AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997

REGISTRATION NO. 333-37557
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
CELL PATHWAYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2834 86-0719923
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION)

702 ELECTRONIC DRIVE
HORSHAM, PENNSYLVANIA 19044
(215) 706-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
ROBERT J. TOWARNICKI
CHIEF EXECUTIVE OFFICER
CELL PATHWAYS, INC.
702 ELECTRONIC DRIVE
HORSHAM, PENNSYLVANIA 19044
(215) 706-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
JAMES C. T. LINFIELD, ESQ. ALLAN G. SPERLING, ESQ.
REX R. O'NEAL, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON
COOLEY GODWARD LLP ONE LIBERTY PLAZA
2595 CANYON BOULEVARD, SUITE 250 NEW YORK, NEW YORK 10006
BOULDER, COLORADO 80302-6737 (212) 225-2000
(303) 546-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.

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

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

PROSPECTUS OCTOBER 22, 1997

2,500,000 SHARES

[LOGO OF CELL PATHWAYS APPEARS HERE]
CELL PATHWAYS, INC.

COMMON STOCK
($.01 PAR VALUE)

All of the 2,500,000 shares of Common Stock, $.01 par value (the "Common
Stock") being offered hereby (the "Shares") are being issued and sold by Cell
Pathways, Inc. ("CPI" or the "Company"). Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between $11.00 and
$13.00 per Share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.

Application has been made to have the Common Stock approved for listing on the
Nasdaq National Market under the trading symbol "CLPA."

SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)

Per Share..................................... $ $ $
Total (2)..................................... $ $ $
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(1) Before deducting expenses of this offering payable by the Company estimated
at $550,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate 375,000 additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $ ,
and $ , respectively. See "Underwriting."

The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about , 1997.

SALOMON BROTHERS INC
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY

The date of this Prospectus is , 1997.

Cell Pathways' technology focuses on the selective induction of apoptosis in
cells that manifest abnormal growth (neoplastic cells), such as precancerous
and cancerous cells. Apoptosis is a naturally occurring physiological process
in which a number of components inside the cell "program" the cell to die
without causing harm to surrounding cells.

[ARTIST'S DEPICTION OF COLON CELLS APPEARS HERE]

The cells of the colon are typically columnar.

[ARTIST'S DEPICTION OF COLON CANCER CELLS APPEARS HERE]

When neoplasia develops, the affected cells are abnormal in shape and have
larger nuclei. The neoplastic cells eventually grow beyond the normal shape of
the tissues.

Apoptosis is visible as the development of clumps of material in the nucleus,
followed by the dismantling of the cell into apoptotic vesicles, which are
naturally cleared by the body.

[ARTIST'S DEPICTION OF THE EFFECT OF CONVENTIONAL CHEMOTHERAPY ON NORMAL AND
CANCEROUS CELLS]

EXISTING CHEMOTHERAPEUTIC AGENTS as well as radiation induce apoptosis in
rapidly proliferating cells without differentiating between neoplastic and
normal cells. The death of normal cells gives rise to many of the adverse
effects of conventional cancer therapy.

[ARTIST'S DEPICTION OF THE EFFECT OF FGN-1 ON NEOPLASTIC LESIONS]

CPI'S COMPOUND FGN-1 has been shown in a Phase I/II trial in patients
afflicted with Adenomatous Polyposis Coli ("APC") to induce apoptosis in
neoplastic lesions without altering the rate of cell death in neighboring
normal tissues.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER ALL OR SOME OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements, including the Notes thereto, contained
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors." In this Prospectus, the
term "Company" or "CPI" refers to Cell Pathways, Inc. Unless otherwise
indicated, the information in this Prospectus (i) assumes the conversion of all
of the outstanding shares of the Company's convertible preferred stock (the
"Convertible Preferred Stock") into Common Stock upon consummation of this
offering; (ii) assumes no exercise of the Underwriters' over-allotment option;
(iii) excludes the issuance of up to 82,612 shares of Common Stock upon
redemption of the Company's 61,250 outstanding shares of Redeemable Preferred
Stock; and (iv) reflects a 1-for-1.8157 reverse split of the Company's
outstanding Common Stock.

THE COMPANY

CPI is a pharmaceutical company focused on the development and
commercialization of products to prevent and treat cancer. The Company is
currently planning clinical trials of its lead compound FGN-1 in six
indications and is conducting an ongoing pivotal Phase III trial for
Adenomatous Polyposis Coli ("APC"), a disease characterized by numerous
precancerous polyps of the colon. The Company plans to initiate Phase II/III
trials of FGN-1 for sporadic adenomatous colonic polyps, prostate cancer, lung
cancer and breast cancer in the fourth quarter of 1997, and to commence
clinical trials of FGN-1 for Barrett's Esophagus and cervical dysplasia in
1998. The Company's technology is based upon its discovery of a novel mechanism
which the Company believes, based on its research, can be targeted to induce
selective apoptosis, or programmed cell death, in precancerous and cancerous
cells without affecting normal cells. Utilizing this proprietary knowledge, the
Company has created over 400 new chemical compounds, over 200 of which display
significantly greater apoptotic potency than FGN-1.

CPI's objectives are to be a leader in cancer chemoprevention and to build an
integrated pharmaceutical company focused on the oncology market. To meet these
objectives, the Company intends to: (i) pursue accelerated clinical development
of FGN-1; (ii) leverage the Company's technology to develop additional agents
for cancer therapy and chemoprevention; (iii) commercialize products directly
to focused physician groups; and (iv) develop strategic collaborations for
selected indications and markets.

The Company's clinical trial strategy for its targeted indications is to
identify subsets of larger patient populations in which clinical endpoints
occur in high frequency and in a relatively short time frame. The Company plans
to utilize data obtained in its completed clinical trials in its initial
indications to provide a basis for commencing more advanced clinical trials in
other indications. The Company believes that this strategy may allow the
Company to reduce the size and duration of clinical trials, thereby generating
statistically significant clinical results more quickly and cost-effectively.

Adenomatous Polyposis Coli. Consistent with its clinical trial strategy, the
Company has chosen APC as its initial indication and has obtained Orphan Drug
status for FGN-1 in the treatment of APC. In a Phase I/II study completed in
January 1997, 18 APC patients were treated with FGN-1 for six months. At the
end of the study, all patients elected to continue in an open label extension
of the study, and several patients have exceeded 24 months on the drug. In this
study and its extension, nearly all patients have been observed to experience a
dose-related reduction in the number and size of exophytic (i.e., raised over
the surface) precancerous rectal polyps that were six millimeters or less in
diameter at the beginning of the study. In the extended study, no progressive
increase in polyp size or

volume was observed in 13 of the 14 patients who have remained in the study and
have been maintained on the optimal dose. There have been no withdrawals from
the study or its extension attributable to serious adverse events. After
reviewing the results of the Phase I/II trial with the FDA, CPI initiated a
pivotal Phase III study in the second quarter of 1997, which will include 150
patients at approximately 12 centers worldwide. The Company is initiating a
concurrent Phase III study in patients with high rates of polyp formation who
otherwise would be excluded from the first Phase III study. There can be no
assurance that the results of the Phase I/II study will be indicative of
results in the Phase III studies or that the Phase III studies will show that
FGN-1 is sufficiently safe and effective for marketing approval by the FDA or
other regulatory authorities.

Sporadic Adenomatous Colonic Polyps. Sporadic adenomatous colonic polyps
occur in more than 30% of people in the U.S. over the age of 50 and are
histologically and genetically indistinguishable from the polyps of APC. In
September 1997, CPI completed a Phase IB study in 18 patients with a history of
sporadic adenomatous colonic polyps and/or cervical dysplasia. CPI plans to
initiate a multi-center, pivotal Phase II/III trial in the fourth quarter of
1997 to evaluate the safety and efficacy of different doses of FGN-1 in the
treatment of existing sporadic adenomatous colonic polyps.

Other Precancer Indications. The Company plans to commence clinical trials of
FGN-1 for other precancerous indications, including Barrett's Esophagus and
cervical dysplasia. Barrett's Esophagus is a precancerous condition of the
lower esophagus. An estimated 2,000,000 people in the U.S. have Barrett's
Esophagus, but only one half have symptoms that could lead to diagnosis.
Cervical dysplasia, a precancerous lesion of the cervix, is diagnosed in
approximately 5% of the fifty million Pap smears performed each year in the
U.S. A small portion of these cases progress to cervical cancer. CPI plans to
initiate Phase II studies in 1998 to evaluate the safety and efficacy of
different doses of FGN-1 for the treatment of Barrett's Esophagus and cervical
dysplasia.

Cancer Indications. In addition, CPI plans to test FGN-1 for certain cancers,
including prostate, lung and breast cancer. It is estimated that in 1997 there
will be approximately 209,000 new cases of prostate cancer and approximately
185,000 new cases of breast cancer in the U.S. The Company plans to initiate
Phase II/III clinical studies in the fourth quarter of 1997 to evaluate the
safety and efficacy of different doses of FGN-1 in preventing the recurrence of
prostate and breast cancer. It is estimated that in 1997 there will be
approximately 177,000 new cases of lung cancer in the U.S. In the fourth
quarter of 1997, the Company plans to conduct a pilot study of the safety and
efficacy of FGN-1 in patients with advanced lung cancer.

The Company has to date retained all rights to FGN-1 and its other compounds,
and plans to establish its own sales force to promote FGN-1 for indications
treated by relatively small, well-defined groups of clinical specialists. To
reach larger physician groups, such as gynecologists, the Company may enter
into marketing agreements with pharmaceutical or biotechnology companies. The
Company also plans to seek partners for international development and
commercialization of its products in all indications.

The business of the Company began operating in partnership form in 1990. The
Company was incorporated in Delaware in November 1992, and served as the
general partner of the partnership until September 1993 when it acquired the
partnership's assets. The Company's executive offices are located at 702
Electronic Drive, Horsham, PA 19044 and its telephone number is (215) 706-3800.

THE OFFERING

Common Stock offered............................ 2,500,000 Shares
Common Stock outstanding after the offering..... 10,160,184 shares(1)
Use of proceeds................................. For research and development
activities, including clinical
development of FGN-1; working
capital; and general corporate
purposes, including capital
expenditures. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... CLPA

RISK FACTORS
See "Risk Factors," commencing on page 6 for a discussion of certain factors
that should be considered by prospective purchasers of the Shares.

SUMMARY FINANCIAL DATA

NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS
DATA:
Revenue................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and
development.......... 814 1,623 2,429 2,575 4,163 2,861 5,586
General and
administrative....... 596 698 705 644 663 439 584
Provision for
redemption of
Redeemable Preferred
Stock................ -- -- -- -- -- -- 1,017
------- ------- ------- ------- ------- -------- --------
Total operating
expenses............. 1,410 2,321 3,134 3,219 4,826 3,300 7,187
------- ------- ------- ------- ------- -------- --------
Loss from operations... (1,410) (2,321) (3,134) (3,219) (4,826) (3,300) (7,187)
Interest income........ 19 52 24 28 91 80 288
------- ------- ------- ------- ------- -------- --------
Net loss............... $(1,391) $(2,269) $(3,110) $(3,191) $(4,735) $ (3,220) $ (6,899)
======= ======= ======= ======= ======= ======== ========
Pro forma net loss per
share(2).............. $ (0.62) $ (0.90)
======= ========
Shares used in
computing pro forma
net loss per
share(2).............. 7,687 7,699
======= ========

SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 11,401 $ 38,205
Working capital....................................... 10,549 37,353
Total assets.......................................... 12,105 38,909
Notes payable......................................... 75 75
Accumulated deficit................................... (22,587) (22,587)
Total stockholders' equity............................ 9,865 37,761

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(1) Excludes 281,550 shares of Common Stock issuable upon the exercise of
outstanding stock options and 134,065 shares of Common Stock issuable upon
the exercise of outstanding warrants, 751,889 shares of Common Stock
reserved for future issuance under the Company's 1997 Equity Incentive Plan
and up to 82,612 shares of Common Stock that may be issued upon the
redemption of the Redeemable Preferred Stock. See "Management--Employee
Benefit Plans," "Description of Capital Stock" and "Shares Eligible for
Future Sale."
(2) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per share.

(3) As adjusted to give effect to the sale of the Shares by the Company
pursuant to this offering (assuming an initial public offering price of
$12.00 per Share), after deducting the Underwriting Discount and estimated
offering expenses payable by the Company and the use of the estimated net
proceeds therefrom. The redemption of $1.1 million of the Redeemable
Preferred Stock assumes the issuance of 45,500 shares of Common Stock and
the payment of $546,000 in cash. See "Use of Proceeds" and
"Capitalization."

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," including statements regarding the anticipated
development and expansion of the Company's business, the products which the
Company expects to offer, anticipated research and development expenditures
and regulatory reform, the intent, belief or current expectations of the
Company, its directors or its officers, primarily with respect to the future
operating performance of the Company, and other statements contained herein
regarding matters that are not historical facts are "forward-looking"
statements (as such term is defined in the Private Securities Litigation
Reform Act of 1995). Because such statements include risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause results to differ
materially from those expressed or implied by such forward-looking statements
include, but are not limited to, the factors set forth in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."

RISK FACTORS

The Shares offered hereby involve a high degree of risk. In addition to the
other information in this Prospectus, the following risk factors should be
considered carefully before purchasing the Common Stock offered hereby.

EARLY STAGE OF DEVELOPMENT; ABSENCE OF DEVELOPED PRODUCTS; UNCERTAINTY OF
CLINICAL TRIALS

The Company is at an early stage of development and must be evaluated in
light of the uncertainties and complications present in a development stage
company. The Company has no products approved for sale and does not expect to
have any products available to be marketed in the near future. CPI has only
one product candidate in clinical trials, FGN-1. The Company has not completed
tests for the safety and efficacy of FGN-1 and has not commenced such tests
for any other compounds.

Before obtaining regulatory approval for the commercial sale of any of its
product candidates, the Company must demonstrate through preclinical and
clinical trials that the product is safe and effective for use in each target
indication. The results from preclinical and early clinical trials may not be
predictive of results that will be obtained in large-scale clinical trials.
There can be no assurance that clinical trials of the Company's product
candidates will demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals or will result in marketable products. Clinical
trials are often conducted with patients who are critically ill. During the
course of treatment these patients may die or suffer other adverse medical
events for reasons that may not be related to the pharmaceutical agent being
tested, but which can nevertheless affect clinical trial results. A number of
companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in advanced clinical trials, even after achieving
promising results in earlier trials.

The completion of clinical trials of the Company's product candidates could
be delayed by many factors and there can be no assurance that such delays or
terminations will not occur. One such factor is the rate of enrollment of
patients, which generally varies throughout the course of a clinical trial and
which depends on the size of the patient population, the number of clinical
trial sites, the proximity of the patients to clinical trial sites, the
eligibility criteria for the clinical trial and the existence of competitive
clinical trials. The Company cannot control the rate at which patients present
themselves for enrollment, and there can be no assurance that the rate of
patient enrollment will be consistent with the Company's expectations or be
sufficient to enable clinical trials of the Company's product candidates to be
completed in a timely manner. The Company is planning to commence at least
four clinical trials before the end of 1997. The Company has limited
experience managing clinical trials and any delays or terminations of such
trials would have a material adverse effect on the Company's business,
financial condition and results of operations.

Although FGN-1 is in Phase III clinical trials for the treatment of APC,
trials to date have involved only a limited number of patients. No assurance
can be given as to the ability of the Company to submit a New Drug Application
("NDA") to the U.S. Food and Drug Administration ("FDA") or the foreign
equivalent with respect to FGN-1 on a timely basis, if at all. In addition,
results obtained in clinical trials for the treatment of APC may not be
predictive of results of clinical trials for other indications. If the
Company's product candidates are not shown to be safe and effective in
clinical trials, including the current Phase III clinical trial for FGN-1,
there would be a material adverse effect on the Company's business, financial
condition and results of operations.

No assurance can be given that the Company will be able to submit an
Investigational New Drug Application ("IND") or foreign equivalents with
respect to any follow-on compounds, that the Company will be permitted to
undertake human clinical testing of such additional compounds, or, if
permitted, that such compounds will be demonstrated to be safe and effective.
The Company's compounds may prove to have undesirable and unintended side
effects or other characteristics that may prevent or limit their commercial
use. Products, if any, resulting from the Company's research and development
programs are not expected to be commercially available for a number of years
even if they are successfully developed and proven to be safe and effective.
Thus, there can be no assurance that any of the Company's product development
efforts will be successfully completed, that regulatory approvals will be
obtained or will be as broad as sought, that the Company's products will be
capable of being produced in commercial quantities at a reasonable cost or
that any products, if introduced, will achieve market acceptance. The failure
of the Company to complete clinical trials, obtain regulatory approval or
successfully market its products, if approved, would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Products in Development" and "--Government
Regulation."

DEPENDENCE ON FGN-1

The Company has one compound, FGN-1, in clinical trials, and does not expect
to have additional compounds in clinical trials in the near future. FGN-1 has
not been approved for marketing by the FDA for any indication and trials to
date have involved only a limited number of patients. There can be no
assurance that marketing approval for FGN-1 will be obtained. FGN-1 is
currently in Phase III clinical trials for the prevention of precancerous
polyps in patients with APC. If approved for marketing, there can be no
assurance that FGN-1 will gain market acceptance or of the extent of the
marketing efforts necessary to gain any such acceptance. In addition,
competition to FGN-1 may develop from other new or existing products. The
failure of FGN-1 to be approved for marketing or to gain market acceptance
would have a material adverse effect on the Company's business, financial
condition and results of operations.

The number of APC patients in the U.S. is limited and may be as few as
25,000. In order to increase the potential applications for which FGN-1 may be
used, the Company must successfully complete lengthy clinical trials and
thereafter receive marketing clearance from the FDA for each additional
indication. There can be no assurance that the Company will successfully
complete these clinical trials and receive appropriate regulatory clearance on
a timely basis, if at all. The inability to do so would have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company has obtained Orphan Drug status for FGN-1 for
the treatment of APC, there can be no assurance that this will provide any
meaningful competitive advantage to the Company. See "Business--Government
Regulation."

TECHNOLOGICAL UNCERTAINTY

To date, the FDA has not approved any drug for the prevention of
precancerous lesions or cancer, and there can be no assurance that CPI will be
able to develop successfully such a chemoprevention

drug, that such drug could be developed within the Company's proposed timeline
or that such drug will be commercially viable or will achieve market
acceptance. The Company's area of focus, oncology in general and
chemoprevention in particular, is not thoroughly understood and there can be
no assurance that the products the Company is seeking to develop will prove to
be safe and effective in preventing or treating precancerous lesions or
cancer.

The Company believes that FGN-1 and its other compounds selectively induce
apoptosis through a novel mechanism. Additional research by the Company or
others may cause the Company to revise or abandon this approach, adversely
affecting the Company's ability to develop products on a timely basis, if at
all. There can be no assurance that the use of the Company's technology will
lead to the development and approval of commercial pharmaceutical products
that are safe and efficacious. There can be no assurance that the Company's
competitors will not develop safer and more effective products, obtain patent
protection or intellectual property rights that limit the Company's ability to
commercialize products that may be developed or commercialize products earlier
than the Company. See "Business--CPI Technology."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

Development of the Company's initial product candidate, FGN-1, and
additional compounds will require substantial additional funds to conduct
research, development and clinical trials necessary to bring such products to
market and to establish manufacturing, marketing and distribution
capabilities. The Company's future capital requirements will depend on many
factors, including, among others: scientific progress in its research and
development programs; progress with preclinical and clinical trials; progress
in obtaining regulatory approvals; the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims; competing technological
efforts and market developments; changes in the Company's existing research
relationships; the ability of the Company to establish sales and marketing
capabilities; the extent of competition; and the ability of the Company to
establish collaborative arrangements to the extent necessary. Based on current
projections, the Company estimates that its existing capital resources, the
net proceeds from this offering and interest thereon, together with facility
and equipment financing, will be sufficient to fund the Company's capital
requirements through approximately the end of 1999, although there can be no
assurance that the Company will not require additional financing earlier.
There is a risk of delay or failure at any stage of developing a product
candidate, and the time required and costs involved in successfully
accomplishing the Company's objectives cannot be predicted. Actual drug
research and development costs could substantially exceed budgeted amounts,
which could have a material adverse effect on the Company's business,
financial condition and results of operations.

There can be no assurance that the Company's revenue and expense forecasts
will prove to be accurate. To the extent necessary, the Company intends to
seek additional funding through public or private equity or debt financings,
collaborative relationships, capital lease transactions or other available
financing transactions. However, there can be no assurance that additional
financing will be available on acceptable terms, if at all, and such
financings could be dilutive to existing stockholders. Moreover, in the event
that additional funds are obtained through arrangements with collaborative
partners, such arrangements may require the Company to relinquish rights to
certain of its technologies, product candidates or products that the Company
would otherwise seek to develop or commercialize itself. If adequate funds are
not available, the Company may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs. The failure of
the Company to obtain adequate financing when needed and on acceptable terms
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; EXPECTED FUTURE LOSSES

The Company and its predecessor have experienced significant operating
losses since inception in 1990. As of September 30, 1997, the Company had an
accumulated deficit of approximately $22.6 million. The Company expects to
incur additional operating losses over the next several years and expects
cumulative losses to increase substantially as the Company's research and
development efforts and preclinical and clinical testing expand. The Company's
ability to achieve profitability is dependent on its ability, alone or with
others, to complete the development of its proposed products successfully,
obtain the required regulatory approvals, manufacture and market its proposed
products successfully or have such products manufactured and marketed by
others and gain market acceptance for such products. There can be no assurance
if or when the Company will achieve profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS

CPI's success will depend, in part, on its ability to obtain patents,
operate without infringing the proprietary rights of others and maintain trade
secrets, both in the U.S. and other countries. Patent matters in the
pharmaceutical industry can be highly uncertain and involve complex legal and
factual questions. Accordingly, the validity, breadth, and enforceability of
CPI's patents and the existence of potentially blocking patent rights of
others cannot be predicted, either in the U.S. or in other countries.

As of October 15, 1997, CPI held title or exclusive licenses to two issued
U.S. patents, one allowed U.S. patent application and one pending U.S. patent
application relating to the therapeutic use of FGN-1 in the treatment of
neoplasia and/or precancerous lesions. The Company has no composition of
matter patent on FGN-1 because FGN-1, which is a sulfone derivative of the
non-steroidal anti-inflammatory drug ("NSAID") sulindac, was described in an
expired 1972 patent, U.S. 3,654,349, and in various scientific journal
articles published in the 1970s. CPI has also been issued or holds exclusive
licenses to 11 foreign patents (including patents in various European
countries and in Australia and an allowed Japanese patent application), as
well as two other pending foreign patent applications relating to the use of
FGN-1 in pharmaceutical compositions for the treatment of neoplasia and/or
precancerous lesions. In Europe, CPI's patent rights relating to FGN-1 are
directed to the use of FGN-1 in the manufacture of pharmaceutical compositions
for the treatment of precancerous lesions. CPI also holds title or exclusive
licenses to four U.S. patent applications which have been allowed, 18 other
pending U.S. patent applications, five issued foreign patents and 18 pending
foreign applications on other compounds, or therapeutic methods involving such
compounds, for the treatment of colonic polyps, precancerous lesions, and/or
neoplasia. CPI also has filed a U.S. patent application on methods for
screening compounds for their usefulness in selectively inducing apoptosis
involving an apoptosis regulatory element ("ARE"). CPI intends to file
additional applications, as appropriate, for patents on new compounds,
products, or processes discovered or developed through application of the
Company's technology.

Beyond the patents granted to date, there can be no assurance that CPI will
discover or develop patentable products or processes, that patents will issue
from any of the currently pending patent applications, or that claims granted
on issued patents will be sufficient to protect the Company's technology.
Potential competitors or other researchers in the field may have filed patent
applications, been issued patents, published articles or otherwise created
prior art that could restrict or block the Company's efforts to obtain
additional patents. There also can be no assurance that the Company's issued
patents or pending patent applications, if issued, will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
proprietary protection or competitive advantages to the Company. CPI's patent
rights also depend on its compliance with technology and patent licenses upon
which its patent rights are based and upon the validity of assignments of
patent rights from consultants and other inventors that were, or are, not
employed by CPI.

In addition, competitors may manufacture and sell CPI's potential products
in those foreign countries where CPI has not filed for patent protection or
where patent protection may be unavailable,

not obtainable or ultimately not enforceable. The ability of such competitors
to sell such products in the U.S. or in foreign countries where CPI has
obtained patents is usually governed by the patent laws of the countries in
which the product is sold. In addition, to the extent that clinical uses of
FGN-1 are discovered beyond those set forth in CPI's patent claims, CPI may
not be able to enforce its patent rights against companies marketing FGN-1 for
such other clinical uses.

The success of the Company also will depend, in part, on CPI not infringing
patents issued to others. Pharmaceutical companies, biotechnology companies,
universities, research institutions, and others may have filed patent
applications or have received, or may obtain, issued patents in the U.S. or
elsewhere relating to aspects of the Company's technology. It is uncertain
whether the issuance of any third-party patents will require the Company to
alter its products or processes, obtain licenses, or cease certain activities.
Some third-party applications or patents may conflict with the Company's
issued patents or pending applications. Such conflict could result in a
significant reduction of the coverage of the Company's issued or licensed
patents. In addition, if patents are issued to other companies which contain
blocking, dominating or conflicting claims and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to
these patents or to develop or obtain alternative technology. If any licenses
are required, there can be no assurance that the Company will be able to
obtain any such licenses on commercially favorable terms, if at all, and if
these licenses are not obtained, the Company might be prevented from pursuing
the development of certain of its potential products. The Company's failure to
obtain a license to any technology that it may require to commercialize its
products may have a material adverse impact on the Company's business,
financial condition and results of operations.

Litigation, which could result in substantial costs to the Company, may also
be necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of the proprietary rights of others. In this
connection, under the Abbreviated New Drug Application provisions of U.S. law,
after four years from the date marketing approval is granted to the Company by
the FDA for a patented drug, a generic drug company may submit an Abbreviated
New Drug Application to the FDA to obtain approval to market in the U.S. a
generic version of the drug patented by the Company. If approval is given to
the generic drug company, the Company would be required to promptly initiate
patent litigation to prevent the marketing of such a generic version prior to
the normal expiration of the patent. There can be no assurance that the
Company's issued or licensed patents would be held valid by a court of
competent jurisdiction. In addition, if competitors of the Company file patent
applications in the U.S. that claim technology also claimed by the Company,
the Company may have to participate in interference proceedings to determine
priority of invention. These proceedings, if initiated by the U.S. Patent and
Trademark Office, could result in substantial cost to the Company, even if the
eventual outcome is favorable to the Company. An adverse outcome with respect
to a third party claim or in an interference proceeding could subject the
Company to significant liabilities, require disputed rights to be licensed
from third parties, or require the Company to cease using such technology, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.

CPI also relies on trade secrets to protect technology, especially where
patent protection is not believed to be appropriate or obtainable or where
patents have not issued. CPI attempts to protect its proprietary technology
and processes, in part, by confidentiality agreements and assignment of
invention agreements with its employees and confidentiality agreements with
its consultants and certain contractors. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently discovered by competitors. Such trade secrets or
other intellectual property of the Company, should they become known to its
competitors, could result in a material adverse effect on the Company's
business, financial condition and results of operations. To

the extent that the Company or its consultants or research collaborators use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights to related or resulting know-how and
inventions.

INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE

The industry in which the Company competes is characterized by extensive
research and development efforts and rapid technological progress. New
developments occur and are expected to continue to occur at a rapid pace, and
there can be no assurance that discoveries or commercial developments by the
Company's competitors will not render some or all of the Company's potential
products obsolete or non-competitive, which would have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's competitive position also depends on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, implement development and marketing plans, obtain patent
protection and secure adequate capital resources.

In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products are being developed that may compete
directly with the products that the Company is seeking to develop and market.
The Company is aware of clinical trials in which a number of pharmaceutical
and nutritional agents are being examined for their potential usefulness in
the treatment of precancerous lesions and cancer. These include studies of
NSAID-like compounds, cyclooxygenase inhibitors, difluoromethylornithine
("DFMO") and natural nutrients in the treatment of APC and sporadic colonic
polyps, studies of retinoids and DFMO in the treatment of cervical dysplasia
and studies of tamoxifen for the prevention of breast cancer. Additional
compounds being tested in various epithelial lesions include compounds related
to aspirin, various vitamins and nutritional supplements, oltipraz, N-acetyl
cysteine and compounds that interfere with hormone activities. The studies are
being conducted by pharmaceutical and biotechnology companies, major academic
institutions and government agencies. There are other agents, including
certain prescription drugs, that have been observed to have an effect on the
ARE. Although the Company is not aware that any third party has demonstrated
the preclinical utility of these compounds in the treatment of precancerous or
cancerous lesions, there can be no assurance that such existing or new agents
will not ultimately be found to be useful, and therefore competitive with any
future products of the Company.

Near-term competition from fully integrated and more established
pharmaceutical and biotechnology companies is expected. Most of these
companies have substantially greater financial, research and development,
manufacturing and marketing experience and resources than the Company and
represent substantial long-term competition for the Company. Such companies
may succeed in discovering and developing pharmaceutical products more rapidly
than the Company or pharmaceutical products that are safer, more effective or
less costly than any that may be developed by the Company. Such companies also
may be more successful than the Company in production and marketing. Smaller
companies may also prove to be significant competitors, particularly through
collaborative arrangements with large pharmaceutical and established
biotechnology companies. Academic institutions, governmental agencies and
other public and private research organizations also conduct clinical trials,
seek patent protection and establish collaborative arrangements for the
development of oncology products.

CPI will face competition based on product efficacy and safety, the timing
and scope of regulatory approvals, availability of supply, marketing and sales
capabilities, reimbursement coverage, price and patent position. There can be
no assurance that the Company's competitors will not develop safer and more
effective products or obtain patent protection or intellectual property rights
that limit the Company's ability to commercialize products that may be
developed or commercialize products earlier than the Company. There can be no
assurance that the Company's issued patents or pending patent applications, if
issued, will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide proprietary protection or competitive
advantage to the Company.

DEPENDENCE ON COLLABORATIVE RELATIONSHIPS

The Company's development and clinical testing efforts are dependent on
third party contractors, such as contractors for animal toxicology studies and
contract research organizations. The loss of any material third party
contractor or the failure of such contractor to perform its duties as
contracted could delay the Company's development efforts and could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company has entered into a Clinical Trials Agreement (the "Agreement")
with the National Cancer Institute ("NCI"), pursuant to which the NCI has
agreed to sponsor clinical trials of FGN-1 for the prevention of precancerous
colonic polyps and for at least one other cancer prevention indication. Under
the Agreement, the NCI contracts directly with third parties to conduct such
trials. The NCI has the right to conduct clinical trials with FGN-1 in any
cancer prevention treatment indication it would like and the Company is
obligated to provide FGN-1 for such trials. In the event that CPI elects to
have the NCI conduct trials needed for regulatory approval, there can be no
assurance that the NCI procedures or changes in policy will not cause such
trials or regulatory filings to be completed on a slower schedule than if CPI
were directly conducting such trials. See "Business--National Cancer Institute
and Other Collaborative Arrangements."

The Company's strategy for commercialization of its proposed products for
certain indications and markets includes collaborating with corporate partners
and others, and, to the extent that such corporate partnerships may be entered
into, is dependent upon the subsequent success of these outside parties in
performing their responsibilities. CPI currently does not have any
collaborations for the commercialization of products. There can be no
assurance that the Company will be able to negotiate any collaborative
arrangements in the future on acceptable terms, if at all, or that such
collaborative arrangements will be maintained or be successful. To the extent
that such arrangements are negotiated, the amount and timing of resources to
be devoted to these activities are not within the complete control of the
Company. There can be no assurance that such partners will perform their
obligations as expected or that the Company will derive any revenue from such
arrangements. There can be no assurance that the Company's future
collaborators will not pursue their existing or alternative technologies or
product candidates in preference to those being developed in collaboration
with the Company. In addition, there can be no assurance that the Company's
future collaborators will pay license fees to the Company, that they will
develop and market any products under the agreements or that they will commit
to fund product development costs. To the extent that the Company chooses not
to enter into collaborative relationships, or is unable to establish such
arrangements, the Company would be required to continue to undertake research,
development and marketing of its proposed products at its own expense. In
addition, the Company may encounter significant delays in introducing its
proposed products into certain markets or find that the development,
manufacture or sale of its proposed products in such markets is adversely
affected by the absence of such collaborative agreements. See "Business--
Products in Development," "--Manufacturing" and "--Marketing and Sales."

EXTENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF NECESSARY FDA AND OTHER
REGULATORY APPROVALS

The research, design, testing, manufacturing, labeling, marketing,
distribution and advertising of pharmaceutical products such as the Company's
proposed products are subject to extensive regulation by governmental
regulatory authorities in the U.S. and other countries. The drug development
and approval process is generally lengthy, expensive and subject to
unanticipated delays. Data obtained from preclinical and clinical testing are
subject to varying interpretations that could delay, limit or prevent FDA
approval. In addition, delays or rejections may be encountered based upon
changes in FDA policy for drug approval during the period of development and
FDA regulatory review of each submitted NDA. Satisfaction of such regulatory
requirements, which includes demonstrating to the

satisfaction of the FDA that the relevant product is both safe and effective,
typically takes several years or more depending upon the type, complexity and
novelty of the product and requires the expenditure of substantial resources.
There can be no assurance that the Company will not encounter problems in
clinical trials which would cause the Company or the FDA to delay or suspend
clinical trials. Any such delay or suspension could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Products in Development" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The Company has not completed testing any of its products for safety or
efficacy in humans. The pivotal Phase III studies of FGN-1 for APC and the
Phase II and III studies of FGN-1 for other indications, if and when
initiated, will seek efficacy data as well as additional safety data and will
require substantial time and significant funding. There can be no assurance
that clinical studies for any of the Company's compounds currently under
development will be completed successfully within any specified time period,
if at all. Further, there can also be no assurance that such testing will show
FGN-1 or any other product to be safe or effective. There can be no assurance
that the Company will not encounter problems in clinical trials that will
cause the Company to delay or suspend clinical trials. See "Business--Products
in Development."

The Company's current clinical trial strategy for the development of drugs
for the prevention of precancerous lesions assumes that the FDA will accept
reduction in the formation of precancerous lesions as an endpoint for
precancer trials. To date, the FDA has not approved any chemoprevention
compounds and there can be no assurance that the FDA will approve such
compounds in the future. Should the FDA require CPI to demonstrate the
efficacy of FGN-1 in the reduction of certain cancers or in overall mortality
rates resulting from certain cancers, the Company's clinical trial strategy
would be materially and adversely affected, as significant additional time and
funding would be required to demonstrate such efficacy. There can be no
assurance that CPI will be able to successfully develop a safe and effective
chemoprevention product or that such product will be commercially viable or
will achieve market acceptance.

There can be no assurance even after such time has been expended and
expenses incurred that regulatory approval will be obtained for any
therapeutic products being developed by the Company. Further, even if such
regulatory approval is obtained, the Company, its products, its contract
manufacturers and its commercial collaborators are subject to continual
regulatory review in both the U.S. and other countries, and later discovery of
previously unknown problems with regard to such a product, distributor or
manufacturer may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market and disqualification or
decertification of the distributor or manufacturer.

granted, the Company would be required to comply with FDA requirements for
manufacturing, labeling, advertising, record keeping and reporting of adverse
experiences and other information. In addition, the Company would be required
to comply with federal and state anti-kickback and other health care fraud and
abuse laws that pertain to the marketing of pharmaceuticals. Failure to comply
with regulatory requirements and other factors could subject CPI to regulatory
or judicial enforcement actions, including but not limited to product recalls
or seizures, injunctions, withdrawal of the product from the market, civil
penalties, criminal prosecution, refusals to approve new products and
withdrawals of existing approvals, as well as enhanced product liability
exposure, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Sales of the
Company's products outside the U.S. will be subject to foreign regulatory
requirements governing clinical trials, marketing approval, manufacturing and
pricing. Non-compliance with these requirements could result in enforcement
actions or penalties or could delay introduction of the Company's products in
certain countries. See "Business--Manufacturing" and "--Marketing and Sales."

The Company has obtained Orphan Drug status for FGN-1 for the treatment of
APC. Although Orphan Drug status may provide an applicant exclusive marketing
rights in the U.S. for a designated indication for seven years following
marketing approval, in order to obtain such benefits, the applicant must be
the sponsor of the first NDA approved for that drug and indication. Moreover,
amendment of the Orphan Drug Act by the U.S. Congress and reinterpretation by
the FDA are frequently discussed. Therefore, there can be no assurance as to
the precise scope of protection that may be afforded by Orphan Drug status in
the future, or that the current level of exclusivity will remain in effect.

POTENTIAL LIMITATIONS ON THIRD-PARTY REIMBURSEMENT AND HEALTH CARE REFORM

In both U.S. and foreign markets, sales of the Company's proposed products
will depend in part on the availability of reimbursement from third-party
payors such as government health administration authorities, private health
insurers and other organizations. The levels of revenues and profitability of
pharmaceutical companies may be affected by the continuing efforts of
governmental and third-party payors to contain or reduce the costs of health
care. The Company cannot predict the effect that private sector or
governmental health care reforms may have on its business, and there can be no
assurance that any such reforms will not have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, in both the U.S. and elsewhere, sales of prescription drugs are
dependent in part on the availability of reimbursement to the consumer from
third-party payors, such as government and private insurance plans. Third-
party payors are increasingly challenging the price and cost-effectiveness of
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. There can be no
assurance that the Company's proposed products will be considered cost-
effective or that adequate third-party reimbursement will be available to
enable the Company to maintain price levels sufficient to realize an
appropriate return on its investment in product development. Legislation and
regulations affecting the pricing of pharmaceuticals may change before any of
the Company's proposed products are approved for marketing. Adoption of such
legislation could further limit reimbursement for medical products and
services. As a result, the Company may elect not to market future products in
certain markets.

LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON CONTRACT MANUFACTURERS AND
SUPPLIERS

The Company does not have facilities to manufacture and produce its
compounds for preclinical, clinical or commercial purposes. The Company's
product candidates have never been manufactured for commercial purposes and
there can be no assurance that such products can be manufactured at a cost or
in quantities necessary to make them commercially viable. If the Company is
unable to manufacture or contract for a sufficient supply of its compounds on
acceptable terms, or if it should

encounter delays or difficulties in its relationships with manufacturers, the
Company's preclinical and human clinical testing schedule would be delayed,
resulting in delay of the submission of products for regulatory approval or
delay of the market introduction and subsequent sales of such products, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, CPI or contract
manufacturers must supply all necessary documentation in support of the
Company's NDA on a timely basis and must adhere to Good Laboratory Practice
("GLP") and current Good Manufacturing Practice ("cGMP") regulations enforced
by the FDA through its facilities inspection program. If these facilities
cannot pass a pre-approval plant inspection, the FDA approval of the products
will not be granted.

FGN-1 is manufactured in bulk form for the Company by Zambon Group
("Zambon"), a large pharmaceutical contract manufacturer located in Milan,
Italy. The Company also works with a single U.S.-based manufacturer, Ohm
Laboratories Inc. ("Ohm"), which manufactures FGN-1 in its final dosage form.
Although the Company is negotiating with these suppliers regarding long-term
supply agreements, the Company currently does not have such agreements with
Zambon or Ohm. There can be no assurance that such suppliers will continue to
make available to the Company the required quantities of FGN-1 on reasonable
terms, if at all. If either Zambon or Ohm is unable or unwilling to make FGN-1
available to the Company in required quantities, there can be no assurance
that the Company will be able to identify and contract with alternative
contract manufacturers. The Company would incur significant costs and delays
to qualify an alternative manufacturer, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. The availability and price of FGN-1 may be subject to curtailment
or change due to limitations that may be imposed under governmental
regulations, suppliers' allocations to meet the demand of other purchasers,
interruptions in production by suppliers and market and other events and
conditions, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Manufacturing."

ABSENCE OF SALES AND MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES

The Company has no experience in sales, marketing or distribution. Depending
upon the marketing strategy ultimately adopted with respect to each relevant
market, the Company intends either to market its products, if developed and
approved, on its own or through relationships with pharmaceutical companies
that have established distribution systems and direct sales forces. To market
any of its products directly, the Company must develop a marketing and sales
force with technical expertise and with supporting distribution capabilities.
There can be no assurance that the Company will be able to establish in-house
sales, marketing and distribution capabilities or relationships with third
parties, or that it will be successful in gaining market acceptance for its
products. To the extent that the Company enters into co-promotion or other
licensing arrangements, any revenues received by the Company will depend upon
the efforts of third parties, and there can be no assurance that such efforts
will be successful. See "Business--Marketing and Sales."

NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS

Because of the specialized scientific nature of the Company's business, the
Company's success is highly dependent upon its ability to attract and retain
qualified scientific and technical personnel. The Company is highly dependent
on the principal members of its scientific and management staff, particularly
Dr. Rifat Pamukcu, and the loss of any of their services might significantly
delay or prevent the achievement of research, development, or business
objectives. The Company does not maintain key-man life insurance with respect
to any of its employees, nor does it intend to secure such insurance. The
Company also relies on consultants and advisors, including the members of its
Scientific Advisory Board, to assist the Company in formulating its research
and development strategy. Retaining and attracting qualified personnel,
consultants and advisors is critical to the Company's success. In order to
pursue its product development and marketing and sales plans, the Company will
be required to hire additional qualified scientific personnel to perform
research and development, as

well as personnel with expertise in clinical testing, government regulation,
manufacturing and marketing and sales. The Company faces competition for
qualified individuals from numerous pharmaceutical and biotechnology
companies, universities and other research institutions. There can be no
assurance that the Company will be able to attract and retain such individuals
on acceptable terms, if at all, and the failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.

POTENTIAL PRODUCT LIABILITY; POSSIBLE INSUFFICIENCY OF INSURANCE

The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
therapeutic products. Clinical research involves the testing of new drugs on
human volunteers pursuant to a research plan, and such testing involves a risk
of liability for personal injury or death to patients due to, among other
reasons, possible unforeseen adverse side effects or improper administration
of the new drug. Many of these patients are already seriously ill and are at
risk of further illness or death. The Company currently has clinical trial
liability insurance but there can be no assurance that it will be able to
maintain such insurance. CPI could be materially and adversely affected if it
were required to pay damages or incur defense costs: (i) in connection with a
claim outside the scope of indemnity or insurance coverage; (ii) if the
indemnity, although applicable, is not performed in accordance with the terms
of the relevant contract; or (iii) if the Company's liability exceeds the
amount of applicable insurance. In addition, there can be no assurance that
insurance will continue to be available on terms acceptable to the Company, if
at all, or that, if obtained, the insurance coverage will be sufficient to
cover any potential claims or liabilities. Similar risks would exist upon the
commercialization or marketing of any products by the Company or its partners.

HANDLING AND DISPOSAL OF HAZARDOUS MATERIALS

The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company. The Company may incur
substantial costs to comply with environmental regulations if the Company
develops manufacturing capacity.

ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE; NO
DIVIDENDS

Prior to this offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market will
develop or, if one develops, that it will be maintained. The public offering
price of the Common Stock, which will be established by negotiation between
the Company and the representatives of the Underwriters, may not be indicative
of prices that will prevail in the market after this offering. See
"Underwriting" for factors to be considered in determining the offering price.
The market price of the Common Stock, like that of the common stock of many
other early-stage pharmaceutical companies, is likely to be highly volatile.
Factors such as the fluctuation in the Company's operating results, comments
by research analysts, announcements of technological innovations or new
commercial products by the Company or its competitors, progress with clinical
trials, governmental regulation, changes in reimbursement policies,
developments in patent or other proprietary rights of the Company or its
competitors, including litigation, developments in the Company's relationships
with collaborative partners, if any, public concern as to the safety and
efficacy of drugs developed by the Company and its competitors and general
market conditions may have a significant effect on the market price of the
Common Stock. The Company has never paid any cash dividends and does not
anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of shares of Common Stock (including shares issued upon the exercise
of outstanding options and warrants) in the public market after this offering
could adversely affect the market price of the Common Stock. In addition to
the 2,500,000 Shares offered hereby, as of the date of this Prospectus, there
will be 7,660,184 shares of Common Stock outstanding (assuming no exercise of
the Underwriters' over-allotment option and no exercise of outstanding stock
options and warrants), all of which are "restricted securities" (the
"Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). Beginning 90 days after the date of this Prospectus,
approximately 5,368 Restricted Shares will become eligible for sale in the
public market pursuant to Rule 144 and Rule 701 under the Securities Act.
Certain officers, directors and stockholders of the Company, who together hold
5,844,290 of the Restricted Shares, have agreed not to sell their shares for a
period of 180 days from the date of this Prospectus. Following completion of
the 180-day period, 2,837,393 shares will be eligible for sale pursuant to
Rule 144(k) and 3,006,897 shares held by certain affiliates of the Company
will be eligible for sale subject to the volume limitations of Rule 144. Upon
completion of this offering, the holders of the 3,006,897 shares, subject to
their agreement not to sell such shares for a period of 180 days, will be
entitled to certain rights with respect to registration of such shares for
offer or sale to the public. In addition, the Company intends to register
1,294,266 shares of Common Stock reserved for issuance under its 1997 Equity
Incentive Plan following the date of the Prospectus. See "Management--Employee
Benefit Plans," "Shares Eligible for Future Sale" and "Description of Capital
Stock--Registration Rights."

CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS

Upon the closing of the offering, the Company's directors and executive
officers will, in the aggregate, beneficially own approximately 29.72% of the
Company's outstanding shares of Common Stock (approximately 28.67% if the
Underwriters' over-allotment option is exercised in full). See "Principal
Stockholders." Accordingly, these stockholders, acting together, will be able
to control many matters requiring approval by the stockholders of the Company,
including the election of directors. Moreover, the Company's Certificate of
Incorporation does not provide for cumulative voting with respect to the
election of directors. Consequently, the present directors and executive
officers will be able to exercise substantial influence over the election of
the members of the Board of Directors. Such concentration of ownership could
have an adverse effect on the price of the Common Stock or have the effect of
delaying or preventing a change in control of the Company. In addition,
certain provisions of Delaware law and the Company's Certificate of
Incorporation could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock. These provisions of Delaware law and the Company's Certificate
of Incorporation may also have the effect of discouraging or preventing
certain types of transactions involving an actual or threatened change of
control of the Company (including unsolicited takeover attempts), even though
such a transaction may offer the Company's stockholders the opportunity to
sell their stock at a price above the prevailing market price. Certain of
these provisions allow the Company to issue preferred stock without any vote
or further action by the stockholders and prevent or eliminate cumulative
voting in the election of directors. These provisions may make it more
difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of the Company. See
"Business," "Management," "Principal Stockholders," and "Description of
Capital Stock--Convertible Preferred Stock" and "--Delaware Anti-Takeover Law
and Certain Charter Provisions."

DILUTION

The initial public offering price will be substantially higher than the book
value per share of Common Stock. Investors purchasing Shares in this offering
will therefore incur immediate and substantial dilution of $8.31 per share of
Common Stock, assuming an initial public offering price of $12.00 per Share.
See "Dilution."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 Shares
offered by the Company hereby are estimated to be approximately $27,350,000
($31,535,000 if the Underwriters' over-allotment option is exercised in full),
based on an assumed initial public offering price of $12.00 per Share and
after deducting the Underwriting Discount and the estimated expenses of this
offering payable by the Company. Upon completion of this offering, the Company
must redeem the outstanding $1.1 million of Redeemable Preferred Stock in
cash, registered Common Stock or a combination thereof.

The Company expects to use the net proceeds of this offering primarily to
fund its research and development activities, including the clinical
development of FGN-1. The balance will be used for working capital and general
corporate purposes, including capital expenditures. The Company has an option
exercisable until March 31, 1998 to purchase its Horsham, Pennsylvania
facility for $3.4 million and is evaluating financing alternatives. The
Company expects to spend up to $3.1 million to install and equip laboratories
and offices at the Horsham facility within approximately the next six months.
The Company may from time to time evaluate opportunities to acquire
complementary technologies or businesses, but currently has no understandings
or agreements related to such acquisitions.

Pending any such uses, the Company intends to invest the net proceeds from
this offering in U.S. government securities and investment grade, interest-
bearing instruments. The Company expects to continue to be able to avoid the
registration requirements of the Investment Company Act of 1940 (the "1940
Act"). Application of the provisions of the 1940 Act would have a material
adverse effect on the Company's business, financial condition and results of
operations.

The amount and timing of the net proceeds actually allocated to specific
research and development activities will depend upon numerous factors, such as
favorable and unfavorable developments in the clinical trial program of FGN-1
and the preclinical development of other compounds, the timing and amount of
clinical trial and other development work, if any, undertaken by the NCI, the
receipt of necessary regulatory approvals, the cost of preparing, filing,
prosecuting, maintaining, defending and enforcing patent claims and other
intellectual property rights, the status of competitive products and
technologies and the timing and availability of alternative methods of
financing for the Company, including any future strategic alliances and joint
ventures with third parties. The Company's research and development
expenditures will vary as product candidates, if any, are added or abandoned.
Funds actually expended for each use may vary significantly depending upon a
number of factors. The Company has not determined the amount it plans to spend
for each purpose or the timing of such expenditures.

The Company believes that the net proceeds of this offering, together with
the Company's available cash reserves, should be adequate to satisfy its
capital requirements through approximately the end of 1999, although there can
be no assurance that the Company will not require additional funds prior to
such date. The Company's future capital needs will be dependent upon many
factors, including progress in its research and development activities, the
magnitude and scope of these activities, progress with preclinical and
clinical trials, the cost of preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, the establishment of
collaborative arrangements, and the cost of any additional manufacturing
scale-up and establishment of a sales organization and related marketing
activities, if undertaken by the Company.

DIVIDEND POLICY

The Company has never declared or paid any dividends on its capital stock
and currently intends to retain any future earnings to finance the growth and
development of its business. Therefore, the Company does not intend to pay any
cash dividends in the foreseeable future.

CAPITALIZATION

The following table sets forth the actual and as adjusted capitalization of
the Company as of September 30, 1997. The as adjusted capitalization of the
Company gives effect to the sale of the 2,500,000 Shares being offered by the
Company hereby, at an assumed initial public offering price of $12.00 per
Share (after deducting the Underwriting Discount and estimated offering
expenses payable by the Company) and the application of the estimated net
proceeds therefrom. The financial data presented below should be read in
conjunction with the Company's Financial Statements and the Notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein and the other financial data included elsewhere in this
Prospectus.

SEPTEMBER 30, 1997(1)
------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)

Short-term notes payable.............................. $ 52 $ 52
======== ========
Long-term notes payable, net of current portion....... 23 23
-------- --------
Redeemable Preferred Stock, $.01 par value, 61,250
shares authorized and outstanding actual; none
outstanding as adjusted.............................. 1,092 --
-------- --------
Stockholders' equity:
Convertible Preferred Stock, $.01 par value,
13,000,000 shares authorized and 6,013,685 shares
outstanding actual; 2,000,000 shares authorized and
none outstanding as adjusted....................... 32,003 --
Common Stock, $.01 par value; 17,000,000 shares
authorized and 1,646,499 shares outstanding actual;
25,000,000 authorized and 10,205,684 shares
outstanding as adjusted(3)......................... 17 102
Additional paid-in capital.......................... 469 60,283
Stock subscription receivable from issuance of
Common Stock....................................... (37) (37)
Accumulated deficit................................. (22,587) (22,587)
-------- --------
Total stockholders' equity......................... $ 9,865 $37,761
-------- --------
Total capitalization.............................. $ 10,980 $37,784
======== ========

- --------

(1) Gives effect to the 1-for-1.8157 reverse stock split of each outstanding
share of Common Stock effected in October 1997.

(2) Gives effect to the conversion of all outstanding shares of Convertible
Preferred Stock into Common Stock and as adjusted to give effect to the
sale of the Shares by the Company pursuant to this offering. The
redemption of the Redeemable Preferred Stock assumes the issuance of
45,500 shares of Common Stock and the payment of $546,000 in cash.

(3) Excludes 281,550 shares of Common Stock issuable upon the exercise of
outstanding stock options, 751,889 shares of Common Stock reserved for
future issuance under the Company's 1997 Equity Incentive Plan and 134,065
shares of Common Stock issuable upon the exercise of outstanding warrants.
The actual shares outstanding excludes up to 82,612 shares of Common Stock
that may be issued upon redemption of the Redeemable Preferred Stock, and
the shares outstanding as adjusted includes the issuance of 45,500 shares
of Common Stock upon the redemption of the Redeemable Preferred Stock. See
"Management--Employee Benefit Plans," "Description of Capital Stock," and
"Shares Eligible for Future Sale."

DILUTION

The net tangible book value of the Company as of September 30, 1997 was
approximately $9,782,000, or $1.28 per share of outstanding Common Stock, and
assumes the conversion of all outstanding shares of Convertible Preferred
Stock at the closing of this offering and the 1-for-1.8157 reverse split of
the outstanding Common Stock. Net tangible book value per share is determined
by dividing the amount of the Company's total tangible assets less total
liabilities by the number of outstanding shares of Common Stock, which
includes the conversion of all outstanding Preferred Stock at the closing of
this offering. After giving effect to the sale by the Company of 2,500,000
Shares offered hereby (at an assumed initial public offering price of $12.00
per Share), and the application of the net proceeds therefrom, and the
redemption of the Redeemable Preferred Stock assuming the issuance of 45,500
shares of Common Stock and payment of $546,000 in cash, the pro forma net
tangible book value of the Company at September 30, 1997 would have been
approximately $37,678,000, or $3.69 per share. This represents an immediate
increase in such net tangible book value of $2.41 per share to existing
stockholders and an immediate dilution of $8.31 per share to new stockholders
purchasing Shares in this offering. The following table illustrates this
dilution per share:

Assumed initial public offering price per Share.................... $12.00
------
Net tangible book value per share before offering................ $1.28
Increase per share attributable to new investors................. 2.41
-----
Net tangible book value per share after offering................... 3.69
------
Dilution per share to new investors................................ $ 8.31
======

The following table summarizes, on a pro forma basis as of September 30,
1997, the differences between the existing stockholders and the new investors
with respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid.

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------

Existing stockholders.......... 7,660,184 75% $33,108,000 52% $4.32
New investors.................. 2,500,000 25 30,000,000 48 12.00
---------- --- ----------- ---
Total........................ 10,160,184 100% 63,108,000 100%
========== === =========== ===

The foregoing tables and calculations are based on the number of shares
outstanding as of September 30, 1997, after giving effect to the conversion of
all of the outstanding shares of Preferred Stock into Common Stock and
excludes 281,550 shares issuable pursuant to stock options granted under the
1997 Equity Incentive Plan at an average exercise price of $3.82, 751,889
shares of Common Stock reserved for future issuance under the Company's 1997
Equity Incentive Plan, 134,065 shares issuable upon the exercise of
outstanding warrants at an average exercise price of $6.23 and up to
approximately 82,612 shares of Common Stock that may be issued upon the
redemption of the Company's Redeemable Preferred Stock. To the extent that
such options and warrants are exercised and such Redeemable Preferred Stock is
redeemed for Common Stock in the future, there will be further dilution to new
investors. See "Management--Employee Benefit Plans."

SELECTED FINANCIAL DATA

The following selected financial data with respect to the Company's balance
sheet data at December 31, 1995, 1996 and September 30, 1997 and with respect
to the Company's statement of operations data for each of the three years
ended December 31, 1994, 1995 and 1996 and the nine month periods ended
September 30, 1996 and 1997 have been derived from the Company's Financial
Statements, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere herein. The
balance sheet data as of December 31, 1992, 1993 and 1994 and the statement of
operations data for the years ended December 31, 1992 and 1993 have been
derived from audited Financial Statements not included herein. The results of
operation for the nine months ended September 30, 1997 are not necessarily
indicative of results to be expected for the full year of any future period.
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Company's Financial Statements and Notes included
elsewhere in this Prospectus.

NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS
DATA:
Revenue................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 814 1,623 2,429 2,575 4,163 2,861 5,586
General and
administrative........ 596 698 705 644 663 439 584
Provision for
redemption of
Redeemable Preferred
Stock................. -- -- -- -- -- -- 1,017
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,410 2,321 3,134 3,219 4,826 3,300 7,187
------- ------- ------- ------- ------- ------- -------
Loss from operations... (1,410) (2,321) (3,134) (3,219) (4,826) (3,300) (7,187)
Interest income........ 19 52 24 28 91 80 288
------- ------- ------- ------- ------- ------- -------
Net loss............... $(1,391) $(2,269) $(3,110) $(3,191) $(4,735) $(3,220) $(6,899)
======= ======= ======= ======= ======= ======= =======
Pro forma net loss per
share(1).............. $ (0.62) $ (0.90)
======= =======
Shares used in
computing pro forma
net loss per
share(1).............. 7,687 7,699
======= =======

DECEMBER 31,
------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 2,732 $ 1,335 $ 605 $ 2,203 $ 645 $11,401
Working capital
(deficiency).......... 2,531 613 (294) 834 (313) 10,549
Total assets........... 2,759 1,396 704 2,330 1,106 12,105
Notes payable.......... -- -- -- -- 111 75
Accumulated deficit.... (2,383) (4,652) (7,762) (10,953) (15,688) (22,587)
Total stockholders'
equity(2)............. 2,545 660 (242) 901 (180) 9,865

- --------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per share.

(2) Partner's equity for 1992. See "Results of Operations--Management
Discussion and Analysis of Financial Condition and Results of Operations."
Based on the number of shares outstanding as of June 30, 1997, after
giving effect to the conversion of all of the outstanding shares of
Preferred Stock into Common Stock. Excludes 281,550 shares of Common Stock
issuable upon the exercise of outstanding stock options, 751,889 shares of
Common Stock reserved for future issuance under the Company's 1997 Equity
Incentive Plan, 134,065 shares of Common Stock issuable upon the exercise
of outstanding warrants and up to approximately 82,612 shares of Common
Stock that may be issued upon the redemption of the Redeemable Preferred
Stock. See "Management--Employee Benefit Plans," "Description of Capital
Stock" and "Shares Eligible for Future Sale."

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

OVERVIEW

The Company is engaged in the research and development of pharmaceutical
compounds intended primarily for the treatment of precancerous lesions and
cancer. From the inception of the Company's business in partnership form in
1990, the Company's operating activities have related primarily to conducting
research and development activities, raising capital and recruiting personnel.
The business converted from partnership to corporate form in September 1993.
Historically, the Company has conducted its business with few direct employees
and many consultants. In the four years leading to the filing of the IND with
the FDA in December 1993 to permit the commencement of human clinical trials
of the Company's first product candidate FGN-1, the Company spent a total of
$4.6 million. Annual expenses increased to $3.1 million, $3.2 million and $4.8
million in 1994, 1995 and 1996, respectively. Phase I clinical trials for FGN-
1 began in February 1994; Phase I/II clinical trials began in August 1995; and
Phase III clinical trials commenced in the second quarter of 1997. Several
additional clinical trials of FGN-1 are expected to commence in the fourth
quarter of 1997 and in 1998, contributing to significantly higher expenses.

The Company has not received any revenue from the sale of products, and no
product candidate of the Company has been approved or will be approved for
marketing in the near future, if ever. Accordingly, the Company's revenue has
been limited to small amounts of interest income, and its primary source of
capital has been the sale of equity securities. As of September 30, 1997, the
Company's accumulated deficit was $22.6 million and its cash on hand was $11.4
million. The Company anticipates that it will continue to incur additional
operating losses for the next several years. There can be no assurance that
the Company's products will be approved for marketing, that the Company will
attain profitability or, if profitability is achieved, that the Company will
remain profitable on a quarterly or annual basis in the future.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 1997 and 1996

Research and development expenses increased 95%, from $2.9 million during
the first nine months of 1996 to $5.6 million in the first nine months of
1997, largely due to increased levels of activity with respect to the
development of FGN-1 and cell biology research related to the Company's
technology. General and administrative expense increased from $439,000 in the
first nine months of 1996 to $584,000 in the first nine months of 1997. The
Company recorded a provision for redemption of the Redeemable Preferred Stock
of $1.0 million during the nine months ended September 30, 1997, as the
Company determined redemption had become probable. The net loss increased from
$3.2 million in the first nine months of 1996 to $6.9 million in the first
nine months of 1997.

Interest income increased from $80,000 in the first nine months of 1996, to
$288,000 in the first nine months of 1997, reflecting the Series F Convertible
Preferred Stock financing which resulted in proceeds of $17.5 million, which
commenced in December 1996 and concluded in June 1997.

Fiscal Years Ended December 31, 1996 and 1995

Research and development expenses increased 62% from $2.6 million in 1995 to
$4.2 million in 1996. This increase was due primarily to increased activity
and costs associated with the pharmaceutical and clinical development of FGN-
1, including the Phase I/II trial of FGN-1 in APC which commenced in August
1995 and, with extensions and adjustments, continued throughout 1996; and
increases in the staffing and supply of the Company's research laboratory and
funding of third party research. Certain costs associated with the Phase I/II
clinical trial of FGN-1 were paid by the NCI directly to the clinical site and
are not reflected in the Company's financial statements. General and
administrative expense increased 3% from $644,000 in 1995 to $663,000 in 1996.
The net loss increased from $3.2 million in 1995 to $4.7 million in 1996.

Interest income increased from $28,000 in 1995 to $91,000 in 1996, due to
the higher cash balances resulting from the sale of the Series E Convertible
Preferred Stock which commenced in June 1995 and resulted in net proceeds of
$6.8 million during the period ending May 1996.

Fiscal Years Ended December 31, 1995 and 1994

Research and development expenses increased 6% from $2.4 million in 1994 to
$2.6 million in 1995, primarily due to the continuing development costs of
FGN-1. General and administrative expense decreased 9%, from $705,000 in 1994
to $644,000 in 1995. The net loss for 1995 increased to $3.2 million from a
net loss of $3.1 million in 1994.

Interest income increased from $24,000 in 1994, to $28,000 in 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily with the
net proceeds received from private placements of equity securities. These
placements aggregated a total of $32.3 million from inception through
September 30, 1997. Net cash generated by financing activities was $2.2
million, $4.3 million and $3.5 million in 1994, 1995 and 1996, respectively,
and $16.9 million during the nine months ended September 30, 1997, primarily
reflecting the sale of equity securities. The most recent Series F Convertible
Preferred Stock private placement which commenced in December of 1996 and
concluded in June 1997 raised $17.5 million.

Net cash used in the operating activities described above was $2.9 million,
$2.7 million and $4.9 million in 1994, 1995 and 1996, respectively. Net cash
used for equipment and deposits in 1994, 1995 and 1996 was $17,000, $26,000
and $161,000, respectively. Net cash used in operating activities during the
first nine months of 1997 was $5.9 million, with an additional $193,000
incurred for equipment purchases, compared to $3.2 million and $120,000 during
the first nine months of 1996, respectively.

Cash on hand (including restricted cash of approximately $200,000) at
September 30, 1997 totaled $11.6 million, compared with $1.5 million as of
September 30, 1996. Cash on hand (including restricted cash of $194,000 in
1996) at December 31, 1994, 1995 and 1996 was $605,000, $2.2 million and
$839,000, respectively.

In March 1996, the Company borrowed $150,000 from a bank for the primary
purpose of equipping its laboratory facilities. The note bears interest at a
rate of 7.79% and is payable in equal monthly installments through March 1999.
At all times the Company keeps approximately $200,000 in a restricted account
pledged to the bank to secure the loan, letters of credit, and other short-
term indebtedness which may arise from time to time.

The Company anticipates that annual expenditures for preclinical studies,
clinical trials, product development, research and general and administrative
expense will increase significantly in future years. In anticipation of the
possible FDA approval for the marketing of FGN-1, the Company expects to begin
preparing for the commercialization of the Company's first product during 1998
and to accelerate such preparation in 1999, adding substantial additional
expense. However, there can be no assurance that the Company will be able to
successfully complete the clinical development of FGN-1 for APC or any other
indication, that the FDA will grant approval within the time frame expected,
if at all, that the other developments or expansions in the Company's programs
of research, development and commercialization will not require additional
funding or encounter delays or that, in light of these or other circumstances,
the Company will be able to achieve the planned levels of revenue, expense and
cash flow.

In June 1997, the Company executed a lease for a 40,000 square foot building
in Horsham, Pennsylvania for a ten-year period with rents rising to
approximately $405,000 in 1998 and $470,000

in 2003. The Company is currently in the process of consolidating its
operations in this building and expects to spend up to $3.1 million during the
next six months to install and equip laboratories and offices. Under this
lease, the Company has the option, exercisable until March 31, 1998, to
purchase the building for $3.4 million. The Company is exploring potential
financing alternatives to furnish and equip the building and potentially to
exercise its option to purchase the building.

The Company expects to finance its continued growth and development largely
through equity financings. Assuming that the Company raises a net amount of
$27.4 million in the current offering, the Company anticipates that such
proceeds, together with current balances and the interest on combined cash
balances, will provide the Company with sufficient working capital to sustain
operations through approximately the end of 1999, although there can be no
assurance that the Company will not require additional funding prior to that
time. The Company anticipates that, if there are delays in its current
programs or if its current programs of research and development yield
expansion opportunities, the Company would seek additional financing, whether
through public or private equity or debt financings, corporate alliances or
through combinations thereof.

There can be no assurance that additional equity or debt capital will, if
needed, be available on terms acceptable to the Company, if at all. Any
additional equity financing would be dilutive to stockholders. Debt financing,
if available, may include restrictive covenants. If additional funds should be
needed but are not available, the Company may be required to curtail its
operations significantly or to obtain funds by entering into collaborative
arrangements or other arrangements on unfavorable terms. The failure by the
Company to raise capital on acceptable terms if and when needed would have a
material adverse effect on the Company's business, financial condition and
results of operations.

INFLATION

The Company does not believe that inflation has had any significant impact
on the Company's business to date.

INCOME TAXES

As of September 30, 1997, the Company had approximately $17.5 million of net
operating loss carryforwards ("NOLs") for income tax purposes available to
offset future federal income tax, subject to limitations for alternative
minimum tax. The NOLs are subject to examination by the federal and state tax
authorities and expire between 2008 and 2012.

Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3.9 million. For tax purposes, these losses
were distributed to the partners in accordance with the provisions of the
partnership agreement of the Company's predecessor partnership. Thus, these
losses, while included in the financial statements of the Company, are not
available to offset future taxable income, if any, of the Company.

The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of
a company of greater than 50% within a three-year period results in an annual
limitation on the Company's ability to utilize its NOLs from tax periods prior
to the ownership change. The Company expects that upon closing of this
offering, such a limitation will be triggered. However, the Company does not
expect such limitation to have a significant impact on its operations.

ACCOUNTING MATTERS

The Company adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," effective January 1,
1996. SFAS 123 defines a fair value based method of accounting for employee
stock compensation, including stock options. However, companies may continue
to account for stock compensation using the intrinsic-value-based method as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and provide pro forma disclosures of net income
and earnings per share assuming the fair-value-based method had been applied.
The Company has elected to account for stock compensation using the intrinsic-
value-based method, and thus, SFAS 123 will not have any material impact on
reported operating results.

The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share."
SFAS 128 is effective for fiscal years ending after December 15, 1997; early
adoption is not permitted. SFAS 128 replaces primary and fully diluted EPS
with basic and diluted earnings per share, respectively. The Company does not
expect SFAS 128 to have a material impact on its reported pro forma net loss
per share amounts.

BUSINESS

OVERVIEW

CPI is a pharmaceutical company focused on the development and
commercialization of products to prevent and treat cancer. The Company is
currently planning clinical trials of its lead compound FGN-1 in six
indications and is conducting an ongoing pivotal Phase III trial for
Adenomatous Polyposis Coli ("APC"), a disease characterized by numerous
precancerous polyps of the colon. The Company plans to initiate Phase II/III
trials of FGN-1 for sporadic adenomatous colonic polyps, prostate cancer, lung
cancer and breast cancer in the fourth quarter of 1997, and to commence
clinical trials of FGN-1 for Barrett's Esophagus and cervical dysplasia in
1998. The Company's technology is based upon its discovery of a novel
mechanism which the Company believes, based on its research, can be targeted
to induce selective apoptosis, or programmed cell death, in precancerous and
cancerous cells without affecting normal cells. Utilizing this proprietary
knowledge, the Company has created over 400 new chemical compounds, over 200
of which display significantly greater apoptotic potency than FGN-1.

BUSINESS STRATEGY

CPI's objectives are to be a leader in cancer chemoprevention and to build
an integrated pharmaceutical company focused on the oncology market. To meet
these objectives the Company intends to:

. Pursue accelerated clinical development of FGN-1. CPI's development
program for FGN-1 is initially focused on indications where small
clinical trials with clear endpoints are expected to yield statistically
significant results. CPI is currently conducting Phase III clinical
trials of FGN-1 for APC, and plans to initiate clinical trials in six
additional indications in 1997 and 1998. By focusing initially on APC, an
indication for which there is a clear need for improved therapies and the
potential to demonstrate efficacy relatively quickly, the Company seeks
to accelerate the market introduction of FGN-1.

. Leverage the Company's technology to develop additional agents for cancer
therapy and chemoprevention. Based on its proprietary technology and its
planned application of high-throughput screening techniques, CPI intends
to expand its library of compounds with the objective of developing
agents for the treatment of certain cancers and precancerous lesions.

. Commercialize products directly to focused physician groups. The Company
intends to establish its own focused sales force to promote products in
the U.S. targeted at diseases that are treated by relatively small, well-
defined groups of physicians. These diseases include APC, sporadic
adenomatous colonic polyps, Barrett's Esophagus, prostate cancer and
bladder cancer.

. Develop strategic collaborations for selected indications and
markets. The Company will seek to establish strategic relationships for
the development and commercialization of potential products for
indications, such as cervical dysplasia, that would require significant
marketing and sales resources. The Company is seeking partners for
international development and commercialization of potential products.

CARCINOGENESIS

Cancer results from a sequence of changes involving the genes of cells which
eventually leads to abnormal and uncontrolled cell proliferation. This multi-
stage process is known as carcinogenesis and generally results from a
combination of factors which occur over a period of years. Certain factors,
such as inherited genetic defects, are present at birth. Other factors that
may contribute to carcinogenesis include environmental exposures and the aging
process. Carcinogenesis is first

recognized clinically when abnormal cells become visible to a screening
procedure or reach a size or location sufficient to create clinical signs and
symptoms. The clinical emergence may occur many years following the events
which first initiated carcinogenesis. Generally, cells characterized by
abnormal growth that may lead to cancer but have not yet invaded surrounding
tissue are termed precancerous.

PRECANCEROUS LESIONS. Many cancers are preceded by precancerous lesions,
which are accumulations of abnormal cells. Because precancerous lesions are
usually asymptomatic, the ability to identify and monitor them and to
intervene clinically before the possible development of cancer is dependent
upon diagnostic screening tests. Recent years have seen broader applications
of screening tests, including the Pap smear, flexible sigmoidoscopy and the
Prostate Specific Antigen ("PSA") test. In addition, there have been recent
advances in genetic screening, such as the BRCA1 and BRCA2 tests to detect
individuals with a higher risk of developing breast cancer in the future.

Precancerous lesions are most often diagnosed in epithelial tissues, such as
the skin or the inside surface of organs, including the intestine, cervix,
bladder and prostate. The following table lists examples of epithelial
precancerous lesions, the types of cancer to which such lesions can progress
and the diagnostic screening tests currently in use to detect such lesions.

EXAMPLES OF EPITHELIAL PRECANCEROUS LESIONS

TYPE OF LESION RELATED CANCER CONVENTIONAL METHOD OF DIAGNOSIS
- -------------- -------------- --------------------------------

Actinic Keratosis Skin Visual examination
Adenomatous Colonic
Polyp Colorectal Endoscopy (sigmoidoscopy or colonoscopy)
Barrett's Esophagus Esophageal Endoscopy (esophagogastroscopy)
Bronchial or Lung
Dysplasia Lung Sputum cytology
Cervical Intraepithelial
Neoplasia Cervical Papanicolau (Pap) smear
Prostatic
Intraepithelial
Neoplasia Prostate Prostate Specific Antigen (PSA) and
digital rectal examination

Transitional Cell
Carcinoma in situ
(earliest stage) Bladder Cystoscopy

Patients with precancerous lesions are advised to follow a program of
regular monitoring and removal of lesions where appropriate. However,
existing techniques for treating precancerous lesions are often expensive,
have undesirable side effects or are of limited effectiveness. Endoscopic or
surgical removal can be effective for single lesions, but risks and costs
increase significantly if lesions recur, if there are numerous lesions or if
lesions occur in less accessible tissues. Because of their significant side
effects, systemic administration of most existing chemotherapeutic drugs is
not appropriate for treating precancerous lesions. Reduction of environmental
risks or change in diet are generally more effective in preventing the early
stages of carcinogenesis than in arresting or reversing the changes that occur
in the later stages of carcinogenesis. As a result of the inadequacy of
current treatments, there is a significant need for the development of new
therapeutics to treat precancerous lesions. If left untreated and not reversed
by natural processes, precancerous lesions may progress to cancer.

CANCER. The American Cancer Society estimates that over 1.4 million new
cases of cancer will be diagnosed and approximately 560,000 cancer deaths will
occur in the U.S. in 1997. Cancer is the second leading cause of death in the
U.S., and over 7.4 million people living in the U.S. have had cancer. Due in
part to the development of new diagnostic procedures, the highest number of
new cancer diagnoses are currently occurring in the prostate, breast, lung and
colon/rectum, representing approximately 60% of all new cancer cases.

Cancer is generally treated by attempting to remove the cancerous cells,
either by surgery or by chemical or radiation therapies. Currently available
chemotherapies and radiation therapies target all

rapidly dividing cells, both cancerous and healthy, and therefore result in
serious side effects. The limited efficacy and harmful side effects of existing
cancer treatments and the costs associated with managing these side effects
continue to drive the search for new therapies.

CPI TECHNOLOGY

To address the need for new therapies, the Company's technology focuses on
the selective induction of apoptosis in cells that manifest abnormal growth
(neoplastic cells), such as precancerous and cancerous cells. Apoptosis is a
naturally occurring physiological process in which a number of components
inside the cell "program" the cell to die without causing harm to surrounding
cells. Apoptosis occurs in tissues that are continually renewing themselves,
such as the lining of the digestive system, or as a natural defense mechanism
that prevents the replication of cells that have undergone DNA damage. The
Company's technology is based upon its discovery of a novel mechanism which the
Company believes, based on its research, can be targeted to induce selective
apoptosis in neoplastic cells without affecting normal cells.

Many existing chemotherapeutic agents as well as radiation induce apoptosis
in rapidly proliferating cells without differentiating between neoplastic cells
and normal cells. This can result in toxicity, including suppression of the
immune system, hair loss and gastrointestinal disturbances. As a result of this
toxicity, most existing chemotherapeutic agents and radiation therapy are not
appropriate for treating precancerous lesions in otherwise healthy individuals
for whom safety and tolerability are essential for chronic or extended
therapeutic use.

CONVENTIONAL INDUCTION OF APOPTOSIS IN CANCER THERAPY. Radiation therapy and
many existing chemotherapeutic agents act on proliferating cells by disrupting
cellular DNA synthesis to induce apoptosis. As depicted below, once significant
damage occurs to the DNA (1), a process is initiated that is controlled by the
gatekeeper protein p53 (2), and modulated by various proteins such as bax and
bcl-2 (3). This process results in the activation of the Interleukin Converting
Enzyme-like ("ICE-like") proteases (4), which trigger a cascade of events
resulting in apoptosis (5). The end result of apoptosis is the dismantling of
the cell into apoptotic vesicles (6), which are naturally cleared by the body.
The apoptotic mechanism identified by CPI does not appear to involve p53, or
the modulator proteins, such as bax or bcl-2.

[ART OF CONVENTIONAL INDUCTION OF APOPTOSIS IN THE CELL APPEARS HERE]

DISCOVERY OF NOVEL APOPTOTIC MECHANISM. The Company believes it has
discovered a previously undefined mechanism for regulating apoptosis. Research
suggests that two key elements of this mechanism are an apoptosis inducing
element ("AIE"), which is activated by naturally-occurring triggers, and an
apoptosis regulatory element ("ARE"), an enzyme which plays a key role in
controlling levels of activated AIE. CPI has determined in colon cancer that
the neoplastic tissue has a higher level of ARE activity than neighboring
normal tissue, which may prevent neoplastic cells from responding to normal
signals that trigger apoptosis. When ARE activity increases, as in neoplastic
cells, AIE activity is reduced and activation of a critical downstream protein
is interrupted, subsequently preventing the activation of the ICE-like
proteases and apoptosis.

SELECTIVE INDUCTION OF APOPTOSIS BY CPI COMPOUNDS. Research suggests that the
Company's compounds, including FGN-1, are targeted at inhibiting ARE activity
in neoplastic cells. As shown in the diagram below, CPI compounds (1) reduce
ARE activity (2), thereby preventing ARE from deactivating the active AIE (3).
Research suggests that the active AIE (4) is then available to trigger a
critical downstream protein (5), which leads to the activation of the ICE-like
proteases (6). As in the case of conventional cancer treatment, the ICE-like
proteases then trigger a cascade of events leading to apoptosis (7) and the
resulting apoptotic vesicles (8).

[ART OF SELECTIVE INDUCTION OF APOPTOSIS BY CPI COMPOUNDS APPEARS HERE]

RESEARCH AND DEVELOPMENT ACTIVITIES. The Company's Biological Discovery Group
consists of its research employees, members of its Scientific Advisory Board,
contract researchers and consultants. The Biological Discovery Group has
identified the specific intracellular protein targeted by FGN-1 and has made
significant progress in sequencing the target protein's gene. The Company has
developed polymerase chain reaction ("PCR")-based probes that may be used to
identify additional indications to be targeted and to develop diagnostic tools.
The Company continues to identify additional elements involved in regulating
the newly identified apoptotic mechanism. CPI plans to investigate the
potential applicability of its novel apoptotic mechanism to other
hyperproliferative diseases, such as benign prostatic hyperplasia, coronary
restenosis, psoriasis and polycystic renal disease. There can be no assurance
that the Company's investigation will be successful.

Utilizing its understanding of chemical structure and biological activity,
the Company has created over 400 new chemical compounds in five chemical
families and over 27 chemical classes, over 200 of which display significantly
greater apoptotic potency than FGN-1. The Company's new compounds are tested
for inhibitory effects on the growth of cancer cells in vitro, for the
induction of apoptosis and for activity against the intracellular target ARE.

A number of CPI compounds have shown activity against in vitro cultures of
transplantable human cancers of the breast, colon, lung and prostate.
Preliminary results of studies with the Company's compounds in primary
cultures of human cancers have shown activity against breast cancer. The
Company is conducting tests on other compounds and tissues. Significant
additional preclinical and clinical trials are necessary to determine the
activity of FGN-1 and other CPI compounds in these cancer indications. See
"Risk Factors--Early Stage of Development; Absence of Developed Products;
Uncertainty of Clinical Trials," and "--Technological Uncertainty."

The Company plans to leverage its understanding of the structure-activity
relationship of CPI's compounds by using combinatorial chemistry techniques
and high-throughput screening systems to expand its proprietary chemical
library. The Company intends to contract with outside firms to create targeted
chemical libraries including thousands of diverse chemical classes. CPI will
then screen these compounds in order to identify potential additional lead
compounds.

PRODUCTS IN DEVELOPMENT

CPI is developing a family of products targeted at the treatment and
management of precancerous lesions and cancer. The Company's lead compound,
FGN-1, is a sulfone derivative of the NSAID sulindac. CPI has shown that FGN-1
exhibits strong anti-neoplastic effects but lacks the anti-cyclooxygenase
activity that is associated with the serious gastrointestinal and renal side
effects observed in NSAIDs. Although FGN-1 is currently in Phase III clinical
trials for the treatment of APC, there can be no assurance that the Company
will obtain marketing approval for FGN-1. Clinical testing of FGN-1 has
involved only a limited number of patients to date and results obtained in
these trials for FGN-1 in the treatment of APC are not necessarily predictive
of the results of future clinical trials for APC or of clinical results for
any other therapeutic indication. See "Risk Factors--Early Stage of
Development; Absence of Developed Products; Uncertainty of Clinical Trials,"
and "--Dependence on FGN-1." The following table lists the potential
indications for, and current clinical development status of, FGN-1:

FGN-1 DEVELOPMENT PROGRAM

INDICATION CLINICAL DEVELOPMENT STATUS(1)
- ---------- ------------------------------

Precancer
Adenomatous Polyposis
Coli Pivotal Phase III trial initiated in 2Q 1997
Phase I/II trial completed in 1Q 1997
Orphan Drug status obtained 1Q 1994
Sporadic Adenomatous
Colonic Pivotal Phase II/III trial expected to commence 4Q 1997
Polyps Phase IB trial completed in 3Q 1997
Barrett's Esophagus Phase II trial expected to commence in 1998
Cervical Dysplasia Phase II trial expected to commence in 1998
Phase IB trial completed in 3Q 1997
Cancer
Prostate Cancer Phase II/III trial expected to commence 4Q 1997
Lung Cancer Pilot study expected to commence 4Q 1997
Breast Cancer Pivotal Phase II/III trial expected to commence 4Q 1997

- --------
(1) A "Pivotal" study is a clinical trial used as primary evidence of safety
and efficacy.
Clinical trials are conducted in three phases, which may overlap:
"Phase I" trials involve the initial introduction of an investigational new
drug into humans and are designed to test for tolerance and side effects
and to determine the metabolic and pharmocologic actions of the drug in
humans. Phase IB denotes a later stage Phase I study.
"Phase II" involves clinical studies conducted in a limited number of
patients to evaluate preliminarily the effectiveness of the drug for a
particular indication and to determine the optimal dosage and the common
short-term side effects and risks.
"Phase III" involves expanded studies to evaluate the safety and
effectiveness of the drug.

The Company's clinical trial strategy seeks to identify subsets of patient
populations for the various targeted indications where the endpoints of
clinical trials occur in high frequency or in a relatively short time frame.
Because the Company is studying FGN-1 for multiple indications, the Company
plans to utilize safety and pharmacokinetic data obtained in clinical trials
completed to date to provide a basis for commencing more advanced clinical
trials in other indications. The Company believes that this strategy of
designing clinical trials around selected populations and utilizing existing
safety data may allow the Company to reduce the duration of clinical trials
and the number of test subjects enrolled in its clinical trials, thereby
generating statistically significant clinical results more quickly and cost-
effectively.

CLINICAL DEVELOPMENT OF FGN-1 FOR PRECANCEROUS LESIONS

Based on FGN-1's safety profile, the Company believes that the compound may
be useful in treating patients with precancerous lesions for whom a drug's
long-term safety profile is important. The initial indication for FGN-1 is
APC, and the Company is also pursuing clinical development of FGN-1 for three
other types of epithelial lesions: sporadic adenomatous colonic polyps,
Barrett's Esophagus and cervical dysplasia. These indications have been
selected based upon several factors, including encouraging preclinical results
and clinical need.

Adenomatous Polyposis Coli. FGN-1 is currently in Phase III clinical trials
for APC, which is an inherited disease characterized by the development of
hundreds to thousands of adenomatous polyps in the colon and the progression
to colon cancer if left untreated. This disease can be confirmed within a
family by genetic testing. Most APC patients must be endoscopically screened
beginning in their teenage years and must have a substantial portion of their
large intestine removed by age 20. Even with this treatment, these patients
continue to develop polyps in the remaining rectal tissue and are typically
monitored by endoscopy 2 to 4 times each year. At each examination, polyps are
removed. CPI's clinical program is testing FGN-1 in patients who previously
have had most of their large intestine removed, leaving the rectum intact
(sub-total colectomy).

It is estimated that there are between 25,000 and 40,000 APC patients in the
U.S. Because of the large number of lesions that occur in these patients and
the continuous development of new lesions with no spontaneous remission, the
Company believes that clinical trials in APC can be conducted in, and
statistically significant results obtained from, a relatively small number of
patients.

In a Phase I/II study conducted with the support of the NCI at the Cleveland
Clinic Foundation, 18 APC patients were treated with FGN-1 for six months. The
study was completed in January 1997 and was designed to observe the safety and
pharmacokinetics of increasing doses of FGN-1. No serious adverse events
attributable to FGN-1 were reported at the clinically effective doses of 400-
600 mg total daily dose. At the 800 mg total daily dose level, four out of six
patients displayed asymptomatic reversible elevations of liver enzymes; all of
such patients continued in the trial at lower dose levels. At the end of the
study, all patients elected to continue in an open label extension of the
study, and several patients have exceeded 24 months on the drug. There have
been no withdrawals from the study or its extension attributable to serious
adverse events.

In the Phase I/II study and its extension, nearly all patients were observed
to experience a marked reduction in the number and size of exophytic (i.e.,
raised over the surface), precancerous rectal polyps that were six millimeters
or less in diameter at the beginning of the study. The effect was observed to
be correlated to dosage, with 600 mg per day having a significantly more
pronounced effect than 400 mg per day. In the extended study, no progressive
increase in polyp size or volume was observed in 13 of the 14 patients who
have remained in the study and have been maintained on the optimal dose.

Following treatment with FGN-1, examination of certain regressing polyps
showed substantial increases in the rate of apoptosis compared with untreated
polyps, while the rate of apoptosis in nearby normal tissue was unchanged. The
Company interprets the different apoptotic rates observed as evidence that
FGN-1 selectively induces apoptosis in neoplastic cells without affecting
normal cells.

Although the Phase I/II study of 18 patients generated preliminary evidence
of effectiveness, additional clinical evidence is necessary before the safety
and efficacy of FGN-1 for APC can be established. Accordingly, CPI initiated a
pivotal Phase III study in the second quarter of 1997. This study will include
150 patients in a double-blind, placebo-controlled trial of FGN-1 at
approximately 12 centers in the U.S., Sweden, the United Kingdom and Israel.
The primary endpoint of the study is reduction in the formation of new polyps.
The design and endpoints of the study have been reviewed with the FDA. The
Company expects to complete enrollment in the study by the end of 1997 and to
follow the patients for 12 months. In addition, the Company plans to enroll
patients with high rates of

recurrence of polyps, who otherwise would be excluded from the pivotal Phase
III study, in a second, concurrent efficacy study that may, if the FDA
requires, include a dose response component. The Company intends to seek
marketing approval for FGN-1 for the prevention of precancerous adenomatous
polyps in APC patients. There can be no assurance that the results of the
Phase I/II study will be indicative of results in the Phase III study or that
the Phase III study will show that FGN-1 is sufficiently safe and effective
for marketing approval by the FDA or other regulatory authorities.

Patients with APC are usually managed by gastroenterologists and colorectal
surgeons. There are approximately 9,500 gastroenterologists and 1,000
colorectal surgeons in the U.S. The Company believes that a subset of these
physicians treats a significant number of APC patients and the Company intends
to focus its marketing efforts on these physicians.

Sporadic Adenomatous Colonic Polyps. Sporadic adenomatous colonic polyps are
relatively common precancerous lesions occurring in the large intestine. These
polyps are histologically, microscopically and genetically indistinguishable
from the polyps of APC.

More than 30% of people in the U.S. over the age of 50 have sporadic
adenomatous colonic polyps. Most of these people will develop only one or two
polyps and once the polyps are removed will not require significant ongoing
medical attention. There are, however, subgroups of people at higher than
usual risk of developing colorectal cancer who should be monitored frequently.
These patients include people with close relatives that have had colorectal
cancer, people over age 60 and people with multiple polyps or polyps which are
large or severely dysplastic or which recur frequently. CPI is targeting these
patients for clinical studies and chemopreventive therapy.

The American Cancer Society, American College of Gastroenterology, American
Gastroenterological Association and other expert organizations recommend that
all people over the age of 50 be screened for precancerous colonic polyps and
colon cancer. This recommendation is not followed universally and, as a
result, a large number of people whose polyps have not been detected are at
risk of develping colon cancer. The procedure for screening for sporadic
adenomatous colonic polyps is an endoscopic examination of the lower part of
the large intestine. This procedure, a sigmoidoscopy, is performed by
gastroenterologists, internists and other physicians. For more extensive and
invasive examination of patients who have had polyps detected by sigmoidoscopy
and for the treatment of sporadic adenomatous colonic polyps, a colonoscopy is
performed, usually by a gastroenterologist.

In September 1997, CPI completed a two-month Phase IB safety and
pharmacokinetic study in 18 patients who had a history of either sporadic
adenomatous colonic polyps and/or cervical dysplasia. The Company plans to
initiate multi-center, pivotal Phase II/III studies in these indications. The
first study, scheduled to commence in the fourth quarter of 1997, is to be a
double-blind, placebo-controlled study to evaluate the safety and efficacy of
different doses of FGN-1 in the treatment of existing sporadic adenomatous
colonic polyps. The Company may need to conduct further concurrent studies of
safety and pharmacokinetics.

Gastroenterologists and colorectal surgeons are primarily responsible for
performing colonoscopies and managing treatment of individuals who have
sporadic adenomatous colonic polyps. There are approximately 10,500 of these
physicians in the U.S. This target audience of physicians builds on and
overlaps with the group of physicians who treat APC and is a logical extension
of the Company's planned marketing and sales efforts.

Barrett's Esophagus. Barrett's Esophagus is a precancerous condition of the
lower esophagus characterized by progressive and readily identifiable changes
in the appearance of the lining of the esophagus or esophageal epithelium.
Some patients experience reflux of stomach acid into the esophagus,
exacerbating the condition. Patients with Barrett's Esophagus have 30 to 40
times greater risk of developing esophageal cancer than the average person.
Treatment with anti-acid therapy or other anti-reflux measures is usually not
effective. Approximately 1% of the U.S. population, or an estimated 2,000,000
people, have Barrett's Esophagus, but only one half of this group experiences
symptoms that could lead to diagnosis.

CPI plans to initiate a 12-month Phase II study in patients with Barrett's
Esophagus to evaluate the safety and efficacy of FGN-1. The Company's proposed
clinical endpoints are reduction in the area affected or in the degree of
dysplasia found in the affected tissues.

Barrett's Esophagus is diagnosed by upper gastrointestinal endoscopy, a
procedure usually performed by gastroenterologists. Treatment is usually
managed by gastroenterologists or by thoracic surgeons, of whom there are
approximately 2,000 in the U.S. Because of the significant overlap between the
physician groups who treat Barrett's Esophagus with those who treat APC and
sporadic adenomatous colonic polyps, the Company does not anticipate that any
significant increase in the sales and marketing organization will be required
to promote products for Barrett's Esophagus.

Cervical Dysplasia. Cervical dysplasia is a relatively common precancerous
lesion of the cervix that is easily diagnosed by Pap smears. Fifty million Pap
smears are performed each year in the U.S., of which approximately 5% reveal
some form of cervical dysplasia. Although very few cases of cervical dysplasia
progress to cancer, it is estimated that in 1997 there will be approximately
15,000 new cases of cervical cancer in the U.S.

In September 1997, CPI completed a two-month Phase IB safety and
pharmacokinetic study in 18 patients who had a history of sporadic adenomatous
colonic polyps and/or cervical dysplasia. CPI plans to initiate in 1998 a six-
month Phase II study to evaluate the safety and efficacy of different doses of
FGN-1 in reducing the size of the area affected by and degree of dysplasia.
Based on the results of that study, further studies may be initiated.

Treatment of cervical dysplasia, especially those cases with more severe
dysplasia or recurrence, is usually performed by gynecologists, of whom there
are approximately 36,000 in the U.S. The Company anticipates seeking a
marketing partner for sales to this large physician market.

CLINICAL DEVELOPMENT OF FGN-1 FOR CANCEROUS LESIONS

Laboratory studies have demonstrated that FGN-1 arrests or slows the
progression of certain cancerous lesions. Based on the safety profile of FGN-1
and its novel mechanism of activity, the Company believes that FGN-1 may be
clinically useful in augmenting radiation and conventional chemotherapy in the
treatment of cancers and the prevention of recurrence. The Company believes
that cancer cells that are resistant to radiation or conventional chemotherapy
may be killed by FGN-1 due to its effect on an apoptotic mechanism that is
different from that targeted by conventional therapies.

The Company is planning additional clinical studies in specific cancer
indications, using the safety and pharmacokinetic data from its APC and
sporadic colonic adenomatous polyp/cervical dysplasia studies to support the
initiation of Phase II or Phase II/III studies. The Company plans to expand
the trials covered under its existing IND for FGN-1 to cover these additional
indications. Results of earlier clinical trials of FGN-1 in the treatment of
APC are not predictive of the results that may be obtained from trials of FGN-
1 in the treatment of cancer.

Prostate Cancer. It is estimated that in 1997 there will be approximately
209,000 new cases of prostate cancer in the U.S. In in vitro and in vivo
studies, the Company has observed that FGN-1 inhibits growth of prostate
cancer, including one such cancer that is resistant to conventional
chemotherapeutic drugs. The Company plans to initiate a Phase II/III clinical
study for prostate cancer in 1997. This study will include men who have had a
prostatectomy and have rising PSA levels, which is often a sign of recurrent
prostate cancer that is not detectable by current imaging or diagnostic
methods. The endpoint of this study is the arrest or delay in the elevation of
PSA. Depending on the results of this study, the Company anticipates
additional clinical studies to confirm the efficacy of the compound.

Prostate cancer is commonly diagnosed and treated by urologists, of whom
there are approximately 10,000 in the U.S. Oncologists, of whom there are
5,500 in the U.S., manage the chemotherapeutic treatment of prostate cancer.
If the Company develops products to treat prostate cancer, the Company
anticipates marketing these products directly to urologists and oncologists.

Lung Cancer. It is estimated that in 1997 there will be approximately
177,000 new cases of lung cancer in the U.S. FGN-1 has shown positive results
in the prevention of chemically-induced lung cancer in rodents. The Company
plans to conduct a pilot study of the safety and efficacy of FGN-1 in patients
with advanced lung cancer. The results of this exploratory study will
determine the Company's plans for further studies.

Lung cancer may be diagnosed by general practitioners or internists.
Oncologists manage the chemotherapeutic treatment of lung cancer. If the
Company develops products to treat lung cancer, the Company anticipates
marketing these products directly to oncologists.

Breast cancer. It is estimated that in 1997 there will be approximately
185,000 new cases of breast cancer in the U.S. The Company has observed that
FGN-1 and other CPI compounds show dose-related inhibitory effects in several
in vitro breast cancer cell systems, in in vivo chemically-induced cancer
models and in in vitro studies with primary breast cancer tissues removed from
patients. The Company plans to initiate a Phase II/III study to evaluate the
safety and efficacy of FGN-1 in the prevention of recurrence of breast cancer
in women who have not responded to traditional recurrence prevention, such as
tamoxifen, and who are in remission after having been treated with
conventional chemotherapeutic agents.

Gynecologists usually diagnose breast cancer, while oncologists manage the
chemotherapeutic treatment. If the Company develops any products to treat
breast cancer, the Company anticipates marketing these products to
oncologists.

NATIONAL CANCER INSTITUTE AND OTHER COLLABORATIVE ARRANGEMENTS

Pursuant to a Clinical Trials Agreement entered into in 1994, the NCI agreed
to sponsor human clinical efficacy trials of FGN-1 for at least two precancer
indications. The first indication is colonic adenomas, including APC. The NCI
sponsored a portion of the Phase I/II clinical study for APC that the Company
concluded in January 1997. The second indication for which the NCI will
sponsor clinical trials is under discussion. The NCI has the right to conduct
as many additional clinical trials as it would like and the Company is
obligated to provide FGN-1 for such studies. The Company has retained all
commercial rights to FGN-1, and the agreement with the NCI contains no
provisions for royalties or restrictions on CPI's ability to commercialize
FGN-1.

The Company has also entered into an amendment of the Clinical Trials
Agreement with the NCI to permit the NCI to conduct preclinical testing and,
if agreed with the Company, clinical testing of three additional CPI
compounds. The Company believes that continued collaboration with the NCI will
advance the progress of both the Company and the NCI in developing therapies
to treat precancerous lesions in a variety of tissues.

In June 1991, the Company entered into a Research and License Agreement with
the University of Arizona. Under the agreement, the Company agreed to attempt
to commercialize at least one product and the University agreed to conduct a
research program in support of the Company's efforts. The University of
Arizona has granted a license to the Company for all patents based on
inventions developed by the University's employees in conjunction with the
Company. The Company has agreed to pay to the University a royalty based on
sales of products based on each such patent.

CPI maintains collaborative relationships with a number of university-based
researchers and commercial vendors throughout the U.S., Europe and Israel who
furnish additional cell biology studies, in vivo pharmacological studies, in
vivo drug candidate screening and animal toxicological studies and scale-up
and synthesis of promising new compounds. CPI retains all exclusive rights to
commercialize the inventions and discoveries that result from these
collaborations.

SCIENTIFIC ADVISORY BOARD

The Company is assisted in its research and development activities by its
Scientific Advisory Board ("SAB") composed of physicians and scientists who
review the Company's research and development, participate in the design of
clinical trials, discuss technological advances relevant to the Company and
its business and otherwise assist the Company. The members of the SAB are
appointed by the Company's management. The SAB meets at least four times
annually and certain members meet in smaller groups or with the Company
individually as needed. Dr. Rifat Pamukcu, the Company's Chief Scientific
Officer and Senior Vice President, Research and Development, served as co-
chair of the Company's SAB prior to joining the Company in 1993, and continues
to participate in all SAB meetings. SAB members are compensated in cash and
stock options for their services to the Company. The Company also reimburses
each member for expenses incurred when traveling to and attending meetings.
All SAB members have commitments or consulting contracts with other
organizations and companies, some of which are competitors or potential
competitors of the Company, that may limit their availability to the Company.
None of these individuals is expected to devote more than a small portion of
his time to the Company. The members of the SAB are listed below by area of
specialization.

SCIENTIFIC ADVISORY BOARD

NAME PROFESSIONAL AFFILIATION
---- ------------------------

CELLULAR & ANIMAL RESEARCH
Dennis Ahnen, M.D. Professor of Medicine, University of Colorado
School of Medicine; Director of Cancer
Prevention and Control, University of
Colorado Cancer Center
David M. Livingston, M.D. Emil Frei Professor of Medicine, Harvard
Medical School; Chief of the Division of
Neoplastic Disease Mechanisms and Chairman of
the Executive Committee for Research, Dana-
Farber Cancer Institute
Alan C. Sartorelli, Ph.D. Alfred Gilman Professor of Pharmacology and
Epidemiology, Yale University School of
Medicine; formerly Director of Yale
Comprehensive Cancer Center
CLINICAL & DRUG DEVELOPMENT
David S. Alberts, M.D. Associate Dean of Research, Director of
Cancer Prevention and Control Program, and
Professor of Medicine and Pharmacology,
Arizona Cancer Center, University of Arizona
Randall W. Burt, M.D. (Chairman) Professor of Internal Medicine and Chief of
Gastroenterology, University of Utah School
of Medicine; formerly Chief of Medical
Services, Veterans Administration Medical
Center, Salt Lake City, Utah
Daniel D. Von Hoff, M.D. Director of the Institute for Drug
Development, Cancer Therapy and Research
Center at the University of Texas Health
Science Center
INDUSTRY RESEARCH & DEVELOPMENT
Ira Ringler, Ph.D. Pharmaceutical industry consultant; formerly
President Takeda-Abbott Pharmaceuticals, and
Vice President, Pharmaceutical Research and
Development, Abbott Laboratories

PATENTS AND PROPRIETARY TECHNOLOGY

As of October 15, 1997, CPI held title or exclusive licenses to two issued
U.S. patents, one allowed U.S. patent application and one pending U.S. patent
application relating to the therapeutic use of FGN-1 in the treatment of
neoplasia and/or precancerous lesions. The Company has no composition of
matter patent on FGN-1 because FGN-1, which is a sulfone derivative of the
NSAID sulindac, was described in an expired 1972 patent, U.S. 3,654,349, and
in various scientific journal articles published in the 1970s. CPI has also
been issued or holds exclusive licenses to 11 foreign patents (including
patents in various European countries and in Australia and an allowed Japanese
patent application) as well as two other pending foreign patent applications
relating to the use of FGN-1 in pharmaceutical compositions for the treatment
of neoplasia and/or precancerous lesions. In Europe, CPI's patent rights
relating to FGN-1 are directed to the use of FGN-1 in the manufacture of
pharmaceutical compositions for the treatment of precancerous lesions. CPI
also holds title or exclusive licenses to four U.S. patent applications which
have been allowed, 18 other pending U.S. patent applications, five issued
foreign patents and 18 pending foreign applications on other compounds, or
therapeutic methods involving such compounds, for the treatment of colonic
polyps, precancerous lesions, and/or neoplasia. CPI also has filed a U.S.
patent application on methods for screening compounds for their usefulness in
selectively inducing apoptosis involving the ARE. CPI intends to file
additional applications, as appropriate, for patents on new compounds,
products, or processes discovered or developed through application of the
Company's technology.

In addition, competitors may manufacture and sell CPI's potential products
in those foreign countries where CPI has not filed for patent protection or
where patent protection may be unavailable, not obtainable or ultimately not
enforceable. The ability of such competitors to sell such products in the U.S.
or in foreign countries where CPI has obtained patents is usually governed by
the patent laws of the countries in which the product is sold. In addition, to
the extent that clinical uses of FGN-1 are discovered beyond those set forth
in CPI's patent claims, CPI may not be able to enforce its patent rights
against companies marketing FGN-1 for such other clinical uses.

any third-party patents will require the Company to alter its products or
processes, obtain licenses, or cease certain activities. Some third-party
applications or patents may conflict with the Company's issued patents or
pending applications. Such conflict could result in a significant reduction of
the coverage of the Company's issued or licensed patents. In addition, if
patents are issued to other companies which contain blocking, dominating or
conflicting claims and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any licenses are required, there can be no
assurance that the Company will be able to obtain any such licenses on
commercially favorable terms, if at all, and if these licenses are not
obtained, the Company might be prevented from pursuing the development of
certain of its potential products. The Company's failure to obtain a license
to any technology that it may require to commercialize its products may have a
material adverse impact on the Company's business, financial condition and
results of operations.

COMPETITION

depends on its ability to attract and retain qualified scientific and other
personnel, develop effective proprietary products, implement development and
marketing plans, obtain patent protection and secure adequate capital
resources.

In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products are being developed that may compete
directly with the products that the Company is seeking to develop and market.
The Company is aware of clinical trials in which a number of pharmaceutical
and nutritional agents are being examined for their potential usefulness in
the treatment of precancerous lesions and cancer. These include studies of
NSAID-like compounds, cyclooxygenase inhibitors, difluoromethylornithine
("DFMO") and natural nutrients in the treatment of APC and sporadic colonic
polyps, studies of retinoids and DFMO in the treatment of cervical dysplasia
and studies of tamoxifen for the prevention of breast cancer. Additional
compounds being tested in various epithelial lesions include compounds related
to aspirin, various vitamins and nutritional supplements, oltipraz, N-acetyl
cysteine and compounds that interfere with hormone activities. The studies are
being conducted by pharmaceutical and biotechnology companies, major academic
institutions and government agencies. There are other agents, including
certain prescription drugs, that have been observed to have an effect on ARE.
Although the Company is not aware that any third party has demonstrated the
preclinical utility of these compounds in the treatment of precancerous or
cancerous lesions, there can be no assurance that such existing or new agents
will not ultimately be found to be useful, and therefore competitive with any
future products of the Company.

CPI will face competition based on product efficacy and safety, the timing
and scope of regulatory approvals, availability of supply, marketing and sales
capability, reimbursement coverage, price and patent position. There can be no
assurance that the Company's competitors will not develop safer and more
effective products or obtain patent protection or intellectual property rights
that limit the Company's ability to commercialize products that may be
developed or commercialize products earlier than the Company. There can be no
assurance that the Company's issued patents or pending patent applications, if
issued, will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide proprietary protection or competitive
advantage to the Company.

GOVERNMENT REGULATION

The research, design, testing, manufacturing, labeling, marketing,
distribution and advertising of products such as the Company's proposed
products are subject to extensive regulation by governmental regulatory
authorities in the U.S. and other countries. The drug development and approval
process is generally lengthy, expensive and subject to unanticipated delays.
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of new pharmaceutical products through
lengthy and detailed preclinical and clinical testing procedures, sampling
activities and other costly and time-consuming compliance procedures. A new
drug may not

be marketed in the U.S. until it has undergone rigorous testing and has been
approved by the FDA. The drug may then be marketed only for the specific
indications, uses, formulation, dosage forms and strengths approved by the
FDA. Similar requirements are imposed by foreign regulators upon the marketing
of a new drug in their respective countries. Satisfaction of such regulatory
requirements, which includes demonstrating to the satisfaction of the FDA that
the relevant product is both safe and effective, typically takes several years
or more depending upon the type, complexity and novelty of the product and
requires the expenditure of substantial resources. Preclinical studies must be
conducted in conformance with the FDA's GLP regulations. The Company's
compounds require extensive clinical trials and FDA review as new drugs.
Clinical trials are vigorously regulated and must meet requirements for FDA
review and oversight and requirements under GCP guidelines. There can be no
assurance that the Company will not encounter problems in clinical trials
which would cause the Company or the FDA to delay or suspend clinical trials.
Any such delay or suspension could have a material adverse effect on the
Company's business, financial condition and results of operations.

The steps required before a drug may be marketed in the U.S. include: (i)
preclinical laboratory and animal tests; (ii) submission to the FDA of an
application for an IND exemption, which must become effective before human
clinical trials may commence; (iii) human clinical trials to establish the
safety and efficacy of the drug; (iv) submission of a detailed NDA to the FDA;
and (v) FDA approval of the NDA. In addition to obtaining FDA approval for
each product, each domestic establishment where the drug is to be manufactured
must be registered with the FDA. Domestic manufacturing establishments must
comply with cGMP regulations and are subject to periodic inspections by the
FDA. Foreign manufacturing establishments manufacturing drugs intended for
sale in the U.S. also must comply with cGMP regulations and are subject to
periodic inspection by the FDA or by local authorities under agreement with
the FDA.

Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the metabolic and pharmacologic activity and
potential safety and efficacy of the product. Preclinical tests must be
conducted by laboratories that comply with FDA regulations regarding GLP. The
results of preclinical tests are submitted to the FDA as part of an IND, which
must become effective before the sponsor may conduct clinical trials in human
subjects. Unless the FDA objects to an IND, the IND becomes effective 30 days
following its receipt by the FDA. There is no certainty that submission of an
IND will result in FDA authorization of the commencement of clinical trials.

Clinical trials involve the administration of the investigational drug to
patients. Every clinical trial must be conducted under the review and
oversight of an institutional review board ("IRB") at each institution
participating in the trial. The IRB evaluates, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution. Clinical trials typically are conducted in three phases, which
generally are conducted sequentially, but which may overlap. Clinical trials
test for efficacy and safety, side effects, dosage, tolerance, metabolism and
clinical pharmacology. Phase I tests involve the initial introduction of the
drug to a small group of subjects to test for safety, dosage tolerance,
pharmacology and metabolism. Phase II trials involve a larger but still
limited patient population to determine the efficacy of the drug for specific
indications, to determine optimal dosage and to identify possible side effects
and safety risks. If a drug appears to be efficacious in Phase II evaluations,
larger-scale Phase III trials are undertaken to evaluate the safety and
effectiveness of the drug, usually, though not necessarily, in comparison with
a placebo or an existing treatment. There can be no assurance, however, that
Phase I, Phase II or Phase III testing will be completed successfully within
any specified time period, if at all. Furthermore, the FDA may suspend
clinical trials at any time if it decides that patients are being exposed to a
significant health risk.

The results of the preclinical studies and clinical trials are submitted to
the FDA as part of an NDA for approval of the marketing of the drug. The NDA
also includes information pertaining to the chemistry, formulation and
manufacture of the drug and each component of the final product, as well

as details relating to the sponsoring company. The NDA review process takes
from one to two years on average to complete, although reviews of treatments
for cancer and other life-threatening diseases may be accelerated. However,
the process may take substantially longer if the FDA has questions or concerns
about a product. In general, the FDA requires at least two adequate and well-
controlled clinical studies demonstrating efficacy in order to approve an NDA.
The FDA may, however, request additional information, such as long-term
toxicity studies or other studies relating to product safety. Notwithstanding
the submission of such data, the FDA ultimately may decide that the
application does not satisfy its regulatory criteria for approval. Finally,
the FDA may require additional clinical tests following NDA approval.

There can be no assurance that the drugs the Company is seeking to develop
will prove to be safe and effective in treating or preventing cancer. The
development of such drugs will require the commitment of substantial resources
to conduct the preclinical development and clinical trials necessary to bring
such compounds to market. Drug research and development by its nature is
uncertain. There is a risk of delay or failure at any stage, and the time
required and cost involved in successfully accomplishing the Company's
objectives cannot be predicted. Actual drug research and development costs
could exceed budgeted amounts, which could have a material adverse effect on
the Company's business, financial condition and results of operations.

CPI cannot predict when, if ever, it might submit for regulatory review
additional compounds currently under development. Once the Company submits its
potential products for review, there can be no assurance that the FDA or other
regulatory approvals for any pharmaceutical products developed by CPI will be
granted on a timely basis, if at all. The FDA and comparable agencies in
foreign countries impose substantial requirements on the introduction of new
pharmaceutical products through lengthy and detailed preclinical and clinical
testing procedures, sampling activities and other costly and time-consuming
compliance procedures. Clinical trials are vigorously regulated and must meet
requirements for FDA review and oversight and requirements under GCP
guidelines. A new drug may not be marketed in the U.S. until it has been
approved by the FDA. There also can be no assurance that the Company will not
encounter delays or rejections that the FDA will not make policy changes
during the period of product development and FDA regulatory review of each
submitted NDA. A delay in obtaining or failure to obtain such approvals would
have a material adverse effect on the Company's business, financial condition
and results of operations. Even if regulatory approval is obtained, it would
be limited as to the indicated uses for which the product may be promoted or
marketed. A marketed product, its manufacturer and the facilities in which it
is manufactured are subject to continual review and periodic inspections. If
marketing approval is granted, the Company would be required to comply with
FDA requirements for manufacturing, labeling, advertising, record keeping and
reporting of adverse experiences and other information. In addition, the
Company would be required to comply with federal and state anti-kickback and
other health care fraud and abuse laws that pertain to the marketing of
pharmaceuticals. Failure to comply with regulatory requirements and other
factors could subject CPI to regulatory or judicial enforcement actions,
including, but not limited to, product recalls or seizures, injunctions,
withdrawal of the product from the market, civil penalties, criminal
prosecution, refusals to approve new products and withdrawal of existing
approvals, as well as enhanced product liability exposure, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Sales of the Company's products outside the U.S.
will be subject to foreign regulatory requirements governing clinical trials,
marketing approval, manufacturing and pricing. Non-compliance with these
requirements could result in enforcement actions and penalties or could delay
introduction of the Company's products in certain countries.

compounds and there can be no assurance that the FDA will approve such
compounds in the future. Should the FDA require CPI to demonstrate the
efficacy of FGN-1 in the reduction of certain cancers or in overall mortality
rates resulting from certain cancers, the Company's clinical trial strategy
would be materially and adversely affected, as significant additional time and
funding would be required to demonstrate such efficacy. There can be no
assurance that CPI will be able to successfully develop a safe and efficacious
chemoprevention product or that such product will be commercially viable or
will achieve market acceptance.

In 1988 and again in 1992, the FDA issued regulations intended to expedite
the development, evaluation and marketing of new therapeutic products to treat
life-threatening and severely debilitating illnesses for which no satisfactory
alternative therapies exist. One program under these regulations provides for
early consultation between the sponsor and the FDA in the design of both
preclinical studies and clinical trials. Another program provides for
accelerated approval based on a surrogate endpoint. There can be no assurance,
however, that any future products the Company may develop will be eligible for
evaluation by the FDA under these regulations. In addition, there can be no
assurance that FGN-1 or any future products the Company may develop, if
eligible for these programs, will be approved for marketing sooner than would
be traditionally expected. Regulatory approval granted under these regulations
may be restricted by the FDA as necessary to ensure the safe use of the drug.
In addition, post-marketing clinical studies may be required. If FGN-1 or any
future products of the Company do not perform satisfactorily in such post-
marketing clinical studies, they would likely be required to be withdrawn from
the market.

In most cases, pharmaceutical companies rely on patents to provide market
exclusivity for the periods covered by the patents. See "Business--Patents and
Proprietary Technology." In the U.S., the Drug Price Competition and Patent
Term Restoration Act of 1984 (the "Hatch-Waxman Act") permits an extension of
patents in certain cases to compensate for patent time expended during
clinical development and FDA review of a drug. In addition, the Hatch-Waxman
Act establishes a period of market exclusivity, independent of any patents,
during which the FDA may not accept or approve abbreviated applications for
generic versions of the drug from other sponsors, although the FDA may accept
and approve subsequent long-form applications for the drug. The applicable
period of market exclusivity for a drug containing an active ingredient not
previously approved is five years. There is no assurance that all or any of
the Company's products, if approved, will receive market exclusivity under the
Hatch-Waxman Act. Failure to receive such exclusivity could have an adverse
effect on the Company's business, financial condition and results of
operations.

Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's cGMP standards, which also must
be observed at all times following approval. Accordingly, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure compliance with cGMP standards. Failure to so comply
subjects the manufacturer to possible FDA action, such as the suspension of
manufacturing or seizure of the product. The FDA may also request a voluntary
recall of a product.

Health care reform legislation, if enacted, could result in significant
change in the financing and regulation of the health care business. In
addition, legislation affecting coverage and reimbursement under Medicare,
Medicaid and other government medical assistance programs has been enacted
from

time to time. The Company is unable to predict whether such legislation will
be enacted in the future or, if enacted, the effect of such legislation on the
future operation of the Company's business. Changes adversely affecting drug
pricing, drug reimbursement, and prescription benefits, among other changes,
could have a materially adverse effect on the Company's business, financial
condition and results of operations.

MANUFACTURING

The Company currently has no manufacturing facilities for clinical or
commercial production of any of its compounds under development. The Company
is currently relying on third-party manufacturers to produce its compounds for
research and clinical purposes. Therefore, CPI will need to develop its own
facilities or contract with third-parties for the manufacture of products, if
any, that it may develop for its own account or in connection with
collaborative arrangements in which it has retained manufacturing rights.

The Company is working with Zambon, an Italian manufacturer of
pharmaceutical chemicals, for the supply of FGN-1 in bulk form. In its most
recent FDA inspection, this manufacturer was found to adhere to cGMP
regulations. Zambon is one of the largest manufacturers of generic sulindac.
Several batches of FGN-1 drug substance, the manufacturing process of which is
similar to that of sulindac, have been delivered by the manufacturer to CPI at
a scale suitable for commercial use and are currently being used in the
Company's pivotal Phase III APC study. Zambon has the capacity to supply the
Company's current and foreseeable future requirements for FGN-1 and is
currently in discussions with CPI to provide for the long-term supply of FGN-
1.

The Company is also working with Ohm, a U.S.-based contract manufacturer, to
manufacture FGN-1 in its final pharmaceutical dosage form. Manufacturing
methods have been transferred to and developed with this contractor. Capsules
used in the current pivotal Phase III APC study are made by this manufacturer
at a scale suitable for commercialization, substantially reducing the need for
further bioequivalency studies. At this time, the Company is negotiating a
formal, commercial supply agreement with this manufacturer.

MARKETING AND SALES

The Company has to date retained all rights to FGN-1 and its other compounds
and plans to establish its own sales, marketing and distribution organization.
The Company plans to promote FGN-1, if approved for sale, primarily to the
gastroenterologists and other physicians who manage patients with APC,
sporadic adenomatous colonic polyps and Barrett's Esophagus. These initial
markets are treated by approximately 10,500 physicians, a relatively small
target audience. If the Company receives additional FDA approvals for FGN-1,
CPI may expand its sales and marketing team to reach other targeted groups of
physicians. Target groups would include the approximately 10,000 urologists
who manage most prostate cancer patients and the approximately 5,500
oncologists who manage cancer therapy patients.

Certain indications, based on their treatment by a large number of
physicians, require an extensive sales force to sufficiently reach the
appropriate physician groups. Cervical dysplasia, for example, is treated by
approximately 36,000 gynecologists. To reach these more extensive physician
groups, the Company may, if appropriate, enter into co-marketing agreements
with pharmaceutical or biotechnology companies.

The Company anticipates marketing its products in Europe by entering into
strategic alliance agreements with established sales organizations located in
such markets, and the Company is currently in preliminary discussions with
several such parties. In Japan and other Pacific Rim countries the Company is
seeking marketing partners to assist in local clinical trials, regulatory
filings, and marketing, sales and distribution. See "Risk Factors--Absence of
Sales and Marketing Experience, Dependence on Third Parties."

EMPLOYEES

As of October 15, 1997, the Company employed 27 persons full-time. CPI
places an emphasis on obtaining the highest available quality of staff. None
of the Company's employees is covered by collective bargaining arrangements
and management considers relations with its employees to be good.

FACILITIES

The Company leases approximately 40,000 square feet of space in Horsham,
Pennsylvania. This lease expires in 2007. The Company has an option
exercisable until March 31, 1998 to purchase this facility for $3.4 million
and is evaluating financing alternatives in order to determine whether to
exercise this option. The Company is currently occupying approximately 15,000
square feet of existing office space while renovating the remaining 25,000
square feet to include approximately 10,000 square feet of laboratory space
and 15,000 square feet of office, warehouse and mechanical space. The Company
also leases approximately 7,900 square feet in Aurora, Colorado, half of which
is laboratory space and half of which is office space. This lease expires in
March 1999. Upon completion of renovations in Horsham, Pennsylvania, the
Company will discontinue all operations in the Aurora facility and consolidate
into the Horsham site.

LEGAL PROCEEDINGS

CPI is not a party to any legal proceedings.

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The executive officers, directors and key employees of the Company are as
follows:

NAME AGE POSITION
---- --- --------

Robert J. Towarnicki............... 46 Director; Chief Executive Officer

Christopher J. Blaxland............ 56 Director; President

Rifat Pamukcu, M.D. ............... 40 Chief Scientific Officer; Senior Vice President--Research
and Development

Richard H. Troy.................... 60 Director; Senior Vice President--Finance,
Law and Administration; Corporate Secretary

William A. Boeger(1)(2)............ 48 Chairman of the Board of Directors

Thomas M. Gibson(2)................ 70 Director

Roger J. Quy, Ph.D.(1) ............ 46 Director

Peter G. Schiff(1)................. 45 Director

Randall M. Toig, M.D. ............. 47 Director

Kerstin B. Menander, M.D., Ph.D. .. 60 Vice President--Medical Affairs

Gary A. Piazza, Ph.D. ............. 38 Senior Director of Biology

- --------
(1) Member of the Compensation and Stock Option Committee.
(2) Member of the Audit Committee.

EXECUTIVE OFFICERS AND DIRECTORS

ROBERT J. TOWARNICKI has served as Chief Executive Officer and a Director of
the Company since October 1996. Prior to joining the Company, from 1992 to
1996 he served as President, Chief Operating Officer, a Director and most
recently as Executive Vice President of Integra LifeSciences Corporation,
which is the publicly held parent firm for a group of biotechnology and
medical device companies including Collatech, Inc., ABS LifeSciences Inc.,
Telios Pharmaceuticals, Inc. and Vitaphore Corporation. In addition, from 1991
to 1992, he served as Founder, President and Chief Executive Officer of
MediRel, Inc. From 1989 to 1991 he was General Manager of Focus/MRL, Inc. from
1985 to 1989 he was Vice President of Development and Operations for Collagen
Corporation and from 1974 to 1985 he held a variety of operations management
positions at Pfizer, Inc. and Merck & Co., Inc. Mr. Towarnicki was a Ph.D.
candidate in Pharmaceutical Chemistry at Temple University School of Pharmacy
and received his M.S. and B.S. degrees from Villanova University.

CHRISTOPHER J. BLAXLAND has served as President and a Director of the Company
since September 1993. Prior to joining the Company, from 1992 to 1993 he
headed the Pharmaceutical Group of Greenwich Pharmaceuticals, Inc., where he
was responsible for establishing and leading that company's commercial
activities, including Phase III development, regulatory affairs, medical
affairs, sales and marketing, manufacturing and quality control. Prior to 1992
he held executive positions with SmithKline Beecham plc for 21 years, serving
in regulatory, commercial development, sales marketing and general management
positions in Australia, Korea, The Netherlands and the U.S. Mr. Blaxland
graduated from the Veterinary School at the University of Sydney, Australia.

RIFAT PAMUKCU, M.D. is the Company's Chief Scientific Officer and Senior Vice
President--Research and Development. Dr. Pamukcu is a co-founder of the
Company. Prior to joining the Company, from 1989 to March 1993, he was
Assistant Professor of Medicine at the University of Cincinnati and co-chair
of the Company's SAB. He continued as an Adjunct Assistant Professor of
Medicine at the University of Cincinnati from 1993 to 1995. He was a
postdoctoral fellow from 1986 to 1989 in the

Division of Gastroenterology at the University of Chicago. Dr. Pamukcu
received a B.A. in Biology from Johns Hopkins University in 1979 and an M.D.
degree from the University of Wisconsin School of Medicine in 1983.

RICHARD H. TROY has served as Senior Vice President--Finance, Law and
Administration, Corporate Secretary and a Director of the Company since
January 1993. He has been an advisor to the Company since its inception, and
he is a director and President of FGN, Inc., the predecessor partnership's
first general partner and a principal stockholder of the Company. Prior to
joining the Company, from 1990 to 1992, he served as Vice President and
Associate General Counsel of UST, Inc. Prior to that, from 1973 to 1990, he
worked at Combustion Engineering, Inc., most recently as Vice President and
Deputy General Counsel, and from 1964 to 1973, he practiced law with the firm
of Shearman & Sterling in New York City. Mr. Troy received a B.A. in
Philosophy from Georgetown University in 1959, studied at the Ludwig-
Maximilians-Universitat in Munich in 1959-60, and received a LL.B. degree from
Harvard Law School in 1963.

WILLIAM A. BOEGER has served as Chairman of the Board of Directors of the
Company since September 1996 and has served as a Director since December 1992.
Since 1993 he also has been Chairman of the Board of Calypte Biomedical
Corporation; he also served as President and Chief Executive Officer of
Calypte Biomedical Corporation from 1993 to 1995. In addition, Mr. Boeger is
Chief Executive Officer of Pepgen Corporation. Since 1986 he has been Managing
General Partner of Quest Ventures II, a venture capital company that he
founded. From 1981 to 1986 Mr. Boeger was employed by Continental Capital
Ventures, a publicly-traded venture capital fund, where he attained the
position of General Partner. Mr. Boeger received a B.S., with an emphasis in
Psychobiology, from Williams College in 1972 and an M.B.A. from the Harvard
Business School.

THOMAS M. GIBSON has served as a Director of the Company since August 1996. He
is also President of Jupiter Electric Company, Inc. and President of
Integrated Technologies Development Corporation. Prior to joining the
Company's Board of Directors, from 1965 to 1990 he was associated with Gibson
Electric Company, Inc., where he attained the position of Chief Executive
Officer. In addition, in the early 1980s he co-founded Gibson Information
Systems, a data service bureau. Mr. Gibson attended Culver Military Academy,
the University of Arizona and University of Illinois.

ROGER J. QUY, PH.D. has served as a Director of the Company since December
1992. He has been with Technology Partners, a venture capital company, since
1989. From 1982 to 1989, Dr. Quy held various management positions with the
Hewlett-Packard Company. Dr. Quy received his undergraduate degree with a
major in Psychology and Law and a Doctorate in Neuroscience from the
University of Keele, England, and an M.B.A. from the Haas School of Business,
University of California, Berkeley.

PETER G. SCHIFF has served as a Director of the Company since December 1992.
He is the President and founder of Northwood Ventures LLC, a firm specializing
in venture capital and leveraged buyouts, President of Northwood Capital
Partners LLC, and Managing General Partner of Rabbit Hollow Partners. Prior to
founding Northwood Ventures LLC in 1983, Mr. Schiff worked for E.M. Warburg,
Pincus & Co., Inc. from 1980 to 1983, and at Chemical Bank from 1976 to 1980.
Mr. Schiff received a B.A. from Lake Forest College in 1974 and an M.B.A. from
the University of Chicago's Graduate School of Business in 1976.

RANDALL M. TOIG, M.D. has served as a Director of the Company since November
1994. He is Associate of Clinical Obstetrics and Gynecology in the Department
of Obstetrics and Gynecology at both the Northwestern University Hospital and
the Northwestern University Medical School. He is also in private medical
practice in Chicago, Illinois and is a Fellow at the American College of
Obstetrics and Gynecology. Dr. Toig received a B.S. in Zoology and
Anthropology from the University of Michigan in 1972 and an M.D. from the
University of Pittsburgh School of Medicine in 1977.

KEY EMPLOYEES

KERSTIN B. MENANDER, M.D., PH.D. has served as Vice President--Medical Affairs
at the Company since January 1997. Prior to joining the Company, she held
senior positions at large pharmaceutical companies such as Syntex Corporation
and Abbott Laboratories as well as at smaller companies. She has conducted
basic research within the area of histopathology and held a position as
Associate Professor in the Department of Histology at the University of Lund,
Sweden. Dr. Menander received her M.D. and Ph.D. degrees from the University
of Lund, Sweden, in 1972 and 1969, respectively.

GARY A. PIAZZA, PH.D. has been the Company's Senior Director of Biology,
responsible for preclinical efficacy testing of new compounds since January
1994. Prior to joining the Company, from 1989 to 1993 he was a Staff Scientist
for The Procter & Gamble Company. From 1987 to 1989, he was a Research
Assistant Oncologist at Brown University/Rhode Island Hospital in the
departments of Pathology and Medical Oncology. From 1985 to 1987, he was a
Research Fellow in the Department of Pharmacology at The Fox Chase Cancer
Center in Philadelphia where he received specialized training in cancer cell
biology. Dr. Piazza received his Ph.D. in Pharmacology from the University of
Alabama at Birmingham in 1985.

COMMITTEES

The Compensation and Stock Option Committee (the "Compensation Committee")
consists of Messrs. Boeger, Quy and Schiff. The Compensation Committee
administers the Company's 1997 Equity Incentive Plan and 1995 Stock Award Plan
and makes awards thereunder. The Compensation Committee also determines the
compensation of the elected officers of the Company.

The Audit Committee consists of Messrs. Boeger and Gibson. The Audit
Committee makes recommendations to the Board of Directors regarding the
engagement of the Company's independent certified public accountants and the
review of the scope and effect of the audit engagement.

DIRECTORS' COMPENSATION

The Company's Directors do not currently receive any compensation for
service on the Board of Directors or any committee thereof. See "Management--
Employee Benefit Plans." Directors are reimbursed for certain expenses in
connection with attendance at Board and committee meetings.

EMPLOYMENT AGREEMENTS

In October 1996, the Company entered into an employment agreement with
Robert J. Towarnicki providing for annual compensation of $175,000 and up to
$35,000 as an annual bonus, an option to purchase up to 96,381 shares of
Common Stock at $0.91 per share subject to a four-year vesting schedule,
certain relocation expenses and a severance payment equal to six months of
salary and vesting of at least 48,190 options in the event of termination
without cause. On July 23, 1997, the Company's Board of Directors increased
Mr. Towarnicki's annual salary to $195,000, effective as of January 1, 1998.

In September 1993, the Company entered into an employment agreement with
Christopher J. Blaxland providing for annual compensation of $150,000, to
increase by $25,000 upon the Company's completion of a $5 million financing,
and up to 25% of base compensation in annual bonus, an option to purchase up
to 59,949 shares of Common Stock subject to a four-year vesting schedule,
certain relocation expenses, a severance payment equal to twelve months of
salary and group insurance programs in the event of termination by the Company
without cause or termination by Mr. Blaxland for

good reason. As of 1997, the Company had increased Mr. Blaxland's annual
compensation to $165,000, and on July 23, 1997, the Company's Board of
Directors increased Mr. Blaxland's annual salary to $175,000, effective as of
January 1, 1998.

In February 1993, the Company entered into an employment agreement with
Rifat Pamukcu providing for annual compensation of $110,000 and up to $30,000
as an annual bonus, certain relocation expenses and a severance payment equal
to nine months of salary in the event of involuntary termination or
termination by Dr. Pamukcu for good reason. As of 1997, the Company had
increased Dr. Pamukcu's annual compensation to $145,000, and on July 23, 1997,
the Company's Board of Directors increased Dr. Pamukcu's annual salary to
$175,000, effective as of January 1, 1998.

In January 1993, the Company entered into a memorandum of employment with
Richard H. Troy providing for annual compensation of $110,000, to increase by
$50,000 upon the Company's initial public offering, up to $30,000 as an annual
bonus, and a severance payment equal to six months of salary and benefits in
the event of termination without cause or termination by Mr. Troy for good
reason. As of 1997, the Company had increased Mr. Troy's annual compensation
to $140,000, and on July 23, 1997, the Company's Board of Directors increased
Mr. Troy's annual salary to $160,000, effective as of January 1, 1998.

EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the three other highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company during the fiscal year ended December 31, 1996
(collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------- -------------------------
SECURITIES
STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS AWARDS OPTIONS
- --------------------------- ---------- --------- ---------- -----------

Robert J. Towarnicki(1)... $ 32,532(1) $ -- $ -- 96,381
Chief Executive Officer

Floyd G. Nichols(1)....... 79,519(1) 25,000(2) 12,800(3) --
Chief Executive Officer

Christopher J. Blaxland... 165,000 25,000(2) 12,800(3) 33,045
President

Rifat Pamukcu, M.D. ...... 145,000 25,000(2) 12,800(3) 33,045
Chief Scientific Officer;
Senior Vice President--
Research and Development

Richard H. Troy........... 140,000 25,000(2) 12,800(3) 27,537
Senior Vice President--
Finance, Law and
Administration; Corporate
Secretary

- --------
(1) Floyd G. Nichols served as Chief Executive Officer of the Company until
his death in May 1996. Robert J. Towarnicki began serving as Chief
Executive Officer of the Company in October 1996.
(2) In February 1996, the Compensation Committee awarded bonuses of $25,000 in
cash to each of Floyd G. Nichols, Christopher J. Blaxland, Rifat Pamukcu
and Richard H. Troy with respect to services rendered during the 1993-1995
period.

(3) In March 1996, pursuant to the 1995 Stock Award Plan, the Compensation
Committee awarded 22,030 shares of the Company's Common Stock to each of
Floyd G. Nichols, Christopher J. Blaxland, Rifat Pamukcu and Richard H.
Troy with respect to services rendered during the 1993-1995 period. The
fair market value of such stock awards was $0.58 per share, as determined
by the Board of Directors.

EMPLOYEE BENEFIT PLANS

By actions of September 13, 1993, October 1, 1993 and March 9, 1994, the
Board of Directors of the Company adopted and amended a stock option plan (the
"1993 Stock Option Plan"), which was approved by vote of the stockholders at
the annual meeting of stockholders held on April 6, 1994. The 1993 Stock
Option Plan authorizes the Company to grant to eligible employees, directors
and consultants of the Company, as determined by the Company's Compensation
Committee, options to purchase shares of the Company's Common Stock. On July
23, 1997, the Board of Directors amended the 1993 Stock Option Plan to
increase from 468,139 to 1,294,266 the number of shares of the Company's
Common Stock authorized for issuance under the 1993 Stock Option Plan. As of
September 30, 1997, the Company had granted, pursuant to its 1993 Stock Option
Plan, options for a total of 576,244 shares of Common Stock, of which 260,827
have been exercised.

On October 14, 1997, the Board amended and restated the 1993 Stock Option
Plan to constitute the 1997 Equity Incentive Plan (the "1997 Equity Incentive
Plan"). The 1997 Equity Incentive Plan provides for the grant of incentive
stock options, as defined under the Internal Revenue Code of 1986, as amended
(the "Code"), to employees and nonstatutory stock options, restricted stock
purchase awards, stock appreciation rights and stock bonuses to employees,
directors and consultants of the Company. The Board, or a Committee appointed
by the Board, administers the 1997 Equity Incentive Plan, and determines
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof.

The terms of stock options granted under the 1997 Equity Incentive Plan may
not exceed 10 years. The exercise price of options granted under the 1997
Equity Incentive Plan is determined by the Board (or Committee), provided that
the exercise price for an option cannot be less than 100% of the fair market
value of the Common Stock on the date of the option grant unless such option
is granted pursuant to an assumption of or a substitution for another option.
Options granted under the 1997 Equity Incentive Plan vest at the rate
specified in the option agreement. Generally, no stock option may be
transferred by the optionee other than by will or the laws of descent or
distribution, provided that an optionee may designate a beneficiary who may
exercise the option following the optionee's death. An optionee whose
relationship with the Company or any affiliate ceases for any reason may
exercise vested options for a term provided in the option agreement.

No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the
option does not exceed five (5) years from the date of grant. In addition, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under the 1997 Equity
Incentive Plan and all other stock plans of the Company and its affiliates)
may not exceed $100,000.

When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no person may be granted options under the 1997 Equity
Incentive Plan covering more than 1,500,000 shares of Common Stock in any
calendar year.

Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1997 Equity Incentive Plan. The Board (or Committee) has the
authority to reprice outstanding options and to offer optionees the
opportunity to replace outstanding options with new options for the same or a
different number of shares. Both the original and new options will count
toward the per-person, calendar year limitation set forth above.

Restricted stock purchase awards granted under the 1997 Equity Incentive
Plan may be granted pursuant to a repurchase option in favor of the Company in
accordance with a vesting schedule and at a price determined by the Board (or
Committee). Stock bonuses may be awarded in consideration of past services
without a purchase payment. Rights under a stock bonus or restricted stock
bonus agreement generally may not be transferred other than by will or the
laws of descent and distribution during such period as the stock awarded
pursuant to such an agreement remains subject to the agreement.

Upon certain changes in control of the Company, all outstanding awards under
the 1997 Equity Incentive Plan shall have the time at which they may be
exercised in full be accelerated and the awards terminated if not exercised
prior to such change in control. In some instances the Company is required to
make a cash payment in settlement of accelerated, but unexercised options that
have terminated due to the change in control.

On October 14, 1997, the Board adopted the 1997 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan") to provide for the automatic grant
of options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee.

The aggregate number of shares of Common Stock that may be issued pursuant
to options granted under the Directors' Plan is 250,000. Pursuant to the terms
of the Directors' Plan, each person serving as a director of the Company who
is not an employee of the Company (a "Non-Employee Director") shall, upon the
effectiveness of the initial public offering of the Company's Common Stock,

automatically be granted an option to purchase 3,000 shares of Common Stock
(the "Initial Grant"). Each person who first becomes a Non-Employee Director
after the effectiveness of the initial public offering of the Company's Common
Stock, automatically shall be granted an option to purchase 10,000 shares of
Common Stock (the "Inaugural Grant"). In addition, on the date of each annual
stockholders meeting commencing with the meeting in 1998, each Non-Employee
Director who has served at least one full year as director will automatically
be granted an option to purchase 3,000 shares of Common Stock (the
"Anniversary Grant").

Options subject to an Initial Grant under the Directors' Plan will vest in
full on March 31, 1998. Options subject to an Inaugural Grant under the
Directors' Plan will vest in three equal, annual installments commencing on
the first anniversary of the date of the grant of the option. Options subject
to an Anniversary Grant under the Directors' Plan will vest in full on the
first anniversary of the date of the grant of the option. The vesting of all
options under the Directors' Plan is conditioned on the continued service of
the recipient as a director, employee or consultant of the Company or any
affiliate of the Company.

The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of the Common Stock granted on the date of
grant. No option granted under the Directors' Plan may be exercised after the
expiration of 10 years from the date it was granted. Options granted under the
Directors' Plan generally are non-transferable, except as provided in the
option agreement. The Directors' Plan will terminate on the tenth anniversary
of the date of its adoption by the Board unless sooner terminated by the
Board.

In the event of certain changes of control, options outstanding under the
Directors' Plan will automatically become fully vested and will terminate if
not exercised prior to such change of control.

On October 14, 1997, the Board approved the Employee Stock Purchase Plan
(the "Purchase Plan") covering an aggregate of 300,000 shares of Common Stock.
The Purchase Plan is intended to qualify as an "employee stock purchase plan"
within the meaning of Section 423 of the Code. Under the Purchase Plan, the
Board may authorize participation by eligible employees, including officers,
in periodic offerings following the adoption of the Purchase Plan. The
offering period for any offering will be no longer than 27 months.

Employees are eligible to participate in the Purchase Plan if they are
employed by the Company or an affiliate of the Company designated by the
Board. Employees who participate in an offering can have up to 15% of their
earnings withheld pursuant to the Purchase Plan and applied, on specified
dates determined by the Board, to the purchase of shares of Common Stock. The
price of Common Stock purchased under the Purchase Plan will be not less than
85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company.

In the event of certain changes of control, the Board has discretion to
provide that each right to purchase Common Stock will be assumed or a similar
right substituted by the successor corporation, or the Board may shorten the
offering period and provide for all sums collected by payroll deductions to be
applied to purchase stock immediately prior to the change in control. The
Purchase Plan will terminate at the Board's direction.

In November 1995, the Board of Directors of the Company adopted a stock
award plan (the "1995 Stock Award Plan"). The 1995 Stock Award Plan allows the
Company to award Common Stock to certain employees, directors and consultants,
as determined by the Company's Compensation Committee, in consideration for
their performing services for the Company. As of September 1997, the Company
had made awards of an aggregate of 101,888 shares of stock pursuant to the
1995 Stock Award Plan to Christopher J. Blaxland, Floyd G. Nichols, Rifat
Pamukcu, Richard H. Troy and certain other employees.

The following table sets forth each grant of stock options made during the
year ended December 31, 1996 to each of the Named Executive Officers:

OPTION GRANTS IN FISCAL YEAR 1996

POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
NUMBER OF GRANTED TO OR BASE OPTION TERMS(2)
OPTIONS EMPLOYEES IN PRICE ----------------------
NAME GRANTED FISCAL YEAR ($/SHARE) EXPIRATION DATE(1) 5% 10%
---- --------- ------------- --------- ------------------ ---------- -----------

Robert Towarnicki(3).... 96,381(4) 33.5% $0.91 October 24, 2006 $ 55,025 $ 139,450
Floyd G. Nichols........ -- -- -- -- -- --
Christopher
Blaxland(3)............ 33,045(5) 11.5 0.58 May 2, 2006 12,075 30,600
Rifat Pamukcu(3)........ 33,045(5) 11.5 0.58 May 2, 2006 12,075 30,600
Richard H. Troy(3)...... 27,537(5) 9.6 0.58 May 2, 2006 10,000 25,500

- --------
(1) The standard options granted pursuant to the 1993 Stock Option Plan expire
ten years after date of grant.
(2) The potential realizable value is calculated assuming that the fair market
value of Common Stock on the date of the grant as determined by the Board
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and the Common
Stock received therefor is sold on the last day of the term of the option
for the appreciated price. The 5% and 10% rates of appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future increases in the
price of its Common Stock.
(3) In July 1997, the Company granted options to purchase 55,075 shares of
Common Stock to Robert J. Towarnicki, options to purchase 5,507 shares of
Common Stock to Christopher J. Blaxland, options to purchase 13,768 shares
of Common Stock to Rifat Pamukcu and options to purchase 5,507 shares of
Common Stock to Richard H. Troy. All of the above options to purchase
Common Stock are exercisable at a price of $6.72 per share.
(4) 24,095 shares vest upon first anniversary of grant; 2,008 vest monthly
between November 30, 1997 and September 30, 2000; and 2,004 vest on
October 31, 2000.
(5) Twenty-five percent of the total options granted vest upon each
anniversary of grant over four years.

The following table sets forth information with respect to (i) the exercise
of stock options by the Named Executive Officers during the fiscal year ended
December 31, 1996, (ii) the number of unexercised options held by the Named
Executive Officers as of December 31, 1996 and (iii) the value of unexercised
in-the-money options as of December 31, 1996:

OPTION EXERCISES AND YEAR-END VALUE TABLE

VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
DEC. 31, 1996 AT DEC. 31, 1996
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE(2)
---- --------------- -------- ---------------- ----------------

Robert J. Towarnicki.... -- -- 96,381/-- --/--
Floyd G. Nichols........ -- -- --/-- --/--
Christopher J.
Blaxland............... 59,949(3) -- (4) 33,045/-- $10,800/--
Rifat Pamukcu........... -- -- 33,045/-- 10,800/--
Richard H. Troy......... 27,537(5) -- (6) --/-- --/--

- --------
(1) All options are subject to vesting; however, early exercise is possible
with portions thereof remaining subject to a repurchase option of the
Company.

(2) To date, all options have been granted at exercise prices equal to the
fair market value per share of Common Stock, as determined by the Board of
Directors; the fair market value at December 31, 1996 was $0.91.
(3) Includes 15,145 shares that were subject to a repurchase option on behalf
of the Company as of December 31, 1996.

(4) Granted on September 13, 1993, with an exercise price of $0.58 per share;
exercised on April 6, 1996, at which time the Company's Board of Directors
determined that the fair market value was $0.58 per share.
(5) All 27,537 shares were subject to a repurchase option of the Company as of
December 31, 1996.

(6) Granted and exercised on May 3, 1996, with an exercise price and fair
market value, as determined by the Board of Directors, of $0.58 per share.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Bylaws provide that the Company will indemnify its directors,
officers, employees and agents to the fullest extent permitted by Delaware
law. The Company will adopt Amended and Restated Bylaws, effective upon the
closing of this offering, which will provide that the Company will indemnify
its directors and executive officers to the fullest extent permitted by
Delaware law; provided, however, that the Company may modify the extent of
such indemnification by individual contracts, and shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by
the Company's Board of Directors, (iii) such indemnification is provided by
the Company, in its sole discretion, pursuant to the powers vested in the
Company under Delaware law or (iv) such indemnification is required to be made
under the Company's Amended and Restated Bylaws. Under the Amended and
Restated Bylaws, the Company shall have the power to indemnify its other
officers, employees and agents as permitted under Delaware law.

In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware Law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty to
the Company and its stockholders. This provision of the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of non-
monetary relief would remain available under Delaware law. Each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of the law, for any transaction
from which the director derived an improper personal benefit, for improper
transactions between the director and the Company, for improper distributions
to stockholders and for improper loans to directors and officers. This
provision also does not affect a director's responsibilities under any laws,
such as the federal securities laws or state or federal environmental laws.

The indemnification provisions in the Company's Bylaws permit
indemnification for certain liabilities arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.

There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.

CERTAIN TRANSACTIONS

FIRST ROUND OF SERIES E PREFERRED

Between April 1994 and July 1994, the Company sold to institutional and other
accredited investors a total of 298,908 shares of Series E Convertible
Preferred Stock ("Series E Preferred") at a price of $7.44 per share and
warrants to purchase an additional 10,323 shares of Series E Preferred at $7.44
per share in a first round of financing of Series E Preferred. In August 1995,
in connection with repricing the Series E Preferred to $5.72 per share, the
Company's Board of Directors authorized the issuance of additional Series E
Preferred. In conjunction with this new price, the Company issued 90,161 shares
of Series E Preferred and 3,114 warrants to purchase Series E Preferred to the
previous holders of Series E Preferred. Certain directors, executive officers
and five percent stockholders purchased Series E Preferred and warrants to
purchase Series E Preferred in the first round of financing of Series E
Preferred, as follows: FGN, Inc., which is a holder of more than five percent
of the Company's voting stock and a Director and the President of which is
Richard H. Troy, a Director, Senior Vice President--Finance, Law and
Administration and Corporate Secretary of the Company, purchased 7,168 shares
of Series E Preferred; the Thomas M. Gibson Trust established by Thomas M.
Gibson, a Director of the Company, purchased a total of 524 shares of Series E
Preferred; Quest Ventures II and Quest Ventures International, entities in
which William A. Boeger, a Director of the Company, is a general manager,
purchased a total of 27,519 shares of Series E Preferred and warrants to
purchase Series E Preferred; Randall M. Toig, a Director of the Company,
purchased 3,584 shares of Series E Preferred; Richard H. Troy, a Director,
Senior Vice President--Finance, Law and Administration and the Corporate
Secretary of the Company, purchased 2,581 shares of Series E Preferred and
warrants to purchase Series E Preferred; Technology Partners, which is a holder
of more than five percent of the Company's voting stock and a general manager
of which is Roger J. Quy, a Director of the Company, purchased 92,597 shares of
Series E Preferred and warrants to purchase Series E Preferred; Rabbit Hollow
Partners, the Managing General Partner of which is Peter G. Schiff, a Director
of the Company, purchased 18,121 shares of Series E Preferred; and Northwood
Ventures LLC, which is a holder of more than five percent of the Company's
voting stock and the President of which is Peter G. Schiff, a Director of the
Company, purchased 73,993 shares of Series E Preferred and warrants to purchase
Series E Preferred.

BRIDGE LOAN AND SECOND ROUND OF SERIES E PREFERRED

The Company commenced the second round of Series E Preferred financing
between June and August 1995, when the Company received a bridge loan of
$791,000 from certain of its stockholders and issued convertible promissory
notes with an annual interest rate of 9% to such stockholders. Certain
directors, executive officers and five percent stockholders participated in the
bridge loan, as follows: Floyd G. Nichols, who was a Director and the Company's
Chief Executive Officer, purchased a $50,000 convertible promissory note;
Northwood Ventures LLC, the President of which is Peter G. Schiff, a Director
of the Company, purchased a $200,000 convertible promissory note; Quest
Ventures II, a general manager of which is William A. Boeger, a Director of the
Company, purchased a $50,000 convertible promissory note; and Technology
Partners West Fund IV, a general manager of which is Roger J. Quy, a Director
of the Company, purchased a $90,000 convertible promissory note. The Company
converted the bridge loan's principal and interest into 139,680 shares of
Series E Preferred and warrants to purchase an additional 69,140 shares of
Series E Preferred in August 1995.

Between August 1995 and May 1996, the Company issued 1,246,459 shares of
Series E Preferred and warrants to purchase an additional 116,131 shares of
Series E Preferred at $5.72 per share, which includes those issued in
converting the bridge loan. Certain directors, executive officers and five
percent stockholders purchased Series E Preferred in the conversion of the
bridge loan and the second round of financing of Series E Preferred, as
follows: Floyd G. Nichols, who was a Director and the Company's Chief Executive
Officer, purchased 9,691 shares of Series E Preferred and

warrants to purchase Series E Preferred; Northwood Ventures LLC, the President
of which is Peter G. Schiff, a Director of the Company, purchased 81,065
shares of Series E Preferred and warrants to purchase Series E Preferred;
Northwood Capital Partners LLC, the President of which is Peter G. Schiff, a
Director of the Company, purchased 45,461 shares of Series E Preferred;
Technology Partners West Fund IV, a general manager of which is Roger J. Quy,
a Director of the Company, purchased 83,206 shares of Series E Preferred and
warrants to purchase Series E Preferred; and Thomas M. Gibson, a Director of
the Company, and the Thomas M. Gibson Trust purchased a total of 17,484 shares
of Series E Preferred.

SERIES F PREFERRED

Between December 1996 and June 1997, the Company sold a total of 2,648,491
shares of Series F Convertible Preferred Stock ("Series F Preferred") and
warrants to purchase 69,295 shares of Series F Preferred to institutional
investors and accredited investors. Certain directors, executive officers and
five percent stockholders of the Company participated in the private offering,
as follows: Technology Partners, which is a holder of more than five percent
of the Company's voting stock and a general partner of which is Roger J. Quy,
a Director of the Company, purchased 55,654 shares of Series F Preferred;
Northwood Ventures LLC, which is a holder of more than five percent of the
Company's voting stock and a President of which is Peter G. Schiff, a Director
of the Company, purchased 61,133 shares of Series F Preferred and warrants to
purchase Series F Preferred; Northwood Capital Partners LLC, the President of
which is Peter G. Schiff, a Director of the Company, purchased 15,283 shares
of Series F Preferred and warrants to purchase Series F Preferred; The Goldman
Sachs Group, L.P., which is a holder of more than five percent of the
Company's voting stock, purchased 390,737 shares of Series F Preferred and
warrants to purchase Series F Preferred; and Grosvenor G. Nichols, the
brother-in-law of Richard H. Troy, a Director, Senior Vice President--
Finance, Law and Administration and the Corporate Secretary of the Company,
purchased 14,181 shares of Series F Preferred and warrants to purchase Series
F Preferred.

GRANTS OF BONUSES AND STOCK OPTIONS

On July 23, 1997, the Company's Compensation Committee authorized the grant
of stock options at an exercise price of $6.72 per share under the Company's
1993 Stock Option Plan and the payment of cash bonuses as follows:

OPTIONS CASH
------- -------

Robert J. Towarnicki..................................... 55,075 $40,000
Christopher J. Blaxland.................................. 5,507 25,000
Rifat Pamukcu............................................ 13,768 25,000
Richard H. Troy.......................................... 5,507 25,000

MANDATORY REDEMPTION OF COMPANY'S REDEEMABLE PREFERRED STOCK

Upon the closing of the offering, the Company must redeem, in cash and/or
registered Common Stock at the option of the Company, in an aggregate value of
$1,092,070, the outstanding shares of Redeemable Preferred Stock, all of which
are held by FGN, Inc., a holder of more than five percent of the Company's
voting stock and a director, the President and a stockholder of which is
Richard H. Troy, a Director, Senior Vice President--Finance, Law and
Administration and the Corporate Secretary of the Company. Pursuant to
arrangements FGN, Inc. entered into in 1990 with certain

persons who participated in the founding of the Company, FGN, Inc. will
immediately pay out all but $75,000 of the proceeds of such redemption of the
Redeemable Preferred Stock to or on behalf of such persons, including the
payment of cash and/or registered Common Stock in an aggregate value of
$150,000 to Rifat Pamukcu, the Company's Chief Scientific Officer and Senior
Vice President--Research and Development, and the payment of cash and/or stock
in an aggregate value of $100,000 to Richard H. Troy, a Director, Senior Vice
President--Finance, Law and Administration and Corporate Secretary of the
Company.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997, as adjusted
to give effect to the sale by the Company of the Shares offered hereby
(assuming no exercise of the Underwriters' over-allotment option) by (i) each
principal stockholder, including those known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, (ii) each
Named Executive Officer, (iii) each director of the Company, and (iv) all
current directors and executive officers of the Company as a group.

PERCENT OF SHARES
NUMBER BENEFICIALLY OWNED(1)
OF SHARES BENEFICIALLY --------------------------------
BENEFICIAL OWNER OWNED PRIOR TO OFFERING PRIOR TO OFFERING AFTER OFFERING
---------------- ----------------------- ----------------- --------------

PRINCIPAL STOCKHOLDERS:
FGN, Inc.(2)............ 1,007,827 13.16% 9.92%
1300 S. Potomac St.,
Suite 110
Aurora, CO 80012
Northwood Ventures 580,205 7.55% 5.70%
LLC(3).................
485 Underhill Blvd.,
Suite 205
Syossett, NY 11791
Technology Partners..... 529,414 6.91% 5.21%
West Fund IV, L.P.
150 Tiburon Blvd.,
Suite A
Belvedere, CA 94920
The Goldman Sachs Group, 390,737 5.09% 3.84%
L.P.(4)................
85 Broad Street
New York, NY 10004
New York Life Insurance 372,129 4.86% 3.66%
Company................
51 Madison Avenue
New York, NY 10010
Vulcan Ventures, 332,435 4.34% 3.27%
Inc.(5)................
110-110 Avenue N.E.,
Suite 550
Bellevue, WA 98004
DIRECTORS AND EXECUTIVE
OFFICERS:**
Christopher J. 120,531 1.57% 1.19%
Blaxland(6).............
William A. Boeger(7).... 181,660 2.37% 1.79%
Thomas M. Gibson(8)..... 39,218 * *
Rifat Pamukcu, M.D.(9).. 204,107 2.65% 2.00%
Roger J. Quy, 529,414 6.91% 5.21%
Ph.D.(10)...............
Peter G. Schiff(11)..... 580,205 7.55% 5.70%
Randall M. Toig, 75,461 * *
M.D.(12)................
Robert J. 159,274 2.06% 1.56%
Towarnicki(13)..........
Richard H. Troy(14)..... 1,169,570 15.26% 11.50%
All executive officers
and directors as a
group
(9 persons)(15)........ 3,059,440 39.25% 29.72%

- --------
* Indicates beneficial ownership of less than one percent.
**The address of the directors and executive officers is 702 Electronic
Drive, Horsham, PA 19044.

(1) This table is based upon information supplied by officers, directors and
principal stockholders. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, the
Company believes that each of the stockholders named in this table has
sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 7,660,184 shares
of Common Stock outstanding as of September 30, 1997 and 10,160,184
shares of Common Stock outstanding after completion of this offering,
adjusted as required by rules promulgated by the Commission.

(2) Until the closing of this offering, FGN, Inc. has the authority to vote
419,905 additional shares of Common Stock of which it is not the
beneficial owner but that it holds in trust for 11 persons, including
135,264 shares for Rifat Pamukcu and 88,119 shares for Richard H. Troy,
Mr. Troy's wife and daughter. Excludes up to approximately 82,612 shares
of Common Stock that might be received upon redemption of the Company's
Redeemable Preferred Stock, less than 10% of which, if so redeemed, would
remain with FGN, Inc.
(3) Includes 60,331 shares and warrants to purchase 413 shares beneficially
owned by Northwood Capital Partners LLC, 53,919 shares and warrants to
purchase 413 shares beneficially owned by Rabbit Hollow Partners and
14,870 shares beneficially owned by the Edward T. Schiff et. al. Trust,
entities that may be deemed affiliates of Northwood Ventures LLC.
(4) Includes 18,606 shares issuable upon exercise of outstanding warrants.
(5) Includes 7,442 shares issuable upon exercise of outstanding warrants.
(6) Includes 5,507 shares subject to stock options exercisable immediately
pursuant to the terms of an early exercise agreement, although unvested
shares remain subject to a repurchase option by the Company.
(7) Includes 7,367 shares owned of record by Mr. Boeger, 103,530 shares owned
of record by Quest Ventures II and 70,763 shares owned of record by Quest
Ventures International. Mr. Boeger is a managing general partner of Quest
Ventures II and Quest Ventures International, and may be deemed to share
voting and investment power with respect to such shares. Mr. Boeger
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(8) Includes 14,292 shares in the Thomas M. Gibson Trust established by
Thomas M. Gibson.
(9) Includes 135,264 shares beneficially owned by Dr. Pamukcu but held in
trust by FGN, Inc. and 46,813 shares subject to stock options exercisable
immediately pursuant to an early exercise agreement, although unvested
shares remain subject to a repurchase option by the Company.
(10) Includes 529,414 shares owned of record by Technology Partners. Dr. Quy
is a general partner of Technology Partners, and may be deemed to share
voting and investment power with respect to such shares. Dr. Quy
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(11) Includes 450,259 shares and warrants owned of record by Northwood
Ventures LLC, 60,744 shares and warrants owned of record by Northwood
Capital Partners LLC, 54,332 shares and warrants owned of record by
Rabbit Hollow Partners and 14,870 shares owned of record by the Edward T.
Schiff et. al. Trust. Mr. Schiff is the President of Northwood Ventures
LLC, the President of Northwood Capital Partners LLC, the Managing
General Partner of Rabbit Hollow Partners and the Trustee of the Edward
T. Schiff et. al. Trust; he may be deemed to share voting and investment
power with respect to such shares. Mr. Schiff disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(12) Includes 372 shares issuable upon exercise of outstanding warrants.
(13) Includes 372 shares issuable upon exercise of outstanding warrants and
55,075 shares subject to stock options exercisable immediately pursuant
to the terms of an early exercise agreement, although unvested shares
remain subject to a repurchase option by the Company.
(14) Includes 71,597 shares beneficially owned by Mr. Troy but held in trust
by FGN, Inc., warrants to purchase 82 shares, and 5,507 shares subject to
stock options exercisable immediately pursuant to the terms of an early
exercise agreement, although unvested shares remain subject to a
repurchase option by the Company. Also includes 15,007 shares
beneficially owned by Mr. Troy's spouse, Elizabeth N. Troy, and 8,866
shares beneficially owned by Mr. Troy's daughter, Elizabeth D. Troy, as
well as 1,007,827 shares owned of record by FGN, Inc., of which Mr. Troy
is a director and the President. Mr. Troy may be deemed to share voting
and investment power with respect to such 23,873 shares beneficially
owned by his spouse and daughter and to such 1,007,827 shares
beneficially owned by FGN, Inc.; however, Mr. Troy disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(15) Includes shares held by directors and executive officers of the Company
and entities affiliated with such persons. See Notes 6 through 14 above.

DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and Bylaws, which have been filed as exhibits to the
Company's Registration Statement, of which this Prospectus is a part.

As of September 30, 1997, the Company's authorized capital stock consisted
of 17,000,000 shares of Common Stock, $0.01 par value, 61,250 shares of
Redeemable Preferred Stock, $0.01 par value per share and 13,000,000 shares of
Convertible Preferred Stock, $0.01 par value. As of such date, there were
1,646,499 shares of Common Stock outstanding held of record by 40
stockholders, 61,250 shares of Redeemable Preferred Stock outstanding and
6,013,685 shares of Convertible Preferred Stock outstanding. Assuming the
conversion of all outstanding Convertible Preferred Stock into Common Stock
and the effectiveness of a 1-for-1.8157 reverse split of the outstanding
shares of Common Stock there were 7,660,184 shares of Common Stock
outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of Directors, and as a consequence, minority stockholders will not be
able to elect Directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no preemptive rights. All outstanding shares of Common Stock
are, and all shares of Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.

The Company will adopt an Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws that will provide that, effective upon the
closing of this offering, the Board of Directors has the authority to issue up
to 25,000,000 shares of Common Stock, including those shares previously issued
and outstanding.

REDEEMABLE PREFERRED STOCK

The Redeemable Preferred Stock is non-voting, not convertible and not
eligible to receive any dividend. Upon the closing of this offering, the
Company must redeem in cash and/or registered Common Stock, at the option of
the Company, all outstanding shares of Redeemable Preferred Stock. FGN, Inc.
holds all shares of Redeemable Preferred Stock. Pursuant to arrangements FGN,
Inc. entered into in 1990 with certain persons who participated in the
founding of the Company and who have served as employees of or consultants to
the Company, FGN, Inc. will immediately pay out all but $75,000 of the
proceeds of such redemption to or on behalf of such persons. As a result of
forfeitures, the Company's redemption obligation has been reduced to
$1,092,070. The Company has recorded a charge to income of $1,017,000 in the
quarter ended September 30, 1997 to reflect the redemption.

CONVERTIBLE PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of Convertible
Preferred Stock will be converted into 6,013,685 shares of Common Stock. The
Company will adopt an Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws which will provide that,

effective upon the closing of this offering the Board of Directors has the
authority, without further action by the stockholders, to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of such series, without any further vote or action by stockholders.
The issuance of Preferred Stock could adversely affect the voting power of
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.

WARRANTS

In connection with the Company's Series E Preferred financings, the Company
issued warrants to purchase 129,568 shares of Series E Preferred at $5.72 per
share, of which warrants to purchase 64,798 shares of Series E Preferred have
been exercised. The outstanding warrants to purchase 64,770 shares may be
exercised in whole at any time or in part from time to time prior to their
expiration on the earlier of June 5, 1999 or a firm commitment underwritten
public offering, including this offering.

The Company issued warrants to purchase 69,295 shares of Series F Preferred
at $6.72 per share in connection with its Series F financing. Such warrants may
be exercised in whole at any time or in part from time to time prior to their
expiration on July 20, 1999.

The exercise price for the warrants and the number of shares issuable upon
exercise of the warrants are subject to adjustment upon a stock split, stock
dividend or subdivision. Additionally, an adjustment will be made upon a sale
of all or substantially all of the assets of the Company or in the case of a
reorganization, reclassification, consolidation or merger of the Company, in
order to enable holders of warrants to purchase the number of shares of stock
receivable in such event by a holder of the number of shares of Preferred Stock
that might otherwise have been purchased upon exercise of the warrants. The
warrants do not confer upon the holder any voting or any other rights of a
stockholder of the Company.

REGISTRATION RIGHTS

The Company and the holders of the Company's Common Stock, Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock have entered into
a stockholders agreement, as amended (the "Stockholders Agreement"), whereby
certain stockholders may request that the Company use its best efforts to
effect the registration (a "Demand Registration Right") of certain securities
under the Securities Act of 1933 (the "Securities Act") and certain
stockholders must receive notice of the Company's intent to register Common
Stock under the Securities Act and may request that the Company use its best
efforts to cause certain securities of the stockholders to be registered (a
"Piggyback Registration Right"). The Stockholders Agreement provides, however,
that if the representatives of the underwriters advise the Company in writing
that marketing factors require a limitation on the number of shares to be
underwritten, the number of shares that the stockholders may cause to be
registered pursuant to a Piggyback Registration Right may be reduced or
eliminated altogether. The representatives of the underwriters have so advised
the Company in writing that marketing factors require a limitation on the
number of shares to be underwritten to the number of shares offered by the
Company; thus, the stockholders may not exercise any registration rights in
this offering. The Stockholder Agreement provides that all registration rights
terminate for each holder of Common Stock after the closing of this offering if
all shares held by such holder may be sold under Rule 144(k) under the
Securities Act during any 90-day period.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.

The Company's Certificate of Incorporation requires that any action required
or permitted to be taken by stockholders of the Company must be effected at a
duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing unless the Board is provided with at least
10-day prior written notice. The Company's Bylaws provide that special
meetings of the stockholders of the Company may be called only by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or holders
of 20% of the Company's voting stock. In addition, the Company's Bylaws
provide that the authorized number of Directors may be changed only by
resolution of the Board of Directors. The Company's Stockholders Agreement
provides that Directors can only be removed for cause by a majority vote of
the stockholders or by the entity that, pursuant to the Stockholders
Agreement, appointed such Director.

The Company will adopt an Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws that will become effective upon the closing of
this offering. Under the Amended and Restated Certificate of Incorporation,
stockholders of the Company will be unable to effect actions by written
consent after the occurrence of an initial public offering, including this
offering. Special meetings of the stockholders of the Company will be called
only by the Board of Directors, the Chairman of the Board, or the Chief
Executive Officer. The Amended and Restated Certificate of Incorporation will
provide that the Board will be classified, that the authorized number of
directors may be changed only by resolution of the Board of Directors and that
directors may only be removed for cause by a majority vote of the
stockholders.

These provisions may have the effect of delaying, deterring or preventing a
change in control of the Company, depressing the market price of Common Stock
or discouraging hostile takeover bids in which stockholders of the Company
could receive a premium for their shares of Common Stock.

LISTING

Application has been made to have the Common Stock approved for listing on
the Nasdaq National Market under the trading symbol "CLPA."

TRANSFER AGENT AND REGISTRAR

BankBoston, N.A. is the transfer agent and registrar for the Company's
Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.

Upon completion of this offering, the Company will have an aggregate of
10,160,184 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and
warrants). Of these shares, the 2,500,000 Shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 7,660,184 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 701 promulgated under the
Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows:

DAYS AFTER SHARES
DATE OF ELIGIBLE FOR
THIS PROSPECTUS FUTURE SALE COMMENT
--------------- ------------ -------

Upon Effectiveness...... 2,500,000 Freely tradable. Shares sold in offering.
90 Days................. 5,368 Rule 144 and Rule 701 (outstanding shares not subject to
180-day lockup).
180 Days................ 5,844,290 Lockup released. Outstanding shares salable under Rule 144,
Rule 144(k) and Rule 701 (3,006,897 of which are held by
Affiliates and will be subject to the volume limitations of
Rule 144 and Rule 701 described below).

Following completion of the 180-day lock-up period, holders of the 3,006,897
shares that will be subject to the volume limitations of Rule 144 and Rule 701
will be entitled to certain rights with respect to the registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration. See
"Description of Capital Stock--Registration Rights."

agreed that it will not, during the 180-day period commencing on the date of
the Underwriting Agreement, without the prior written consent of Salomon
Brothers Inc, offer, sell, or contract to sell, or otherwise dispose of (or
enter into any transaction which is designed to, or could be expected to,
result in the disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any
affiliate of the Company or any person in privity with the Company or any
affiliate of the Company) directly or indirectly, or announce the offering of,
any other shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock, except that the Company may issue,
sell or file a registration statement with the Commission with respect to
Common Stock pursuant to any employee stock option plan, stock ownership plan
or dividend reinvestment plan of the Company in effect on the date of the
Underwriting Agreement or in connection with the redemption of the Redeemable
Preferred Stock and the Company may issue Common Stock issuable upon the
conversion of securities or the exercise of warrants outstanding on the date of
the Underwriting Agreement.

In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, an Affiliate of the Company or person (or persons whose
shares are aggregated) who has beneficially owned Restricted Shares for at
least one year will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission. Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice, and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed to
have been an Affiliate of the Company at any time during the 90 days
immediately preceding the sale and who has beneficially owned Restricted Shares
for at least two years is entitled to sell such shares under Rule 144(k)
without regard to the limitations described below.

An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.

UNDERWRITING

Upon the terms and subject to the conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below (the "Underwriters"), for whom Salomon Brothers Inc, BancAmerica
Robertson Stephens and Cowen & Company are acting as representatives (the
"Representatives"), and each of such Underwriters has severally agreed to
purchase from the Company the respective number of Shares set forth opposite
its name below:

NUMBER OF
UNDERWRITER SHARES
----------- ---------

Salomon Brothers Inc...............................................
BancAmerica Robertson Stephens.....................................
Cowen & Company....................................................
---------
Total.......................................................... 2,500,000
=========

In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the Shares
offered hereby (other than those covered by the over-allotment option described
below) if any such shares of Common Stock are purchased. In the event of a
default by any Underwriter, the Underwriting Agreement provides that, in
certain circumstances, purchase commitments of the non-defaulting Underwriters
may be increased or the Underwriting Agreement may be terminated. The Company
has been advised by the Representatives that the several Underwriters propose
initially to offer such Shares at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per Share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per Share to other
dealers. After the initial offering, the public offering price and such
concessions may be changed.

The Company has granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock, at the public offering price less the
Underwriting Discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of Common Stock that the Underwriters have agreed to purchase. To
the extent that the Underwriters exercise such option, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase a number of
option shares proportionate to such Underwriter's initial commitment.

The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.

In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 375,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, Salomon Brothers Inc, on behalf of the Underwriters, may impose
"penalty bids" under

contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the offering) for the account of the
other Underwriters, the selling concession with respect to Common Stock that
is distributed in the offering but subsequently purchased for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.

The Company's officers, directors and certain stockholders are obligated,
pursuant to the terms of the Stockholders Agreement, not to offer, sell,
contract to sell, pledge or otherwise dispose of shares of capital stock of
the Company for a period of 180 days after the Effective Date. In addition,
the Company's officers, directors and certain stockholders will agree that
they will not, without the prior written consent of Salomon Brothers Inc,
offer, sell, contract to sell, pledge or otherwise dispose of, or file a
registration statement with the Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call equivalent
position within the meaning of Section 16 of the Securities Exchange Act of
1934, as amended, with respect to, any shares of capital stock of the Company
or any securities convertible into or exercisable or exchangeable for such
capital stock, or publicly announce an intention to effect any such
transaction, for a period of 180 days after the date of the Underwriters
Agreement, other than (i) any Shares to be sold in this offering, (ii) any
option or warrant or the conversion of a security outstanding on the date of
the Underwriting Agreement and referred to herein and (iii) shares of Common
Stock disposed as of bona fide gifts so long as the transferee agrees to be
bound by the lock-up obligation described in this sentence. The Company has
agreed that it will not, during the 180-day period commencing on the date of
the Underwriting Agreement, without the prior written consent of Salomon
Brothers Inc, offer, sell, or contract to sell, or otherwise dispose of (or
enter into any transaction which is designed to, or could be expected to,
result in the disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any
affiliate of the Company or any person in privity with the Company or any
affiliate of the Company) directly or indirectly, or announce the offering of,
any other shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock, except that the Company may issue,
sell or file a registration statement with the Commission with respect to
Common Stock pursuant to any employee stock option plan, stock ownership plan
or dividend reinvestment plan of the Company in effect on the date of the
Underwriting Agreement or in connection with the redemption of the Redeemable
Preferred Stock and the Company may issue Common Stock issuable upon the
conversion of securities or the exercise of warrants outstanding on the date
of the Underwriting Agreement.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof. In the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

Prior to this offering, there has been no public market for the Common
Stock. The price to the public for the Shares has been determined through
negotiations between the Company and the Representatives and was based on,
among other things, the Company's financial and operating history and
condition, the prospects of the Company and its industry in general, the
management of the Company and the market prices of securities of companies
engaged in businesses similar to those of the Company. There can, however, be
no assurance that the prices at which the Shares will sell in the public
market after this offering will not be lower than the price at which the
Shares are sold by the Underwriters.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Cooley Godward LLP, Boulder, Colorado. Certain legal matters
will be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton,
New York, New York. Certain legal matters pertaining to the Company's patents
will be passed upon for the Company by Brinks Hofer Gilson & Lione, Chicago,
Illinois. Certain legal matters pertaining to the Company's regulatory matters
will be passed upon for the Company by Hyman, Phelps & McNamara, P.C.,
Washington, D.C.

EXPERTS

The financial statements of the Company included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included in reliance upon the authority of said firm as
experts in giving said reports.

The statements in this Prospectus as set forth under the captions "Risk
Factors--Uncertainty of Protection of Patents and Proprietary Rights" and
"Business--Patents and Proprietary Technology" have been reviewed and approved
by Brinks Hofer Gilson & Lione, Chicago, Illinois, patent counsel to the
Company, as experts on such matters, and are included herein in reliance upon
such review and approval.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"SEC"), Washington, D.C., a Registration Statement on Form S-1 under the Act,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as part thereof. Statements contained in
this Prospectus as to the contents of any contract or document filed as an
exhibit to the Registration Statement is qualified by reference to such exhibit
as filed. A copy of the Registration Statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the Registration Statement may be obtained from such offices upon
the payment of the fees prescribed by the SEC. The SEC maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the SEC's World Wide Web site is http://www.sec.gov.

CELL PATHWAYS, INC.

INDEX TO FINANCIAL STATEMENTS

PAGE
----

CELL PATHWAYS, INC.
Report of Independent Public Accountants................................ F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
and on a pro forma basis as of September 30, 1997 (unaudited).......... F-3
Statements of Operations for the years ended December 31, 1994, 1995,
1996, and for the nine months ended September 30, 1996 and 1997 and the
period from inception (August 10, 1990) to September 30, 1997 ......... F-4
Statements of Stockholders' Equity for the period from inception (August
10, 1990) to September 30, 1997 ....................................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995,
1996, and for the nine months ended September 30, 1996 and 1997 and the
period from inception (August 10, 1990) to September 30, 1997 ......... F-7
Notes to Financial Statements........................................... F-8

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors ofCell Pathways, Inc.:

We have audited the accompanying balance sheets of Cell Pathways, Inc. (a
Delaware corporation in the development stage), as of December 31, 1995, and
1996, and September 30, 1997 and the related statements of operations,
stockholders' equity (deficit) and partners' investment, and cash flows for
the three years ended December 31, 1994, 1995 and 1996, the nine month periods
ended September 30, 1996 and 1997 and for the period from inception (August
10, 1990) to September 30, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cell Pathways, Inc. as of
December 31, 1995, and 1996, and September 30, 1997 and the results of its
operations and its cash flows for the three years ended December 31, 1994,
1995 and 1996, the nine month periods ended September 30, 1996 and 1997 and
for the period from inception (August 10, 1990) to September 30, 1997, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Denver, Colorado

October 22, 1997

F-2

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)

DECEMBER 31, PRO FORMA
------------------ SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- ------------- -------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............. $ 2,203 $ 645 $ 11,401 $ 11,401
Restricted cash (Note
2)...................... -- 194 196 196
Advances to employees.... 5 4 -- --
Prepaid expenses and
other................... 54 67 77 77
-------- -------- -------- --------
Total current assets... 2,262 910 11,674 11,674
-------- -------- -------- --------
PROPERTY AND EQUIPMENT..... 95 256 449 449
Less: Accumulated
depreciation............ (38) (71) (112) (112)
-------- -------- -------- --------
57 185 337 337
-------- -------- -------- --------
DEFERRED OFFERING COSTS.... -- -- 83 83
DEPOSITS................... 11 11 11 11
-------- -------- -------- --------
Total assets........... $ 2,330 $ 1,106 $ 12,105 $ 12,105
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable......... $ 206 $ 159 $ 106 $ 106
Accrued liabilities...... 1,222 1,015 967 967
Note payable (Note 7).... -- 49 52 52
-------- -------- -------- --------
Total current
liabilities........... 1,428 1,223 1,125 1,125
-------- -------- -------- --------
LONG-TERM LIABILITIES:
Note payable, net of
current portion......... -- 62 23 23
COMMITMENTS AND
CONTINGENCIES
(Notes 3, 5 and 9)
REDEEMABLE PREFERRED STOCK,
$.01 par value, 61,250
shares authorized, issued
and outstanding,
redeemable for a total of
$1,092.................... 1 1 1,092 1,092
-------- -------- -------- --------
STOCKHOLDERS' EQUITY
(DEFICIT):
Convertible preferred
stock, $.01 par value,
13,000,000 shares
authorized, 2,819,333,
3,457,137 and 6,013,685
shares outstanding, with
an aggregate liquidation
preference of $12,023,
$15,819 and $32,937,
respectively............ 11,639 15,137 32,003 --
Common stock $.01 par
value, 17,000,000 shares
authorized, 1,264,612,
1,497,386 and 1,646,499
shares issued and
outstanding............. 13 15 17 77
Additional paid-in
capital................. 226 359 469 32,412
Stock subscription
receivable from issuance
of convertible preferred
stock................... (24) (3) -- --
Stock subscription
receivable from issuance
of common stock......... -- -- (37) (37)
Deficit accumulated
during the development
stage................... (10,953) (15,688) (22,587) (22,587)
-------- -------- -------- --------
Total stockholders'
equity (deficit)...... 901 (180) 9,865 9,865
-------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)............. $ 2,330 $ 1,106 $ 12,105 $ 12,105
======== ======== ======== ========

The accompanying Notes to Financial Statements are an integral part of these
statements.

F-3

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

FOR THE PERIOD
FOR THE NINE FROM INCEPTION
FOR THE YEARS ENDED MONTHS ENDED (AUGUST 10,
DECEMBER 31, SEPTEMBER 30, 1990) TO
--------------------------- ------------------ SEPTEMBER 30,
1994 1995 1996 1996 1997 1997
------- ------- --------- ------- --------- --------------

EXPENSES:
Research and
development (Note 2) $(2,429) $(2,575) $ (4,163) $(2,861) $ (5,586) $(17,907)
General and
administrative....... (705) (644) (663) (439) (584) (4,189)
Provision for
redemption of the
redeemable preferred
stock................ -- -- -- -- (1,017) (1,017)
------- ------- --------- ------- --------- --------
Total expenses...... (3,134) (3,219) (4,826) (3,300) (7,187) (23,113)
Interest income....... 24 28 91 80 288 526
------- ------- --------- ------- --------- --------
NET LOSS................ $(3,110) $(3,191) $ (4,735) $(3,220) $ (6,899) $(22,587)
======= ======= ========= ======= ========= ========
Pro forma net loss per
share (unaudited).... $ (0.62) $ (0.90)
========= =========
Share used to compute
pro forma net loss
per share
(unaudited).......... 7,686,628 7,699,386
========= =========

The accompanying Notes to Financial Statements are an integral part of these
statements.

F-4

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS' INVESTMENT

FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)

STOCK
SUBSCRIPTION
RECEIVABLE
FROM DEFICIT
ISSUANCE ACCUMULATED
REDEEMABLE CONVERTIBLE OF DURING
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL CONVERTIBLE THE
PARTNERS' ---------------- ---------------- ---------------- PAID-IN PREFERRED DEVELOPMENT
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK STAGE
---------- -------- ------- -------- ------- --------- ------ ---------- ------------ -----------

BALANCES, inception
(August 10, 1990).... $ -- -- $ -- -- $ -- -- $-- $-- $-- $ --
Partner cash
contributions in
September 1990 for
Class A Partnership
units............... 406 -- -- -- -- -- -- -- -- --
Partner contribution
of interest in
research grant in
September 1990 for
Class A Partnership
units, at historical
cost................ 49 -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (253)
------ -------- ------ -------- ------ --------- ---- ---- ---- -------
BALANCES, December 31,
1990................. 455 -- -- -- -- -- -- -- -- (253)
Partner cash
contributions in
March 1991 for Class
A Partnership
units............... 406 -- -- -- -- -- -- -- -- --
Partner cash
contributions in
December 1991 for
Class B Partnership
units............... 897 -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (739)
------ -------- ------ -------- ------ --------- ---- ---- ---- -------
BALANCES, December 31,
1991................. 1,758 -- -- -- -- -- -- -- -- (992)
Partner cash
contributions in
January and April
1992 for Class B
Partnership units... 21 -- -- -- -- -- -- -- -- --
Partner cash
contributions in
December 1992 for
Class B Partnership
units............... 134 -- -- -- -- -- -- -- -- --
Partner cash
contributions in
December 1992 for
Class C Partnership
units............... 1,540 -- -- -- -- -- -- -- -- --
Partner cash
contributions in
December 1992 for
Class D Partnership
units............... 1,475 -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- (1,391)
------ -------- ------ -------- ------ --------- ---- ---- ---- -------
BALANCES, December 31,
1992................. 4,928 -- -- -- -- -- -- -- -- (2,383)
Partner cash
contributions in
January 1993 to
March 1993 for Class
D Partnership
units............... 385 -- -- -- -- -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 480,459 shares
of Series A
convertible
preferred stock..... (812) -- -- 480,459 812 -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 467,078 shares
of Series B
convertible
preferred stock..... (868) -- -- 467,078 868 -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 385,525 shares
of Series C
convertible
preferred stock..... (1,540) -- -- 385,525 1,540 -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 339,696 shares
of Series D
convertible
preferred stock..... (1,860) -- -- 339,696 1,860 -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 61,250 shares of
redeemable preferred
stock............... (1) 61,250 1 -- -- -- -- -- -- --
Exchange of interests
in the Partnership
in September 1993
for 1,255,433 shares
of common stock..... (232) -- -- -- -- 1,255,433 13 219 -- --
Net loss............. -- -- -- -- -- -- -- -- -- (2,269)
------ -------- ------ -------- ------ --------- ---- ---- ---- -------

F-5

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS' INVESTMENT--
(CONTINUED)

FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' --------------- ----------------- ---------------- PAID-IN
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ------- --------- ------- --------- ------ ----------

BALANCES, December
31, 1993.......... $-- 61,250 $ 1 1,672,758 $ 5,080 1,255,433 $13 $219
====
Issuance of common
stock for services
valued at $.74 per
share............. -- -- -- -- 9,179 -- 7
Issuance of 298,908
shares of Series E
convertible
preferred stock
for cash at $7.44
per share......... -- -- 298,908 2,225 -- -- --
Net loss........... -- -- -- -- -- -- --
------- ------- --------- ------- --------- --- ----
BALANCES, December
31, 1994.......... 61,250 1 1,971,666 7,305 1,264,612 13 226
Issuance of 617,826
shares of Series E
convertible
preferred stock
for cash at $5.72
per share......... -- -- 617,826 3,534 -- -- --
Issuance of 90,161
shares of Series E
convertible
preferred stock to
effect the price
change from $7.44
to $5.72 (Note
4)................ -- -- 90,161 -- -- -- --
Conversion of
bridge notes
payable plus
interest to
139,680 shares of
Series E
convertible
preferred stock at
a price of $5.72
per share (Note
4)................ -- -- 139,680 800 -- -- --
Net loss........... -- -- -- -- -- -- --
------- ------- --------- ------- --------- --- ----
BALANCES, December
31, 1995.......... 61,250 1 2,819,333 11,639 1,264,612 13 226
Issuance of 488,953
shares of Series E
convertible
preferred stock
for cash at
$5.72 per share, net of offering costs
of $300........... -- -- 488,953 2,498 -- -- --
Collection of
Series E
convertible stock
subscription
receivable........ -- -- -- -- -- -- --
Issuance of 148,851
shares of Series F
convertible
preferred stock
for cash at $6.72
per share......... -- -- 148,851 1,000 -- -- --
Issuance of 101,880
shares of common
stock in February
1996 as bonuses to
officers and
employees valued
at $0.58 per
share............. -- -- -- -- 101,880 1 58
Issuance of 8,166
shares of common
stock in May 1996
for consulting
services, valued
at $0.58 per
share............. -- -- -- -- 8,166 -- 5
Exercise of options
to purchase common
stock at $0.58 per
share............. -- -- -- -- 122,728 1 70
Net loss........... -- -- -- -- -- -- --
------- ------- --------- ------- --------- --- ----
BALANCES, December
31, 1996.......... 61,250 1 3,457,137 15,137 1,497,386 15 359
Issuance of
2,499,640 shares
of Series F
convertible
preferred stock
for cash at $6.72
per share, net of
offering costs of
$245 ............. -- -- 2,499,640 16,548 -- -- --
Exercise of
warrants to
purchase 55,546
shares of Series E
convertible
preferred stock at
$5.72 per share .. -- -- 55,546 318 -- -- --
Cashless exercise
of warrants to
purchase 1,362
shares of Series E
Preferred Stock... -- -- 1,362 -- -- -- --
Exercise of options
by employees and
directors at $0.58
- $0.91 per
share............. -- -- -- -- 138,099 2 110
Issuance of common
stock to director
at $6.72 per
share............. -- -- -- -- 5,507 -- 37
Issuance of common
stock to
consultant, valued
at $6.72 per
share............. -- -- -- -- 5,507 -- 37
Collection of stock subscription receivable.. -- -- -- -- -- -- --
Provision for
redemption of
redeemable
preferred stock... -- 1,091 -- -- -- -- (74)
Net loss .......... -- -- -- -- -- -- --
------- ------- --------- ------- --------- --- ----
BALANCES, September
30, 1997.......... 61,250 $ 1,092 6,013,685 $32,003 1,646,499 $17 $469
======= ======= ========= ======= ========= === ====

STOCK
SUBSCRIPTION
RECEIVABLE
FROM ISSUANCE DEFICIT
OF ACCUMULATED
CONVERTIBLE DURING THE
PREFERRED DEVELOPMENT
STOCK STAGE
------------- -----------

BALANCES, December
31, 1993.......... $-- $ (4,652)
Issuance of common
stock for services
valued at $.74 per
share............. -- --
Issuance of 298,908
shares of Series E
convertible
preferred stock
for cash at $7.44
per share......... (24) --
Net loss........... -- (3,110)
------------- -----------
BALANCES, December
31, 1994.......... (24) (7,762)
Issuance of 617,826
shares of Series E
convertible
preferred stock
for cash at $5.72
per share......... -- --
Issuance of 90,161
shares of Series E
convertible
preferred stock to
effect the price
change from $7.44
to $5.72 (Note
4)................ -- --
Conversion of
bridge notes
payable plus
interest to
139,680 shares of
Series E
convertible
preferred stock at
a price of $5.72
per share (Note
4)................ -- --
Net loss........... -- (3,191)
------------- -----------
BALANCES, December
31, 1995.......... (24) (10,953)
Issuance of 488,953
shares of Series E
convertible
preferred stock
for cash at
$5.72 per share, net of offering costs
of $300........... -- --
Collection of
Series E
convertible stock
subscription
receivable........ 21 --
Issuance of 148,851
shares of Series F
convertible
preferred stock
for cash at $6.72
per share......... -- --
Issuance of 101,880
shares of common
stock in February
1996 as bonuses to
officers and
employees valued
at $0.58 per
share............. -- --
Issuance of 8,166
shares of common
stock in May 1996
for consulting
services, valued
at $0.58 per
share............. -- --
Exercise of options
to purchase common
stock at $0.58 per
share............. -- --
Net loss........... -- (4,735)
------------- -----------
BALANCES, December
31, 1996.......... (3) (15,688)
Issuance of
2,499,640 shares
of Series F
convertible
preferred stock
for cash at $6.72
per share, net of
offering costs of
$245 ............. -- --
Exercise of
warrants to
purchase 55,546
shares of Series E
convertible
preferred stock at
$5.72 per share .. -- --
Cashless exercise
of warrants to
purchase 1,362
shares of Series E
Preferred Stock... -- --
Exercise of options
by employees and
directors at $0.58
- $0.91 per
share............. -- --
Issuance of common
stock to director
at $6.72 per
share............. (37) --
Issuance of common
stock to
consultant, valued
at $6.72 per
share............. -- --
Collection of stock subscription receivable.. 3 --
Provision for
redemption of
redeemable
preferred stock... -- --
Net loss .......... -- (6,899)
------------- -----------
BALANCES, September
30, 1997.......... $(37) $(22,587)
============= ===========

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

F-6

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

FOR THE PERIOD
FOR THE YEARS FOR THE NINE MONTHS FROM INCEPTION
ENDED DECEMBER 31, ENDED SEPTEMBER 30, (AUGUST 10,
------------------------- ---------------------- 1990) TO
1994 1995 1996 1996 1997 SEPTEMBER 30, 1997
------- ------- ------- ---------- ---------- ------------------

CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $(3,110) $(3,191) $(4,735) $ (3,220) $ (6,899) $(22,587)
Adjustments to
reconcile net loss to
net cash from
operating
activities--
Depreciation expense
and other............ 10 12 33 16 41 112
Issuance of common
stock for services... 7 -- 5 5 -- 12
Provision for
redemption of
redeemable preferred
stock................ -- -- -- -- 1,017 1,017
Other................. -- 9 -- 1 5 16
Decrease (increase) in
advances to
employees............ (3) 2 1 21 4 --
Decrease (Increase) in
prepaid expenses..... (29) (16) (13) 5 (10) (77)
Increase (decrease) in
accounts payable and
accrued liabilities.. 210 483 (195) (64) (64) 1,110
------- ------- ------- ---------- ---------- --------
Net cash flows from
operating
activities.......... (2,915) (2,701) (4,904) (3,236) (5,906) (20,397)
------- ------- ------- ---------- ---------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of
equipment............ (19) (23) (161) (120) (193) (449)
Cash (paid for)
received from
deposits............. 2 (3) -- -- -- (11)
------- ------- ------- ---------- ---------- --------
Net cash flows from
investing
activities.......... (17) (26) (161) (120) (193) (460)
------- ------- ------- ---------- ---------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of convertible
preferred stock, net
of related offering
costs................ 2,202 3,534 3,498 2,496 16,548 25,839
Proceeds from exercise
of warrants to
purchase Series E
convertible preferred
stock................ -- -- -- -- 318 318
Collection of
shareholder
receivable........... -- -- 21 -- 3 24
Cash received for
common stock options
exercised............ -- -- 71 71 107 178
Cash paid for deferred
offering costs....... -- -- -- -- (83) (83)
Proceeds from bridge
loan (Note 4)........ -- 791 -- -- -- 791
Partner cash contribu-
tions................ -- -- -- -- -- 5,312
Decrease (increase) in
restricted cash...... -- -- (194) -- (2) (196)
Borrowings............ -- -- 150 150 -- 150
Repayment of
borrowings........... -- -- (39) (27) (36) (75)
------- ------- ------- ---------- ---------- --------
Net cash flows from
financing
activities.......... 2,202 4,325 3,507 2,690 16,855 32,258
------- ------- ------- ---------- ---------- --------
Net increase (decrease)
in cash and cash
equivalents........... (730) 1,598 (1,558) (666) 10,756 11,401
CASH AND CASH
EQUIVALENTS, beginning
of period............. 1,335 605 2,203 2,203 645 --
------- ------- ------- ---------- ---------- --------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 605 $ 2,203 $ 645 $ 1,537 $ 11,401 $ 11,401
======= ======= ======= ========== ========== ========
SUPPLEMENTAL
DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Conversion of
partners' investment
to preferred stock... $ -- $ -- $ -- $ -- $ -- $ 4,927
======= ======= ======= ========== ========== ========
Conversion of bridge
loan to preferred
stock................ $ -- $ 800 $ -- $ -- $ -- $ 800
======= ======= ======= ========== ========== ========
Issuance of preferred
stock to investment
advisors............. $ -- $ -- $ 146 $ -- $ 115 $ 261
======= ======= ======= ========== ========== ========
Issuance of common
stock as payment of
management bonus .... $ -- $ -- $ 59 $ -- $ -- $ 59
======= ======= ======= ========== ========== ========
Sale of common stock
in exchange for stock
subscription
receivable........... $ -- $ -- $ -- $ -- $ 37 $ 37
======= ======= ======= ========== ========== ========
Issuance of common
stock as payment for
accounts payable..... $ -- $ -- $ -- $ -- $ 37 $ 37
======= ======= ======= ========== ========== ========

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

F-7

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BASIS OF PRESENTATION

Cell Pathways, Inc. (the "Company") is a pharmaceutical company focused on
the development and commercialization of pharmaceutical products to prevent
and treat cancer. The Company is in the development stage and has yet to
generate revenues. There is no assurance of any future revenues. The Company's
intended products are subject to long development cycles and there is no
assurance the Company will be able to successfully develop, manufacture,
obtain regulatory approval for or market its products. During the period
required to develop its products, the Company plans to continue to finance
operations through debt and equity financings (see Notes 4 and 6). There is no
assurance, however, that such additional funding will be available to the
Company when required. The Company will continue to be considered in the
development stage until such time as it generates significant revenues from
its principal operations. As of September 30, 1997, the Company had a deficit
accumulated during the development stage of $22,587,000.

The Company is a Delaware corporation and is the successor to Cell Pathways
Limited Partnership (the "Partnership"). The Partnership was formed on August
10, 1990 pursuant to the laws of the State of Illinois under the name of FGN
Pharmaceutical Research Limited Partnership. The Partnership Agreement was
amended on December 9, 1992 to provide for additional financing, admission of
a new general partner (the Company) and new limited partners, change in the
name of the Partnership and eventual conversion of the Partnership to
corporate form. On September 29, 1993, the assets and liabilities of the
Partnership were acquired by the Company in exchange for the preferred and
common stock of the Company, thereby converting the business from partnership
to corporate form. The accompanying financial statements include the accounts
of the Partnership from inception (August 10, 1990) through September 29,
1993, and the accounts of the successor Delaware corporation thereafter.

In October 1997, the Company effected a 1-for-1.8157 reverse stock split.
All share and per share amounts have been restated in the aggregate to reflect
this event. Such amounts may be adjusted upon determination of fractional
shares.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Cash, Cash Equivalents and Restricted Cash

For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. As of December 31, 1996 and September 30, 1997,
approximately $194,000 and $196,000 of cash and cash equivalents was
restricted to secure letters of credit and other indebtedness of the Company
(See Note 7).

F-8

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Equipment

Depreciation of equipment is provided on the straight-line method over
estimated useful lives of five to seven years.

Research and Development

Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects, as well as fees paid to various entities
that perform certain research on behalf of the Company.

Stock Compensation

The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's stock option plan, options may be granted at
not less than the fair market value on the date of the grant and therefore no
compensation expense is recognized for stock options granted to employees. In
1996, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."

Unaudited Pro Forma Net Loss Per Share

The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock into common stock concurrent with the closing of
the Company's anticipated initial public offering ("IPO"). Accordingly,
historical net loss per common share is not considered meaningful as it would
differ materially from the pro forma net loss per common share and common
stock equivalent shares given the contemplated changes in the capital
structure of the Company.

Pro forma net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Common equivalent
shares from stock options and warrants are excluded from the computation as
their effect is anti-dilutive, except as required by the SEC. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock and common stock equivalent shares issued by the Company during the 12
months immediately preceding the filing of the IPO, plus shares which became
issuable during the same period as a result of the granting of options to
purchase common stock, have been included in the calculation of weighted
average number of shares of common stock as if they were outstanding for all
periods presented (using the treasury stock method). Accordingly, those common
stock and common stock equivalent shares issued during the 12 months
immediately preceding the filing of the IPO have been included in the
computation of pro forma net loss per common share. In addition, the Company
has assumed the conversion of convertible preferred stock issued into common
stock for all periods presented.

The Financial Accounting Standards Board recently issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 is effective for fiscal years ending after
December 15, 1997; early adoption is not permitted. SFAS No. 128 replaces
primary and fully diluted earnings per share with basic and diluted earnings
per share, respectively. The Company does not expect that SFAS No. 128 will
have a material effect on its reported pro forma net loss per share.

F-9

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Unaudited Pro Forma Information

Upon closing of the Company's IPO, all of the outstanding shares of Series
A, B, C, D, E, and F convertible preferred stock will be automatically
converted into shares of common stock on a share for share basis. The
unaudited pro forma balance sheet as of September 30, 1997 reflects the
conversion of 6,013,685 shares of preferred stock into 6,013,685 shares of
common stock.

Deferred Offering Costs

The Company has deferred costs related to its proposed initial public
offering. Such costs will be offset against the proceeds of the offering upon
completion of the offering. If the offering is not completed, such costs will
be expensed.

(3) RESEARCH AND DEVELOPMENT CONTRACTS

The Company enters into clinical trial, consulting, research and other
agreements for goods and services. Under such agreements, the Company may pay
for services on an annual, monthly or project basis. Under an agreement with
the University of Arizona, the Company will pay a royalty to the University of
Arizona with regard to the sale of future products, if developed, based on
certain patents.

In 1994, the Company entered into a Clinical Trials Agreement with the
National Cancer Institute ("NCI"), pursuant to which the NCI may sponsor
certain clinical trials.

F-10

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(4) STOCKHOLDERS' EQUITY AND PARTNERS' INVESTMENT

The Company is authorized to issue a total of 30,061,250 shares of stock,
consisting of 13,000,000 shares of $0.01 par value convertible preferred
stock, 61,250 shares of $0.01 par value redeemable preferred stock and
17,000,000 shares of $0.01 par value common stock. Convertible preferred stock
consists of the following:

DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------

Series A, 480,459 shares authorized and
outstanding, entitled to a preference
in liquidation of $1,012,000.......... $ 812,000 $ 812,000 $ 812,000
Series B, 467,078 shares authorized and
outstanding, entitled to a preference
in liquidation of $1,052,000.......... 868,000 868,000 868,000
Series C, 385,525 shares authorized and
outstanding, entitled to a preference
in liquidation of $1,540,000.......... 1,540,000 1,540,000 1,540,000
Series D, 371,950 shares authorized,
339,696 shares issued and outstanding,
entitled to a preference in
liquidation of $1,860,000............. 1,860,000 1,860,000 1,860,000
Series E, 1,765,085 shares authorized,
1,146,575, 1,635,528 and 1,692,436
shares issued and outstanding,
respectively, entitled to a preference
in liquidation of $6,559,000,
$9,354,000 and $9,681,000,
respectively.......................... 6,559,000 9,057,000 9,375,000
Series F, 2,863,909 authorized, none,
148,852 and 2,648,491 issued and
outstanding, entitled to a preference
in liquidation of zero, $1,000,000 and
$17,793,000, respectively............. -- 1,000,000 17,548,000
----------- ----------- -----------
$11,639,000 $15,137,000 $32,003,000
=========== =========== ===========

Each share of Series A, B, C, D, E and F convertible preferred stock is
convertible into one share of common stock at any time at the option of the
holder and is entitled to vote as if converted into common stock. Each share
of each such series of the convertible preferred stock is mandatorily
convertible into one share of common stock upon the earlier of: (i) the
affirmative vote or consent of at least 67% of the holders of such shares;
(ii) the resolution of the board of directors to such effect at a time when
fewer than 25% of the originally issued convertible preferred shares are
outstanding; or (iii) the closing of a firm commitment underwritten public
offering at a public offering price equal to or exceeding $11.98 per share of
common stock (as adjusted) resulting in aggregate proceeds to the Company
and/or the selling stockholders (before underwriter discounts and other
offering expenses) of $10 million or more.

Series A, B, C, D, E and F convertible preferred shares have per share
liquidation preferences of $2.11, $2.25, $3.99, $5.48, $5.72 and $6.72,
respectively. Series A, B, C and D correspond to similarly designated classes
of limited partnership units issued by the Partnership pursuant to financings
arranged in 1990 (Class A), 1991 (Class B) and 1992 (Classes C and D). The
ranking of

F-11

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

liquidation preferences is Series F, Series E, Series C, Series D, Series B,
Series A and then the redeemable preferred stock. In March of 1994, the
Company issued 9,179 shares of common stock to Lehman Brothers, Inc. as
partial payment for financial advisory services.

In April 1994, the Company commenced an offering of Series E convertible
preferred stock at a price of $7.44 per share. The Company issued 298,908
Series E convertible preferred shares, and warrants to purchase an additional
10,323 shares of Series E convertible preferred stock at $7.44 per share
resulting in proceeds to the Company of $2,225,000. In conjunction with the
Company's 1995 financing (see below), the Series E convertible preferred stock
was repriced to $5.72 per share, the same price as the 1995 financing.
Accordingly, the Company issued an additional 90,161 shares, and warrants to
purchase an additional 3,114 shares of Series E convertible preferred stock at
$5.72 per share.

In June through August 1995, as the first step in offering additional Series
E convertible preferred stock, the Company borrowed $791,000 from certain of
its stockholders. In August 1995, this bridge loan, together with interest at
9%, was converted into 139,680 shares of Series E convertible preferred stock
at $5.72 per share. In connection with the bridge loan, warrants to purchase
an additional 69,140 shares of Series E convertible preferred stock at $5.72
per share were issued, which are exercisable until the earlier of June 5,
1999, or the closing of an initial public offering of securities by the
Company or the sale of all or substantially all of the assets of the Company.
In August 1995, the Board of Directors authorized the issuance and sale of up
to $7 million of Series E convertible preferred stock at $5.72 per share,
including conversion of the bridge loan. During the year ended December 31,
1995, the Company issued 617,826 additional shares of Series E convertible
preferred stock and warrants to purchase an additional 46,991 shares of Series
E convertible preferred stock at $5.72 per share, resulting in proceeds to the
Company of $3,534,000; and in January through May of 1996, the Company issued
an additional 463,425 shares of Series E convertible preferred stock at $5.72
per share, resulting in proceeds to the Company of $2,650,000. This offering,
including conversion of the bridge loan, resulted in the issuance of 1,220,931
shares of Series E convertible preferred stock and warrants to purchase
116,131 shares of Series E convertible preferred stock, resulting in net
proceeds of $6,832,000. In May of 1996, the Company issued 25,528 shares of
Series E convertible preferred stock and $154,000 cash as payment for
financial advisory services.

During 1996 the Company issued 101,880 shares of common stock as bonuses to
officers and employees, and 8,166 shares of common stock were issued for
consulting services.

In December 1996, the Company commenced a private offering of Series F
convertible preferred stock and related warrants at $6.72 per share. As of
December 31, 1996, the Company had issued 148,851 shares of Series F
convertible preferred stock and warrants to purchase 7,443 additional shares
of Series F convertible preferred stock, resulting in proceeds to the Company
of $1,000,000. During 1997, the Company issued 2,482,522 additional shares of
Series F convertible preferred stock and warrants to purchase an additional
61,852 shares of Series F convertible preferred stock, resulting in net
proceeds to the Company of $16,548,000. The warrants are exercisable until the
earlier of July 20, 1999, or the sale of all or substantially all of the
assets of the Company. In addition, the Company issued 17,118 shares of Series
F convertible preferred stock as compensation for services rendered in
connection with the offering of the Series F convertible preferred stock.

The certificate of incorporation and a stockholders' agreement entered into
among the Company, the founder and certain venture capital investors in
conjunction with the December 1992 financing provide for class voting or
combined class voting under certain circumstances. The stockholders'

F-12

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

agreement provides for an agreed upon process for the election of directors
which has the effect that the signatories thereof, through the size of their
holdings, can determine which individuals become directors of the Company. The
provision for election of the directors ceases to be operative upon closing of
a firm commitment underwritten public offering at a public offering price
equal to or exceeding $11.98 per share of common stock (as adjusted) resulting
in aggregate proceeds to the Company and/or the selling stockholders (before
underwriter discounts and other offering expenses) of $10 million or more. The
stockholders' agreement also provides for registration rights and the priority
thereof, and for certain rights of first refusal and of co-sale with respect
to securities of the Company.

(5) REDEEMABLE PREFERRED STOCK

The redeemable preferred stock carries no vote and no dividend and is not
convertible into common stock. The redeemable preferred stock is mandatorily
redeemable in an aggregate amount of $1,092,000 upon the closing of any firm
commitment underwritten public offering of common stock. Such redemption may
be made either in cash, registered common stock, or a combination of the two,
at the Company's option.

The redeemable preferred stock is held by FGN, Inc., the former general
partner of the Partnership. It is anticipated that all but $75,000 of the
proceeds received by FGN, Inc. from the redemption of the redeemable preferred
stock will be paid by FGN, Inc. to certain of the founding and continuing
participants in the business. Accordingly, the Company has always expected
that upon determination that redemption was probable, the Company would record
the amount paid for redemption as compensation expense. Company preparations
during the third quarter of 1997 for a possible initial public offering of
common stock later in 1997 make it probable that the Company will redeem such
stock. Accordingly, the Company has recorded a provision for the redemption of
the preferred stock during the third quarter of 1997.

(6) STOCK OPTIONS AND WARRANTS

In 1993, the Company adopted a stock option plan which, in October 1997, was
amended and renamed the 1997 Equity Incentive Plan. Pursuant to the 1997
Equity Incentive Plan, the Company is authorized to grant Common Stock, stock
appreciation rights, or options to purchase Common Stock with respect to
1,294,266 shares of Common Stock for issuance to eligible employees, directors
and consultants. As of September 30, 1997, options with respect to 576,244
shares have been issued, 260,827 have been exercised and 281,550 shares were
outstanding. The stock options granted may be either incentive stock options
("ISO") or nonstatutory stock options ("NSO"). Such options may be granted
only at an exercise price not less than the fair market value of the shares at
the date of grant unless such option is granted pursuant to an assumption of
or a substitution for another option. The board of directors may set the rate
at which the options become exercisable and determine when the options expire,
subject to the limitations described below. The options granted may be
exercised up to ten years following the date of grant. All options will
generally become exercisable in the event the Company is sold or has other
significant changes in ownership. Generally, the options vest ratably over a
four-year period.

The Company accounts for stock options granted to employees under the 1997
Equity Incentive Plan in accordance with the intrinsic value method provided
for under APB Opinion No. 25. Under the 1997 Equity Incentive Plan, options
may be granted at not less than the fair market value on the date of the grant
and therefore no compensation expense is, or has been, recognized in respect
of stock options awarded to employees. The option pricing models recommended
by SFAS No. 123 for

F-13

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

recognition of, or disclosure of pro forma, compensation cost in respect of
employee stock options are option pricing models which have been developed for
fully transferable, traded options having no vesting requirements and which
require the input of subjective assumptions including expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, in management's opinion,
the existing models do not necessarily provide a reliable single measure of
the fair value of its stock options. Had compensation cost for the 1997 Equity
Incentive Plan been recognized in the income statements under SFAS No. 123,
the Company's net loss would have increased to the following pro forma
amounts:

YEARS ENDED DECEMBER 31, FOR THE NINE MONTH
------------------------ PERIOD ENDED
1995 1996 SEPTEMBER 30, 1997
------------ ------------ ------------------

Net loss:
As reported........... $ (3,191,000) $ (4,735,000) $(6,899,000)
============ ============ ===========
Pro forma
(unaudited).......... $ (3,192,000) $ (4,767,000) $(6,997,000)
============ ============ ===========
Pro forma net loss per
share:
As reported
(unaudited).......... $ (0.62) $ (0.90)
============ ===========
Pro forma
(unaudited).......... $ (0.62) $ (0.91)
============ ===========

The pro forma disclosures made above do not reflect options granted prior to
January 1, 1995. This pro forma compensation cost may also not be
representative of the effects which SFAS No. 123 may have on the disclosure of
pro forma compensation cost and resulting pro forma net loss in future years.

A summary of the status of the 1993 Stock Option Plan at December 31, 1994,
1995, 1996 and September 30, 1997 and changes during the periods then ended is
presented in the table and narrative below.

FOR THE NINE
MONTHS ENDED
1994 1995 1996 SEPTEMBER 30, 1997
---------------- ----------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
FIXED PRICE OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------------------- ------ --------- ------- --------- -------- --------- -------- ---------

Outstanding at beginning
of period............... 82,384 $0.58 89,956 $0.60 102,897 $0.60 262,145 $0.66
Granted................ 7,572 0.74 12,941 0.58 287,758 0.69 185,589 5.48
Exercised.............. -- -- -- -- (122,728) 0.58 (138,099) 0.81
Forfeited.............. -- -- -- -- (5,782) 0.58 (28,085) 0.58
Expired................ -- -- -- -- -- -- -- --
------ ------- -------- --------
Outstanding at end of
period.................. 89,956 $0.60 102,897 $0.60 262,145 $0.66 281,550 $3.82
====== ======= ======== ========
Vested and exercisable at
end of period........... 53,106 $0.58 16,132 $0.69 38,938 $0.60
======= ======== ========
Weighted average fair
value of options granted
during the period per
SFAS 123................ $0.07 $0.12 $3.99
===== ===== =====

F-14

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes information about employee stock options
outstanding and exercisable at September 30, 1997:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NUMBER OF WEIGHTED
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1997 LIFE IN YEARS PRICE 1997 PRICE
-------- -------------- ------------- -------- -------------- --------

$0.58 88,389 8.40 $0.58 33,890 $0.58
$0.74 7,572 7.00 0.74 5,048 0.74
$0.91 -- 9.10 0.91 -- --
$1.82 46,811 9.50 1.82 -- --
$6.72 138,778 9.80 6.72 -- --
------- ------
281,550 38,938
======= ======

Under the 1997 Equity Incentive Plan, the Company is authorized to grant
options with respect to 1,294,266 shares of Common Stock, of which options to
purchase 751,889 shares of Common Stock remain to be granted.

Included in the above table are options to purchase 96,381 shares of Common
Stock at $0.91 per share granted to the Company's current Chief Executive
Officer upon his employment in October 1996. Generally, the options vest
ratably over a four-year period. Pursuant to the terms of his employment
agreement, a minimum of 48,191 of these options will vest if his employment is
terminated without cause.

Options issued under the 1997 Equity Incentive Plan may be immediately
exercisable but any unvested shares exercised are held by the Company and are
subject to reacquisition by the Company should employment terminate prior to
completion of applicable vesting periods.

For purposes of the pro forma disclosure set forth above, the fair value of
each option grant is estimated on the date of grant as provided by SFAS No.
123 and using the following additional assumptions: risk-free interest rate--
6.15%; expected dividends--0%; volatility--80% and expected life of option--6
years.

In 1995, the Company adopted the 1995 Cell Pathways, Inc. Stock Award Plan
pursuant to which the Company may award shares of common stock to employees,
directors and consultants as part or all of their compensation, whether
salary, bonus or fee and whether for past services or as incentive for current
and future services. The only awards which have been made under this plan were
made during 1996 by way of bonus compensation to officers and employees of the
Company for the years 1993, 1994 and 1995. In accordance with APB Opinion No.
25, a compensation charge of $59,000 associated with the issuance of 101,889
shares of common stock having a fair market value of $0.58 per share at the
date of grant, was recognized in the year ended 1995.

In October, 1997, the Board of Directors adopted the 1997 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") covering an aggregate of
250,000 shares of Common Stock.

F-15

Pursuant to the terms of the Directors' Plan, each person serving as a
director of the Company who is not an employee of the Company (a "Non-Employee
Director") shall, upon the effectiveness of the initial public offering of the
Company's Common Stock, automatically be granted an option to purchase 3,000
shares of Common Stock (the "Initial Grant"). Each person who first becomes a
Non-Employee Director after the effectiveness of the initial public offering
of the Company's Common Stock, automatically shall be granted an option to
purchase 10,000 shares of Common Stock (the "Inaugural Grant"). In addition,
on the date of each annual stockholders meeting commencing with the meeting in
1998, each Non-Employee Director who has served at least one full year as
director will automatically be granted an option to purchase 3,000 shares of
Common Stock (the "Anniversary Grant").

Options subject to an Initial Grant under the Directors' Plan will vest in
full on March 31, 1998. Options subject to an Inaugural Grant under the
Directors' Plan will vest in 3 equal, annual installments commencing on the
first anniversary of the date of the grant of the option. Options subject to
an Anniversary Grant under the Directors' Plan will vest in full on the first
anniversary of the date of the grant of the option. The vesting of all options
under the Directors' Plan is conditioned on the continued service of the
recipient as a director, employee or consultant of the Company or any
affiliate of the Company.

In October 1997, the Board approved the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 300,000 shares of Common Stock.
Under the Purchase Plan, the Board may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no longer than
27 months.

In December 1992, the Company issued a warrant to purchase 6,664 shares of
Class D convertible preferred stock at an exercise price of approximately
$5.48 per share. The warrant expired on December 31, 1996 in accordance with
its terms.

In connection with the offerings of Series E convertible preferred stock in
1994 and 1995, the Company issued warrants to purchase an aggregate of 129,568
additional shares of Series E convertible preferred stock, exercisable at
$5.72 per share until the earlier of: (i) the closing of an initial public
offering of securities by the Company; (ii) the sale of all or substantially
all of the assets of the Company; and (iii) August 31, 1997 (in the case of
60,428 shares all of which have been exercised) or June 5, 1999 (in the case
of 69,140 shares). During 1996, warrants were exercised to purchase 81 shares
of Series E convertible preferred stock. During the nine months ended
September 30, 1997,

F-16

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

warrants to purchase 55,546 shares of Series E convertible preferred stock
were exercised for cash at $5.72 per share. Further, holders of warrants to
purchase 9,172 shares of Series E convertible preferred stock tendered their
warrants in a cashless exercise in exchange for 1,362 shares of Series E
convertible preferred stock at $6.72 per share. As of September 30, 1997,
warrants to purchase 64,770 shares of Series E convertible preferred stock
were outstanding.

In connection with the offerings of Series F convertible preferred stock,
commencing in December of 1996, the Company issued in December of 1996
warrants to purchase 7,443 shares of Series F convertible preferred stock, and
during 1997, warrants to purchase 61,852 shares of Series F convertible
preferred stock, at an exercise price of $6.72 per share, all exercisable
until the earlier of: (i) July 20, 1999; or (ii) the sale of all or
substantially all of the assets of the Company.

(7) DEBT

In March 1996, the Company borrowed $150,000 from a bank. The note bears
interest at a rate of 7.79% and is payable in equal monthly installments
through March 1999. As of September 30, 1997, the principal amount outstanding
was $75,000.

(8) INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." As of September 30, 1997, the Company had
approximately $17,500,000 of net operating loss carryforwards ("NOLs") for
income tax purposes available to offset future federal income tax, subject to
limitations for alternative minimum tax. The NOLs are subject to examination
by the tax authorities and expire between 2008 and 2012.

Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3,900,000. For tax purposes these losses were
distributed to the partners in accordance with the provisions of the
Partnership Agreement. Thus, these losses, while included in the financial
statements of the Company, are not available to offset future taxable income,
if any, of the Company.

The components of the net deferred income tax asset at December 31, 1994,
1995 1996, and September 30, 1997 were as follows:

AS OF DECEMBER 31
------------------------------------- AS OF SEPTEMBER 30,
1994 1995 1996 1997
----------- ----------- ----------- -------------------

Net operating loss
carryforwards.......... $ 1,400,000 $ 2,550,000 $ 4,310,000 $ 6,484,000
Less--valuation
allowance.............. (1,400,000) (2,550,000) (4,310,000) (6,484,000)
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========

The Company has not yet achieved profitable operations. Accordingly,
management believes the tax assets as of September 30, 1997 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire net tax asset.

F-17

CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(9) COMMITMENTS AND CONTINGENCIES

In August 1993, the Company entered into a lease for laboratory facilities
located in Aurora, Colorado. The lease is for a term of five and one-half
years beginning in January 1994 and provides for a renewal option of an
additional five years at the end of the initial term. In July 1997, the
Company signed a lease for office and laboratory space in Horsham,
Pennsylvania. This lease is for a period of 10 years. The Company has an
option to purchase the Horsham facility by March 31, 1998 for $3.4 million.

Aggregate minimum rental payments under the Aurora and Horsham leases are as
follows:

1997.............................. $ 124,000
1998.............................. 457,000
1999.............................. 440,000
2000.............................. 440,000
2001.............................. 440,000
Thereafter........................ 2,599,000
----------
Total........................... $4,500,000
==========

Rental expenses under this lease and other month-to-month leases entered
into by the Company totaled $55,000, $57,000 and $95,000 for the years ended
December 31, 1994, 1995 and 1996, respectively, and $69,000 and $84,000 during
the nine month periods ended September 30, 1996 and 1997, respectively.

In 1995, the Company entered into a contractual agreement with one of its
vendors to perform testing. Pursuant to the agreement, the Company is
committed to pay the following amounts for continuing testing activities:
$410,000 and $670,000 in 1997 and 1998, respectively.

F-18

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.

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

TABLE OF CONTENTS

PAGE
----

Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 26
Management............................................................... 46
Certain Transactions..................................................... 56
Principal Stockholders................................................... 59
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 68
Index to Financial Statements............................................ F-1

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

UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

2,500,000 SHARES

[LOGO OF CELL PATHWAYS, INC. APPEARS HERE]
CELL PATHWAYS, INC.

COMMON STOCK
($.01 PAR VALUE)

SALOMON BROTHERS INC

BANCAMERICA ROBERTSON STEPHENS

COWEN & COMPANY

PROSPECTUS

DATED , 1997

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than the underwriting
discount and commissions, payable by the registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the registration fee and the NASD filing fee.

Registration fee................................................... $ 11,326
NASD filing fee.................................................... 4,238
Nasdaq application fee............................................. 1,000
Blue sky qualification fee and expenses............................ 7,500
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 250,000
Accounting fees and expenses....................................... 85,000
Transfer agent and registrar fees.................................. 3,000
Miscellaneous...................................................... 37,936
--------
Total............................................................ $550,000
========

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Under Section 145 of the Delaware General Corporation Law, the Company has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act").

The Company's Restated Certificate of Incorporation provides for the
elimination of liability for monetary damages for breach of the Directors'
fiduciary duty of care to the Company and its stockholders. These provisions
do not eliminate the Directors' duty of care and, in appropriate
circumstances, equitable remedies such an injunctive or other forms of
nonmonetary relief will remain available under Delaware law. In addition, each
Director will continue to be subject to liability for breach of the Director's
duty of loyalty to the Company, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the Director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision does not affect a Director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and Directors for certain liabilities arising under the
Securities Act or otherwise. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company 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.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since September 1, 1994, the Company has sold and issued the following
unregistered securities:

(1) During the period, the Company granted stock options to employees,
consultants, directors, officers and affiliates of the Company as provided
below. From September 1, 1994 to December 31, 1994, the Company granted
stock options under the 1993 Stock Option Plan covering an aggregate of
7,572 shares of Common Stock at an exercise price of $0.74 per share. In
1995, the Company granted stock options under the 1993 Stock Option Plan
covering an aggregate of 12,941 shares of Common Stock at an exercise price
of $0.58 per share. In 1996, the Company granted stock options under the
1993 Stock Option Plan covering an aggregate of 287,758 shares of Common
Stock at an average exercise price of $0.69 per share. Since January

II-1

1, 1997, the Company has granted stock options under its 1993 Stock Option
Plan covering an aggregate of 185,589 shares of Common Stock at an average
exercise price of $5.48 per share. Each of these options vests over a
period of time following its respective date of grant.

(2) On March 26, 1996, the Company awarded an aggregate of 101,880 shares
of restricted stock, pursuant to its 1995 Stock Award Plan, to Christopher
J. Blaxland, Claire M. Ganz, Floyd G. Nichols, Rifat Pamukcu, Gary A.
Piazza and Richard H. Troy.

(3) In April 1994, the Company commenced a private offering of Series E
Convertible Preferred Stock ("Series E Preferred") at a price of $7.44 per
share. Between April 1994 and July 1994, the Company sold to institutional
investors and accredited investors a total of 298,908 shares of Series E
Preferred and warrants to purchase an additional 10,323 shares of Series E
Preferred at $7.44 per share. In August 1995, in connection with repricing
the Series E Preferred to $5.72 per share, the Company's Board of Directors
authorized the issuance of additional Series E Preferred. In conjunction
with this new price, the Company issued 90,161 shares of Series E Preferred
and 3,114 warrants to purchase Series E Preferred to the previous holders
of Series E Preferred.

(4) Between August 1995 and May 1996, the Company issued to certain
stockholders 1,220,931 shares of Series E Preferred and warrants to
purchase an additional 116,131 shares of Series E Preferred at $5.72 per
share, which include 139,680 shares of Series E Preferred and warrants to
purchase an additional 69,140 shares of Series E Preferred issued in August
1995, when the Company converted a bridge loan of $791,000 evidenced by
convertible promissory notes with a 9% annual interest rate. In May 1996,
the Company issued 25,528 shares of Series E Preferred to Lehman Brothers,
Inc. and Lunn Partners, LLC as partial payment for financial advisory
services.

(5) In December 1996, the Company commenced a private offering of Series
F Convertible Preferred Stock ("Series F Preferred") at a price of $6.72
per share. Between mid-December 1996 and June 1997, the Company issued to
institutional investors and accredited investors an aggregate of 2,631,373
shares of Series F Preferred and warrants to purchase an additional 69,295
shares of Series F Preferred at $6.72 per share. In addition, the Company
issued 17,118 shares of Series F Preferred as compensation for services
rendered in connection with the offering of the Series F Preferred.

The sales and issuance of securities in the transactions described in
paragraphs (1) and (2) above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.

The sales and issuances of securities in the transactions described in
paragraphs (3), (4) and (5) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) thereof and/or Regulation D
promulgated under the Securities Act. The purchasers in each case represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. All recipients either received
adequate information about the Company or had access, through employment or
other relationships, to such information.

II-2

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------

1.1** Underwriting Agreement.
3.1* Fifth Amended and Restated Certificate of Incorporation of the
Company.
3.2* Certificate of Amendment to Fifth Amended and Restated Certificate of
Incorporation of the Company.
3.3 Form of Sixth Amended and Restated Certificate of Incorporation to be
effective upon the closing of the offering.
3.4* Bylaws of the Company.
3.5 Form of Amended and Restated Bylaws of the Company to be effective
upon the closing of the offering.
4.1 Reference is made to Exhibits 3.1 through 3.5
4.2** Specimen stock certificate representing shares of Common Stock of the
Company.
5.1** Opinion of Cooley Godward LLP regarding the legality of the securities
being registered.
10.1* Third Amended and Restated Stockholders' Agreement, dated as of
December 31, 1996 among the Company and the stockholders listed on
the signature pages thereto.
10.2* 1993 Stock Option Plan, as amended.
10.3* Form of Incentive Stock Option Agreement.
10.4* Form of Non-Qualified Stock Option Agreement.
10.5* Form of Early Exercise Stock Purchase Agreement.
10.6* 1995 Stock Award Plan.
10.7* Form of Series E Preferred Stock Subscription Agreement.
10.8* Form of Series E Preferred Stock Purchase Warrant.
10.9* Note, Preferred Stock and Warrant Purchase Agreement, dated December
13, 1996, between the Company and The Goldman Sachs Group, L.P.
10.10* Stock Purchase Agreement, dated May 23, 1997, between the Company and
New York Life Insurance Company.
10.11* Form of Series F Preferred Stock Subscription Agreement.
10.12* Form of Series F Preferred Stock Purchase Warrant.
10.13* Employment Agreement, dated October 12, 1996, between the Company and
Robert J. Towarnicki.
10.14** Form of Employment Agreement between the Company and Robert J.
Towarnicki to be effective upon the closing of the offering.
10.15* Employment Agreement, dated September 1, 1993, between the Company and
Christopher J. Blaxland.
10.16** Form of Employment Agreement between the Company and Christopher J.
Blaxland to be effective upon the closing of the offering.
10.17* Employment Agreement, dated February 1, 1993, between the Company and
Rifat Pamukcu.
10.18** Form of Employment Agreement between the Company and Rifat Pamukcu to
be effective upon the closing of the offering.
10.19* Memorandum of Employment, dated January 1, 1993, between the Company
and Richard H. Troy.
10.20** Form of Employment Agreement between the Company and Richard H. Troy
to be effective upon the closing of the offering.
10.21* Agreement, dated June 30, 1994, between the Company and the Division
of Cancer Prevention and Control, National Cancer Institute.
10.22* Amendment to Agreement between the Company and the Division of Cancer
Prevention and Control, National Cancer Institute, dated September 4,
1996.

II-3

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------

10.23+ Research and License Agreement, dated June 26, 1991, between the
Company and the University of Arizona, as amended.
10.24* Lease, dated August 9, 1993, between the Company and WRC Properties,
Inc.
10.25* Lease, dated June 20, 1997, between the Company and Marave Associates,
L.P.
10.26 1997 Equity Incentive Plan
10.27 1997 Non-Employee Director Stock Option Plan
10.28 1997 Employee Stock Purchase Plan
11.1 Statement re Computation of Per Share Earnings.
23.1** Consent of Cooley Godward LLP (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3* Consent of Brinks Hofer Gilson & Lione.
24.1* Power of Attorney (included on page II-5).
27.1 Financial Data Schedule.

- --------

* Previously Filed.

** To be filed by amendment.

+The Company is applying for confidential treatment with respect to portions
of this Exhibit.

(b) Financial Statement Schedules.

NUMBER DESCRIPTION
------ -----------

All other schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS.

The Company hereby undertakes to provide 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
of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the provisions described in Item 14 or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer, or controlling
person of the Company 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 Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

The undersigned Company undertakes that: (1) for purposes of determining any
liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Company
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act of 1933, each post effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

II-4

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this Amendment No. 1
to be signed on its behalf by the undersigned, in the City of Horsham, State of
Pennsylvania, on the 22nd day of October, 1997.

Cell Pathways, Inc.

/s/ Richard H. Troy
By: __________________________________

RICHARD H. TROY SENIOR VICE
PRESIDENT--FINANCE, LAW AND
ADMINISTRATION AND CORPORATE
SECRETARY

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT NO. 333-37557 HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE

/s/ Robert J. Towarnicki Chief Executive October 22, 1997
- ------------------------------------ Officer; Director
ROBERT J. TOWARNICKI (Principal
Executive Officer)

/s/ Richard H. Troy Senior Vice October 22, 1997
- ------------------------------------ President--
RICHARD H. TROY Finance, Law and
Administration;
Corporate
Secretary;
Director
(Principal
Financial and
Accounting
Officer)

/s/ Christopher J. Blaxland* President; Director October 22, 1997
- ------------------------------------
CHRISTOPHER J. BLAXLAND

/s/ William A. Boeger* Chairman of the October 22, 1997
- ------------------------------------ Board of Directors
WILLIAM A. BOEGER

/s/ Thomas M. Gibson* Director October 22, 1997
- ------------------------------------
THOMAS M. GIBSON

/s/ Robert J. Quy, Ph.D.* Director October 22, 1997
- ------------------------------------
ROBERT J. QUY, PH.D.

/s/ Peter G. Schiff* Director October 22, 1997
- ------------------------------------
PETER G. SCHIFF

/s/ Randall M. Toig, M.D.* Director October 22, 1997
- ------------------------------------
RANDALL M. TOIG, M.D.

*By /s/ Richard H. Troy
- ------------------------------------
RICHARD H. TROY
ATTORNEY-IN-FACT

II-5