal of directors and filling of vacancies could
make it more difficult for a third party to acquire, or discourage a third
party from acquiring, control of us.

Stockholder Meetings. Under our by-laws to be effective upon the closing of
this offering, special meetings of the stockholders may be called only by the
board of directors, the chairman of the board or the chief executive officer.
Our by-laws will also provide that stockholders wishing to propose business to
be brought before a meeting of stockholders will be required to comply with
various advance notice requirements. Finally, our certificate of incorporation
and by-laws will provide that any action required or permitted to be taken by
our stockholders at an annual or special meeting may be taken only if properly
brought before the meeting, and may not be taken by written consent in lieu of
a meeting. These provisions could have the effect of delaying until the next
stockholders' meeting stockholder actions which are favored by the holders of a
majority of our outstanding voting securities. These provisions may also
discourage a third party from making a tender offer for our common stock,
because even if it acquired a majority of our outstanding voting securities,
the third party would be able to take action as a stockholder (such as electing
new directors or approving a merger) only at a duly called stockholders'
meeting, and not by written consent.

Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to acquire us. These and other provisions may have the effect of
deterring hostile takeovers or delaying changes in control of us.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company. The transfer agent's address is 40 Wall Street, New
York, NY 10005.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Sales of substantial amounts
of our common stock in the public market after any restrictions on sale lapse
could adversely affect the prevailing market price of the common stock and
impair our ability to raise equity capital in the future.

Upon completion of the offering, we will have 28,394,775 outstanding shares
of common stock, outstanding options to purchase 2,292,003 shares of common
stock and outstanding warrants to purchase 336,618 shares of common stock,
assuming no additional option or warrant grants or exercises after May 31,
2001. None of the shares sold in the offering will be subject to the lock-up
agreements described below. We expect that all shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment
option, will be freely tradable without restriction under the Securities Act,
unless purchased by our "affiliates" as that term is defined in Rule 144 under
the Securities Act. In general, affiliates include officers, directors and 10%
or greater stockholders.

The remaining 22,994,775 shares outstanding and 2,628,621 shares subject to
outstanding options and warrants are "restricted securities" within the meaning
of Rule 144. Restricted securities may be sold in the public market only if the
sale is registered or if it qualifies for an exemption from registration, or if
the securities can be sold under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below. Sales of restricted securities in
the public market, or the availability of these shares for sale, could
adversely affect the market price of the common stock.

Lock-Up Agreements

We, our directors, officers, and various other stockholders and employees,
who together hold substantially all of our securities, have entered into lock-
up agreements in connection with this offering. These lock-up agreements
generally provide that these holders will not offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of our common stock or any
securities exercisable for or convertible into our common stock owned by them
prior to this offering for a period of 180 days after the date of this
prospectus without the prior written consent of Deutsche Banc Alex. Brown Inc.
Notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until these agreements expire or are waived. Assuming that Deutsche Banc Alex.
Brown Inc. does not release any securityholders from the lock-up agreements,
the following shares will be eligible for sale in the public market at the
following times:

. Beginning on the effective date of the registration statement of which
this prospectus forms a part, all of the shares sold in this offering
will be immediately available for sale in the public market.

. Beginning 180 days after the effective date, approximately an additional
22,994,775 shares will be eligible for sale pursuant to Rule 144, Rule
144(k) and Rule 701, subject to the volume and other restrictions
described below.

Rule 144

In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:

. 1% of the number of shares of common stock then outstanding, which will
equal approximately 283,947 shares immediately after this offering, and

. the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.

Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.

Rule 701

Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell these shares in reliance upon Rule 144, but without
compliance with certain restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 ninety days after effectiveness
without complying with the holding period requirement and that non-affiliates
may sell these shares in reliance on Rule 144 ninety days after effectiveness
without complying with the holding period, public information, volume
limitation or notice requirements of Rule 144.

Incentive Plans

We intend to file one or more registration statements under the Securities
Act after the effective date of this offering to register shares to be issued
pursuant to our 1997 Stock Option Plan, 2001 Incentive Plan and Employee Stock
Purchase Plan. As a result, shares issued under our 1997 Stock Option Plan, our
2001 Incentive Plan or our Employee Stock Purchase Plan will generally be
freely tradable in the public market. However, shares held by affiliates will
still be subject to the volume limitation, manner of sale, notice and public
information requirements of Rule 144, unless otherwise resellable under Rule
701. As of May 31, 2001, we had granted options to purchase 2,292,003 shares of
common stock to employees that had not been exercised or canceled, of which
options to purchase 683,649 shares were exercisable. See "Management--Incentive
Plans" and "Description of Capital Stock--Registration Rights."

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Banc Alex.
Brown Inc., Banc of America Securities LLC and SG Cowen Securities Corporation,
have severally agreed to purchase from us the following respective number of
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus:

Number
Underwriters of Shares
- ------------ ---------

Deutsche Banc Alex. Brown Inc. .......................................
Banc of America Securities LLC........................................
SG Cowen Securities Corporation.......................................
---------
Total............................................................... 5,400,000
=========

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock we are offering are subject
to conditions precedent and that the underwriters will purchase all of the
shares of common stock offered by this prospectus, other than those covered by
the over-allotment option described below, if they purchase any of these
shares.

The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock to the public at the
public offering price shown on the cover of this prospectus and to dealers at a
price that represents a concession not in excess of $ per share under the
public offering price. The underwriters may allow, and these dealers may re-
allow, a concession of not more than $ per share to other dealers. After
the initial public offering, representatives of the underwriters may change the
offering price and other selling terms.

We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 810,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered by this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters
will become obligated, subject to conditions, to purchase approximately the
same percentage of these additional shares of common stock as the number of
shares of common stock to be purchased by it in the above table bears to the
total number of shares of common stock offered by this prospectus. We will be
obligated, pursuant to the option, to sell these additional shares of common
stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer
the additional shares on the same terms as those on which the shares are being
offered.

The underwriting discounts and commissions per share are equal to the public
offering price per share of common stock less the amount paid by the
underwriters to us per share of common stock. The underwriting discounts and
commissions are % of the initial public offering price. We have agreed to pay
the underwriters the following discounts and commissions, assuming either no
exercise or full exercise by the underwriters of the underwriters' over-
allotment option:

Total Fees
-------------------------------------------
Without Exercise of With Full Exercise of
Fee Per Share Over-Allotment Option Over-Allotment Option
------------- --------------------- ---------------------

Discounts and
commissions paid by
us.................... $ $ $

In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $1,000,000.

We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of any of these
liabilities.

Each of our officers and directors, and substantially all of our
stockholders and holders of options and warrants to purchase our stock, have
agreed, subject to limited exceptions, not to offer, sell, contract to sell or
otherwise dispose of, or enter into any transaction that is designated to, or
could be expected to, result in the disposition of any shares of our common
stock or other securities convertible into or exchangeable or exercisable for
shares of our common stock or derivatives of our common stock owned by these
persons prior to this offering or common stock issuable upon exercise of
options or warrants held by these persons for a period of 180 days after the
effective date of the registration statement of which this prospectus is a part
without the prior written consent of Deutsche Banc Alex. Brown Inc. They may
give this consent at any time without public notice. We have entered into a
similar agreement with the representatives of the underwriters except that
without such consent we may grant options and sell shares pursuant to our stock
option plan and we may issue shares of our common stock in connection with a
strategic partnering transaction or in exchange for all or substantially all of
the equity or assets of a company in connection with a merger or acquisition.
There are no agreements between the representatives and any of our stockholders
or affiliates releasing them from these lock-up agreements prior to the
expiration of the 180-day period.

The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.

. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum price
per share.

. Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the over-
allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.

. Syndicate covering transactions may involve purchases of the common stock
in the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open

market. A naked short position is more likely to be created if the
underwriters are concerned that there could be downward pressure on the
price of the shares in the open market after pricing that could adversely
affect investors who purchase in the offering.

. Penalty bids permit the representatives of the underwriters to reclaim a
selling concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a stabilizing or
syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of our common stock may be higher than
the price that might otherwise exist in the open market. These transactions
may be affected on the Nasdaq National Market or otherwise and, if commenced,
may be discontinued at any time.

At our request, the underwriters have reserved for sale at the initial
public offering price up to 270,000 shares of our common stock being sold in
this offering for our directors, officers, employees, business associates and
their respective friends and family members. The number of shares of our
common stock available for the sale to the general public will be reduced to
the extent these reserved shares are purchased. Any reserved shares not
purchased by these persons will be offered by the underwriters to the general
public on the same basis as the other shares in this offering.

A prospectus in electronic format is being made available on Internet web
sites maintained by one or more of the lead underwriters of this offering and
may be made available on web sites maintained by other underwriters. Other
than the prospectus in electronic format, the information on any underwriter's
web site and any information contained in any other web site maintained by an
underwriter is not part of the prospectus or the registration statement of
which the prospectus forms a part.

Pricing of this Offering

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price of our common stock
will be determined by negotiation among us and the representatives of the
underwriters. Among the primary factors that will be considered in determining
the public offering price are:

. prevailing market conditions,

. our results of operations in recent periods,

. the present stage of our development,

. the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business, and

. estimates of our business potential.

Deutsche Banc Alex. Brown Inc. acted as a placement agent in connection
with the private placement of our Series A convertible preferred stock and, in
connection with that placement received compensation consisting of cash and
warrants to purchase our common stock. In addition, several employees of
Deutsche Banc Alex. Brown Inc. purchased a total of 4,652 shares of the Series
A convertible preferred stock on the same terms as those on which such
securities were offered to other investors in the Series A placement. These
shares will convert into 41,868 shares of our common stock upon the completion
of this offering. The holders of these shares have entered into lock-up
agreements that prevent transfers of the shares for a period of 180 days after
the effective date of the registration statement of which this prospectus
forms a part.

VALIDITY OF COMMON STOCK

The validity of the common stock offered hereby will be passed upon for us
by Ropes & Gray, Boston, Massachusetts. Piper Marbury Rudnick & Wolfe LLP,
Baltimore, Maryland has represented the underwriters in this offering.
Attorneys of Ropes & Gray own 41,868 shares of our common stock through a
collective investment vehicle.

EXPERTS

The financial statements as of December 31, 1999 and 2000 and for each of
the three years in the period ended December 31, 2000 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION ABOUT US

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act concerning the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement or its exhibits and
schedules. For further information about us and our common stock, we refer you
to the registration statement and to its attached exhibits and schedules.
Statements made in this prospectus concerning the contents of any document are
not necessarily complete. With respect to each document filed as an exhibit to
the registration statement, we refer you to the exhibit for a more complete
description of the matter involved.

You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, NY 10048, and at 500 West Madison Street, Suite 1400, Chicago,
IL 60661. You may obtain information on the operation of these reference
facilities by calling the Commission at (800) SEC-0330. You may obtain copies
of all or any part of our registration statement from the Commission upon
payment of prescribed fees. You may also inspect reports, proxy and information
statements and other information that we file electronically with the
Commission without charge at the Commission's Internet site,
http://www.sec.gov.

We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors.

CONTROL DELIVERY SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

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

Consolidated Balance Sheets as of December 31, 1999 and 2000 and as of
March 31, 2001 (unaudited)................................................ F-3
Consolidated Pro Forma Stockholders' Equity as of March 31, 2001
(unaudited)............................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1999 and 2000 and for the three months ended March 31, 2000 and 2001
(unaudited)............................................................... F-4
Consolidated Statements of Stockholders' Deficit and Comprehensive Income
(Loss)
for the years ended December 31, 1998, 1999 and 2000 and for the three
months ended March 31, 2001 (unaudited)................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000 and for the three months ended March 31, 2000 and 2001
(unaudited)............................................................... F-7
Notes to Consolidated Financial Statements................................. F-8

F-1

Report of Independent Accountants

To the Board of Directors and Stockholders ofControl Delivery Systems, Inc.:

The stock split in the form of a stock dividend described in Note 2 to the
consolidated financial statements has not been consummated at June 15, 2001.
When it has been consummated, we will be in a position to furnish the following
report:

"In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' deficit and
comprehensive income (loss) and cash flows present fairly, in all material
respects, the financial position of Control Delivery Systems, Inc. and its
subsidiary at December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States 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."

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

January 27, 2001, except as to the information in Note 16, for which the date
is June 12, 2001.

F-2

CONTROL DELIVERY SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

Pro Forma
December 31, Stockholders'
------------------------ March 31, Equity at
1999 2000 2001 March 31, 2001
----------- ----------- ----------- --------------
(unaudited)

Assets
Current assets:
Cash and cash
equivalents............ $ 1,143,763 $18,788,723 $21,052,927
Short-term investments,
available for sale..... -- 10,797,343 9,483,923
Accounts receivable -
related party.......... 99,111 1,596,000 96,000
Income tax receivable... -- -- 703,078
Deferred tax asset...... -- 623,530 --
Other current assets.... 13,000 1,041,964 1,145,180
----------- ----------- -----------
Total current assets.. 1,255,874 32,847,560 32,481,108
Property and equipment,
net..................... 256,066 1,349,800 1,643,489
Other assets (Note 14)... 13,125 106,656 530,323
----------- ----------- -----------
Total assets......... $ 1,525,065 $34,304,016 $34,654,920
=========== =========== ===========
Liabilities and
Stockholders' Deficit
Current liabilities:
Accounts payable........ $ 340,398 $ 1,257,411 $1,388,221
Accrued expenses........ 108,382 3,623,317 125,083
Accrued royalties....... 65,564 48,000 48,000
Income taxes payable ... -- 815,452 --
Deferred revenue........ 1,263,761 3,170,698 4,120,227
----------- ----------- -----------
Total current
liabilities.......... 1,778,105 8,914,878 5,681,531
Commitments (Note 11)
Series A redeemable
convertible preferred
stock, $0.01 par value;
no shares authorized,
issued and outstanding
December 31, 1999;
650,000 shares
authorized, 641,642
shares issued and
outstanding December 31,
2000 and March 31, 2001;
no shares authorized,
issued and outstanding
pro forma March 31, 2001
(Liquidation value at
March 31, 2001
$34,481,841) ........... -- 31,375,997 31,493,939 $ --
----------- ----------- ----------- -----------
Stockholders' (deficit)
equity:
Undesignated preferred
stock, $0.01 par
value; 100,000 shares
authorized, no shares
issued and outstanding
December 31, 1999;
1,350,000 shares
authorized, no shares
issued and outstanding
December 31, 2000 and
March 31, 2001;
20,000,000 shares
authorized, no shares
issued and outstanding
pro forma March 31,
2001................... -- -- -- --
Common stock, $0.01 par
value; 27,000,000
shares authorized,
19,074,015 shares
issued and outstanding
December 31, 1999;
27,000,000 shares
authorized, 16,915,122
shares issued and
outstanding December
31, 2000; 27,000,000
shares authorized,
17,219,997 shares
issued and outstanding
March 31, 2001;
100,000,000 shares
authorized, 22,994,775
shares issued and
outstanding pro forma
March 31, 2001......... 190,740 169,151 172,200 229,948
Additional paid-in
capital................ 1,840,240 1,558,094 4,865,607 36,301,800
Deferred stock
compensation........... (116,173) (386,174) (355,332) (355,332)
Accumulated other
comprehensive income
(loss)................. -- (69,527) 4,093 4,093
Accumulated deficit..... (2,167,847) (7,258,403) (7,207,118) (7,207,118)
----------- ----------- ----------- -----------
Total stockholders'
(deficit) equity..... (253,040) (5,986,859) (2,520,550) $28,973,391
----------- ----------- ----------- ===========
Total liabilities and
stockholders'
(deficit) equity..... $ 1,525,065 $34,304,016 $34,654,920
=========== =========== ===========

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

F-3

CONTROL DELIVERY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months
For the Years Ended December 31, Ended March 31,
------------------------------------- -----------------------
1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- -----------
(unaudited)

Revenues:
License fees and
collaborative research and
development - related
party...................... $ -- $ 1,889,537 $ 4,024,878 $ 937,124 $ 2,577,118
Royalties - related party... 638,005 496,378 379,813 91,536 119,841
Government research grants.. 476,602 399,512 731,116 300,000 200,000
----------- ----------- ----------- ----------- -----------
Total revenues............ 1,114,607 2,785,427 5,135,807 1,328,660 2,896,959
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development.... 1,155,561 1,549,359 7,033,428 665,189 1,999,476
Royalties................... 315,185 496,164 355,817 45,859 59,648
General and administrative.. 513,547 872,223 1,954,858 399,021 1,226,040
----------- ----------- ----------- ----------- -----------
Total operating expenses.. 1,984,293 2,917,746 9,344,103 1,110,069 3,285,164
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.................. (869,686) (132,319) (4,208,296) 218,591 (388,205)
Interest income.............. 3,395 38,648 834,320 16,130 439,490
Interest expense............. -- -- (30,456) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) before
income taxes................ (866,291) (93,671) (3,404,432) 234,721 51,285
Provision for income taxes... -- -- 191,922 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)............ (866,291) (93,671) (3,596,354) 234,721 51,285
----------- ----------- ----------- ----------- -----------
Accretion on redeemable
convertible preferred stock
and warrants................ -- -- (196,572) -- (117,942)
----------- ----------- ----------- ----------- -----------
Net income (loss)
attributable to common
stockholders................ $ (866,291) $ (93,671) $(3,792,926) $ 234,721 $ (66,657)
=========== =========== =========== =========== ===========
Net income (loss) per share:
Basic....................... $ (0.05) $ (0.01) $ (0.21) $ 0.01 $ (0.00)
Diluted..................... (0.05) (0.01) (0.21) 0.01 (0.00)
Shares used in computing net
income (loss) per share:
Basic....................... 18,453,114 19,056,321 17,757,846 19,022,013 17,204,832
Diluted..................... 18,453,114 19,056,321 17,757,846 20,123,100 17,204,832
Unaudited pro forma net
income (loss) per share:
Basic....................... $ (0.15) $ 0.00
Diluted..................... (0.15) 0.00
Shares used in computing
unaudited pro forma net
income (loss) per share:
Basic....................... 23,532,624 22,979,610
Diluted..................... 23,532,624 24,546,330

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

F-4

CONTROL DELIVERY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE INCOME
(LOSS)

For the Years Ended December 31, 1998, 1999 and 2000
and for the three months ended March 31, 2001 (unaudited)

Accumulated
Other
Common Stock Additional Deferred Compre- Accum- Total Comprehensive
-------------------- Paid-in Stock hensive ulated Stockholders' Income
Shares Amount Capital Compensation Loss Deficit Deficit (Loss)
---------- -------- ---------- ------------ ----------- ----------- ------------- -------------

Balance at
December 31, 1997.... 18,000,000 $180,000 $ 430,464 $ -- $ -- $(1,207,885) $ (597,421)
Sale of common
stock................ 916,470 9,165 990,835 -- -- -- 1,000,000
Compensation expense
associated with stock
options.............. -- -- 15,206 -- -- -- 15,206
Net loss and
comprehensive loss... -- -- -- -- -- (866,291) (866,291) $ (866,291)
---------- -------- ---------- --------- ------- ----------- ----------- ===========
Balance at
December 31, 1998.... 18,916,470 189,165 1,436,505 -- -- (2,074,176) (448,506)
Sale of common
stock................ 157,545 1,575 248,425 -- -- -- 250,000
Deferred compensation
related to employee
stock option grants.. -- -- 128,687 (128,687) -- -- --
Amortization of
deferred stock
compensation......... -- -- -- 12,514 -- -- 12,514
Compensation expense
associated with stock
options.............. -- -- 26,623 -- -- -- 26,623
Net loss and
comprehensive loss... -- -- -- -- -- (93,671) (93,671) $ (93,671)
---------- -------- ---------- --------- ------- ----------- ----------- ===========
Balance at
December 31, 1999.... 19,074,015 190,740 1,840,240 (116,173) -- (2,167,847) (253,040)
Purchase and
retirement of
Company's common
stock (Note 9)....... (2,514,015) (25,140) (2,010,663) -- -- (1,494,202) (3,530,005)
Issuance of warrants
in conjunction with
redeemable
convertible preferred
stock offering, at
fair value........... -- -- 1,098,082 -- -- -- 1,098,082
Accretion of
redeemable
convertible preferred
stock to redemption
value................ -- -- (196,572) -- -- -- (196,572)
Exercise of employee
stock options........ 355,122 3,551 297,706 -- -- -- 301,257
Deferred compensation
related to employee
stock option grants.. -- -- 343,305 (343,305) -- -- --
Amortization of
deferred
stock compensation... -- -- -- 73,304 -- -- 73,304
Compensation expense
associated with stock
options.............. -- -- 185,996 -- -- -- 185,996
Unrealized loss on
short-term
investments.......... -- -- -- -- (69,527) -- (69,527) $ (69,527)
Net loss............. -- -- -- -- -- (3,596,354) (3,596,354) (3,596,354)
-----------
Comprehensive loss... -- -- -- -- -- -- -- $(3,665,881)
---------- -------- ---------- --------- ------- ----------- ----------- ===========
Balance at
December 31, 2000 ... 16,915,122 169,151 1,558,094 (386,174) (69,527) (7,258,403) (5,986,859)
Accretion of
redeemable
convertible preferred
stock to redemption
value................ -- -- (117,942) -- -- -- (117,942)
Exercise of employee
stock options........ 24,075 241 35,559 -- -- -- 35,800
Amortization of
deferred stock
compensation......... -- -- -- 30,842 -- -- 30,842
Compensation expense
associated with stock
options.............. -- -- (39,296) -- -- -- (39,296)
Common stock issued
for services......... 280,800 2,808 3,429,192 -- -- -- 3,432,000
Unrealized gain on
short-term
investments.......... -- -- -- -- 73,620 -- 73,620 $ 73,620
Net income........... -- -- -- -- -- 51,285 51,285 51,285
-----------
Comprehensive income
..................... -- -- -- -- -- -- -- $ 124,905
---------- -------- ---------- --------- ------- ----------- ----------- ===========
Balance March 31,
2001................. 17,219,997 $172,200 $4,865,607 $(355,332) $ 4,093 $(7,207,118) $(2,520,550)
========== ======== ========== ========= ======= =========== ===========

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

F-5

CONTROL DELIVERY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended
For the Years Ended December 31, March 31,
------------------------------------ -----------------------
1998 1999 2000 2000 2001
----------- ---------- ----------- ---------- -----------
(unaudited)

Cash flows from
operating activities:
Net income (loss)...... $ (866,291) $ (93,671) $(3,596,354) $ 234,721 $ 51,285
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation........... 15,911 22,140 141,769 18,794 87,908
Non-cash charges for
stock-based
compensation.......... 15,206 39,137 3,691,300 32,610 (8,454)
License maintenance fee
offset by common stock
repurchase............ -- -- (158,537) -- --
Accrued interest on
note receivable....... -- -- (1,333) -- --
Changes in operating
assets and
liabilities:
Accounts receivable... 85,184 19,888 (1,496,889) 13,052 1,500,000
Income tax
receivable........... -- -- -- -- (703,078)
Deferred tax asset.... -- -- (623,530) -- 623,530
Other current assets.. (1,500) (11,500) (1,028,964) 8,331 (103,216)
Other assets.......... -- (3,125) (67,198) (19,901) 50,000
Accounts payable...... (54,717) 43,727 917,013 33,108 130,810
Accrued expenses...... 13,866 68,831 82,935 (57,279) (66,234)
Accrued royalties..... (60,290) 4,464 (17,564) (65,564) --
Income taxes payable.. -- -- 815,452 -- (815,452)
Deferred revenue...... (161,261) 1,142,409 1,065,474 (29,899) 949,529
----------- ---------- ----------- ---------- -----------
Net cash provided by
(used in) operating
activities.......... (1,013,892) 1,232,300 (276,426) 167,973 1,696,628
----------- ---------- ----------- ---------- -----------
Cash flows from
investing activities:
Purchases of short-term
investments, available
for sale.............. -- -- (10,866,870) -- --
Sales and maturities of
short-term
investments........... -- -- -- -- 1,387,040
Deposit on acquisition
of building........... -- -- -- -- (500,000)
Purchases of property
and equipment......... (5,093) (252,160) (1,235,503) (164,252) (381,597)
----------- ---------- ----------- ---------- -----------
Net cash provided by
(used in) investing
activities.......... (5,093) (252,160) (12,102,373) (164,252) 505,443
Cash flows from
financing activities:
Accrued payroll,
officers.............. 24,423 -- -- -- --
Payment of accrued
payroll, officers..... -- (215,696) -- -- --
Issuance of note
receivable to related
party................. -- -- (25,000) -- --
Proceeds from payment
of note receivable by
related party......... -- -- -- -- 26,333
Proceeds from the
issuance of preferred
stock, net of issuance
costs................. -- -- 32,277,507 -- --
Payments to purchase
and retire Company's
common stock (Note
9).................... -- -- (465,000) (65,000) --
Payment of note payable
(Note 9).............. -- -- (2,065,005) -- --
Proceeds from the sale
of common stock....... 1,000,000 250,000 301,257 -- 35,800
----------- ---------- ----------- ---------- -----------
Net cash provided by
(used in) financing
activities.......... 1,024,423 34,304 30,023,759 (65,000) 62,133
----------- ---------- ----------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 5,438 1,014,444 17,644,960 (61,279) 2,264,204
Cash and cash
equivalents at
beginning of period.... 123,881 129,319 1,143,763 1,143,763 18,788,723
----------- ---------- ----------- ---------- -----------
Cash and cash
equivalents at end of
period................ $ 129,319 $1,143,763 $18,788,723 $1,082,484 $21,052,927
=========== ========== =========== ========== ===========
Supplemental disclosure
of cash flow
information:
Cash paid for
interest.............. $ -- $ -- $ 30,456 $ -- $ --
Cash paid for taxes.... -- -- -- -- $ 910,000
Supplemental disclosure
of non-cash financing
activities:
Purchase and retirement
of 1,287,945 shares of
Company's common stock
in exchange for
issuance of a note
payable of
$2,065,005............ -- -- 2,065,005 -- --
Purchase and retirement
of 1,074,015 shares of
Company's common stock
in exchange for the
waiver of a one-time
license maintenance
fee due of
$1,000,000............ -- -- 1,000,000 -- --
Issuance of stock to
consultants for prior
services.............. -- -- -- -- 3,432,000

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

F-6

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

1. The Company

Nature of Business

Control Delivery Systems, Inc. (the "Company") designs, develops and
manufactures innovative, sustained-release drug delivery products.

The Company is subject to risks common to companies in the biopharmaceutical
industry including, but not limited to, the successful development and
commercialization of products, clinical trial uncertainty, fluctuations in
operating results and financial risks, potential need for additional funding,
protection of proprietary technology and patent risks, compliance with
government regulations, dependence on key personnel and collaborative partners,
competition, technological and medical risks, customer demand, compliance with
Food and Drug Administration and other government regulations, management of
growth and effectiveness of marketing by the Company and by third parties.

2. Summary of Significant Accounting Policies

Stock Split

On June 12, 2001, the Company's board of directors approved a nine-for-one
stock split of the Company's common stock in the form of a stock dividend to be
effected prior to the initial public offering (the "IPO"). In accordance with
the terms of the Series A redeemable convertible preferred stock, the
conversion ratio will be adjusted so that each share of redeemable convertible
preferred stock is convertible into nine shares of common stock. All common
stock share and per share amounts and stock option data in these consolidated
financial statements have been restated to reflect this split.

Change in Company Fiscal Year End

In November 2000, the Company changed its fiscal year end from November 30
to a calendar year end. Accordingly, previously prepared financial statements
have been restated to reflect the revised year end.

Basis of Presentation; Principles of Consolidation

The accompanying consolidated financial statements reflect the operations of
the Company and CDS Securities Corp., its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated.

Interim Financial Information

The financial statements for the three months ended March 31, 2000 and 2001
are unaudited but include all adjustments (consisting only of normal recurring
adjustments), which the Company considers necessary for a fair presentation of
the operating results and cash flows for such periods.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported

F-7

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the dates of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents, which consist of money market funds, municipal notes and bonds,
and commercial paper, are valued at cost plus accrued interest.

Investments

Investments consist of marketable securities, which are classified as
available for sale. Investments are stated at fair value with unrealized gains
and losses included as a component of accumulated other comprehensive income
(loss), which is a separate component of stockholders' deficit until realized.
The fair value of these securities is based on quoted market prices. Realized
gains and losses are determined on the specific identification method and are
included in investment income.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations
of credit risk primarily consist of cash and cash equivalents. The Company
places its cash and cash equivalents and short-term investments with financial
institutions which management believes are of high credit quality.

At December 31, 1999 and 2000 and at March 31, 2001, all of the Company's
accounts receivable were due from one customer. Revenue from one customer
represented 57.2%, 85.7% and 85.8% of total revenues during the years ended
December 31, 1998, 1999 and 2000, and 77.4% and 93.1% of total revenues for the
three months ended March 31, 2000 and 2001, respectively.

Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable, at December 31,
1999 and 2000 and March 31, 2001 approximated their fair value due to the
short-term nature of these items.

Derivative Instruments

In June of 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities--an Amendment to
FASB Statement No. 133." This statement establishes accounting and reporting
standards for derivative instruments embedded in other contracts (collectively
referred to as "derivatives") and for hedging activities. The statement
requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The Company has adopted this new
accounting standard effective January 1, 2001. This adoption did not have a
significant effect on the Company's financial statements.

F-8

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

Property and Equipment

Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Leaseholds are
amortized over the shorter of the asset life or the lease term. Property and
equipment held under capital leases are initially recorded at the lower of the
fair market value of the related asset or the present value of the minimum
lease payments at the inception of the lease. Repairs and maintenance which do
not improve or extend the life of the respective assets are charged to
operations. On disposal, the related accumulated depreciation or amortization
is removed from the accounts and any resulting gain or loss is included in the
results of operations.

Impairment of Long-lived Assets

The Company evaluates the recoverability of its property and equipment and
other long-lived assets when circumstances indicate that an event of impairment
may have occurred in accordance with the provisions of SFAS 121, "Accounting
for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed
Of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets or the business to which
such assets relate. Impairment is measured based on the difference between the
carrying value of the related assets or businesses and the discounted future
cash flows of such assets or businesses. No impairment was required to be
recognized for any of the years ended December 31, 1998, 1999 and 2000, or for
the three months ended March 31, 2000 and 2001.

Pro Forma Stockholders' Equity (Unaudited)

In August 2000, the board of directors authorized management of the Company
to select underwriters in anticipation of filing a Registration Statement with
the Securities and Exchange Commission to sell shares of its common stock in an
IPO. Upon the IPO, all outstanding shares of redeemable convertible preferred
stock at December 31, 2000 will convert into common stock. Also, the Company's
board of directors has approved an Amended and Restated Certificate of
Incorporation authorizing the Company to issue 100,000,000 shares of common
stock and 20,000,000 shares of preferred stock, which the Company expects to
file prior to the IPO. The unaudited pro forma balance sheet presentation of
Stockholders' Equity has been prepared assuming all preferred stock was
converted into common stock at March 31, 2001.

Revenue Recognition

The Company enters into licensing and development agreements with
collaborative partners for the development of products. The terms of the
agreements may include nonrefundable license fees, funding for research and
development, payments based on the achievement of certain milestones and
royalties on product sales.

Nonrefundable license fees, milestone payments and collaborative research
and development payments under licensing and development agreements are
recognized as revenue on a percentage of completion basis. The Company's cost
of the total effort to complete the Company's expected research and development
activities under an agreement is estimated from the commencement date. For each
reporting period, the Company determines the cost of the effort that the
Company has

F-9

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

incurred to date under an agreement and divides this amount by the amount of
the Company's total expected research and development costs under that
agreement at that time. Revenue recognized for a reporting period for license
fees, milestone payments and collaborative research and development efforts is
determined by multiplying the resulting percentage completed by the total
license, milestone and research and development revenue expected to be received
under that agreement, and deducting revenue previously recognized. The
remaining unrecognized revenue is spread over the remaining performance period
in a similar manner. The Company includes contingent payments in total revenue
expected to be received under an agreement only when all contingencies related
to a milestone have been removed and the collaborative partner becomes
obligated to make the payment. Payments received in advance of being earned are
recorded as deferred revenue. The deferred revenue balance at March 31, 2001 is
expected to be recognized over the remaining life of the contract, in
accordance with percentage of completion accounting principles.

Government research grants are nonrefundable and are recognized as revenue
when the related expense is incurred. Revenue recognized under government
research grants is recorded consistent with guidelines issued by the governing
body issuing the grant.

The Company evaluates all collaborative agreements each reporting period to
determine the appropriate revenue recognition for that period. The evaluation
includes all of the potential revenue components from each specific
collaborative agreement.

Research and Development and Patents

All research and development costs and costs incurred to secure patents are
expensed as incurred.

Stock-based Compensation

SFAS 123, "Accounting for Stock-based Compensation," ("SFAS 123")
encourages, but does not require, companies to record compensation costs for
stock-based employee compensation at fair value. The Company has chosen to
adopt SFAS 123 for employees for disclosure purposes only. In accounting for
its stock-based compensation plan, the Company applies Accounting Principles
Board Opinion No. 25 ("APB 25"), and related interpretations for all awards
granted to employees. Under APB 25, when the exercise price of options granted
to employees under the plan equals the market price of the common stock on the
date of grant, no compensation cost is required. When the exercise price of
options granted to employees under the plan is less than the market price of
the common stock on the date of grant, related compensation costs are expensed
over the vesting period. For stock options granted to non-employees, the
Company recognizes compensation costs in accordance with the requirements of
SFAS 123 and Emerging Issues Task Force ("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" ("EITF 96-18"). SFAS 123 and
EITF 96-18 require that companies recognize compensation expense for grants of
stock, stock options and other equity instruments based on fair value.

F-10

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

Income Taxes

The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, as well as net operating loss carryforwards, and are measured
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets may be reduced by a valuation
allowance to reflect the uncertainty associated with their ultimate
realization.

Comprehensive Income (Loss)

The Company accounts for comprehensive income (loss) under SFAS 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for reporting and displaying comprehensive income and its components in the
financial statements. Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. The Company had no items of
other comprehensive income during the years ended December 31, 1998 and 1999
and $69,527 in unrealized holding losses on its investments in 2000 and $0 and
$73,620 in unrealized holding gains for the three months ended March 31, 2000
and 2001, respectively.

Net Income (Loss) Per Common Share

The Company accounts for and discloses net income (loss) per common share in
accordance with Statement of Financial Accounting Standards ("SFAS") 128
"Earnings Per Share," ("SFAS 128") and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic net income
(loss) per common share ("Basic EPS") is computed by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted net income
(loss) per common share ("Diluted EPS") is computed by dividing net income
(loss) by the weighted average number of common shares and dilutive potential
common share equivalents then outstanding. Potential common shares consist of
shares issuable upon the exercise of stock options and warrants and the
weighted average conversion of the preferred stock into shares of common stock.
The calculations of the net income (loss) per share for the years ended
December 31, 1998, 1999 and 2000 and the three months ended March 31, 2001 do
not include common stock equivalents as their impact would be antidilutive.

Segment Reporting

SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131") requires companies to report information about
operating segments in interim and annual financial statements. It also
established standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it
operates in only one segment.

F-11

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

3. Net Income (Loss) Per Share and Unaudited Pro Forma Net Income (Loss) Per
Share

Net income (loss) per share is computed under SFAS 128. Basic net income
(loss) per share is computed using the weighted average number of shares of
common stock outstanding during the period. Shares used to compute diluted net
income (loss) per share differ from shares used to compute basic net income
(loss) per share due to common stock equivalent shares resulting from the
assumed exercise of outstanding stock options and warrants, and conversion of
the Series A redeemable convertible preferred stock.

The following sets forth the computation of basic and diluted net income
(loss) per share:

For the Three Months
Ended
For the Year Ended December 31, March 31,
------------------------------------- -----------------------
1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- -----------

Basic and diluted net
income (loss) per
share:
Net income (loss)
attributable to
common stockholders.. $ (866,291) $ (93,671) $(3,792,926) $ 234,721 $ (66,657)
Weighted average
number of common
shares outstanding:
Basic............... 18,453,114 19,056,321 17,757,846 19,022,013 17,204,832
Diluted............. 18,453,114 19,056,321 17,757,846 20,123,100 17,204,832
Net income (loss) per
share:
Basic............... $ (0.05) $ (0.01) $ (0.21) $ 0.01 $ (0.00)
Diluted............. (0.05) (0.01) (0.21) 0.01 (0.00)

The following potentially dilutive securities were excluded because their
effect was antidilutive:

For the Three
For the Year Ended December Months Ended
31, March 31,
--------------------------- ---------------
1998 1999 2000 2000 2001
------- --------- --------- ----- ---------

Options........................... 904,500 1,395,900 1,868,328 -- 2,292,003
Warrants.......................... -- -- 336,618 -- 336,618
Redeemable convertible preferred
stock............................ -- -- 5,774,778 -- 5,774,778

F-12

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

Pro forma basic and diluted net income (loss) per share is computed using
the weighted average number of shares of common stock outstanding, including
potentially dilutive common shares arising from the assumed exercise of
outstanding stock options and warrants and conversion of the Series A
redeemable convertible preferred stock, as if converted at the beginning of
the period for both basic and diluted earnings per share.

The following sets forth the computation of pro forma net income (loss) per
share (unaudited):

For the
For the Three Months
Year Ended Ended
December 31, March 31,
2000 2001
------------ ------------

Pro forma net income (loss):
Net loss attributable to common stockholders....... $(3,792,926) $ (66,657)
Accretion of preferred stock to redemption value... 196,572 117,942
----------- -----------
Pro forma net income (loss).......................... $(3,596,354) $ 51,285
=========== ===========
Shares used in computing pro forma basic and diluted
net income (loss) per share:
Weighted average number of common shares
outstanding....................................... 17,757,846 17,204,832
Weighted average impact of assumed conversion of
preferred stock at the beginning of the period.... 5,774,778 5,774,778
----------- -----------
Shares used in computing pro forma net income (loss)
per share:
Basic.............................................. 23,532,624 22,979,610
=========== ===========
Diluted............................................ 23,532,624 24,546,330
=========== ===========
Pro forma net income (loss) per share:
Basic.............................................. $ (0.15) $ 0.00
Diluted............................................ (0.15) 0.00

Potentially dilutive common shares of 2,204,946 related to the assumed
exercise of the outstanding warrants and stock options were excluded from the
pro forma diluted calculation because their effect was antidilutive for the
year ended December 31, 2000.

4. Investments

Cash and cash equivalents consist of the following:

December 31,
----------------------
March 31,
1999 2000 2001
---------- ----------- -----------

Commercial paper......................... $ -- $ 9,873,425 $ 7,295,776
Cash and money market funds.............. 1,143,763 4,894,792 5,231,815
Municipal notes and bonds................ -- 4,020,506 8,525,336
---------- ----------- ---------------
$1,143,763 $18,788,723 $21,052,927
========== =========== ===============

Gross unrealized losses on commercial paper classified as cash equivalents
at December 31, 1999, 2000 and March 31, 2001 were $0, $48,252 and $19,581,
respectively.

F-13

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

Short-term investments at amortized cost, including accrued interest, and
fair value:

Gross Gross
Amortized Unrealized Unrealized
December 31, 2000 Cost Gains Losses Fair Value
- ----------------- ----------- ---------- ---------- -----------

Corporate debt securities........ $ 5,891,216 $3,455 $(3,003) $ 5,891,668
Commercial paper................. 4,927,402 -- (21,727) 4,905,675
----------- ------- --------- -----------
$10,818,618 $3,455 $(24,730) $10,797,343
=========== ======= ========= ===========

Gross Gross
Amortized Unrealized Unrealized
March 31, 2001 Cost Gains Losses Fair Value
- -------------- ----------- ---------- ---------- -----------

Corporate debt securities........ $ 5,960,434 $28,090 $ -- $ 5,988,524
Municipal notes and bonds........ 1,000,699 -- -- 1,000,699
Commercial paper................. 2,499,115 -- (4,415) 2,494,700
----------- ------- --------- -----------
$ 9,460,248 $28,090 $ (4,415) $ 9,483,923
=========== ======= ========= ===========

There were no gross realized gains and losses for the years ended December
31, 1998, 1999 and 2000 and the three months ended March 31, 2001. All short-
term investments held at December 31, 2000 and March 31, 2001 mature within one
year.

5. Property and Equipment

Property and equipment consist of the following:

December 31,
Estimated Useful ------------------- March 31,
Life (Years) 1999 2000 2001
---------------- -------- ---------- ----------

Computer equipment and
software..................... 3 $ 71,278 $ 158,372 $ 425,259
Office furniture and
equipment.................... 5 11,389 188,786 241,037
Research and development
equipment.................... 5 179,321 700,329 809,907
Manufacturing equipment....... 5 -- 34,968 34,969
Leasehold improvements........ * 14,393 352,901 352,901
Construction in progress...... 78,195 154,723 107,603
-------- ---------- ----------
354,576 1,590,079 1,971,676
Less accumulated
depreciation................. 98,510 240,279 328,187
-------- ---------- ----------
Property and equipment, net... $256,066 $1,349,800 $1,643,489
======== ========== ==========

- --------
* Shorter of asset life or lease term.

Depreciation expense was $15,911, $22,140 and $141,769 for the years ended
December 31, 1998, 1999 and 2000, respectively. Depreciation expense for the
three months ended March 31, 2000 and 2001 was $18,794 and $87,908,
respectively.

F-14

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

6. Accrued Expenses

Accrued expenses consist of the following:

December 31,
------------------- March 31,
1999 2000 2001
-------- ---------- ---------

Accrued stock compensation........................ $ -- $3,432,000 $ --
Accrued payroll and benefits...................... 57,795 189,375 102,321
Accrued other..................................... 50,587 1,942 22,762
-------- ---------- --------
$108,382 $3,623,317 $125,083
======== ========== ========

7. Preferred Stock

Preferred stock, $0.01 par value, is issuable in series with rights and
preferences designated by series. In June 1999, the Board of Directors
designated 50,000 shares as Series A redeemable preferred stock and the Company
granted a stockholder an option to purchase up to 50,000 shares of this series
at an aggregate price of up to $50 million, subject to reduction for payments
made pursuant to a licensing and development agreement. In July 2000, the
option was terminated and the Company eliminated the series.

In August 2000, the Board of Directors designated 650,000 shares as Series A
redeemable convertible preferred stock ("Series A preferred stock"). Also, in
August 2000, the Company sold 641,642 of these Series A shares to third-party
investors at $53.74 per share for a total of $31,179,425 in cash, net of
issuance costs of $3,302,416, including cash costs of $2,204,334 and the fair
value of warrants in the amount of $1,098,082 issued in conjunction with the
preferred stock offering. The carrying value of the Series A preferred stock is
being accreted to the liquidation value on a straight-line basis through the
first redemption date of August 2007.

Series A preferred stockholders vote together with the common stockholders
as a single class. Series A preferred stock is convertible into nine shares of
common stock and is entitled to non-cumulative dividends when and if declared,
at the annual rate of $4.30 per share. Holders of a majority of the outstanding
Series A preferred stock may elect on and after August 8, 2007 to have the
Company redeem all then outstanding Series A preferred stock at the issue price
plus any accrued and unpaid dividends. On liquidation, the holders of the
Series A preferred stock are entitled to a liquidation preference equal to the
issue price plus all accrued and unpaid dividends. The Series A preferred stock
outstanding will automatically be converted into shares of common stock upon
the earliest of (1) the closing by the Company of a public offering raising
gross proceeds of $20 million or more at an offering price per share greater
than or equal to $11.94, (2) following completion of a public offering not
triggering conversion under (1) above, the date on which the average closing
price of the common stock has exceeded $11.94 for any 20 consecutive trading
days, or (3) the receipt by the Company of a written consent of the holders of
at least 66 2/3% of the Series A preferred stock then outstanding or conversion
of at least 66 2/3% of the Series A preferred stock originally issued.

8. Warrants

In connection with its issuance of the Series A preferred stock, the Company
issued warrants to a third party to purchase up to 336,618 shares of the
Company's common stock at an exercise price of $5.97 per share. The warrants
expire on April 7, 2002.

F-15

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

The fair value of the warrants was determined using the Black-Scholes
pricing model and $1,098,082 was recorded in equity as additional paid-in
capital and as a discount on the preferred stock. The discount is being
amortized to additional paid-in capital on a straight line basis through the
first redemption date of August 2007.

9.Common Stock

In 1998 and 1999, Bausch & Lomb Incorporated ("Bausch & Lomb") purchased
916,470 and 157,545 shares of common stock for $1,000,000 and $250,000,
respectively. In April 1998, the Company gave Bausch & Lomb the right to pay
license fees and royalties owed to the Company by transferring these shares of
common stock back to the Company at their original purchase price, and Bausch &
Lomb gave the Company the right to require payment of royalties due from Bausch
& Lomb with such shares at such price. In June 2000, these agreements were
terminated, and Bausch & Lomb sold all of these shares to the Company in
consideration of the waiver of the payment of $1,000,000 in license maintenance
fees and a $250,000 cash payment made in November 2000 by the Company. Bausch &
Lomb continues to own 5,400,000 shares of common stock which it or one of its
subsidiaries has held since 1992.

In September 1999, the Company gave a shareholder a right to require the
Company to repurchase over a period of years up to 1,800,000 shares at $1.11
per share. Prior to 2009, the Company had a right to purchase such shares at
$1.60 with cash and a promissory note. In January 2000, the Company purchased
58,500 shares for cash at $1.11 per share. On June 15, 2000, the Company and
the shareholder terminated this agreement and the Company purchased 1,381,500
shares at a price of $1.60 per share. The Company paid $150,000 in cash and
$2,065,005 with an 8.75% promissory note due June 2001, collateralized by
1,287,945 shares of the Company's common stock. In August 2000, the Company
paid the principal amount of the note, plus interest.

In November 2000, the Company approved for issuance 280,800 shares of common
stock to non-employees for services previously rendered. The shares of common
stock were issued in January 2001. The Company recorded stock-based
compensation expense of $3,432,000 for the year ended December 31, 2000.

10.Stock Option Plan

In July 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") under which up to 2,700,000 shares may be issued. The 1997 Plan provides
for the grant of incentive stock options ("ISOs") as well as nonqualified
options ("NSOs") to employees, directors and other individuals providing
services to the Company. The Board of Directors determines the term of each
option, exercise price, number of shares for which each option is granted,
whether restrictions will be imposed on the shares subject to options and the
vesting period over which each option is exercisable. The exercise price for
ISOs and NSOs cannot be less than the fair market value per share of the
underlying common stock on the date granted. The exercise price for ISOs and
NSOs granted to holders of more than 10% of the voting stock of the Company
cannot be less than 110% of the fair market value per share of the underlying
common stock on the grant date. The term of ISOs and NSOs cannot exceed ten
years, and the options typically vest over three to five years. The term of
ISOs granted to holders of more than 10% of the voting stock of the Company
cannot exceed five years.

F-16

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

A summary of the status of options granted to employees and directors under
the Company's stock option plan as of December 31, 1998, 1999 and 2000 and
changes during the years then ended is presented below:

1998 1999 2000
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------

Outstanding at beginning
of period.............. 859,500 $0.69 859,500 $0.69 1,350,900 $0.84
Granted............... -- -- 626,400 1.00 872,550 4.62
Exercised............. -- -- -- -- (355,122) 0.85
Canceled.............. -- -- (135,000) 0.69 (45,000) 0.69
--------- --------- ---------
Outstanding at end of
period................. 859,500 $0.69 1,350,900 $0.84 1,823,328 $2.65
========= ========= =========
Outstanding and
exercisable at end of
period................. 214,875 $0.69 429,750 $0.79 545,652 $0.84
Options available for
future grant at end of
period................. 1,750,500 1,304,100 521,550
Weighted average grant
date fair value:
Options granted at
fair value........... $ -- $0.39 $1.29
Options granted at
less than
subsequently
determined fair
value................ $ -- $0.30 $1.48

The following table summarizes information about stock options granted to
our employees and directors outstanding at December 31, 2000:

Options Outstanding Options Exercisable
------------------------------------------ -----------------------
Weighted Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Life Exercise Number Exercise
Per Share Outstanding (In Years) Price Exercisable Price
--------- ----------- ---------------- -------- ----------- --------

$0.69 451,125 6.71 $ 0.69 338,346 $0.69
0.89 409,653 8.65 0.89 121,806 0.89
1.33 90,000 8.86 1.33 85,500 1.33
1.56 477,000 9.08 1.56 -- --
2.78 45,000 9.33 2.78 -- --
2.99 121,500 9.59 2.99 -- --
12.22 229,050 9.84 12.22 -- --
--------- -------
$0.69-12.22 1,823,328 8.52 $ 2.65 545,652 $0.84
========= =======

F-17

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

The Company granted some options to employees of the Company at a price it
subsequently deemed to be less than fair market value. Under APB 25, the
Company recorded stock-based compensation expense of $0, $12,514 and $73,304
for the years ended December 31, 1998, 1999 and 2000, respectively, and $9,387
and $30,842 for the three months ended March 31, 2000 and 2001, respectively.

During 1997, the Company granted 45,000 options to a non-employee. Under
EITF 96-18, the Company recorded compensation expense of $15,206, $26,623 and
$185,996 for the fiscal years ended December 31, 1998, 1999 and 2000,
respectively, and $23,223 and $(39,296) for the three months ended March 31,
2000 and 2001, respectively.

If compensation costs for the Company's stock-based compensation plan had
been determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net loss and net loss per share for the
years ended December 31, 1998, 1999 and 2000 would have increased to the pro
forma amounts shown below:

For the Year Ended December 31,
---------------------------------
1998 1999 2000
--------- --------- -----------

Net loss attributable to common
stockholders as reported.................. $(866,291) $ (93,671) $(3,792,926)
Pro forma net loss attributable to common
stockholders ............................. (912,676) (153,663) (3,819,163)
Basic and diluted net loss per share as
reported.................................. (0.05) (0.00) (0.21)
Basic and diluted pro forma net loss per
share..................................... (0.05) (0.01) (0.22)

For purposes of the preceding pro forma analysis, the fair value of each
option grant is estimated on the date of grant using the minimum value method
with the following weighted average assumptions:

For the Year Ended December 31,
---------------------------------
1998 1999 2000
--------- --------- -----------

Expected option term (in years)............ -- 5.63 5.55
Risk-free interest rate.................... -- 5.71% 6.39%
Expected dividend yield.................... -- None None

11. Commitments

The Company leases its facilities under noncancelable operating lease
agreements which expire through November 30, 2003. Under the terms of the
facilities leases, the Company is obligated to pay its pro rata share of real
estate taxes, utilities, insurance and common operating costs as well as base
rents. The facilities leases contain renewal provisions.

F-18

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

Future minimum lease payments under noncancelable operating leases as of
December 31, 2000 are as follows:

December 31,
Fiscal Year 2000
----------- ------------

2001............................................................ $336,380
2002............................................................ 333,298
2003............................................................ 301,013
2004............................................................ --
--------
Total minimum lease payments.................................. $970,691
========

Rental expense associated with operating leases was $70,920, $90,449 and
$318,630 for the years ended December 31, 1998, 1999 and 2000 and $66,738 and
$81,525 for the three months ended March 31, 2000 and 2001, respectively.

On February 9, 2001, the Company entered into a definitive agreement to
purchase a 34,000 square foot facility for $4.5 million, under which it has
made a $500,000 deposit. The Company currently expects this transaction to
close in late 2001.

12. Income Taxes

The components of the consolidated provision relating to continuing
operations, which includes amounts currently payable and those deferred because
of temporary and permanent differences between the financial statement and tax
bases of assets and liabilities, for the year ended December 31, 1999 and 2000,
were:

For the
Year Ended
December 31,
---------------
1999 2000
------ --------

Current:
Federal...................................................... $ -- $662,501
State........................................................ -- 152,951
Deferred
Federal...................................................... -- (623,530)
State........................................................ -- --
------ --------
Total.......................................................... $ -- $191,922
====== ========

At December 31, 1999 and 2000, the Company had federal and state net
operating loss carryforwards ("NOL") of approximately $334,249 and $0,
respectively, which expire at various dates through 2018. These net operating
loss carryforwards may be used to offset future federal and state income tax
liabilities. Based upon the Internal Revenue Code and changes in Company
ownership, utilization of the NOL may be subject to an annual limitation.

F-19

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

The components of the Company's net deferred tax asset are as follows:

For the Year Ended
December 31,
---------------------
1999 2000
--------- ----------

Depreciation............................................. $ (4,564) $ 3,748
Deferred revenue......................................... 508,917 1,331,423
Federal and state NOL.................................... 129,454 --
Deferred stock compensation.............................. -- 1,373,207
Other.................................................... 123,820 260,084
--------- ----------
Total deferred tax asset................................ 757,627 2,968,462
Valuation allowance...................................... (757,627) (2,344,932)
--------- ----------
Net deferred tax asset.................................. $ -- $ 623,530
========= ==========

A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, a
valuation allowance has been recorded for the amount of the deferred tax asset
that is uncertain of realization.

13. Agreements

University of Kentucky Research Foundation ("UKRF")

UKRF has granted the Company exclusive, worldwide rights to make, use, sell
and sublicense products using certain United States and related foreign
patents. The Company is required to pay royalties at various percentages of net
sales or net royalties it receives on sales of products utilizing technology
covered by patents licensed from UKRF. Under these agreements, the Company
recorded royalty expense totaling $315,185, $496,164 and $355,817 for the
fiscal years ended December 31, 1998, 1999 and 2000, respectively. The Company
also recorded royalty expense of $45,859 and $59,648 for the three months ended
March 31, 2000 and 2001, respectively.

Two officers of the Company previously held academic positions at UKRF and
pursuant to agreements between them and UKRF, a portion of the royalties paid
to UKRF were paid to them as sub-royalties as follows: $93,074, $100,752 and
$55,192 for the years ended December 31, 1998, 1999, and 2000, respectively.

Strategic Collaborations

In December 1992, the Company entered into a license and development
agreement with Chiron Vision Corporation ("Chiron") with respect to the
Company's first commercialized product, Vitrasert. Bausch & Lomb acquired
Chiron in 1997. Under the terms of the agreement, Bausch & Lomb has exclusive
worldwide rights to make, use and sell Vitrasert and other products utilizing
the licensed patents for the treatment of conditions of the eye, for which the
Company receives royalty payments on worldwide net sales. Bausch & Lomb may
terminate the agreement without cause upon 180 days' written notice. Royalty
payments earned from Bausch & Lomb were $638,005, $496,378 and $379,813 for the
years ended December 31, 1998, 1999 and 2000, respectively, and $91,536 and
$119,841 for the three months ended March 31, 2000 and 2001, respectively.

F-20

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

In June 1999, the Company and Bausch & Lomb entered into a license and
development agreement with respect to treatment of conditions of the eye. The
Company granted Bausch & Lomb an exclusive, worldwide license to make, use and
sell products for treatment of the eye based on the Company's patents and other
technology. Bausch & Lomb agreed to fund the Company's costs related to the
joint development of products for the treatment of diabetic macular edema,
uveitis and age-related macular degeneration based on agreed-upon research and
development plans and budgets, and pay the Company license and license
maintenance fees and milestone payments.

Effective January 1, 2001, the Company amended its June 1999 license and
development agreement with Bausch & Lomb. Pursuant to this amendment, the
Company assumed significantly increased responsibilities under the agreement.
These responsibilities include conducting clinical trials for its products for
the treatment of diabetic macular edema and age-related macular degeneration,
providing materials for clinical trials and developing the capacity to serve as
a second production facility for commercial-scale manufacturing of products.

Based on the current budget at December 31, 2000, the total license fees,
milestone payments and collaborative research and development payments will
total $58 million. Bausch & Lomb will also pay the Company royalties based on
net sales of licensed products. Bausch & Lomb may terminate this agreement
without cause upon 90 days' written notice. The amounts of license fees and
collaborative research and development and milestone payments received from
Bausch & Lomb under this agreement, which have been recognized as revenue on a
percentage of completion basis, were $0, $1,889,537 and $4,024,878 for the
years ended December 31, 1998, 1999 and 2000, respectively, and $937,124 and
$2,577,118 for the three months ended March 31, 2000 and 2001, respectively.

Government Research Grants

During 1998, 1999 and 2000 and the first quarter of 2001, the Company
received federal government research grants to research and evaluate certain
ophthalmic products. These research grants related to the second generation
Vitrasert for the treatment of CMV retinitis, a device to aid in corneal
transplants and a device to treat uveitis, and range from one to two years in
length. Total grant proceeds were $476,602, $399,512 and $731,116 for the years
ended December 31, 1998, 1999 and 2000, respectively, and $300,000 and $200,000
for the three months ended March 31, 2000 and 2001, respectively. Amounts
remaining available to the Company under approved grants as of March 31, 2001
totaled approximately $650,000.

14. Related Party

The Company is a party to license and development agreements with Bausch &
Lomb. Bausch & Lomb is a stockholder of the Company, and its Chief Financial
Officer is on the Company's board of directors. The Company recognized total
revenue from Bausch & Lomb of $638,005, $2,385,915 and $4,404,691 for the years
ended December 31, 1998, 1999, and 2000, respectively, and $1,028,660 and
$2,696,959 for the three months ended March 31, 2000 and 2001, respectively.

F-21

CONTROL DELIVERY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Information as of March 31, 2001 and for the three months

ended March 31, 2000 and 2001 is unaudited)

The Company had accounts receivable due from Bausch & Lomb of $99,111 and
$1,596,000 as of December 31, 1999 and 2000, respectively, and $96,000 at March
31, 2001.

In April 2000, the Company loaned $25,000 to an officer of the Company,
collateralized by 13,500 shares of the Company's common stock at an annual rate
of 8.0% due in 2002. As of December 31, 2000, $26,333 is included in other
assets on the balance sheet. The note was repaid in the first quarter of 2001.

15. Employee Benefit Plans

During 1997, the Company adopted a Salary Reduction Simplified Employee
Pension Plan under Internal Revenue Code Section 408(k) for all employees with
at least $3,000 in gross salaries. Participants may contribute up to a maximum
of $6,000 of their gross salaries as annual compensation to the plan, subject
to certain limitations. The Company matches employee contributions at a rate of
3% of their annual salary, up to a maximum of $6,000. Contributions to the Plan
provided by the employees were $42,000, $50,335, $88,546 and $16,684 for the
years ended December 31, 1998, 1999, 2000, and for the three months ended March
31, 2000, respectively. Additionally, contributions to the Plan provided by the
Company were $22,952, $29,801, $38,995 and $8,451 for the years ended December
31, 1998, 1999 and 2000, and for the three months ended March 31, 2000,
respectively. As of January 1, 2001, the Company and its employees have stopped
contributing to this plan.

Effective January 1, 2001, the Company established a savings plan for its
employees which is designated to be qualified under section 401(k) of the
Internal Revenue Code. Eligible employees are permitted to contribute to the
401(k) plan through payroll deduction, subject to statutory and plan limits.
The Company matches 100% of the employee contributions up to 5% of each
employee's qualified compensation. Contributions to the Plan provided by the
employees were $61,892 for the three months ended March 31, 2001. Additionally,
contributions to the Plan provided by the Company was $37,204 for the three
months ended March 31, 2001.

16. Subsequent Events

In June 2001, the Company's board of directors approved the 2001 Incentive
Plan, which will become effective upon approval by the Company's stockholders.
A total of 2,700,000 shares of common stock have been reserved for issuance
under this plan. The plan terminates in June 2011, unless terminated earlier by
the Company's board of directors.

In June 2001, the Company's board of directors approved the Employee Stock
Purchase Plan, which will be submitted for approval to the Company's
stockholders prior to the IPO. The plan authorizes the issuance of up to a
total of 270,000 shares of common stock to participating employees.

F-22

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.

TABLE OF CONTENTS

Page
----

Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Note Regarding Forward-Looking Statements................................ 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data .................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 27
Management............................................................... 40
Related Party Transactions............................................... 47
Principal Stockholders................................................... 48
Description of Capital Stock............................................. 50
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 55
Validity of Common Stock................................................. 58
Experts.................................................................. 58
Where You Can Find More Information About Us............................. 58
Index to Consolidated Financial Statements............................... F-1

Until , 2001 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to unsold allotments or subscriptions.

Control Delivery Systems, Inc.

[LOGO]
[LOGO OF CDS APPEARS HERE]

5,400,000 Shares

Common Stock

Deutsche Banc Alex. Brown

Banc of America Securities LLC

SG Cowen

Prospectus

, 2001

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the SEC registration fee, the NASD fee and the Nasdaq National Market
listing fee.

SEC registration fee............................................ $ 24,425
NASD filing fee................................................. 9,815
Nasdaq National Market listing fee.............................. 95,000
Printing........................................................ 125,000
Legal fees and expenses......................................... 435,000
Accounting fees and expenses.................................... 285,000
Transfer agent and registrar fees............................... 15,000
Miscellaneous................................................... 10,760
----------
Total......................................................... $1,000,000
==========

Item 14. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").

As permitted by the Delaware General Corporation Law, the certificate of
incorporation of the Registrant provides that its directors shall not be liable
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent that the exculpation from
liabilities is not permitted under the Delaware General Corporation Law as in
effect at the time the liability is determined. As permitted by the Delaware
General Corporation Law, the certificate of incorporation of the Registrant
also provides that the Registrant shall indemnify its directors to the full
extent permitted by the laws of the State of Delaware.

The Registrant has obtained policies of insurance under which coverage is
provided (a) to its directors and officers against loss arising from claims
made by reason of breach of fiduciary duty or other wrongful acts, including
claims relating to public securities matters and (b) to the Registrant with
respect to payments which may be made by the Registrant to these officers and
directors pursuant to the above indemnification provision or otherwise as a
matter of law.

The Underwriting Agreement provides for the indemnification of officers and
directors of the Registrant by the Underwriters against some types of
liability.

In addition, the Registrant has entered into an indemnification agreement
with each of its directors which requires the Registrant to indemnify the
director in certain circumstances and provides procedures that govern the
indemnification.

Item 15. Recent Sales of Unregistered Securities.

We have sold and issued the following unregistered securities in the past
three years:

On June 9, 1999, we issued to one investor an option to purchase 50,000
shares of a series of our preferred stock which we have since eliminated in
connection with a licensing and development

II-1

agreement. This option was never exercised and has since been terminated.

On the dates indicated below, we issued the indicated number of shares of
common stock to one investor, for aggregate consideration of $1,250,000.

Date of Issuance Number of Shares
---------------- ----------------

April 15, 1998............................................ 367,200
June 10, 1998............................................. 225,900
September 10, 1998........................................ 183,240
December 10, 1998......................................... 140,130
February 10, 1999......................................... 157,545

On August 8, 2000, we issued 641,642 shares of Series A convertible
preferred stock to 45 investors for aggregate consideration of $34,481,841.

On August 8, 2000, we issued warrants to purchase 336,618 shares of our
common stock at a purchase price of $5.97 per share to the placement agent for
our Series A convertible preferred stock financing in exchange for services.

In the period from January 1, 1998 through June 15, 2001, we have granted
options to purchase an aggregate of 2,003,400 shares of common stock to a
number of our employees, directors and consultants. We have not received
consideration from any grantee of any of our options. As of this date, options
to purchase 355,122 shares have been exercised for an aggregate consideration
of $337,057.

On November 3, 2000, we granted to three consultants the right to receive an
aggregate of 280,800 shares of common stock on January 2, 2001, in exchange for
services rendered. These shares were issued on January 2, 2001.

We intended that the above issuances of our securities be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In addition, we intended that the issuances of options to purchase our common
stock be exempt from registration under the Securities Act in reliance upon
Rule 701 and/or Section 4(2) promulgated under the Securities Act. The
recipients of securities in each transaction described above represented to us
their intentions to acquire the securities for investment only and not with a
view to, or for sale in connection with, any distribution. We affixed
appropriate legends to the share certificates, warrants and options issued in
the transactions described above. We believe that all recipients had adequate
access, through their relationships with us, to information about us.

II-2

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits. The following exhibits are filed as part of this
registration statement:

Number Description
------ -----------

1.1* Form of Underwriting Agreement.

3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant.

3.2 Form of Amended and Restated By-laws of the Registrant.

3.3 Form of Specimen Certificate for Common Stock of the Registrant.

4.1 Warrant to Purchase Common Stock.

5.1* Opinion of Ropes & Gray.

10.1** Registration Rights Agreement dated as of August 8, 2000 among the
Registrant, the Investors (as defined therein) and the Stockholders
(as defined therein).

10.2** 1997 Stock Option Plan.

10.3** Lease, dated as of November 15, 1999, between the Registrant and Rita
A. Cannistraro, as Trustee of Metro Realty Trust.

10.4+** License Agreement, dated as of October 20, 1991, by and between the
University of Kentucky Research Foundation and the Registrant,
including amendment.

10.5+** License Agreement, dated as of October 31, 1995, by and between the
University of Kentucky Research Foundation and the Registrant.

10.6+** License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.

10.7+** License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.

10.8+** License Agreement, dated as of September 9, 1997, by and between the
University of Kentucky Research Foundation and the Registrant.

10.9+** License Agreement, dated as of December 31, 1992, by and between the
Registrant and Chiron Vision Corporation (f/k/a Chiron IntraOptics,
Inc.), including amendments 1-4.

10.10+ License Agreement, dated as of June 9, 1999, between the Registrant
and Bausch & Lomb Incorporated.

10.11+** Amendment to Exhibit 10.10, effective as of January 1, 2001.

10.12** Preferred Stock Purchase Agreement, dated as of August 8, 2000, among
the Registrant and the Investors (as defined therein).

10.13 2001 Incentive Plan.

10.14* Form of Employment Agreement between the Registrant and each of Paul
Ashton, Thomas Smith and Michael Soja.

10.15 Form of Indemnification Agreement entered into between the Registrant
and each of the Registrant's directors.

21.1** Subsidiaries of the Registrant.

23.1 Consent of PricewaterhouseCoopers LLP.

23.2* Consent of Ropes & Gray (included in Exhibit 5.1).

24.1 Power of Attorney (included in signature page).

- --------

* To be filed by amendment.

** Previously filed.

+ The Registrant requests confidential treatment for portions of this exhibit.
An unredacted version of this exhibit has been filed separately with the
Commission.

II-3

Item 17. Undertakings.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

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

The undersigned Registrant hereby undertakes that:

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

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

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Boston, Commonwealth of Massachusetts, on the 15th of June, 2001.

CONTROL DELIVERY SYSTEMS, INC.

By: /s/ Paul Ashton
-------------------------------------
Paul Ashton
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on June 15, 2001.

Signature Title
--------- -----

/s/ Paul Ashton Chief Executive Officer, President, Secretary and
______________________________________ Director
Paul Ashton

/s/ Michael J. Soja Chief Financial Officer (Principal Financial and
______________________________________ Accounting Officer)
Michael J. Soja

/s/ William S. Karol Director
______________________________________
William S. Karol

* Chairman of the Board of Directors
______________________________________
Thomas J. Smith

* Director
______________________________________
Alan L. Crane

* Director
______________________________________
Stephen C. McCluski

* Director
______________________________________
James L. Currie

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
immediately below constitutes and appoints Paul Ashton or Thomas J. Smith, or
either of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any and all additional
registration statements pursuant to Rule 462(b) under the Securities Act of
1933, as amended, in connection with or related to the offering contemplated by
this Registration Statement and its amendments and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact
and agent or his substitute or substitutes may lawfully do or cause to be done
by virtue hereof.

Signature Title
--------- -----

/s/ Michael J. Soja Chief Financial Officer (Principal Financial and
___________________________________________Accounting Officer)
Michael J. Soja

/s/ William S. Karol Director
___________________________________________
William S. Karol

* By: /s/ Paul Ashton
_______________________________________
Paul Ashton, attorney-in-fact, pursuant
to
powers of attorney previously filed as
part
of this registration statement.

II-5

EXHIBIT INDEX