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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C., 20549

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997

Commission file number 0-20713

ENTREMED, INC.
(Exact name of registrant as specified in its charter)

Delaware 58-1959440
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(State of Incorporation) (I.R.S. Employer Identification No.)

Suite 200, 9610 Medical Center Drive, Rockville, MD 20850
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (301) 217-9858
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Securities registered pursuant to Section 12 (g) of the Act:

Title Name of Exchange
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Common Stock, Par Value $.01 Per Share Nasdaq National Market

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this Form 10-K [X]

As of March 19, 1998, 12,372,104, shares of common stock were outstanding and
the aggregate market value of the shares of common stock held by non-affiliates
was approximately $157,978,350.

DOCUMENTS INCORPORATED BY REFERENCE

See Part III hereof with respect to incorporation by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 and the Exhibit Index hereto.

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ENTREMED, INC. AND SUBSIDIARIES
FORM 10-K - FISCAL YEAR ENDED DECEMBER 31, 1997

Contents and Cross Reference Sheet

Form 10-K Form 10-K Form 10-K
Part No. Item No. Description Page No.
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I 1 Business
The Company . . . . . . . . . . . . . . . . . . . . . . . 3
Corporate Strategy . . . . . . . . . . . . . . . . . . . . 5
Angiogenesis . . . . . . . . . . . . . . . . . . . . . . . 5
EntreMed's Antiangiogenesis Program . . . . . . . . . . . 7
EntreMed's Cell Permeation Technology . . . . . . . . . . 9
Collaborations and License Agreements . . . . . . . . . . 11
Competition . . . . . . . . . . . . . . . . . . . . . . . 14
Manufacturing and Marketing . . . . . . . . . . . . . . . 16
Patents and Proprietary Rights . . . . . . . . . . . . . . 16
Government Regulation . . . . . . . . . . . . . . . . . . 18
Employees . . . . . . . . . . . . . . . . . . . . . . . . 22
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 22

2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 29
4 Submission of Matters to a Vote of Security Holders . . . . . 30
II 5 Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . 30

6 Selected Financial Data . . . . . . . . . . . . . . . . . . . 32
7 Management's Discussion and Analysis of
Financial Conditions and Results of Operations
Overview . . . . . . . . . . . . . . . . . . . . . . . . . 33
Results of Operations . . . . . . . . . . . . . . . . . . 33
Liquidity and Capital Resources . . . . . . . . . . . . . 34
Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . 36
Impact of Recently Issued Accounting Standards . . . . . . 36
Inflation . . . . . . . . . . . . . . . . . . . . . . . . 36

8 Financial Statements . . . . . . . . . . . . . . . . . . . . . 36
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . 37

III 10 - 13 Incorporated by reference from the Company's Proxy Statement . 37
IV 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 37

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Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II - 1

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This document includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended ("Exchange Act"). All
statements in this Form 10-K that are not descriptions of historical facts are
forward-looking statements, based on management's estimates, assumptions and
projections, that are subject to risks and uncertainties. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable as of the date hereof, actual results could differ materially from
those currently anticipated due to a number of factors, including risks
relating to the early stage of products under development; uncertainties
relating to clinical trials; dependence on third parties; future capital needs;
and risks relating to the commercialization, if any, of the Company's proposed
products (such as marketing, safety, regulatory, patent, product liability,
supply, competition and other risks). Additional important factors that could
cause actual results to differ materially from the Company's current
expectations are included in the Company's Securities and Exchange Commission
filings. The Company assumes no obligation to update its forward-looking
statements.

PART I

ITEM 1. BUSINESS

THE COMPANY

EntreMed, Inc. ("EntreMed" or the "Company") was organized in
September 1991 and is engaged primarily in the research and development of
biopharmaceutical products that address the role of angiogenesis in the
prevention and treatment of a broad range of diseases.

The Company is an innovative biopharmaceutical company with a research
and product focus on the role of angiogenesis in disease. Angiogenesis is the
biological process by which new blood vessels are formed and is a normal
process during the first three months of embryonic development, the
reproductive cycle of women, and in wound healing. At other times,
angiogenesis is harmful when associated with pathology, particularly that of
cancer and macular degeneration, a leading cause of blindness. The Company
believes that antiangiogenic products, which inhibit the abnormal growth of
blood vessels, may have fewer adverse side effects than traditional therapies
for these diseases. EntreMed's portfolio of potential therapeutics include the
anti-angiogenic compounds, Angiostatin(TM) protein, Endostatin(TM) protein,
2-Methoxyestradiol and thalidomide which are used to block the growth of blood
vessels supplying primary and metastatic tumors.

In December 1995, the Company and Bristol-Myers Squibb Company
("Bristol-Myers Squibb") entered into a collaboration (the "BMS Collaboration")
to develop and commercialize certain antiangiogenic therapeutics. This
collaboration provides for Bristol-Myers Squibb to fund certain Company
research, provide milestone payments to the Company and pay the Company
royalties on net sales of any products developed under the collaboration. In
addition, in December 1995 and June 1996 Bristol-Myers Squibb made equity
investments in the Company

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in an aggregate amount of $11,500,000. In return, the Company granted
Bristol-Myers Squibb exclusive worldwide rights to antiangiogenic applications
of thalidomide, thalidomide analogs and the Angiostatin(TM) protein and a
five-year right of first refusal to negotiate for commercial rights with respect
to the development of any technology licensed, or to be licensed, by the
Company from Children's Hospital, Boston, an affiliate of Harvard Medical
School, ("Children's Hospital"), in the field of antiangiogenic therapeutics.
See "Collaborations and License Agreements".

The Company's product candidates have been developed primarily through
sponsored research collaborations and licensing agreements. The principal
antiangiogenic therapeutics currently under development by the Company were
licensed from Children's Hospital where the Company sponsors research under the
direction of Dr. M. Judah Folkman. The Company's sponsored research programs
are augmented by its internal capabilities in the angiogenesis field.

To date, the Company has:

_ Licensed from Children's Hospital four antiangiogenic
molecules - Angiostatin(TM) protein, thalidomide and
thalidomide analogs, Endostatin(TM) protein and
2-Methoxyestradiol.

- Licensed to Bristol-Myers Squibb Company commercial rights to
Angiostatin(TM) protein, thalidomide and thalidomide analogs.

_ Isolated, identified, sequenced, cloned, and recombinantly
expressed Angiostatin(TM) protein in quantities sufficient for
preclinical studies. In preclinical studies, Angiostatin(TM)
protein appeared to inhibit vascularization and growth of
primary and metastatic tumors.

_ Isolated, identified, sequenced, cloned, and recombinantly
expressed Endostatin(TM) protein in quantities sufficient for
preclinical studies. In preclinical studies, Endostatin(TM)
protein appeared to inhibit vascularization and growth of
primary and metastatic tumors.

_ Initiated randomized Phase II clinical trials to evaluate the
antiangiogenic effects of thalidomide in inhibiting the
progression of age-related macular degeneration, a leading
cause of blindness.

_ Initiated Phase II clinical trials to evaluate the
antiangiogenic effects of thalidomide in inhibiting the
progression of metastatic breast cancer.

_ Received positive interim results in Phase II clinical trials
evaluating the antiangiogenic effects of thalidomide in
inhibiting the progression of brain cancer, prostate cancer,
and Kaposi's sarcoma.

_ Reacquired commercial rights to thalidomide from Bristol-Myers
Squibb Company.

_ Assayed in mice an orally administered thalidomide analog
resulting in inhibition of metastatic mouse melanoma.

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_ Signed letters of intent to collaborate with the National
Cancer Institute ("NCI") to undertake pharmacology and
toxicology studies and also to develop commercial production
methods for both Endostatin(TM) protein and
2-Methoxyestradiol.

_ Demonstrated that orally administered 2-Methoxyestradiol
inhibits growth of human breast and neuroblastoma cell lines
in mice.

CORPORATE STRATEGY

The Company's strategy is to discover and develop novel antiangiogenic
therapeutics as well as other promising technologies, such as cell permeation,
which the Company perceives to have clinical and commercial potential. The
principal elements of the Company's strategy are (i) to focus its resources on
current core technologies, (ii) to broaden its product and technology portfolio
through sponsored research collaborations with academic institutions,
government organizations and private enterprises, (iii) to augment product
development with its in-house research and development capabilities and (iv) to
leverage its resources through corporate partnerships in order to minimize the
cost to the Company of late-stage clinical trials and to accelerate product
commercialization. The Company's product candidates are in the developmental
stage and require further research, evaluation, and regulatory approval. No
assurance can be given that any product candidate will result in a product
capable of commercial use.

ANGIOGENESIS

Overview

Within the human body, a network of arteries, capillaries and veins,
known as the vasculature, functions to transport blood throughout the tissues.
The basic network of the vasculature is developed through angiogenesis, a
fundamental process by which new blood vessels are formed. The primary
angiogenic period in humans takes place during the first three months of
embryonic development. During this period, cytokines and growth factors, which
are normally suppressed, are activated to stimulate the growth of new blood
vessels. Once the general network of the blood vessels is complete, these
angiogenic stimulators are inhibited and blood vessels grow longer and larger
in diameter until adulthood through a different process termed vasculogenesis.

Angiogenesis and Cancer

The term cancer includes many different types of uncontrolled cellular
growth. Clusters of cancer cells, referred to as tumors, may destroy
surrounding organs, impair physiological function and often lead to death. In
order to survive, cancer cells require oxygen and nutrients which they receive
from the body's blood supply. In order to access this blood supply, cancer
cells initiate a biochemical mechanism that stimulates angiogenesis to provide
the blood supply

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that nourishes the tumor. As cancer cells grow and metastasize (spread from
primary sites to other parts of the body) they require continuous angiogenesis.
Antiangiogenic drug candidates are intended to inhibit the growth of
tumor-feeding blood vessels and may prove to be effective in treating certain
cancers, with fewer adverse side effects than current therapies. Cancer is the
second leading cause of death in the United States and it is estimated that
approximately one million two hundred thousand new cases of cancer are expected
to be diagnosed in 1998.

Existing cancer treatments include surgery, radiation therapy and
chemotherapy. Surgery is an invasive method of removing tumors. However, some
tumors are currently deemed inoperable due to their location, extent of organ
infiltration or size. Radiation therapy produces ionized molecules within the
body that attack cancer cells, and may also damage surrounding healthy cells.
Chemotherapy involves the administration of toxic substances (cytotoxins)
designed to kill cancer cells and usually produces severe side effects. In
addition, resistance to chemotherapy occurs over time. The Company believes
that its antiangiogenic therapeutics may prove to have significant advantages
over traditional cancer therapies, including reduced toxicity, and lack of drug
resistance, and may be administered in conjunction with other antiangiogenic
and traditional therapies.

Angiogenesis and Blindness

Angiogenesis within the eye, a condition often associated with
diabetes and macular degeneration, is a major cause of blindness. Macular
degeneration, which is often age-related, and diabetic retinopathy, a
secondary effect of diabetes, both involve the formation of new blood vessels
behind, or in front of the retina, respectively. The blood vessels that grow in
front of the retina block vision and the blood vessels that grow behind the
retina often hemorrhage or cause retinal detachment each resulting in a
decrease or loss of vision. It is estimated that approximately eight million
people in the U.S. have diabetic retinopathy, and that twenty-five thousand
cases result in blindness each year. It is estimated that approximately
thirteen million Americans suffer from macular degeneration. Nearly two million
of these people will develop vision impairment, of which one hundred thousand
will develop blindness each year. (Source: Prevent Blindness America). Current
treatments for diabetic retinopathy and to a more limited extent, macular
degeneration involve laser-based photocoagulation therapy, which often causes
additional damage to the retina and surrounding cells.

Angiogenesis and Other Disease Indications

A variety of other disease indications are related to angiogenesis,
including rheumatoid arthritis, atherosclerosis, psoriasis and Crohn's disease.
The Company believes that its antiangiogenic technologies may be applicable to
such diseases. To date, the Company has not researched antiangiogenic therapy
in diseases outside of cancer or macular degeneration. There can be no
assurance that the Company will pursue research outside these indications, that
product candidates will result from any research undertaken, or that any
products for these diseases will ever be commercialized.

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ENTREMED'S ANTIANGIOGENESIS PROGRAM

The Company believes that certain small molecules or proteins that
exhibit antiangiogenic effects may be useful as therapeutics for diseases
involving angiogenesis. The Company currently focuses on angiogenesis
inhibition as a treatment for oncologic and ophthalmologic indications. Product
candidates under development include: (i) thalidomide and several of its
chemical analogs which inhibit angiogenesis, (ii) Angiostatin(TM) protein and
Endostatin(TM) protein, each a newly discovered angiogenesis inhibitor
naturally produced by the body and, (iii) 2-Methoxyestradiol, an oral
angiogenesis inhibitor, and its chemical analogs. The Company's evaluation of
thalidomide and its chemical analogs as an antiangiogenic therapeutic may also
enable the Company to generate clinical and marketing data on the general
utility of angiogenesis inhibitors. The Company believes that this data
might be useful in the development of Angiostatin(TM) protein, Endostatin(TM)
protein, and 2-Methoxyestradiol which, although in an earlier stage of
development than thalidomide, may have greater specificity as antiangiogenic
therapeutics. The Company believes that, if successfully developed, these
products could be used alone or in combination with each other to treat certain
angiogenic-related diseases.

Product Candidates

Thalidomide and Thalidomide Analogs. The Company is evaluating the
antiangiogenic properties of the drug thalidomide and its chemical analogs.
Thalidomide, which was widely prescribed as a sedative in Europe in the late
1950s and early 1960s, caused severe birth defects when taken by pregnant
women. The Company believes that thalidomide may have affected fetal
development and caused birth defects by blocking new blood vessel growth, a
characteristic that may make thalidomide useful in the prevention and treatment
of angiogenic disorders. Thalidomide has been shown to block angiogenesis in
preclinical animal studies conducted at Children's Hospital. Due to the
negative history of thalidomide, as well as patent and competitive issues, the
Company has commenced research on chemical analogs of thalidomide which have
similar mechanisms of action and focus on the antiangiogenic therapeutic
potential of this drug. The Company proposes to develop thalidomide, or a
thalidomide analog, as an oral therapeutic to inhibit the progression of
certain angiogenic diseases, including cancer and certain causes of blindness.

The Company and the National Cancer Institute initiated Phase II
clinical trials in 1996 to evaluate the antiangiogenic effects of thalidomide
in inhibiting the progression of breast cancer, prostate cancer and Kaposi's
sarcoma. The Company also initiated and expanded a Phase II clinical trial for
brain cancer in 1996. In May 1997, the Company announced successful interim
results in brain cancer and Kaposi's sarcoma patients treated with thalidomide.
In June 1997, the Company and the National Cancer Institute announced an
increase in the number of prostate cancer patients in NCI-sponsored Phase II
clinical trials of thalidomide. In August 1997, the Company reacquired the
commercial rights to thalidomide in exchange for renewing Bristol-Myers
Squibb's warrant to purchase an additional $10,000,000 of the Company's common
stock. Bristol-Myers Squibb continues to hold the rights to thalidomide
analogs. See "-- Collaborations and License Agreements.", "---Competition",
and "Patents and Proprietary Rights". Thalidomide

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was additionally shown to inhibit the abnormal formation of blood vessels in
the eye in animal studies performed at Children's Hospital. The Company is
currently conducting Phase II clinical trials at the Scheie Eye Institute at
the University of Pennsylvania School of Medicine and with the Retina
Associates of Cleveland to evaluate the antiangiogenic effects of thalidomide
in blindness due to age-related macular degeneration.

Although not yet approved for sale in the United States, thalidomide
has been used as an investigational agent to treat a limited number of patients
for leprosy and other diseases and is being developed by other companies for
various disease indications, but not including the diseases in which
angiogenesis is a factor. Celgene Corporation has received an approvable
letter from the U.S. Food and Drug Administration ("FDA") for the use of
thalidomide in erythema nodosum leprosum, an inflammatory skin condition of some
leprosy patients. The approvable letter from the FDA indicates that Celgene
will be required to resolve issues of labeling, packaging, and distribution
prior to final market approval.

Angiostatin(TM) Protein and Endostatin(TM) Protein. The Company is
currently developing two endogenous proteins, Angiostatin(TM) protein and
Endostatin(TM) protein, as potential long term cancer therapeutics to prevent
metastatic disease and as therapies for primary tumors. These two proteins are
different in structure and origin but have similar biological activity.

Metastatic tumor growth is attributed to the implantation and growth
of tumor cells at secondary sites. These tumor cells are released by a primary
tumor, or are released into circulation during surgical removal of the primary
tumor. Although surgeons generally remove significant amounts of healthy tissue
surrounding the tumor, in many cases "seed cells" have already escaped the
primary tumor, circulated through the body, and become embedded elsewhere. It
has been observed that in certain cases, these seed cells, or metastases, do
not vascularize and grow while the primary tumor is in place. However, after
the primary tumor is removed, metastatic tumors often grow rapidly.

In Company-sponsored research at Children's Hospital, a substance
associated with primary tumors was identified which appears to prevent
vascularization and growth of metastatic tumors. Based upon such research, the
Company believes that primary tumors secrete an enzyme that cleaves
plasminogen, a known protein associated with blood clotting, into a smaller,
previously undiscovered protein. The Children's Hospital team isolated and
identified the protein in 1995, which the Company named Angiostatin(TM)
protein. The Company has cloned and expressed the gene that codes for
Angiostatin(TM) protein. In 1996, the Children's Hospital team also isolated
and identified a second endogenous protein, named Endostatin(TM) protein. The
gene for Endostatin(TM) protein has been cloned and expressed by the Company.
Preclinical studies, including the murine Lewis Lung Carcinoma ("LLC")
metastatic model, demonstrated that both Angiostatin(TM) and Endostatin(TM)
proteins inhibited the growth of metastatic tumors. In addition, the
Angiostatin(TM) protein was shown to reduce the size of primary murine
carcinomas and sarcomas as well as human prostate, breast and colon cancers
grown in immunodeficient mice. The Company is addressing additional required
preclinical studies for Angiostatin(TM) protein. The Company is currently
producing Angiostatin(TM) and Endostatin(TM) protein in quantities sufficient
for preclinical studies.

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The Company is collaborating with the NCI to pursue the early
preclinical development of Endostatin(TM) protein and 2-Methoxyestradiol
("2-ME") and its analogs, including exploration of methods for commercial
production of the molecules and possible clinical trails.

The Company currently anticipates that either the Angiostatin(TM)
protein or Endostatin(TM) protein, as endogenous angiogenesis inhibitors, could
be administered as an adjunct therapy after cancer diagnosis and sustained
thereafter. The Company believes that there may be utility in using these
proteins in combination and that these proteins may also be effective in
inhibiting other angiogenic diseases such as diabetic retinopathy and macular
degeneration, although the Company has not conducted any research to date in
these areas. The Company has obtained exclusive licenses from Children's
Hospital for patent applications filed on the Angiostatin(TM) and
Endostatin(TM) proteins and related technology. BMS has sublicensed commercial
rights to Angiostatin(TM) protein from the Company.

Other Antiangiogenesis Research

The Company maintains an internal discovery and development program
and also continues to sponsor and support research at Children's Hospital on
angiogenesis technologies with the aim of discovering additional antiangiogenic
products. The Company's research in these areas is currently early stage,
although the Company and Children's Hospital have identified other proteins and
compounds with angiogenic or antiangiogenic properties that may be candidates
for further development. To the extent that additional antiangiogenic
therapeutics are developed at Children's Hospital and licensed by the Company,
Bristol-Myers Squibb has a five-year right of first refusal to negotiate for a
sublicense to such technologies from the Company.

ENTREMED'S CELL PERMEATION TECHNOLOGY

Overview

The Company is applying its expertise in the role of blood function to
the development of a cell permeation technology that may facilitate the
delivery into blood cells of drugs, genes or other therapeutic agents that
otherwise would not readily permeate through the cell membrane. To date, the
Company has focused its cell permeation research on a method of enhancing the
oxygen delivery capabilities of blood.

Human blood is comprised of four components: red blood cells, white
blood cells, plasma and platelets. The principal functions of human blood are
to transport oxygen and nutrients to tissues, carry waste products away from
tissues and defend the body against infection. Hemoglobin, a protein-iron
molecule contained within red blood cells, is responsible for carrying oxygen
from the lungs to tissues throughout the body. Tissues and organs in the body
require oxygen to function properly, and oxygen deficiency may lead to tissue
damage or death. In human blood, each hemoglobin molecule carries four
molecules of oxygen, but releases only one. It has been proposed that inositol
hexaphosphate ("IHP"), a naturally occurring plant

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chemical, may enhance the oxygen releasing capabilities of hemoglobin by
allowing the release of three oxygen molecules. The theory that IHP could
enhance the oxygen releasing capacity of hemoglobin has been proposed for
several years. Scientists have observed that a molecule similar to IHP found in
the hemoglobin of birds is more efficient at releasing oxygen than a
corresponding molecule (2,3 diphosphoglycerate, or 2,3 DPG) found in human
hemoglobin. However, IHP does not readily diffuse through the cell membrane of
human red blood cells and previous techniques used to introduce IHP into red
blood cells showed significant problems and resulted in substantial cell
damage. The Company's research is focused on overcoming these problems.

The Company's research has led to the development of a prototype
device designed to introduce IHP into red blood cells without significant cell
damage. The Company intends to develop this application as a therapeutic in
such chronic and acute diseases as angina, congestive heart failure, heart
attacks, and other diseases involving inadequate circulation or respiratory
functions. Existing methods of treatment for these diseases, including
surgical remedies, drug therapies and non-surgical devices, treat such diseases
by seeking to increase blood flow, rather than increasing the blood's oxygen
releasing capacity. In addition, unlike blood that is stored in blood banks,
which loses its capacity to deliver oxygen for approximately 12 to 24 hours
following a transfusion, blood treated with IHP may be able to release oxygen
to tissues more rapidly following transfusion. As IHP-treated blood may release
more oxygen to tissues than untreated human blood, it may also be possible that
a smaller amount of IHP-treated blood can be transfused to obtain equivalent
tissue oxygenation.

With the exception of IHP-treated red blood cells, the Company has not
yet explored any other applications of its cell permeation technology.
Potential therapeutic candidates will be selected based on an analysis of
various disease indications and related market potential, the likely time and
expense required for development and adaptation of the core technology for the
specific application and the interest of potential strategic partners.
Potential product candidates may be reformulations of existing compounds
approved by the FDA where enhancement of delivery through blood cell membranes
is believed to have increased clinical value compared to existing methods.

Device for Oxygen Enhanced Blood Delivery

The Company has constructed a prototype device designed to introduce
IHP molecules into red blood cells, which may enhance the delivery of oxygen to
tissues and organs, and is sponsoring contract research and development on
IHP-treated blood. An initial prototype flow electroporation device has been
constructed and the accompanying reagents have been developed, although design
activities are ongoing and there can be no assurance that a clinically
acceptable device will be completed. The Company intends to conduct
preclinical toxicology studies required to demonstrate the safety and efficacy
of IHP-treated red blood cells in enhancing the delivery of oxygen to tissues
in relevant disease states.

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The Company's flow electroporation technology is based on Company
sponsored research previously conducted at the Center for Blood Research
Laboratories at Harvard Medical School ("CBRL"). In November 1992, the Company
obtained an exclusive worldwide license to this technology from the CBRL in
exchange for cash payments and royalties based on sales, and a United States
patent was received from the U.S. Patent and Trademark office in March 1998
covering the electroporation chamber, a core component of the Company's cell
permeation technology. Device and disposable component engineering and
development has been and continues to be conducted by a contract manufacturer.

The Company is in discussions with several major medical device
companies and is seeking to enter into collaborative arrangements with such
companies to develop and commercialize the Company's cell permeation
technology. However, there can be no assurance that any such agreements will
be entered into with any of these companies or any potential partner or that
the terms of any agreement will be favorable to the Company.

COLLABORATIONS AND LICENSE AGREEMENTS

General. The Company intends to continue to develop in-licensed
products and sponsored research programs and to enter into collaborations and
licensing agreements with corporate partners for product development,
manufacturing and marketing. The Company believes that it will be necessary to
enter into collaborative arrangements with other companies in the future to
develop, commercialize, manufacture and market its cell permeation technology,
as well as other products or technologies it may acquire or develop.

Bristol-Myers Squibb Company Collaboration. In December 1995, the
Company entered into the BMS Collaboration for the development of certain
antiangiogenic products. The BMS Collaboration provided for a five year
research program, the grant to Bristol-Myers Squibb of an exclusive license to
the Company's thalidomide, thalidomide analogs and Angiostatin(TM) protein
technologies and an equity investment in the Company by Bristol-Myers Squibb.

During the five year research term, the Company has agreed to conduct
research and Bristol-Myers Squibb has agreed to support and fund such research.
Bristol-Myers Squibb has agreed to provide funding of $18,350,000, payable in
ten semi-annual payments of $1,835,000, of which $9,175,000 has been paid to
date. In addition, Bristol-Myers Squibb has paid $730,000 to reimburse the
Company for thalidomide clinical studies. Bristol-Myers Squibb also paid to the
Company $1,000,000 in license fees, a portion of which was paid to Children's
Hospital, and $2,500,000 in consideration of know-how and research and
development previously performed by the Company.

The Company granted Bristol-Myers Squibb an exclusive worldwide
royalty-bearing license to make, use and sell products that are based upon the
Company's Angiostatin(TM) protein, thalidomide and thalidomide analog
technologies. Bristol-Myers Squibb also received a five year right of first
refusal to negotiate for commercial rights with respect to the development of
any technology licensed or to be licensed by the Company from Children's
Hospital in the field of antiangiogenic therapeutics. Such right of first
refusal applies to the Company's Endostatin(TM) protein technology and 2-

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Methoxyestradiol technologies. Pursuant to such rights of first refusal BMS
proposed terms for the sublicense of such technologies. The parties were
unable to reach agreement on terms. Therefore, the Company has the ability to
offer sublicensing rights to Endostatin(TM) protein and 2-ME technologies to
other pharmaceutical companies if it so desires.

In August 1997, the Company reacquired the commercial rights to
thalidomide in exchange for an extension of the period during which
Bristol-Myers Squibb could evaluate Endostatin(TM) and 2-ME pursuant to BMS's
right of first refusal and renewing BMS's warrants to purchase an additional
$10,000,000 of the Company's common stock at $22.50 per share, or 444,444
shares from the Company. This warrant was renewed and expired in November
1997. Bristol-Myers Squibb continues to hold the rights to thalidomide
analogs. Bristol-Myers Squibb advised the Company that its determination not
to pursue commercialization of thalidomide was based upon patent and certain
competitive and market issues, including the development of thalidomide
products by other companies. See "--Competition" and "--Patents and
Proprietary Rights". However, based upon discussions with Bristol-Myers
Squibb, the decision regarding thalidomide is not expected to affect
Bristol-Myers Squibb's internal efforts with respect to thalidomide analogs nor
Angiostatin(TM) protein research and development as contemplated in the BMS
Collaboration. Therefore, the Company does not believe that Bristol-Myers
Squibb's decision will have a material adverse effect on the Company's
development of an oral antiangiogenic therapeutic.

The BMS Collaboration also provides for royalties to the Company based
on the net sales price of products sold by Bristol-Myers Squibb. With respect
to any product that is derived from Angiostatin(TM) protein, the royalty shall
be 15% of net sales, subject to a reduction to no less than 10% based on
manufacturing costs and third party royalties. With respect to any product
derived from thalidomide analogs, the royalty shall range from 8% to 12.5%
based on sales volume.

In addition, the Company may be entitled to receive additional
payments for each product category based upon the achievement of defined and
primarily late-stage clinical development and regulatory filing milestones. In
the event all of these milestones are achieved, as to which there can be no
assurance, these additional payments could total $26,000,000. Up to $6,000,000
of the milestone payments for products related to thalidomide analogs and up to
$4,000,000 of the milestones for products related to Angiostatin(TM) protein
will be creditable against any royalties that may become payable by
Bristol-Myers Squibb to the Company, although the cumulative amount of credits
in any year may not exceed 50% of the aggregate royalties otherwise payable.
The Company retained certain co-promotion rights if Bristol-Myers Squibb elects
to seek a co-promotion partner with respect to any products covered by the
collaboration. The BMS Collaboration may be terminated by Bristol-Myers Squibb
for any reason upon six months notice without any further liability for future
payments.

Pursuant to the BMS Collaboration, Bristol-Myers Squibb purchased
541,666 shares of the Company's Common Stock for $12.00 per share in December
1995 and purchased an additional $5,000,000 of Common Stock concurrent with the
Company's June 1996 IPO in a private placement at the initial public offering
price per share of $15.00 per share. The Company also issued to Bristol-Myers
Squibb a warrant, exercisable for one-year from June 19, 1996, to

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purchase up to $10,000,000 of Common Stock at an exercise price per share equal
to $22.50 per share, or 444,444 shares from the Company. This warrant was
renewed and expired in November 1997. The Company has granted to Bristol-Myers
Squibb certain registration rights with respect to all of these shares.

Academic Collaborations. In addition to its in-house research
program, the Company collaborates with several academic institutions to support
research in areas of the Company's product development interests. Usually,
research supported at outside academic institutions is performed in conjunction
with additional in-house research. Often, the faculty members responsible for
supervision of the research performed at the academic institution will
participate further as consultants to the Company's in-house effort.

Typically under these arrangements, the Company agrees to fund the
research it has chosen to support with a specified budget over a specified time
period, usually one to three years. In return, the Company usually obtains an
exclusive license, with the right to grant sublicenses, and the right to
further develop and market products that arise out of the technology being
supported. Under several of these licenses, the Company is required to meet
specified milestones or diligence requirements in order to retain its license
of such technologies. There can be no assurance that the Company will satisfy
these milestones and diligence requirements and be able to retain such
licenses. In addition to providing research support, the Company usually is
required to pay royalties to the academic institution on sales, if any, of any
licensed products resulting from such research. The Company in most instances
files and prosecutes patent applications on behalf of the institutions.

The Company's primary academic collaboration is with Children's
Hospital. In September 1993, the Company entered into a sponsored research
agreement with Children's Hospital to support research conducted under the
direction of Dr. M. Judah Folkman on the role of angiogenesis in pathological
conditions. Under the agreement, as amended in August 1995, the Company agreed
to pay to Children's Hospital $11,000,000, of which $8,000,000 was paid through
February 1998, $1,000,000 is due on April 1, 1998 and the remainder is due in
equal semi-annual payments of $1,000,000 until April 1, 1999. The Company also
granted to Children's Hospital options to acquire 83,334 shares of Common Stock
at an exercise price of $6.00 per share and additional options to acquire
50,000 shares at an exercise price of $6.375 per share. The Company obtained an
exclusive option to negotiate an exclusive, worldwide, royalty-bearing license
to any technology resulting from the research at Children's Hospital in areas
covered by the agreement. The Company received a right to sublicense the
licensed technologies, although the Company agreed to pay to Children's
Hospital a portion of all sublicensing payments, which do not include payments
to support research and development by the Company or equity investments in the
Company. The Company has also received certain rights of first refusal to
certain additional research projects and any new project opportunities arising
from Dr. Folkman's core laboratory activities.

The Company exercised its option in May 1994 to obtain exclusive
worldwide licenses to certain oral antiangiogenic technology (thalidomide and
its analogs), cancer diagnostic and prognostic technology, and endogenous
antiangiogenic technology, Angiostatin(TM) protein. In

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December 1996, the Company exercised its option to obtain the exclusive
worldwide licenses to Endostatin(TM) protein and 2-Methoxyestradiol, an orally
available angiogenesis inhibitor. These license agreements provide for certain
milestone payments by the Company to Children's Hospital as well as royalties
based on sales, if any, of any products developed from the licensed
technologies. The milestone payments aggregate $4,650,000, of which $290,000
has been paid through December 31, 1997, and are based upon license fees and
the achievement of regulatory approvals.

Other Collaborative and Strategic Relationship Arrangements. In July
1996, the Company acquired, through its subsidiary Cytokine Sciences, Inc.
("Cytokine"), substantially all of the assets of Innovative Therapeutics, Inc.
("ITI") in exchange for 15% of the common stock of Cytokine valued at
approximately $44,000. Prior to the acquisition, the Company sponsored
research at ITI on methods to treat disease by stimulating cellular immunity.
The methods currently under development are designed to target specific
diseases by the administration of synthetic peptides or recombinant proteins
that mimic proteins which occur naturally during that particular disease. These
therapeutic agents are designed to initiate cellular immune responses
exclusively, without affecting humoral immunity. Prior to the acquisition, the
Company had paid ITI approximately $832,500 pursuant to its research
collaboration.

Under the terms of the transaction with ITI, the Company agreed to
provide funding to Cytokine in an aggregate amount of $1,600,000 during the
first two years commencing July 2, 1996, with an additional $1,500,000 to be
provided at the sole option of the Company during the third year. All
intercompany balances and transactions have been eliminated in the consolidated
financial statements.

The Company intends to continue to support and fund research at other
companies or academic or other institutions in selected areas in exchange for
rights to technologies and products derived from such sponsored research or
equity positions in such companies. The Company expects to focus on sponsored
research in areas in which it has existing expertise or where a strong market
opportunity is perceived. The Company may establish subsidiaries to develop and
commercialize promising technologies or products generated from this research,
which may create opportunities for separately financing and managing new
development programs.

COMPETITION

Competition in the pharmaceutical, biotechnology and biopharmaceutical
industries is intense and based significantly on scientific and technological
factors, the availability of patent and other protection for technology and
products, the ability and length of time required to obtain governmental
approval for testing, manufacturing and marketing and the ability to
commercialize products in a timely fashion. Moreover, the biopharmaceutical
industry is characterized by rapidly evolving technology that could result in
the technological obsolescence of any products developed by the Company. The
Company competes with many specialized biopharmaceutical firms, as well as a
growing number of large pharmaceutical companies that are applying
biotechnology to their operations. Many biopharmaceutical companies have
focused their

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development efforts in the human therapeutics area, and many major
pharmaceutical companies have developed or acquired internal biotechnology
capabilities or made commercial arrangements with other biopharmaceutical
companies. These companies, as well as academic institutions, governmental
agencies and private research organizations, also compete with the Company in
recruiting and retaining highly qualified scientific personnel and consultants.

The Company's competition will be determined in part by the potential
indications for which the Company's compounds may be developed and ultimately
approved by regulatory authorities. The Company is relying on Bristol-Myers
Squibb to commercialize the licensed antiangiogenic products, Angiostatin(TM)
protein and thalidomide analogs, and accordingly, the success of these products
will depend in significant part on Bristol-Myers Squibb's efforts and ability
to compete in these markets. The success of the BMS Collaboration will depend
in part upon Bristol-Myers Squibb's own competitive, marketing and strategic
considerations, including the relative advantages of alternative products being
developed and marketed by Bristol-Myers Squibb and its competitors. For
example, Bristol-Myers Squibb currently markets cancer therapeutics, which
would be competitive with any antiangiogenic products developed under the BMS
Collaboration to treat cancer.

The Company is aware of companies and research institutions
investigating the role of angiogenesis generally and specifically as it may be
useful in developing therapeutics to treat various diseases associated with
abnormal blood vessel growth. In studies available to date, these angiogenic
inhibitors have shown varying effectiveness in inhibiting angiogenesis and
differing degrees of bioavailability and toxicity. Significant further
preclinical and clinical development of these products is needed prior to an
assessment of the more significant competitive product candidates in the
antiangiogenic disease indications targeted by the Company.

The Company is aware of other companies developing thalidomide and
certain of its chemical analogs for various disease indications, including
Celgene Corporation, for the treatment of erythema nodosum leprosum ("ENL"),
AIDS-related cachexia (or wasting) and mouth ulcers, and Andrulis
Pharmaceuticals, for diabetes. Celgene has received an approvable letter from
the FDA for the use of thalidomide in ENL. In 1997, two patents licensed to the
Company were issued to Children's Hospital by the U.S. Patent and Trademark
Office covering the use of thalidomide to treat angiogenic-mediated diseases
including cancer, macular degeneration and rheumatoid arthritis. Although the
Company believes that its patent rights would preclude another company from
marketing thalidomide for antiangiogenic indications, there can be no assurance
that any patent will issue or afford meaningful protection. In August 1997,
the Company reacquired the commercial rights to thalidomide from Bristol-Myers
Squibb who continue to hold the rights to thalidomide analogs. Bristol-Myers
Squibb has advised the Company that its determination not to pursue the
commercialization of thalidomide was based upon patent and certain competitive
and market issues, including the development of thalidomide products by other
companies. See "-- Collaboration and License Agreement."

A number of companies utilize or are developing cell permeation or
drug delivery technologies and competition for the development of drug delivery
products is intense, although the Company's focus is on blood cell permeation.
The Company is aware of at least one other

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company, Allos Therapeutics, Inc., that is engaged in early-stage research
regarding a method to acutely increase the oxygen-releasing capacity of
hemoglobin for treating cancer. The Company also anticipates that IHP-treated
blood (which is not technically a blood replacement), will compete for use in
blood transfusions with readily available products, including whole human blood
or packed red blood cells, and products under development, such as blood
substitutes.

Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, manufacture and market products. In
addition, many of these competitors have extensive experience in preclinical
testing and human clinical trials and in obtaining regulatory approvals. The
existence of competitive products, including products or treatments of which
the Company is not aware, or products or treatments that may be developed in
the future, may adversely affect the marketability of products which may be
developed by the Company.

MANUFACTURING AND MARKETING

The Company's strategy is to enter into collaborative arrangements
with pharmaceutical and other companies for the development, manufacturing and
marketing of products requiring broad marketing capabilities and for overseas
marketing. These collaborators are generally expected to be responsible for
funding or reimbursing all or a portion of the development costs, including the
costs of clinical testing necessary to obtain regulatory clearances and for
commercial scale manufacturing, in exchange for exclusive or semi-exclusive
rights to market specific products in particular geographic territories. To
date, the Company has entered into one collaboration agreement, with
Bristol-Myers Squibb, relating to Angiostatin(TM) and thalidomide analogs.
However, the Company may, in the future, consider manufacturing or marketing
certain products directly and to co-promote certain products if it believes it
is appropriate under the circumstances. The Company has no experience in
manufacturing or marketing products on a commercial scale and does not have the
resources to manufacture or market by itself on a commercial scale any of its
product candidates. In the event the Company decides to establish a
manufacturing facility, the Company will require substantial additional funds,
and will be required to hire and train significant additional personnel and
comply with the extensive "good manufacturing practice" regulations applicable
to such a facility.

PATENTS AND PROPRIETARY RIGHTS

The Company's success will depend in part on its ability to obtain patent
protection for its products, both in the United States and abroad. The patent
position of biotechnology and pharmaceutical companies, in general, is highly
uncertain and involves complex legal and factual questions.

The intellectual property that the Company has licensed exclusively from
Children's Hospital of the Harvard Medical School includes eight pending U.S.
patent applications and one issued patent covering Angiostatin(TM) protein, DNA
coding for the Angiostatin(TM) protein, the use of Angiostatin(TM) protein as a
therapeutic agent and the use of Angiostatin(TM) protein as a diagnostic agent.
Four of these patent applications have been allowed by the U.S. Patent and

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Trademark Office. Included in the Children's Hospital license are five pending
U.S patent applications and three issued patents covering the use of the
thalidomide molecule and thalidomide analogs as an anti-angiogenic agent for
the treatment of a wide variety of diseases that are caused by uncontrolled
angiogenesis. These patent applications also include composition of matter
coverage for certain thalidomide analogs. In addition, the Company has licensed
two pending patent applications and two issued patents covering estrogenic
compounds as anti-mitotic agents and anti-angiogenic compounds. The Company has
also licensed two pending U.S. patent applications covering the Endostatin(TM)
protein, DNA coding for the Endostatin(TM) protein, the use of Endostatin(TM)
protein as a therapeutic agent and the use of Endostatin(TM) protein as a
diagnostic agent. The patent applications also cover the combination of
Endostatin(TM) protein and Angiostatin(TM) protein as a therapeutic
composition.

The Company has two U.S. patent applications pending and two issued
patents covering the device and method for introducing substances into cells by
flow electroporation. These patent applications and patents cover the
electroporation chamber in the device, the overall electroporation device and
the treatment of a wide variety of diseases using cells that have been treated
in the electroporation device. One of the issued patents has been licensed from
the Centers for Blood Research at Harvard University.

Patent applications corresponding to the above described U.S. patent
applications have been filed in Europe, Japan, Canada and other selected
countries.

The Company has registered the mark ENTREMED in the U.S. Patent and
Trademark Office and has filed intent-to-use trademark applications in the U.S.
Patent and Trademark Office for the marks "ANGIOSTATIN", "ENDOSTATIN"
"VASCULOSTATIN", "WE'RE NOT MAKING BETTER BLOOD, WE'RE MAKING BLOOD BETTER",
and "DOING WELL BY DOING GOOD".

There can be no assurance that any future patents will be granted or that
patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection to the Company. Furthermore, there can be no assurance that others
will not independently develop similar products or, if patents are issued to
the Company or its collaborators, will not design around such patents

Furthermore, the enactment of the legislation implementing the General
Agreement on Trade and Tariff ("GATT") has resulted in certain changes to
United States patent laws that became effective on June 8, 1995. Most notably,
the term of patent protection for patent applications filed on or after June 8,
1995 is no longer a period of seventeen years from the date of grant. The new
term of a United States patent will commence on the date of issuance and
terminate twenty years from the earliest effective filing date of the
application. Because the time from filing to issuance of biotechnology patent
application is often more than three years; a twenty-year term from the
effective date of filing may result in a substantially shortened term of patent
protection, which may adversely impact the Company's patent position if this
change results in a shorter period of patent coverage. The Company's business
could be adversely affected to the extent that the duration and level of the
royalties it is entitled to receive from a collaborative partner is based on
the existence of a valid patent.

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The Company's potential products may conflict with patents which have been
or may be granted to competitors, universities or others. As the biotechnology
industry expands and more and more patents are issued, the risk increases that
the Company's potential products may give rise to claims that they infringe the
patents of others. Such other persons could bring legal actions against the
Company claiming damages and seeking to enjoin clinical testing, manufacturing
and marketing of the affected products. If any such actions are successful, in
addition to any potential liability for damages, the Company could be required
to obtain a license to continue to manufacture or market the affected products.
There can be no assurance that the Company would prevail in any such action or
that any license required under any such patent would be made available on
acceptable terms, if at all. If the Company becomes involved in litigation, it
could consume a substantial portion of the Company's time and resources.

Composition of matter patent protection is not available for thalidomide.
The Company is aware of at least two other issued patents covering certain
non-antiangiogenic uses of thalidomide. Although the Company believes that the
claims in such patents will not interfere with the Company's proposed use of
thalidomide, there can be no assurance that the holders of such patents will
not be able to exclude the Company from using thalidomide for other
non-antiangiogenic uses of thalidomide.

The Company requires its employees, consultants and advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. The agreements generally provide that trade
secrets and all inventions conceived by the individual and all confidential
information developed or made known to the individual during the term of the
relationship shall be the exclusive property of the Company and shall be kept
confidential and not disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's proprietary information in the
event of unauthorized use or disclosure of such information.

GOVERNMENT REGULATION

The Company's development, manufacture and potential sale of
therapeutics is subject to extensive regulation by United States and foreign
governmental authorities.

Regulation of Pharmaceutical Products. Products being developed by
the Company may be regulated by the FDA as drugs or biologics or, in some
cases, as medical devices. New drugs are subject to regulation under the
Federal Food, Drug, and Cosmetic Act, and biological products, in addition to
being subject to certain provisions of that Act, are regulated under the

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Public Health Service Act. The Company believes that drug products developed by
it or its collaborators will be regulated either as biological products or as
new drugs. Both statutes and the regulations promulgated thereunder govern,
among other things, the testing, manufacturing, safety, efficacy, labeling,
storage, record keeping, advertising and other promotional practices involving
biologics or new drugs, as the case may be. FDA approval or other clearances
must be obtained before clinical testing, and before manufacturing and
marketing, of biologics and drugs.

Obtaining FDA approval has historically been a costly and time
consuming process. Generally, in order to gain FDA premarket approval, a
developer first must conduct preclinical studies in the laboratory and in
animal model systems to gain preliminary information on an agent's efficacy and
to identify any safety problems. The results of these studies are submitted as
a part of an investigational new drug ("IND") application, which the FDA must
review before human clinical trials of an investigational drug can start. The
IND application includes a detailed description of the clinical investigations
to be undertaken.

In order to commercialize any products, the Company or its
collaborator must sponsor and file an IND and be responsible for initiating and
overseeing the clinical studies to demonstrate the safety, efficacy and potency
that are necessary to obtain FDA approval of any such products. For Company or
collaborator-sponsored INDs, the Company or its collaborator will be required
to select qualified investigators (usually physicians within medical
institutions) to supervise the administration of the products, and ensure that
the investigations are conducted and monitored in accordance with FDA
regulations, including the general investigational plan and protocols contained
in the IND. Clinical trials are normally done in three phases, although the
phases may overlap. Phase I trials are concerned primarily with the safety and
preliminary effectiveness of the drug, involve fewer than 100 subjects, and may
take from six months to over one year. Phase II trials normally involve a few
hundred patients and are designed primarily to demonstrate effectiveness in
treating or diagnosing the disease or condition for which the drug is intended,
although short-term side effects and risks in people whose health is impaired
may also be examined. Phase III trials are expanded clinical trials with larger
numbers of patients which are intended to evaluate the overall benefit-risk
relationship of the drug and to gather additional information for proper dosage
and labeling of the drug. Clinical trials generally take two to five years to
complete, but may take longer. The FDA receives reports on the progress of each
phase of clinical testing, and it may require the modification, suspension, or
termination of clinical trials if it concludes that an unwarranted risk is
presented to patients.

If clinical trials of a new product are completed successfully, the
sponsor of the product may seek FDA marketing approval. If the product is
regulated as a biologic, the FDA will require the submission and approval of a
Biologics License Application ("BLA") before commercial marketing of the
biologic. If the product is classified as a new drug, the Company must file a
New Drug Application ("NDA") with the FDA and receive approval before
commercial marketing of the drug. The NDA or BLA must include detailed
information about the drug and its manufacture and the results of product
development, preclinical studies and clinical trials. The testing and approval
processes require substantial time and effort and there can be no assurance
that any approval will be granted on a timely basis, if at all. NDAs and BLAs
submitted to the FDA can take up to two to five years to receive approval. If
questions arise during the FDA

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review process, approval can take more than five years. Notwithstanding the
submission of relevant data, the FDA may ultimately decide that the NDA or BLA
does not satisfy its regulatory criteria for approval and deny approval or
require additional clinical studies. In addition, the FDA may condition
marketing approval on the conduct of specific post-marketing studies to further
evaluate safety and effectiveness. Even if FDA regulatory clearances are
obtained, a marketed product is subject to continual review, and later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market as well as possible
civil or criminal sanctions.

Thalidomide is regulated by the FDA's Center for Drug Evaluation and
Research. Although not approved for sale in the U.S., thalidomide has been used
as an investigational agent to treat thousands of patients for leprosy and
other diseases. EntreMed has filed an IND application and started Phase II
trials in macular degeneration, a leading cause of blindness, and expects that
the analysis of these results, together with availability of necessary funding,
could determine whether Phase III trials may be attempted. The National Cancer
Institute in collaboration with EntreMed has begun Phase II trials in breast
cancer, prostate cancer, brain cancer and Kaposi's sarcoma. It is expected
that future cancer trials may be dependent on the results of these studies.
Thalidomide must meet the standard regulatory requirements of any new drug, and
successful Phase III clinical trials will be necessary to form the basis of an
NDA.

Analogs of thalidomide may be regulated as new chemical entities by
the FDA's Center for Drug Evaluation and Research. Although these compounds
are in the discovery phase of research, it is expected that as new chemical
entities are discovered complete preclinical toxicology studies will be
required prior to studies in humans. The remainder of the developmental and
regulatory requirements will be similar to that of any new drug.

Angiostatin(TM) and Endostatin(TM) proteins, each a naturally
occurring substance, are considered biologics and will be regulated by the
FDA's Center for Biologics Evaluation and Research. As genetically engineered
and endogenous proteins, Angiostatin(TM) protein and Endostatin(TM) protein
will face unique and specific regulation hurdles, such as those related to the
manufacture of the products and the behavior of the products in the body. The
regulatory requirements for recombinant proteins have been developed for other
endogenous molecules (e.g., Epogen(TM), Neupogen(TM) and interferons) and
Angiostatin(TM) protein and Endostatin(TM) protein are expected to follow these
established guidelines. Successful preclinical studies and Phase I, II and III
trials will be necessary to form the basis for a BLA. Bristol-Myers Squibb is
responsible for conducting these clinical studies with Angiostatin(TM) protein.

The cell permeation technology, and specifically IHP-treated red blood
cells, will be regulated by the FDA's Center for Biologics Evaluation and
Research. In 1997, the FDA responded to a letter from EntreMed requesting a
product jurisdiction determination, designating the Center for Biologics
Evaluation and Research as the agency component with primary jurisdiction for
the premarket review and regulation of the product. The product will be
reviewed as a medical device under the premarket application ("PMA") provisions
of the Federal Food, Drug and Cosmetic Act (described below). Historically,
the FDA's Office of Blood

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Research and Review has had the most expertise and experience in regulating
blood, apheresis equipment and disposables associated with the processing of
human blood. Further development for IHP-treated blood is expected to follow a
similar path to that of any therapeutic biologic, with successful completion of
Phase I, Phase II and Phase III trials required to precede the filing of a PMA.
As the cell permeation technology requires the use of red blood cells produced
from humans, the Company will be required to comply with, or to contract with
suppliers that comply with, stringent regulation of blood component collection.
That regulation is designed to protect both donors and recipients of blood
products and involves significant record-keeping and other burdens.

Regulation of Devices. Any device products which may be developed by
the Company are likely to be regulated by the FDA as medical devices rather
than drugs. In addition, as noted, the device used to insert IHP in blood cells
also may be regulated as a medical device. The nature of the FDA requirements
applicable to such products depends on their classification by the FDA. A
device developed by the Company would be automatically classified as a Class
III device, requiring pre-market approval, unless the device was substantially
equivalent to an existing device that has been classified in Class I or Class
II or to a pre-1976 device that has not yet been classified or the Company
could convince the FDA to reclassify the device as Class I or Class II. If the
Company were unable to demonstrate such substantial equivalence and unable to
obtain reclassification, it would be required to undertake the costly and
time-consuming process, comparable to that for new drugs, of conducting
preclinical studies, obtaining an investigational device exemption to conduct
clinical tests, filing a premarket approval application, and obtaining FDA
approval.

If the device were a Class I product, the "general controls" of the
Federal Food, Drug, and Cosmetic Act chiefly adulteration, misbranding, and
good manufacturing practice requirements would nevertheless apply. If
substantial equivalence to a Class II device could be shown, the general
controls plus "special controls" such as performance standards, guidelines for
safety and effectiveness, and post-market surveillance would apply. While
demonstrating substantial equivalence to a Class I or Class II product is not
as costly or time-consuming as the pre-market approval process for Class III
devices, it can in some cases also involve conducting clinical tests to
demonstrate that any differences between the new device and devices already on
the market do not affect safety or effectiveness. If substantial equivalence to
a pre-1976 device that has not yet been classified has been shown, it is
possible that the FDA would subsequently classify the device as a Class III
device and call for the filing of premarket approval applications at that time.
If the FDA took that step, then filing an application acceptable to the FDA
would be a prerequisite to remaining on the market.

It is likely that the review process will nevertheless occur in the
Center for Biologics Evaluation and Research. It is possible, however, that
such Center would consult with relevant officials in the FDA's Center for
Devices and Radiological Health. Such a consultation might further delay
approval of the device and thus of this technology.

Other. In addition to the foregoing, the Company's business is and
will be subject to regulation under various state and federal environmental
laws, including the Occupational Safety

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and Health Act, the Resource Conservation and Recovery Act and the Toxic
Substance Control Act. These and other laws govern the Company's use, handling
and disposal of various biological, chemical and radioactive substances used in
and wastes generated by its operations. The Company believes that it is in
material compliance with applicable environmental laws and that its continued
compliance therewith will not have a material adverse effect on its business.
The Company cannot predict, however, whether new regulatory restrictions on the
marketing of biotechnology products will be imposed by state or federal
regulators and agencies.

EMPLOYEES

As of March 31, 1998, the Company had 50 full-time employees, of which
40 were in research and development and 10 were in management and
administration. The Company intends to hire additional personnel. The Company
also utilizes part-time or temporary consultants on an as-needed basis. None of
the Company's employees is represented by a labor union and the Company
believes its relations with its employees are satisfactory.

RISK FACTORS

History of Losses; Accumulated Deficit and Anticipated Future Losses.
To date, the Company has been engaged primarily in research and development
activities and, with the exception of license fees and research and development
funding under the BMS Collaboration and research grants, has not derived any
revenues from operations. At December 31, 1997, the Company had an accumulated
deficit of approximately $31,794,000 and significant losses have continued and
are expected to continue for the foreseeable future. The Company will be
required to conduct substantial research and development and clinical testing
activities for all of its proposed products, which activities are expected to
result in operating losses for the foreseeable future, particularly due to the
extended time period before the Company expects to commercialize any products,
if ever. In addition, to the extent the Company relies upon others for
development and commercialization activities, the Company's ability to achieve
profitability will be dependent upon the success of such third parties. There
can be no assurance that the Company will be able to generate revenues from
operations or achieve profitability on a sustained basis, if at all.

Early Stage and Uncertainty of Product Development. The Company's
proposed products and research programs are in the early developmental stage
and require significant time-consuming and costly research and development,
testing and regulatory clearances. Accordingly, the Company does not expect
any of its product candidates to be commercially available for several years,
if ever. The successful development of any product is subject to the risks of
failure inherent in the development of products or therapeutic procedures based
on innovative technologies. These risks include the possibilities that any or
all of these proposed products or procedures are found to be ineffective or
toxic, or otherwise fail to receive necessary regulatory clearances; that the
proposed products or procedures are uneconomical to manufacture or market or do
not achieve broad market acceptance; that third parties hold proprietary rights
that preclude the Company from marketing them; or that third parties market a
superior or equivalent product. The failure of the Company's research and
development activities to result in

22
23
any commercially viable products would materially adversely affect the
Company's future prospects.

Uncertainties Related to Clinical Trials. The Company has limited
experience in conducting clinical trials and intends to rely primarily on
Bristol-Myers Squibb or other pharmaceutical companies with which it may
collaborate in the future for clinical development and regulatory approval of
its product candidates. Before obtaining regulatory approvals for the
commercial sale of its products, the Company or its collaborative partners will
be required to demonstrate through preclinical studies and clinical trials that
the proposed products are safe and effective for use in each target indication.
The results from preclinical studies and early clinical trials may not be
predictive of results that will be obtained in large-scale testing, and there
can be no assurance that the clinical trials conducted by the Company or its
partners will demonstrate sufficient safety and efficacy to obtain the required
regulatory approvals or will result in marketable products. One of the
Company's potential products, thalidomide, is believed to have caused severe
birth defects in children during the late 1950s and early 1960s. Although the
Company believes that the characteristics of thalidomide that may have affected
fetal development and caused birth defects by blocking new blood vessel growth
may make thalidomide useful in the prevention and treatment of angiogenic
disorders, there can be no assurance that clinical trials with the drug will
demonstrate its safety and efficacy or that the drug will not be associated
with other characteristics that prevent or limit its commercial use.

In addition, clinical trials are often conducted with patients having
the most advanced stages of disease. During the course of treatment, these
patients can die or suffer other adverse medical effects for reasons that may
not be related to the pharmaceutical agent being tested, but which can
nevertheless affect clinical trial results. Various companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after attaining promising results in earlier trials. Clinical
trials for the product candidates being developed by the Company and its
collaborators may be delayed by many factors. Any delays in, or termination of,
the clinical trials of any of the Company's product candidates, or the failure
of any clinical trials to meet applicable regulatory standards, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Dependence on Bristol-Myers Squibb and Other Collaborative Partners
and Licensees. The Company does not intend to conduct late-stage clinical
trials, or manufacture or market any of its product candidates in the
foreseeable future. The Company has granted Bristol-Myers Squibb the right to
conduct development, manufacturing, commercialization and marketing activities
relating to certain of the Company's antiangiogenesis technologies.
Accordingly, the Company is substantially dependent on Bristol-Myers Squibb for
the development, funding and commercial success of any of these product
candidates. In addition, payments from Bristol-Myers Squibb may constitute a
substantial portion of the Company's revenues for the next several years. The
BMS Collaboration may be terminated for any reason by Bristol-Myers Squibb on
six months' notice, in which event Bristol-Myers Squibb would have no further
funding obligation to the Company. In the event Bristol-Myers Squibb were to
terminate its agreement with the Company or otherwise fail to conduct its
collaborative activities successfully and in a timely manner, the preclinical
and clinical development or commercialization of the

23
24
licensed antiangiogenesis product candidates would be delayed or terminated.
Any such delay or termination could have a material adverse effect on the
Company's business, financial condition and results of operations. The success
of the BMS Collaboration will depend in part upon Bristol-Myers Squibb's own
competitive, marketing and strategic considerations, including the relative
advantages of alternative products being developed and marketed by
Bristol-Myers Squibb and its competitors. In addition, if Bristol-Myers Squibb
is unsuccessful in commercializing any product candidates, the Company's
business, financial condition and results of operations would be materially
adversely affected.

The Company intends to enter into additional corporate alliances to
develop and commercialize products based upon its cell permeation technology
and any other technologies that may be acquired or developed by the Company.
The Company expects to grant to its collaborative partners rights to
commercialize any products developed under these collaborative agreements, and
the Company may rely on its collaborative partners to conduct research and
development efforts and clinical trials on, obtain regulatory approvals for,
and manufacture and market any products licensed to these partners. The amount
and timing of resources devoted to these activities generally will be
controlled by each such individual partner. As the Company generally expects to
retain only a royalty interest in sales or a percentage of profits of products
licensed to third parties, its revenues may be less than if it retained all
commercialization rights and marketed products directly. In addition, there can
be no assurance that the corporate partners will not pursue alternative
technologies or develop competitive products as a means for developing
treatments for the diseases targeted by the Company's programs.

There can be no assurance that the Company will be successful in
establishing any additional collaborative arrangements, that products will be
successfully commercialized under any collaborative arrangement or that the
Company will derive any revenues from such arrangements. In addition, the
Company's strategy involves entering into multiple, concurrent strategic
alliances to pursue commercialization of its core technologies. There can be no
assurance that the Company will be able to manage simultaneous programs
successfully. With respect to existing and potential future strategic alliances
and collaborative arrangements, the Company will be dependent upon the
expertise and dedication of sufficient resources by these outside parties to
develop, manufacture or market products. Should a strategic alliance or
collaborative partner fail to develop or commercialize a product to which it
has rights, the Company's business, financial condition and results of
operations could be materially and adversely affected.

Future Capital Needs and Commitments; Uncertainty of Additional
Funding. The Company has incurred negative cash flows since inception and has
expended, and expects to continue to expend, substantial funds to continue its
research and development programs. The Company anticipates that its existing
resources and committed funding from Bristol-Myers Squibb will be sufficient to
meet the Company's planned expenditures during 1998, although there can be no
assurance that the Company will not require additional funds. There can be no
assurance that the results of research and development activities, progress of
preclinical studies or clinical trials, changes in or terminations of
relationships with strategic partners, changes in the focus, direction or costs
of the Company's research and development programs, competitive

24
25
and technological advances, the regulatory approval process or other factors
will not result in the expenditure of the Company's resources before such time.
The Company will require substantial funds in addition to existing working
capital to develop its product candidates and otherwise to meet its business
objective.

The Company is a party to sponsored research agreements requiring it
to fund $4,100,000 through 1999 (including $3,000,000 to Children's Hospital).
Pursuant to the terms of certain license agreements, the Company is also
obligated to exercise diligence in bringing potential products to market and to
make certain milestone payments that, in some instances, are substantial. The
Company's failure to make any required sponsored research or milestone payment
could result in the termination of the relevant sponsored research or license
agreement, which could have a material adverse effect on the Company.

The Company may seek additional funding through collaborative
arrangements and public or private financing, including equity financing. There
can be no assurance that such collaborative arrangements or additional
financing will be available on acceptable terms or at all. If additional funds
are raised by issuing equity securities, dilution to stockholders may result.
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 and development
programs or forfeit its rights to future technologies; to obtain funds through
arrangements with collaborative partners or others that 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; or to license the rights to such products on terms that are not
favorable to the Company.

Uncertainty of Government Regulatory Requirements; Lengthy Approval
Process. The Company's research, development, preclinical and clinical trials,
manufacturing and marketing of most of its product candidates are subject to an
extensive regulatory approval process by the United States Food and Drug
Administration (the "FDA") and other regulatory agencies in the United States
and abroad. The process of obtaining FDA and other required regulatory
approvals for drug and biologic products, including required preclinical and
clinical testing, is lengthy, expensive and uncertain. There can be no
assurance that, even after such time and expenditures, the Company will be able
to obtain necessary regulatory approvals for clinical testing or for the
manufacturing or marketing of any products. The Company or its collaborators
may encounter significant delays or excessive costs in their efforts to secure
necessary approvals or licenses. Even if regulatory clearance is obtained, a
marketed product is subject to continual review, and later discovery of
previously unknown defects or failure to comply with the applicable regulatory
requirements may result in restrictions on a product's marketing or withdrawal
of the product from the market as well as possible civil or criminal sanctions.

Competition; Risk of Technological Obsolescence. The pharmaceutical
biotechnology industries are intensely competitive and competition from other
companies and other research and academic institutions is expected to increase.
Many of these companies have substantially greater financial and research and
development capabilities than the Company and have substantially greater
experience in undertaking preclinical and clinical testing of products,
obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products. The

25
26
Company is aware of other companies engaged in the development of thalidomide
for various disease indications, including Celgene Corporation and Andrulis
Pharmaceuticals, and a number of other companies and academic institutions are
pursuing angiogenesis research and are testing other angiogenesis inhibitors.
The Company's blood oxygen enhancement product candidate will also compete for
certain applications with numerous other available therapeutics and with blood
and blood substitute products in development by others. In addition to
competing with universities and other research institutions in the development
of products, technologies and processes, the Company may compete with other
companies in acquiring rights to products or technologies from universities.

Moreover, the pharmaceutical and biotechnology industries are rapidly
evolving fields in which developments are expected to continue at a rapid pace.
There can be no assurance that the Company will develop products that are more
effective or achieve greater market acceptance than competitive products, or
that the Company's competitors will not succeed in developing products and
technologies that are more effective than those being developed by the Company
or that would render the Company's products and technologies less competitive
or obsolete.

Dependence on Patents and Other Proprietary Rights; Uncertainty of
Patent Position and Proprietary Rights. The Company's success will depend in
part on its ability to obtain patent protection for its products, both in the
United States and abroad. The patent position of biotechnology and
pharmaceutical companies in general is highly uncertain and involves complex
legal and factual questions. There can be no assurance that any additional
patents will be granted or that patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection to the Company. Furthermore, there can be
no assurance that others will not independently develop similar products or, on
patents issued to the Company or its collaborators, will not design around such
patents.

Furthermore, the enactment of the legislation implementing the General
Agreement on Trade and Tariffs has resulted in certain changes to United States
patent laws that became effective on June 8, 1995. Most notably, the term of
patent protection for patent applications filed on or after June 8, 1995 is no
longer a period of seventeen years from the date of grant. The new term of a
United States patent will commence on the date of issuance and terminate twenty
years from the earliest effective filing date of the application. As the time
from filing to issuance of biotechnology patents is often more than three
years, a twenty-year term from the effective date of filing may result in a
substantially shortened term of patent protection, which may adversely impact
the Company's patent position. If this change results in a shorter period of
patent coverage, the Company's business could be adversely affected to the
extent that the duration and level of the royalties it is entitled to receive
from a collaborative partner is based on the existence of a valid patent.

The Company's potential products may conflict with patents which have
been or may be granted to competitors, universities or others. As the
biotechnology industry expands and more patents are issued, the risk increases
that the Company's potential products may give rise to claims that they
infringe the patents of others. Such other persons could bring legal actions

26
27
against the Company claiming damages and seeking to enjoin clinical testing,
manufacturing and marketing of the affected products. Any such litigation
could result in substantial cost to the Company and diversion of effort by the
Company's management and technical personnel. If any such actions are
successful, in addition to any potential liability for damages, the Company
could be required to obtain a license in order to continue to manufacture or
market the affected products. There can be no assurance that the Company would
prevail in any such action or that any license required under any such patent
would be made available on acceptable terms, if at all. Failure to obtain
needed patents, licenses or proprietary information held by others may have a
material adverse effect on the Company's business. In addition, if the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's time and resources.

Composition of matter patent protection is not available for
thalidomide. The Company is aware of at least two other issued patents covering
certain non-antiangiogenic uses of thalidomide. Although the Company believes
that the claims in such patents will not interfere with the Company's proposed
use of thalidomide, there can be no assurance that the holders of such patents
will not be able to exclude the Company from using thalidomide for other
non-antiangiogenic uses of thalidomide.

The Company also relies on trade secret protection for its
confidential and proprietary information. However, trade secrets are difficult
to protect and there can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its rights to
unpatented trade secrets. The Company requires its employees, consultants and
advisors to execute a confidentiality agreement upon the commencement of an
employment or consulting relationship with the Company. The agreements
generally provide that all trade secrets and inventions conceived by the
individual and all confidential information developed or made known to the
individual during the term of the relationship shall be the exclusive property
of the Company and shall be kept confidential and not disclosed to third
parties except in specified circumstances. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information.

To the extent that consultants, key employees or other third parties
apply technological information independently developed by them or by others to
the Company's proposed projects, disputes may arise as to the proprietary
rights to such information which may not be resolved in favor of the Company.
Certain of the Company's consultants are employed by or have consulting
agreements with third parties and any inventions discovered by such individuals
generally will not become property of the Company.

Dependence Upon Key Personnel and Consultants. The Company is
dependent on certain of its executive officers and scientific personnel,
including John W. Holaday, Ph.D., the Company's Chairman, President and Chief
Executive Officer. The Company has entered into a three-year employment
agreement with Dr. Holaday effective January 1, 1996. Competition for qualified
employees among pharmaceutical and biotechnology companies is intense, and the
loss

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of certain of such persons, or an inability to attract, retain and motivate
additional highly skilled scientific, technical and management personnel, could
materially adversely affect the Company's business and prospects. There can be
no assurance that the Company will be able to retain its existing personnel or
attract and retain additional qualified employees.

The Company may also be dependent, in part, upon the continued
contributions of the lead investigators of the Company's sponsored research
programs. The Company's scientific consultants and collaborators may have
commitments to or consulting or advisory agreements with other entities that
may affect their ability to contribute to the Company or may be competitive
with the Company. Inventions or processes discovered by such persons will not
necessarily become the property of the Company, but may remain the property of
such persons or of such persons' full-time employers.

Risk of Product Liability; Availability of Insurance. The use of the
Company's potential products in clinical trials and the marketing of any
pharmaceutical products may expose the Company to product liability claims. The
Company has obtained a level of liability insurance coverage that it deems
appropriate for its current stage of development. However, there can be no
assurance that the Company's present insurance coverage is adequate. Such
existing coverage will not be adequate as the Company further develops
products, and no assurance can be given that in the future adequate insurance
coverage or indemnification by collaborative partners will be available in
sufficient amounts or at a reasonable cost. A successful product liability
claim could have a material adverse effect on the business and financial
condition of the Company.

Uncertainty Related to Health Care Reimbursement and Reform Measures.
The Company's success may depend, in part, on the extent to which reimbursement
for the costs of therapeutic products and related treatments will be available
from third-party payors such as government health administration authorities,
private health insurers, managed care programs and other organizations. Over
the past decade, the cost of health care has risen significantly, and there
have been numerous proposals by legislators, regulators and third-party health
care payors to curb these costs. Some of these proposals have involved
limitations on the amount of reimbursement for certain products. There can be
no assurance that similar federal or state health care legislation will not be
adopted in the future or that any products sought to be commercialized by the
Company or its collaborators will be considered cost-effective or that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return
on its investment in product development. Moreover, the existence or threat of
cost control measures could have an adverse effect on the willingness or
ability of Bristol-Myers Squibb or other potential collaborators to pursue
research and development programs related to the Company's product candidates.

Hazardous Materials. The Company's research and development involves
the controlled use of hazardous biological, chemical and radioactive materials.
The Company is subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such
materials and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards

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prescribed by such laws and 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 have a material adverse effect on of the Company.

No Manufacturing or Marketing Capacity. The Company does not
generally expect to engage directly in manufacturing or marketing of products
in the near term, but may elect to do so in certain cases. The Company does not
currently have the capacity to manufacture or market products or any experience
in such activities. If the Company elects to perform these functions, the
Company will be required to either develop these capacities, or contract with
others to perform some or all of these tasks. The Company may be dependent to a
significant extent on corporate partners, licensees or other entities for
manufacturing and marketing of products. If the Company engages directly in
manufacturing or marketing, the Company will require substantial additional
funds and personnel and will be required to comply with extensive regulations
applicable to such a facility. There can be no assurance that the Company will
be able to develop or contract for these capacities when required in connection
with the Company's business.

ITEM 2. PROPERTIES

The Company currently occupies an aggregate of approximately 13,500
square feet of office space (approximately 8,250 square feet of which is
laboratory space) in Rockville, Maryland pursuant to two leases. One lease,
representing 1,900 square feet, is on a month to month basis and the other
lease expires in April 2003. The leases provide for total annual rent of
approximately $227,000 during 1998, subject to specified annual increases. The
Company is presently intending to lease a new facility.

ITEM 3. LEGAL PROCEEDINGS

The Company is a defendant in a lawsuit initiated in August 1995 in
the United States District Court for the Eastern District of Tennessee by
Bolling, McCool & Twist ("BMT"), a consulting firm. In the suit, BMT asserts
that the Company breached an agreement between BMT and the Company by failing to
pay BMT certain fees it asserts are owed under the agreement. More
specifically, BMT has asserted a claim for the payment of services rendered in
the approximate amount of $50,000 and seeks a success fee in an unspecified
amount in connection with the BMS Collaboration. The judge in the case
bifurcated the proceeding into two phases: an adjudication of whether the
Company breached its agreement with BMT and then a damage phase. After a trial
on the merits the jury found in favor of BMT on the breach of contract claim.
However the damage phase of the trial has not been completed. Despite the jury
verdict on the breach of contract claim, the Company is unable to predict with
certainty the eventual outcome of the lawsuit. The Company intends to continue
to contest the action vigorously and believes that this proceeding will not
have a material adverse effect on the Company or on its financial condition,
although there can be no assurance that this will be the case.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

EntreMed's Common Stock trades on the Nasdaq National Market under the
symbol "ENMD". The table below sets forth the high and low sales prices of the
Company's Common Stock as reported by the Nasdaq National Market for the
periods indicated. These prices are based on quotations between dealers, do
not reflect retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions.

1996 High Low
---- ---- ---

Second Quarter (June 19, 1996 - June 30, 1996) 16 1/4 14 7/8
Third Quarter (July 1, 1996 - September 30, 1996) 18 5/8 8 7/8
Fourth Quarter (October 1, 1996 - December 31, 1996) 17 1/4 12

1997
----
First Quarter (January 1, 1997 - March 31, 1997) 18 1/2 12 1/4
Second Quarter (April 1, 1997 - June 30, 1997) 14 3/4 8 1/2
Third Quarter (July 1, 1997 - September 30, 1997) 12 3/4 8 7/8
Fourth Quarter (October 1, 1997 - December 31, 1997) 15 1/2 6 1/2

1998
----
First Quarter (January 1, 1997 - March 19, 1998) 15 3/4 9 3/4

At March 19, 1998, there were approximately 350 shareholders of
record, and as of that date, the Company estimates there were approximately
1,000 beneficial owners holding stock in nominee or "street" name.

The Company has not paid any cash dividends and does not anticipate
paying any cash dividends in the foreseeable future.

In June 1996, the Registrant issued to Bristol-Myers Squibb Company
333,333 shares of Common Stock at a purchase price of $15.00 per share.

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In January through March 1996, the Registrant issued an aggregate of
83,991 shares of Common Stock to Samuel R. Dunlap, Jr., a director of the
Registrant, upon the exercise of stock options exercisable at $1.50 per share.

In December 1996, the Registrant issued to a former employee an
aggregate of 15,686 shares of Common Stock upon the exercise of stock options
for an aggregate consideration of $99,998 or $6.375 per share.

During the year ended December 31, 1997, the Registrant issued an
aggregate of 244,170 shares of Common Stock upon the exercise of stock options
and warrants for an aggregate consideration of $504,632 at exercise prices
ranging from $1.50 to $9.00 per share.

Except as otherwise noted above, (i) the above transactions were
private transactions not involving a public offering and were exempt from the
registration provisions of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof, (ii) the sale of securities was without the use of an
underwriter and (iii) the certificates evidencing the shares bear a restrictive
legend permitting the transfer thereof only upon registration of the shares or
an exemption under the Securities Act of 1933, as amended.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 1997, and for
each of the five years in the period ended December 31, 1997, are from the
financial statements of EntreMed, Inc., which have been audited by Ernst &
Young LLP, independent auditors. The data should be read in conjunction with
the financial statements, related notes and other financial information
included herein.

Year Ended December 31,
-----------------------
STATEMENTS OF OPERATIONS DATA: 1997 1996 1995 1994 1993
---------------------------------------------------------------------------

Revenues
Collaborative research
and development $ 4,342,369 $ 4,425,000 $ 347,501 $ - $ -
License fees 200,000 200,000 16,667 - -
Grant Revenues 215,119 - 347,001 90,185 -
Total revenues 4,757,488 4,625,000 711,169 90,185 -

Expenses:
Research and development 8,998,705 7,553,793 5,939,512 3,673,929 4,772,652
General and administrative 4,915,724 3,435,501 2,458,976 1,549,705 1,552,143
Interest expense 1,418 27,267 65,754 - -
Interest income (2,621,630) (1,621,729) (44,854) (18,993) (85,939)

Net Loss (6,536,729) $(4,769,832) $(7,708,219) $(5,114,456) $(6,238,856)

Net Loss per share $ (0.54) $ (0.50) $ (1.41) $ (1.09) $ (1.57)

Weighted average number of
shares outstanding 12,158,372 9,532,671 5,485,763 4,712,776 3,980,899

Pro forma net loss per share(1) $ (0.46) $(1.03)

Pro forma weighted average
number of shares
outstanding (1) 10,422,781 7,485,763

BALANCE SHEET DATA:
Cash and cash equivalents
and short-term investments 45,245,071 52,720,829 6,885,099 218,619 2,188,665
Working capital 41,454,371 49,049,124 5,689,810 (332,427) 2,112,738
Total assets 47,838,663 54,146,339 10,146,383 843,742 3,258,995
Deferred revenue, less
current portion 1,341,666 2,236,666 2,741,666 - -
Accumulated deficit (31,793,532) (25,256,803) (20,486,971) (12,778,752) (7,280,210)
Total stockholders' equity 41,953,094 47,694,191 3,601,260 292,696 2,798,982

- ----------
(1) Pro forma net loss per share and weighted average shares outstanding for
the years ended December 31, 1995 and 1996 give effect to the automatic
conversion of 3,000,000 outstanding shares of Preferred Stock into 2,000,000
shares of Common Stock on June 19, 1996, the effective date of the Company's
initial public offering. See Notes 1 and 8 of Notes to Financial Statements.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report. See"---Risk Factors".

OVERVIEW

Since its inception in September 1991, the Company has devoted
substantially all of its efforts and resources to sponsoring and conducting
research and development on its own behalf and through collaborations with
corporate partners and academic research and clinical institutions, and
establishing its facilities and hiring personnel.

With the exception of license fees and research and development
funding from Bristol-Myers Squibb and certain research grants, the Company has
not generated any revenue from operations. For the period from inception to
December 31, 1997, the Company incurred a cumulative net loss of approximately
$31,800,000. The Company has incurred additional losses since such date and
expects to incur additional operating losses for the foreseeable future. In
December 1995, the Company entered into the BMS Collaboration and, through
December 31, 1997, had received approximately $13,405,000 in license and
research and development fees and expense reimbursements and an $11,500,000
equity investment pursuant to this alliance. The Company expects that its
revenue sources for at least the next several years will be limited to research
grants and future collaboration payments from Bristol-Myers Squibb and from
other collaborators under arrangements that may be entered into in the future.
The timing and amounts of such revenues, if any, will likely fluctuate sharply
and depend upon the achievement of specified milestones, and results of
operations for any period may be unrelated to the results of operations for any
other period. See "Business - Collaborations and License Agreements".

RESULTS OF OPERATIONS

Years Ended December 31, 1997, 1996, and 1995.

Revenues under collaborative research and development agreements were
approximately $4,342,000, $4,425,000, and $348,000 and license fees were
approximately $200,000, $200,000, and $17,000 in the years ended December 31,
1997, 1996, and 1995, respectively. The collaborative research and development
fees relate to the amortization over five years of a one-time payment of
$2,500,000 ($500,000, $500,000 and $42,000 recognized in 1997, 1996 and 1995,
respectively); the amortization of the semi-annual payment of $1,835,000 as
called for under the BMS Collaboration ($3,670,000, $3,670,000 and $306,000
recognized in 1997, 1996 and 1995, respectively); and $172,000 and $255,000
recognized in 1997 and 1996, respectively, as reimbursement for clinical
studies. The license fees represent the amortization over five years of a
one-time $1,000,000 license fee under the BMS Collaboration, a portion of which
was paid to Children's Hospital. Approximately one month's amortization of
these amounts is included in 1995 as the BMS Collaboration was entered into in
December 1995 compared to twelve full months for 1997 and 1996. In addition,
revenues during 1995 included grant revenues from the

33
34
World Health Organization and SBIR grants of $347,000. In 1997, there were
grant revenues of approximately $215,000 from a Small Business Innovative
Research program from the National Institutes of Health.

Research and development expenses increased by 27.2% from
approximately $5,940,000 in 1995 to $7,554,000 in 1996 and increased by 19.1%
to approximately $8,999,000 in 1997, due primarily to increased efforts in the
Company's internal and sponsored research and product development programs
related to its antiangiogenesis and blood cell permeation technologies.
Research and development expenditures included sponsored research payments of
approximately $2,570,000, $3,461,000, and $3,700,000 and internal research and
development expenses of approximately $3,370,000, $4,093,000, and $5,300,000 in
1995, 1996 and 1997, respectively.

General and administrative expenses increased by 43.1% in 1997 to
approximately $4,916,000 from $3,436,000 in 1996 and increased by 39.7% in 1996
from $2,459,000 in 1995. The 1997 and 1996 increases resulted primarily from
increases in administrative costs associated with being a public company,
investigating potential strategic relationships, obtaining professional
services and adding administrative staff to support the research scientists and
collaborative efforts the Company is conducting. Interest income increased
from $45,000 to $1,622,000 in 1995 and 1996, respectively, and to $2,622,000 in
1997. The 1996 and 1997 increases are due to the Company investing in
interest-bearing securities the net proceeds from the IPO and the BMS
Collaboration. The Company had interest expense of approximately $66,000,
$27,000, and $1,400 in 1995, 1996, and 1997, respectively, as a result of
capital lease obligations.

LIQUIDITY AND CAPITAL RESOURCES

From inception through December 31, 1997, the Company financed its
operations from (i) the net proceeds of private placements of equity securities
which raised approximately $17,000,000, (ii) payments from Bristol-Myers
Squibb, including $9,700,000 received in December 1995 (of which $6,500,000 was
an equity investment), $11,535,000 received in 1996 (of which $5,000,000 was an
equity investment), and $3,670,000 in 1997, (iii) various grants from the World
Health Organization and Small Business Innovation Research ("SBIR") grants
totaling approximately $652,000, (iv) its June 1996 Initial Public Offering
("IPO") which raised net proceeds of approximately $43,541,000 and (v) proceeds
of approximately $654,000 under capital leases.

Bristol-Myers Squibb is obligated to make additional semi-annual
payments to the Company of $1,835,000 in each of June and December through June
2000 as well as additional payments in the event certain mostly late-stage
regulatory milestones are achieved. Bristol-Myers Squibb may terminate the
collaboration agreement and return the licensed technology to the Company at
any time upon six months' notice, in which event it would have no further
funding obligation to the Company.

At December 31, 1997, the Company had working capital of approximately
$41,500,000. The Company's cash resources have been used to finance research
and development, including

34
35
sponsored research, capital expenditures, including leasehold improvements to
the Company's laboratory facility, and general and administrative expenses.
Over the next several years, the Company expects to incur substantial
additional research and development costs, including costs related to
early-stage research in areas not reimbursed by Bristol-Myers Squibb,
preclinical and clinical trials, increased administrative expenses to support
its research and development operations and increased capital expenditures for
expanded research capacity, various equipment needs and facility improvements.

At December 31, 1997, the Company was a party to sponsored research
agreements requiring it to fund an aggregate of approximately $4,100,000
through 1999 (including $3,000,000 to Children's Hospital) and license
agreements requiring milestone payments of up to $4,360,000 and additional
payments upon attainment of regulatory milestones. In addition, the Company
agreed to provide funding to Cytokine Sciences, Inc., its 85% owned subsidiary,
in an aggregate amount of $1,600,000 during the first two years commencing July
2, 1996, with an additional $1,500,000 to be provided at the sole option of the
Company during the third year. The Company is also a party to an office lease
expiring in 2003 with total future minimum lease payments of approximately
$1,227,000. See Note 11 of Notes to Financial Statements.

At December 31, 1997, the Company had available net operating loss
carryforwards of $30,224,000 to offset any future taxable income for federal
tax purposes. The utilization of the loss carryforwards to reduce future income
taxes will depend on the Company's ability to generate sufficient taxable
income prior to the expiration of the net operating loss carryforwards. The
carryforwards begin to expire in the year 2006. However, the Tax Reform Act of
1986 limits the maximum annual use of net operating loss and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a corporation. For financial reporting purposes, a valuation allowance has
been recognized to reduce the net deferred tax assets to zero due to
uncertainties with respect to the Company's ability to generate taxable income
in the future sufficient to realize the benefit of deferred income tax assets.
See Note 7 of Notes to Financial Statements.

The Company believes that its existing resources and committed funding
from Bristol-Myers Squibb will be sufficient to meet the Company's planned
expenditures during 1998, although there can be no assurance the Company will
not require additional funds. The Company's working capital requirements will
depend upon numerous factors, including the progress of the Company's research
and development programs (which may vary as product candidates are added or
abandoned), preclinical testing and clinical trials, achievement of regulatory
milestones, the Company's corporate partners fulfilling their obligations to
the Company, the timing and cost of seeking regulatory approvals, the level of
resources that the Company devotes to the development of manufacturing,
marketing and sales capabilities, if any, technological advances, the status of
competitors, the ability of the Company to maintain existing and establish new
collaborative arrangements with other companies to provide funding to the
Company to support these activities and other factors. In any event, the
Company will require substantial funds in addition to the present existing
working capital to develop its product candidates and otherwise to meet its
business objectives.

35
36
YEAR 2000

The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
those computer programs having time-sensitive software would recognize a date
using "00" as the year 1900 rather than the year 2000.

Based on a recent assessment, the Company determined that its
accounting software will need to be updated or modified. This should be
accomplished through updates from the software manufacturer. The Company does
not expect any material costs associated with this modification or any
disruptions to its primary operations. The Company anticipates no other year
2000 problems which are reasonably likely to have a material adverse effect on
the Company's operations. There can be no assurance, however, that such
problems will not arise.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. These new standards require that all items recognized as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Statement
130 is effective for fiscal years beginning after December 15, 1997. The
adoption of Statement 130 will not impact the Company's consolidated financial
statements.

In June 1997, the FASB issued Statement 131, Disclosures About
Segments of an Enterprise and Related Information ("Statement 131"). Statement
131 changes the way public companies report segment information in annual
financial statements and also requires those companies to report selected
segment information in interim financial reports. Statement 131 is effective
for years beginning after December 15, 1997. The adoption of Statement 131
will not have a significant impact on the Company's consolidated financial
statements.

INFLATION

Management does not believe that inflation has a material impact on
the Company's results of operations.

ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted in a separate section of this
report. See Index to Consolidated Financial Statements on Page F-1.

36
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

The information called for by Item 10: Directors and Executive
Officers of the Registrant; Item 11: Executive Compensation; Item 12: Security
Ownership of Certain Beneficial Owners and Management; and Item 13: Certain
Relationships and Related Transactions will be included in and is incorporated
by reference from the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120
days after the close of its fiscal year.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS - An index to Consolidated Financial Statements
appears on page F-1.

2. Schedules

All financial statement schedules are omitted because they are not
applicable, not required under the instructions or all the information required
is set forth in the financial statements or notes thereto.

3. Exhibits

3.1* Amended and Restated Certificate of Incorporation of
the Registrant

3.1(a) Amendment to the Certificate of Incorporation

3.2* Form of Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of the Registrant

3.3* By-laws of the Registrant

10.1* Research Collaboration and License Agreement, dated
December 7, 1995, between the Registrant and
Bristol-Myers Squibb Company ("BMS")

37
38
10.2* Restricted Stock Purchase Agreement, dated December 7,
1995, between the Registrant and BMS

10.3* Warrant to Purchase Common Stock, dated December 7,
1995, issued by the Registrant to BMS

10.4* Registration Rights Agreement, dated December 7, 1995,
between the Registrant and BMS

10.5* Research Agreement, dated September 29, 1993, between
the Registrant and Children's Hospital

10.6* Amendment to Research Agreement, dated August 23, 1995,
between the Registrant and Children's Hospital

10.7* License Agreement, dated May 26, 1994, between
Children's Medical Center Corporation ("CMCC") and the
Registrant

10.8* Amendment to License Agreement, dated August 23, 1995,
between CMCC and the Registrant

10.9* License Agreement, dated May 26, 1994, between CMCC
and the Registrant

10.10* Amendment to License Agreement, dated August 23, 1995,
between CMCC and the Registrant

10.11* Sponsored Research Agreement, dated November 5, 1992,
between the Registrant and CBR Laboratories, Inc.
("CBRL")

10.12* Licensing Agreement, dated November 5, 1992, between
the Registrant and CBRL

10.13* Employment Agreement, dated as of January 1, 1996,
between the Registrant and John W. Holaday, Ph.D.

10.14* 1992 Stock Incentive Plan

10.15* Amended and Restated 1996 Stock Option Plan

10.16* Form of Stock Option Agreement

10.17* Consulting Agreement between the Registrant and Samuel
R. Dunlap, Jr.

10.18* Consulting Agreement between the Registrant and Steve
Gorlin (superseded by Exhibit 10.18a)

38
39
10.18(a)* Termination Agreement dated May 15, 1996 effective
August 1, 1996, between the Registrant and Steve Gorlin

10.19* Master Equipment Lease Agreement, dated April 10, 1995,
between the Registrant and MMC/GATX Partnership No. 1

10.20* Lease between the Registrant and Red Gate III Limited
Partnership

10.21* Form of Indemnification Agreement

10.22* Research and License Agreement, dated August 1993,
between the Registrant and Innovative Therapeutics, Inc.

10.23** Agreement between Cytokine Sciences, Inc. and
Innovative Therapeutics, Inc.

10.24*** License Agreement between Children's Hospital Medical
Center Corporation and EntreMed, Inc. signed December
5, 1996 regarding Endostatin(TM) protein, An Inhibitor
of Angiogenesis

10.25*** License Agreement between Children's Hospital Medical
Center Corporation and EntreMed, Inc. signed December
20, 1996 regarding Estrogenic Compounds as
Anti-Mitotic Agents

10.26 Agreement between Bristol-Myers Squibb and EntreMed,
Inc. signed August 5, 1997 regarding Termination of
Collaborative Research and License Agreement with
Respect to Thalidomide Products

10.27**** Amendment to the 1996 Stock Option Plan

21 Subsidiaries of the Registrant

23.1 Consent of Independent Auditors

27.1 Financial Data Schedule

27.2 Financial Data Schedule

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

* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-3536) declared effective by the Securities and
Exchange Commission on June 11, 1996.

39
40
** Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1996 previously filed with the Securities and Exchange
Commission.

*** Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1997 previously filed with the Securities and
Exchange commission.

**** Compensatory Plan or Arrangement.

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

(b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the three
month period ended December 31, 1997.

40
41
ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CERTAIN EXHIBITS

YEAR ENDED DECEMBER 31, 1997

ENTREMED, INC.

ROCKVILLE, MARYLAND
42
FORM 10-K - ITEM 14(a)(1) AND (2)

ENTREMED, INC. AND SUBSIDIARIES

List of Financial Statements and Financial Statement Schedules

The following consolidated financial statements of EntreMed, Inc. and
subsidiaries are included in Item 8:

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

The following consolidated financial statement schedules of EntreMed, Inc. and
subsidiaries are included in Item 14(d):

None

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
43

Consolidated Financial Statements

EntreMed, Inc.

Years ended December 31, 1997, 1996 and 1995
with Report of Independent Auditors
44
EntreMed, Inc.

Consolidated Financial Statements

Years ended December 31, 1997, 1996 and 1995

CONTENTS

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Report of Independent Auditors

Board of Directors
EntreMed, Inc.

We have audited the accompanying consolidated balance sheets of EntreMed, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EntreMed, Inc. at December 31, 1997 and 1996 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Atlanta, Georgia
February 5, 1998

F-1
46
EntreMed, Inc.

Consolidated Balance Sheets

DECEMBER 31,
1997 1996
--------------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 18,232,491 $ 33,051,206
Short-term investments 27,012,580 19,669,623
Account receivable 84,151 -
Interest receivable 520,457 401,673
Prepaid expenses and other 86,095 97,962
--------------------------------------
Total current assets 45,935,774 53,220,464

Furniture and equipment, net 1,498,781 824,559

Other assets 404,108 101,316
--------------------------------------
Total assets $ 47,838,663 $ 54,146,339
======================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 683,201 $ 600,303
Accrued liabilities 1,265,905 957,718
Capital leases payable - 104,152
Deferred revenue (Note 5) 2,532,297 2,509,167
--------------------------------------
Total current liabilities 4,481,403 4,171,340

Deferred revenue, less current portion (Note 5) 1,341,666 2,236,666

Minority interest 62,500 44,142

Stockholders' equity:
Convertible preferred stock, $1.00 par and $1.50 liquidation
value:
5,000,000 shares authorized, none issued and outstanding at
December 31, 1997 and 1996, respectively - -
Common stock, $.01 par value:
20,000,000 shares authorized, 12,253,768 and 12,009,598
shares issued and outstanding at December 31, 1997 and
1996, respectively 122,538 120,096
Additional paid-in capital 73,624,088 72,830,898
Accumulated deficit (31,793,532) (25,256,803)
--------------------------------------
Total stockholders' equity 41,953,094 47,694,191
--------------------------------------
Total liabilities and stockholders' equity $ 47,838,663 $ 54,146,339
======================================

See accompanying notes.

F-2
47
EntreMed, Inc.

Consolidated Statements of Operations

YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------------------

Revenues:
Collaborative research and development
(Note 5) $ 4,342,369 $ 4,425,000 $ 347,501
Licensing (Note 5) 200,000 200,000 16,667
Grant revenues 215,119 - 347,001
------------------------------------------------------
4,757,488 4,625,000 711,169

Costs and expenses:
Research and development 8,998,705 7,553,793 5,939,512
General and administrative 4,915,724 3,435,501 2,458,976
------------------------------------------------------
13,914,429 10,989,294 8,398,488
Interest expense (1,418) (27,267) (65,754)
Investment income 2,621,630 1,621,729 44,854
------------------------------------------------------

Net loss $(6,536,729) $(4,769,832) $(7,708,219)
======================================================

Net loss per share (basic and diluted) $ (0.54) $ (0.50) $ (1.41)
======================================================

Weighted average number of shares outstanding
(basic and diluted) 12,158,372 9,532,671 5,485,763
======================================================

Pro forma net loss per share $ (0.46) $ (1.03)
===================================
Pro forma weighted average number of shares
outstanding 10,422,781 7,485,763
===================================

See accompanying notes.

F-3
48

EntreMed, Inc.

Consolidated Statements of Stockholders' Equity

COMMON STOCK PREFERRED STOCK
--------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------

Balance at January 1, 1995 5,064,101 $ 50,641 3,000,000 $ 3,000,000
Issuance of common stock for options exercised
at $1.50 per share 42,663 427 - -
Issuance of common stock for compensation to
directors at $6.38 per share 12,150 121 - -
Sale of common stock at $6.38 per share, net of
offering costs of approximately $180,000 710,862 7,109 - -
Sale of common stock in connection with research
agreement at $12.00 per share 541,666 5,417 -
Sale of common stock at $12.00 per share 5,146 51 - -
Net loss - - - -
------------------------------------------------------------
Balance at December 31, 1995 6,376,588 63,766 3,000,000 3,000,000
Issuance of common stock for options exercised
at $1.50 to $6.38 per share 99,677 997 - -
Initial public offering of 3,200,000 shares of
common stock and private placement of 333,333
shares at $15.00 per share, net of offering
costs of approximately $4,459,000 3,533,333 35,333 - -
Automatic conversion of preferred stock to
common stock upon initial public offering 2,000,000 20,000 (3,000,000) (3,000,000)
Warrants issued for consulting services - - - -
Net loss - - - -
------------------------------------------------------------
Balance at December 31, 1996 12,009,598 120,096 - -
Issuance of common stock for options exercised 244,170 2,442 - -
Warrants issued for consulting services - - - -
Net loss - - - -
------------------------------------------------------------
Balance at December 31, 1997 12,253,768 $122,538 - $ -
============================================================

ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------------------------------------------

Balance at January 1, 1995 $10,020,807 $(12,778,752) $ 292,696
Issuance of common stock for options exercised
at $1.50 per share 63,573 - 64,000
Issuance of common stock for compensation to
directors at $6.38 per share 77,379 - 77,500
Sale of common stock at $6.38 per share, net of
offering costs of approximately $180,000 4,306,382 - 4,313,491
Sale of common stock in connection with research
agreement at $12.00 per share 6,494,583 - 6,500,000
Sale of common stock at $12.00 per share 61,741 - 61,792
Net loss - (7,708,219) (7,708,219)
----------------------------------------------
Balance at December 31, 1995 21,024,465 (20,486,971) 3,601,260
Issuance of common stock for options exercised
at $1.50 to $6.38 per share 225,002 - 225,999
Initial public offering of 3,200,000 shares of
common stock and private placement of 333,333
shares at $15.00 per share, net of offering
costs of approximately $4,459,000 48,505,431 - 48,540,764
Automatic conversion of preferred stock to
common stock upon initial public offering 2,980,000 - -
Warrants issued for consulting services 96,000 - 96,000
Net loss - (4,769,832) (4,769,832)
----------------------------------------------
Balance at December 31, 1996 72,830,898 (25,256,803) 47,694,191
Issuance of common stock for options exercised 502,190 - 504,632
Warrants issued for consulting services 291,000 - 291,000
Net loss - (6,536,729) (6,536,729)
----------------------------------------------
Balance at December 31, 1997 $73,624,088 $(31,793,532) $41,953,094
==============================================

See accompanying notes.

F-4
49

EntreMed, Inc.

Consolidated Statements of Cash Flows

YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(6,536,729) $(4,769,832) $(7,708,219)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 336,668 190,960 201,593
Stock and warrants issued for compensation and
consulting expense 291,000 96,000 77,500
Minority interest 18,358 - -
Changes in assets and liabilities:
Account receivable (84,151) 2,500,000 (2,500,000)
Interest receivable (118,784) (397,657) (4,016)
Prepaid expenses and other 9,075 (98,360) -
Accounts payable 82,898 233,053 (183,796)
Accrued liabilities 308,187 615,942 341,776
Deferred revenue (Note 5) (871,870) (589,999) 5,335,832
----------------------------------------------
Net cash used by operating activities (6,565,348) (2,219,893) (4,439,330)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (32,014,130) (34,563,369) -
Maturities of short-term investments 24,671,173 14,893,746 -
Other investments (300,000) (100,000) -
Purchases of furniture and equipment (1,010,890) (215,027) (210,829)
----------------------------------------------
Net cash used by investing activities (8,653,847) (19,984,650) (210,829)

CASH FLOWS FROM FINANCING ACTIVITIES
Sales of common stock 504,632 48,766,763 10,939,283
Proceeds from sale lease-back - - 654,020
Payment of lease obligation (104,152) (396,113) (276,664)
Repayment of note payable - - (510,000)
Proceeds from note payable - - 510,000
----------------------------------------------
Net cash provided by financing activities 400,480 48,370,650 11,316,639

Net increase (decrease) in cash and cash equivalents (14,818,715) 26,166,107 6,666,480
Cash and cash equivalents at beginning of year 33,051,206 6,885,099 218,619
----------------------------------------------
Cash and cash equivalents at end of year $18,232,491 $33,051,206 $ 6,885,099
==============================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND
NONCASH INVESTMENT AND FINANCING ACTIVITIES
Interest paid $ 1,418 $ 27,267 $ 65,754
==============================================

Purchase of furniture and equipment in exchange for
minority interest $ - $ 44,118 $ -
==============================================
Equipment purchased under capital lease $ - $ - $ 122,909
==============================================

See accompanying notes.

F-5
50
EntreMed, Inc.

Notes to Consolidated Financial Statements

Years ended December 31, 1997, 1996 and 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

EntreMed, Inc. (the "Company") is engaged primarily in the research and
development of biopharmaceutical products that address the role of blood and
blood vessels in the prevention and treatment of a broad range of diseases.
The Company's core technologies include (i) an antiangiogenesis program focused
on the development of proprietary products intended to inhibit the abnormal
growth of new blood vessels associated with cancer and certain causes of
blindness and (ii) a blood cell permeation device designed to enhance the
ability of red blood cells to deliver oxygen to organs and tissues and which
may also be used to deliver drugs, genes or other therapeutic agents that
otherwise would not readily diffuse through blood cell membranes.

The Company's strategy is to accelerate development of its antiangiogenesis and
cell permeation technologies as well as other promising technologies which the
Company perceives to have clinical and commercial potential. The principal
elements of the Company's strategy are (i) to focus its resources on current
core technologies, (ii) to broaden its product and technology portfolio through
sponsored research collaborations with academic institutions, government
organizations and private enterprises, (iii) to augment product development
with its in-house research and development capabilities and (iv) to leverage
its resources through corporate partnerships in order to minimize the cost to
the Company of late-stage clinical trials and to accelerate effective product
commercialization. All of the Company's product candidates are in the
development stage and require further research, development, testing and
regulatory clearances.

The Company was organized in September 1991 as a Delaware Corporation and from
inception through December 1995 was in the development stage. In December
1995, the Company and Bristol-Myers Squibb Company ("Bristol-Myers Squibb")
entered into a collaboration to develop and commercialize certain
antiangiogenesis therapeutics (see Note 5). The Company received 95%, 100% and
50% of its revenues from Bristol-Myers Squibb in 1997, 1996 and 1995,
respectively, and expects this concentration to continue in future years.

The accompanying consolidated financial statements include the accounts of the
Company's 85% owned subsidiary, Cytokine Sciences, Inc. Cytokine was formed in
June 1996 for the purpose of acquiring the assets of Innovative Therapeutics,
Inc. in

F-6
51
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)

July 1996 in exchange for 15% of the common stock of Cytokine valued at
approximately $44,000. All intercompany balances and transactions have been
eliminated in consolidation. Minority interest expense of $18,358 and $24 is
included in general and administrative expenses for the years ended December
31, 1997 and 1996, respectively.

RESEARCH AND DEVELOPMENT

Research and development expenses consist of independent proprietary research
and development costs, the costs associated with work performed under
collaborative research agreements and the Company's sponsored funding of
research programs performed by others. Research and development costs are
expensed as incurred.

PATENT COSTS

Costs incurred in filing, prosecuting and maintaining patents are expensed as
incurred. Such costs aggregated approximately $409,000, $565,000 and $454,000
in 1997, 1996 and 1995, respectively.

INVESTMENTS

The Company invests in various debt securities. These investments are
accounted for in accordance with Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
which requires certain debt securities to be reported at amortized cost,
certain debt and equity securities to be reported at market with current
recognition of unrealized gains and losses, and certain debt and equity
securities to be reported at market with unrealized gains and losses as a
separate component of stockholders' equity.

Management determines the appropriate classification of investments as
held-to-maturity or available-for-sale at the time of purchase and re-evaluates
such designation as of each balance sheet date. The Company has classified all
investments as available-for-sale. Available-for-sale securities are carried
at fair value, with the unrealized gains and

F-7
52
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENTS (CONTINUED)

losses, net of tax, reported in stockholders' equity. The amortized cost of
debt securities in this category is adjusted for the amortization of premiums
and accretion of discounts to maturity. Such amortization is included as
investment income. Realized gains and losses and declines in value judged to
be other-than-temporary on the available-for-sale securities are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income.

FURNITURE AND EQUIPMENT

Furniture and equipment are stated at cost and are depreciated over their
expected useful lives. Depreciation is provided on a straight-line basis.
Amortization associated with capitalized leases is included in depreciation
expense. Furniture and equipment are summarized as follows:

DECEMBER 31
1997 1996
------------------------------

Furniture and equipment $2,211,263 $1,200,373
Less: accumulated depreciation (712,482) (375,814)
------------------------------
$1,498,781 $ 824,559
==============================

CASH EQUIVALENTS

Cash equivalents include cash and short-term investments with original
maturities of less than 90 days.

INCOME TAXES

Income taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.

F-8
53
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Revenue from the collaborative research and development agreement is recorded
when earned as defined under the terms of the agreement. Nonrefundable fees
received upon contract signing are recorded as deferred revenue and recognized
over the term of the agreement mentioned in Note 5. Revenues related to grants
received for specific project proposals are recognized in revenue as earned in
accordance with specified provisions, including performance requirements, in
the contracts. Other periodic research funding payments received which are
related to future performance are deferred and recognized as income when
earned.

NET LOSS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effect of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements.

Pro forma net loss per common share is calculated using the weighted average
number of common and common equivalent shares outstanding during 1996 and 1995
assuming the conversion of the convertible preferred stock at the beginning of
each respective period. Net loss per share is based on the weighted average
number of common shares outstanding.

STOCK BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("SFAS 123") sets forth accounting and reporting standards for
stock based employee compensation plans (see Note 9). As permitted by SFAS
123, the Company continues to account for stock option grants in accordance
with APB Opinion

F-9
54
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK BASED COMPENSATION (CONTINUED)

No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under APB No. 25, no compensation expense is recognized for stock or stock
options issued to employees at fair market value. Accordingly, adoption of
SFAS 123 has not affected the Company's results of operations or financial
position.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results inevitably will differ from those estimates, and such
differences may be material to the financial statements.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement 131, Disclosures About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 changes
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports. Statement 131 is effective for
periods beginning after December 15, 1997. The adoption of Statement 131 will
not have a significant impact on the Company's consolidated financial
statements.

F-10
55
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RELATED PARTY TRANSACTIONS

During 1995, the Company borrowed approximately $510,000 from related parties,
of which $162,916 was borrowed from a director of the Company, and issued to
such lenders notes payable at 9% interest. Upon receipt of proceeds from a
collaborative research and development agreement mentioned in Note 5, the
Company paid the notes and accrued interest.

The Company receives legal services from a law firm in which a Company director
is a partner. The cost of these services was negotiated on an arms length
basis and amounted to $160,000 and $406,000 for the years ended December 31,
1997 and 1996, respectively.

As of December 31, 1997 and 1996, the Company maintained approximately 87% and
88%, respectively, of its cash, cash equivalents and short-term investments
under the management of a registered investment advisory firm for which a
Company director serves as chairman of the board. Such assets under management
are maintained by a high quality, third party financial institution custodian.

The Company has an agreement with one of its directors under which the director
provides consulting services. During 1997, the Company paid $180,000 under
this agreement.

3. INVESTMENTS

All of the Company's investments are classified as available-for-sale and are
summarized as follows:

AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------------

DECEMBER 31, 1997
U.S. Treasury securities $23,012,580 $ - $ - $23,012,580
U.S. corporate securities 4,000,000 4,000,000
--------------------------------------------------------------
Total securities $27,012,580 $ - $ - $27,012,580
==============================================================

F-11
56
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

3. INVESTMENTS (CONTINUED)

AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------

DECEMBER 31, 1996
U.S. Treasury securities $14,751,966 $ - $ - $14,751,966
U.S. corporate securities 4,917,657 - - 4,917,657
----------------------------------------------------------------
Total securities $19,669,623 $ - $ - $19,669,623
================================================================

The Company had no realized gains or losses from the sale of short-term
investments for the years ended December 31, 1997 and 1996. All U.S. Treasury
and U.S. corporate securities have maturity dates of less than one year as of
December 31, 1997 and 1996.

4. SPONSORED RESEARCH PROGRAM AGREEMENTS

The Company has entered into several agreements to sponsor external research
programs. The Company's primary external research program agreement was
entered into in September 1993 with the Children's Hospital in Boston,
Massachusetts, an entity affiliated with Harvard Medical School ("Children's
Hospital"). Under this sponsored research agreement, the Company agreed to pay
Children's Hospital $11,000,000 to support research on the role of angiogenesis
in pathological conditions. In accordance with the terms of this sponsored
research agreement, $8,000,000 has been paid as of December 31, 1997,
$1,000,000 is due on April 1, 1998 and the remainder is due in equal
semi-annual payments until April 1, 1999. This sponsored research agreement
gives the Company an exclusive option to negotiate an exclusive, worldwide,
royalty-bearing license for any technology resulting from the research at
Children's Hospital in areas covered by the agreement. Amounts due under the
sponsored research agreement with Children's Hospital, which is cancelable by
the Company upon six months' notice, are paid in advance every six months and
are expensed as incurred as research and development costs. As of December 31,
1997, the Company's total commitments for external research programs are as
follows:

1998 $2,830,000
1999 1,271,000
-----------
Total commitments $4,101,000
===========

F-12
57
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT

In December 1995, the Company and Bristol-Myers Squibb entered into a
collaboration to develop and commercialize certain antiangiogenesis
therapeutics ("BMS Collaboration"). The BMS Collaboration provides for
Bristol-Myers Squibb to fund the Company's research, provide milestone payments
to the Company, and pay the Company royalties on net sales of any products
developed under the BMS Collaboration. In return, the Company granted
Bristol-Myers Squibb exclusive worldwide rights, held by the Company, to
antiangiogenic applications of thalidomide, thalidomide analogs and the
Angiostatin(TM) protein. In August 1997, the Company reacquired the commercial
rights to thalidomide in exchange for renewing Bristol-Myers Squibb's warrant
to purchase an additional $10,000,000 of the Company's common stock as
described below. Bristol-Myers Squibb continues to hold the rights to
thalidomide analogs.

Bristol-Myers Squibb is obligated under the BMS Collaboration to fund $18.35
million over five years for costs to be incurred by the Company related to
specified research and development. The Company may receive an additional $32
million if the Company attains certain late-stage clinical development and
regulatory filing milestones under the BMS Collaboration, a portion of which
will be credited against royalties. In addition to this funding, Bristol-Myers
Squibb has reimbursed the Company $730,000 for clinical studies and
ophthalmological trials. Bristol-Myers Squibb may terminate the BMS
Collaboration for any reason with six months notice, in which event
Bristol-Myers Squibb would have no further funding obligation to the Company.
In the event Bristol-Myers Squibb were to terminate the BMS Collaboration or
otherwise fail to conduct its collaborative activities successfully and in a
timely manner, the preclinical and clinical development or commercialization of
the Company's licensed antiangiogenesis product candidates might be delayed or
terminated.

The Company received a non-refundable, non-creditable licensing fee of $1
million in 1995 under the BMS Collaboration and an additional $2.5 million on
March 31, 1996 in recognition of certain research and development efforts of
the Company. These amounts were recorded as deferred revenue and are being
recognized over five years, the initial term of the BMS Collaboration
agreement.

F-13
58
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

5. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CONTINUED)

Concurrent with the signing of the BMS Collaboration, the Company issued
Bristol-Myers Squibb 541,666 shares of common stock for aggregate cash proceeds
of $6,500,000. Bristol-Myers Squibb also purchased 333,333 shares of additional
common stock of the Company at the initial public offering price of $15 per
share, or a total of $5,000,000, at the time the Company completed its initial
public offering in June 1996 and was granted the right to purchase an
additional $10,000,000 of the Company's common stock at $22.50 per share, or
444,444 shares from the Company at any time up to June 19, 1997. This warrant
was renewed and expired in November 1997.

During 1997, 1996 and 1995, the Company recognized approximately $4,542,000,
$4,625,000 and $347,000 in revenue, respectively, and incurred costs of
approximately $5,200,000, $4,000,000 and $500,000 related to the BMS
Collaboration.

6. SALE-LEASEBACK AGREEMENT

During 1995, the Company entered into a sale-leaseback agreement which is
accounted for as a capital lease. The lessor agreed to purchase the Company's
equipment and also assumed and exercised the Company's purchase option on other
leased equipment. The Company agreed to lease-back the equipment over an
initial term of two years with annual renewal options in years three and four.
The Company had the option to purchase the equipment at fair market value at
the end of years two and three. In connection with this agreement, the Company
granted the lessor warrants for 33,334 shares of common stock at an exercise
price of $6.38 per share.

During 1997, the Company exercised its purchase option and paid approximately
$263,000 for such equipment.

F-14
59
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

7. INCOME TAXES

The Company has net operating loss carryforwards of approximately $30,224,000
and $22,150,000 at December 31, 1997 and 1996, respectively, for income tax
purposes that expire in years 2006 through 2012. The Company also has research
and development tax credit carryforwards of approximately $1,719,000 and
$1,330,000 as of December 31, 1997 and 1996, respectively, that expire in years
2007 through 2012. The utilization of the net operating loss and research and
development carryforwards may be limited in future years due to changes in
ownership of the Company pursuant to Internal Revenue Code Section 382. For
financial reporting purposes, a valuation allowance has been recognized to
reduce the net deferred tax assets to zero due to uncertainties with respect to
the Company's ability to generate taxable income in the future sufficient to
realize the benefit of deferred income tax assets.

Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred income tax assets and liabilities as of December 31, 1997
and 1996 are as follows:

1997 1996
-------------------------------------

Deferred income tax assets (liabilities):
Research and development credit carryforward $ 1,719,000 $ 1,330,000
Net operating loss carryforwards 11,485,000 8,146,000
Deferred revenues 918,000 1,073,000
Other 529,000 371,000
Depreciation (4,000) (17,000)
Valuation allowance for deferred income tax assets
(14,647,000) (10,903,000)
-------------------------------------
Net deferred income tax assets $ - $ -
=====================================

F-15
60
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

7. INCOME TAXES (CONTINUED)

A reconciliation of the provision for income taxes to the federal statutory
rate is as follows:

1997 1996 1995
-----------------------------------------------------

Tax benefit at statutory rate $(2,484,000) $(1,813,000) $(2,621,000)
Tax credits (389,000) (90,000) (120,000)
Non-qualified stock options (883,000) - -
Other 12,000 12,000 11,000
Valuation allowance 3,744,000 1,891,000 2,730,000
-----------------------------------------------------
$ - $ - $ -
=====================================================

8. CONVERTIBLE PREFERRED STOCK

The preferred stock had certain preferential rights in the event of liquidation
or dissolution of the Company but did not have any preferences in regard to
voting rights or dividend distributions. The preferred stock was automatically
converted into the Company's common stock upon the effective date of the
Company's initial public offering of the Company's common stock.

9. STOCK OPTIONS AND WARRANTS

In 1992 and 1996, the Company adopted incentive and nonqualified stock option
plans whereby 1,750,000 shares of the Company's common stock were reserved for
grants to various executive, scientific and administrative personnel of the
Company as well as outside directors and consultants, of which 155,859 shares
remain available for grant as of December 31, 1997. These options vest over
periods varying from vesting immediately through vesting over four years and
generally expire 10 years from the date of grant.

F-16
61
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS AND WARRANTS (CONTINUED)

Pro forma information regarding net income and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method subsequent to December 31,
1994. Because FASB Statement No. 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free
interest rates of 5.97%, 6.36% and 5.96%; no dividend yields; volatility
factors of the expected market price of the Company's common stock of 0.80,
0.65 and 0.65; and a weighted-average expected life of an option of 7 years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
and warrants granted to employees are amortized to expense over the vesting
period. The weighted average fair value per option granted in 1997, 1996 and
1995 was $7.90, $9.73 and $4.62, respectively. The weighted average fair value
per warrant granted to employees during 1997 and 1995 was $13.00 and $4.38,
respectively. The Company's pro forma information follows:

1997 1996 1995
------------------------------------------------------------------

Pro forma net loss $(9,493,464) $(6,965,172) $(8,758,895)
Pro forma loss per share $ (0.78) $ (0.71) $ (1.20)

F-17
62
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS AND WARRANTS (CONTINUED)

A summary of the Company's stock options and warrants granted to employees, and
related information for the years ended December 31 follows:

NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
---------------------------------

Outstanding at January 1, 1995 1,170,689 $1.50 - $6.38
Exercised (42,663) $1.50
Granted 436,343 $6.00 - $12.00
-------------
Outstanding at December 31, 1995 1,564,369 $1.50 - $12.00
Exercised (99,677) $1.50 - $6.38
Granted 1,188,364 $9.00 - $16.25
Cancelled (73,112) $6.38
-------------
Outstanding at December 31, 1996 2,579,944 $1.50 - $16.25
Exercised (235,836) $1.50 - $9.00
Granted 761,575 $ 9.38 - $15.00
Cancelled (5,734) $14.00
-------------
Outstanding at December 31, 1997 3,099,949 $1.50 - $16.25
=============
Exercisable at December 31, 1997 2,182,061 $1.50 - $16.25
=============

The following summarizes information about stock options and warrants granted
to employees outstanding at December 31, 1997:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE IN YEARS PRICE AT 12/31/97 PRICE
- ------------------- -------------- ------------------ ---------------- ----------------- --------------

$1.50 637,184 4.7 $ 1.50 630,505 $ 1.50
$6 - $6.375 1,062,537 7.5 $ 6.31 899,419 $ 6.30
$9 - $16.25 1,400,228 9.3 $12.05 652,137 $12.89
-------------- -----------------
3,099,949 7.8 $ 7.92 2,182,061 $ 6.88
============== =================

F-18
63
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS AND WARRANTS (CONTINUED)

The Company also granted 50,000 and 83,334 options to purchase common stock at
$6.38 and $6.00 per share during 1995 and 1993, respectively, to Children's
Hospital in connection with a sponsored research agreement (see Note 4). These
options are not covered by the incentive and nonqualified stock option plan and
are included in the table below.

The Company also has granted warrants to consultants and certain third parties.
Warrants granted generally expire after 10 years from the date of grant. Stock
warrant activity to non-employees is as follows:

NUMBER OF EXERCISE PRICE PER
WARRANTS SHARE
--------------------------------------

Outstanding at January 1, 1995 127,982 $6.00 - $7.65
Granted 139,354 $6.38
--------------
Outstanding at December 31, 1995 267,336 $6.00 - $7.65
Granted 10,000 $14.00
--------------
Outstanding at December 31, 1996 277,336 $6.00 - $14.00
Granted 100,000 $13.00
Exercised (8,334) $6.00
--------------
Outstanding at December 31, 1997 369,002 $1.50 - $14.00
==============
Exercisable at December 31, 1997 332,335 $1.50 - $13.00
==============

The Company also granted warrants to Bristol-Myers Squibb in connection with
the BMS Collaboration described in Note 5 and which expired in November 1997.

10. FINANCIAL INSTRUMENTS

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and account receivable. As of December 31, 1997 and
1996, the Company maintained approximately 87% and 88%, respectively, of its
cash, cash equivalents and short-term investments (short-duration, high quality
debt securities) under the management of a registered investment advisory firm
for which a Company director serves as chairman of the board. Such assets
under management are maintained by a high credit quality, third party financial
institution custodian.

F-19
64
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

10. FINANCIAL INSTRUMENTS (CONTINUED)

The carrying amounts reported in the balance sheet for cash and cash
equivalents, short-term investments, account receivable and accounts payable
approximate their fair values.

11. COMMITMENTS AND CONTINGENCIES

The Company is a defendant in a lawsuit initiated in August 1995 in the United
States District Court for the Eastern District of Tennessee by Bolling, McCool
& Twist ("BMT"), a consulting firm. In the suit, BMT asserts that the Company
breached an agreement between BMT and the Company by failing to pay BMT certain
fees it asserts are owed under the agreement. More specifically, BMT has
asserted a claim for the payment of services rendered in the approximate amount
of $50,000 and seeks a success fee in an unspecified amount in connection with
the BMS Collaboration. The judge in the case bifurcated the proceeding into
two phases: an adjudication of whether the Company breached its agreement with
BMT and then a damage phase. After a trial on the merits the jury found in
favor of BMT on the breach of contract claim. However the damage phase of the
trial has not been completed. Despite the jury verdict on the breach of
contract claim, the Company is unable to predict with certainty the eventual
outcome of the lawsuit. The Company intends to continue to contest the action
vigorously and believes that this proceeding will not have a material adverse
effect on the Company or its financial statements, although there can be no
assurance this will be the case.

In May 1994, the Company entered into two license agreements, whereby the
Company acquired the exclusive, worldwide, royalty-bearing licenses to make,
use, and sell AngiostatinTM, thalidomide (see Note 5) and thalidomide analogs,
all inhibitors of angiogenesis developed by Children's Hospital. In
consideration for receiving the rights, the Company must pay a royalty on any
sublicensing fees, as defined in the agreements, to Children's Hospital. The
Company is also required to pay certain amounts upon the attainment of certain
milestones. The milestone payments aggregate $2,650,000, of which $290,000 has
been paid to date, and are based upon license fees and achievement of
regulatory approvals.

F-20
65
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

In addition, in 1996, the Company entered into two license agreements with
Children's Hospital for the exclusive, worldwide, royalty-bearing licenses to
make, use and sell Endostatin(TM) and 2-Methoxyestradiol, both inhibitors of
angiogenesis. In consideration for receiving the rights, the Company must pay
a royalty on any sublicensing fees, as defined in the agreements, to Children's
Hospital. Each agreement obligates the Company to pay up to $1,000,000 "upon
the attainment of certain milestones." As of December 31, 1997, no payments
were due under these agreements.

These license agreements require the Company to pay Children's Hospital a
specified percentage of the royalty income received on the first $100 million
in net sales of the licensed products, and an increased percentage thereafter,
with a minimum payment based on a percentage of net sales of the licensed
products by any sublicensees.

The Company leases its primary facilities through March 31, 2003. The lease
agreement provides for escalation of the lease payments over the term of the
lease, however, rent expense is recognized under the straight-line method.
Additionally, the Company leases office equipment under an operating lease.
The future minimum payments under its facilities and equipment leases as of
December 31, 1997 are as follows:

1998 $ 237,800
1999 243,900
2000 250,200
2001 256,700
Thereafter 238,200
--------------
Total minimum payments $ 1,226,800
==============

Rental expense for the years ended December 31, 1997, 1996 and 1995 was
$241,000, $226,000 and $210,000, respectively.

12. EMPLOYEE RETIREMENT PLAN

The Company sponsors the EntreMed, Inc. 401(k) Plan and Trust. The plan covers
substantially all employees and enables participants to contribute a portion of
salary and wages on a tax-deferred basis.

F-21
66
EntreMed, Inc.

Notes to Consolidated Financial Statements (continued)

13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly financial information for the years ended December 31,
1997 and 1996 is as follows:

QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------------------------------------

1997
Revenues $ 1,092,500 $ 1,092,500 $ 1,241,040 $ 1,331,448
Research and development costs 2,418,835 1,743,560 2,825,840 2,010,470
General and administrative expenses 749,660 1,219,501 882,078 2,064,485
Net loss (1,423,507) (1,180,443) (1,820,963) (2,111,816)
Net loss per share $ (0.12) $ (0.10) $ (0.15) $ (0.17)

1996
Revenues $ 1,092,500 $ 1,092,500 $ 1,092,500 $ 1,347,500
Research and development costs 2,063,270 1,246,045 2,429,696 1,814,782
General and administrative expenses 771,411 472,224 721,022 1,470,844
Net loss (1,675,407) (464,938) (1,379,087) (1,250,400)
Net loss per share $ (0.23) $ (0.06) $ (0.11) $ (0.10)

F-22
67
SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

ENTREMED, INC.

By: /s/ John W. Holday, Ph.D.
-----------------------------------------------
John W. Holaday, Ph.D., Chairman of the
Board, President and Chief Executive Officer

POWER OF ATTORNEY

The Registrant and each person whose signature appears below hereby
appoint John W. Holaday, Ph.D. as attorney-in-fact with full power of
substitution, severally, to execute in the name and on behalf of the Registrant
and each such person, individually and in each capacity stated below, one or
more amendments to the annual report which amendments may make such changes in
the report at the attorney-in-fact acting in the premises deems appropriate and
to file any such amendment to the report with the Securities and Exchange
Commission.

SIGNATURE

Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.

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

/s/ John W. Holaday, Ph. D. Chairman of the Board and 3/31/98
- --------------------------- Chief Executive Officer
John W. Holaday, Ph. D. (principal executive officer)

/s/ R. Nelson Campbell Chief Financial Officer 3/31/98
- ---------------------- (principal financial and
R. Nelson Campbell accounting officer)

/s/ John C. Thomas, Jr. Secretary/Treasurer 3/31/98
- -----------------------
John C. Thomas, Jr.

/s/ Donald S. Brooks Director 3/31/98
- --------------------------
Donald S. Brooks

II-1
68

/s/Samuel R. Dunlap, Jr. Director 3/31/98
- ------------------------
Samuel R. Dunlap, Jr.

/s/Mark C. M. Randall Director 3/31/98
- ---------------------
Mark C. M. Randall

/s/Lee F. Meier Director 3/31/98
- ---------------
Lee F. Meier

/s/Wendell M. Starke Director 3/31/98
- --------------------
Wendell M. Starke

II-2