COMBICHEM INC, S-1/A, 1997-12-03

COMBICHEM INC
S-1/A, 1997-12-03
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1997

REGISTRATION NO. 333-37981
================================================================================

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

AMENDMENT NO. 2

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

COMBICHEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 8731 33-0617379
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

9050 CAMINO SANTA FE, SAN DIEGO, CALIFORNIA 92121
(619) 530-0484
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

DR. VICENTE ANIDO, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
9050 CAMINO SANTA FE
SAN DIEGO, CALIFORNIA 92121
(619) 530-0484
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:

<TABLE>
<S> <C>
FAYE H. RUSSELL, ESQ. FREDERICK T. MUTO, ESQ.
THOMAS E. HORNISH, ESQ. ERIC J. LOUMEAU, ESQ.
LANCE S. KURATA, ESQ. CHRISTOPHER W. KRUEGER, ESQ.
BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP
550 WEST "C" STREET, SUITE 1300 4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CALIFORNIA 92101 SAN DIEGO, CA 92121
(619) 234-1966 (619) 550-6000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE
================================================================================

<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value
$0.001 per share.......... 2,587,500 Shares $13.00 $ 33,637,500 $ 10,194
=============================================================================================================
</TABLE>

(1) Includes 337,500 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.

(2) Estimated solely for the purpose of computing the amount of the registration
fee.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

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

SUBJECT TO COMPLETION, DATED DECEMBER 3, 1997

LOGO
2,250,000 SHARES

COMMON STOCK

All of the 2,250,000 shares of Common Stock offered hereby are being sold
by CombiChem, Inc. ("CombiChem" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $11.00 and
$13.00 per share. See "Underwriting" for information relating to the method of
determining the initial public offering price. The Company has applied for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"CCHM."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

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

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

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<S> <C> <C> <C>
================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------
Per Share................................. $ $ $
Total(3).................................. $ $ $
================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $700,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 337,500 shares of Common Stock, solely to cover
over-allotments if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.

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

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco, California
on or about , 1997.

BANCAMERICA ROBERTSON STEPHENS

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

UBS SECURITIES

THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3

[DEPICTIONS OF COMBICHEM'S DISCOVERY PROCESS]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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<PAGE> 4

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

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

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

TABLE OF CONTENTS

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PAGE
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<S> <C>
Summary................................................................................ 4
Risk Factors........................................................................... 6
Use of Proceeds........................................................................ 15
Dividend Policy........................................................................ 15
Capitalization......................................................................... 16
Dilution............................................................................... 17
Selected Financial Data................................................................ 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 19
Business............................................................................... 23
Management............................................................................. 40
Certain Transactions................................................................... 53
Principal Stockholders................................................................. 55
Description of Capital Stock........................................................... 57
Shares Eligible for Future Sale........................................................ 60
Underwriting........................................................................... 62
Legal Matters.......................................................................... 64
Experts................................................................................ 64
Additional Information................................................................. 64
Index to Financial Statements.......................................................... F-1
</TABLE>

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

CombiChem was incorporated in California in May 1994 and subsequently
reincorporated in Delaware in October 1997. The Company's executive offices are
located at 9050 Camino Santa Fe, San Diego, California 92121, and its telephone
number is (619) 530-0484.

The Company intends to furnish to its stockholders annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited interim financial
information for each of the first three fiscal quarters of each fiscal year of
the Company.

The Company has filed for trademark protection for the following: Discovery
Engine(TM), Universal Informer Library(TM) and Cascader(TM). All other
trademarks or service marks appearing in this Prospectus are the property of
their respective holders.

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<PAGE> 5

SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. This Prospectus may contain
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.

THE COMPANY

CombiChem, Inc. is a computational drug discovery company that is applying
its proprietary design technology and rapid synthesis capabilities to accelerate
the discovery process for new drugs. The Company believes its approach offers
pharmaceutical and biotechnology companies the opportunity to conduct their drug
discovery efforts in a more productive and cost-effective manner. Using its
proprietary Discovery Engine(TM) process, the Company focuses on the generation,
evolution and optimization of potential new lead candidates for its
collaborative partners, who will then develop, manufacture, market and sell any
resulting drugs. CombiChem believes that its process is widely applicable to a
variety of disease targets and therapeutic indications. To date, the Company has
established collaborative agreements with Teijin Limited ("Teijin"), Roche
Bioscience, a division of Syntex (U.S.A.) Inc. ("Roche Bioscience"), Sumitomo
Pharmaceuticals Co., Ltd. ("Sumitomo"), ImClone Systems Incorporated ("ImClone")
and Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation,
plc ("Elan/Athena"). In addition, the Company intends to use its approach on
internal programs to discover new lead candidates and then to outlicense them to
third parties, retaining a larger economic interest.

The Company's proprietary Discovery Engine is a convergent, iterative
process for drug discovery based on libraries (collections of compounds)
designed for information rather than merely diversity. The design of such
libraries requires the use of various computational and combinatorial chemistry
technologies to select molecules that collectively probe the biological target
in a systematic way to determine the chemical characteristics required for
binding to such target. By identifying features that discriminate between active
and inactive compounds, the computer constructs predictive models, called
hypotheses, and then uses those models to select a more focused library of
compounds. The computer selects compounds from the Company's proprietary Virtual
Library, a computational representation of more than 500 billion drug-like
molecules chosen for ease of laboratory synthesis. CombiChem believes that, by
repeating this process of selecting, synthesizing and screening informative
compounds and analyzing the resulting data, the Discovery Engine quickly
converges on the most predictive hypothesis. This hypothesis describes the
characteristics a compound must possess to be active against the target and,
thus, is used to select a variety of potent lead candidates.

CombiChem is applying its drug discovery approach to three important types
of programs: (i) lead generation, where the goal is to find lead candidates
against new biological targets; (ii) lead evolution, where the goal is to
develop alternative structural series with the same biological activity profile;
and (iii) lead optimization, where the goal is to modify a specific drug
template to improve its biological activity. For novel targets where little or
no information is available as well as those targets for which no suitable leads
have been identified, the Company initiates the Discovery Engine process by
making available for screening its Universal Informer Library(TM), which
consists of a computer-designed, proprietary collection of approximately 10,000
physical compounds.

CombiChem believes that its Discovery Engine has the following advantages:
(i) generating lead candidates from multiple structural series that exhibit the
same biological activity; (ii) generating lead structures against a wide range
of targets including those for which little or no information is available;
(iii) achieving rapid generation, evolution and optimization of lead candidates;
and (iv) reducing synthesis and screening costs. The Company's design technology
facilitates the use of small, informative libraries. The efficiency provided by
the use of such informative libraries is expected to shorten the time required
for the identification of lead candidates to less than two years.

The Company's objective is to be the industry leader in the generation,
evolution and optimization of novel lead candidates. The Company intends to
utilize its scientific and technology assets in the discovery process through a
mix of collaborative and internal programs by applying the following business
strategies: (i) to establish multiple collaborations with large pharmaceutical
and biotechnology companies focused on biological targets chosen by the
collaborators; (ii) to partner with companies to apply discovery technologies to
jointly agreed-upon biological targets; (iii) to conduct internal discovery
efforts aimed at selected biological targets, retaining a larger economic
interest in the subsequently outlicensed lead candidates; (iv) to expand
collaborative opportunities in alternative industries such as the agrochemical
field; and (v) to maintain technology leadership in both software development
and rapid synthesis capabilities.

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THE OFFERING

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Common Stock Offered by the Company....... 2,250,000 shares
Common Stock Outstanding after the 13,168,505 shares(1)
Offering................................
Use of Proceeds........................... To fund research and development, expansion of
laboratory and office facilities, working capital and
general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.... CCHM
</TABLE>

SUMMARY FINANCIAL DATA
(in thousands, except per share data)

<TABLE>
<CAPTION>
PERIOD FROM
MAY 23, 1994
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------- -----------------------
1994 1995 1996 1996 1997
------------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue..................... $ -- $ 50 $ 2,967 $ 1,070 $ 4,599
Total operating expenses.......... (711) (6,763) (8,085) (5,519) (8,341)
--------- ------- ------- --------- -------
Loss from operations.............. (711) (6,713) (5,118) (4,449) (3,742)
Net loss.......................... $(706) $(6,675) $(5,118) $(4,461) $(3,669)
========== ======= ======= ========= =======
Pro forma net loss per share(2)... $ (0.66) $ (0.45)
======= =======
Shares used in computing pro forma
net loss per share(2).......... 7,797 8,192
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(3) ADJUSTED(3)(4)
-------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 4,287 $ 16,120 $ 40,530
Short-term investments............................. 4,115 4,115 4,115
Working capital.................................... 5,288 16,121 40,531
Total assets....................................... 13,363 25,196 49,606
Long-term obligations, less current portion........ 2,377 2,377 2,377
Redeemable convertible preferred stock............. 23,130 -- --
Accumulated deficit................................ (16,168) (12,835) (12,835)
Total stockholders' equity (deficit)............... (15,852) 18,111 42,521
</TABLE>

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

(1) Based on the number of shares outstanding as of September 30, 1997.
Includes: (i) 7,754,933 shares of Common Stock to be issued upon conversion
of redeemable convertible preferred stock, par value $0.001 per share (the
"Preferred Stock"), of the Company; (ii) an aggregate of 1,250,000 shares of
Common Stock issued to ImClone and Elan/Athena in October 1997; and (iii)
901,658 shares of Common Stock which are currently subject to repurchase by
the Company. Excludes: (i) 441,696 shares of Common Stock issuable upon the
exercise of stock options outstanding as of September 30, 1997, with a
weighted average exercise price of $2.81 per share, all of which are
exercisable and 26,177 of which are vested; and (ii) 139,478 shares of
Common Stock issuable upon the exercise of outstanding warrants, with a
weighted average exercise price of $2.27 per share. See "Capitalization."

(2) Computed on the basis described for pro forma net loss per share in Note 1
of Notes to Financial Statements.

(3) Gives effect to (i) the conversion of the Preferred Stock into Common Stock
effective upon the closing of this offering; and (ii) the receipt of $11.833
million for up-front payments and the proceeds from the sale of an aggregate
of 1,250,000 shares of Common Stock to ImClone and Elan/Athena in October
1997.

(4) Adjusted to reflect the sale of 2,250,000 shares of Common Stock offered
hereby, assuming a public offering price of $12.00 per share (the mid-point
of the range set forth on the front cover) less estimated underwriting
discounts and commissions and other expenses of this offering, resulting in
net proceeds to the Company of $24.4 million. See "Use of Proceeds."

Except as otherwise indicated herein, all information contained in this
Prospectus (i) gives effect to a one-for-four reverse split of the Common Stock,
(ii) reflects the conversion of all outstanding shares of Preferred Stock into
an aggregate of 7,754,933 shares of Common Stock, effective upon the closing of
this offering, and (iii) assumes no exercise of the Underwriters' over-allotment
option.

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RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. The
Prospectus may contain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.

NEW AND UNCERTAIN TECHNOLOGY AND BUSINESS

The Company's Discovery Engine process is novel and has not yet been shown
to be successful in the discovery of lead candidates that have been subsequently
developed into commercialized drugs. Furthermore, the Company's drug discovery
efforts are focused on some targets the functions of which are not yet known.
Development of new pharmaceutical products is highly uncertain, and no assurance
can be given that the Company's drug discovery process will result in lead
candidates that will be safe or efficacious or commercially successful as
products. Failure to validate the Company's technology through the successful
discovery of lead candidates would have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company's strategy, which is unproven, is to use its proprietary design
technology for the purpose of rapidly identifying, optimizing and obtaining
proprietary rights to as many lead candidates and development candidates as
possible. The Company's ability to achieve profitability in the near term
depends entirely on its ability to enter into additional collaborative
agreements with third parties and to maintain the agreements it currently has in
place. The pricing and nature of the Company's collaborative relationships is
such that there may only be a limited number of pharmaceutical, biotechnology
and agrochemical companies that will be its potential customers. The Company's
ability to succeed is also dependent upon the acceptance by potential customers
of its Discovery Engine process as an effective tool in new drug discovery.
Historically, pharmaceutical, biotechnology and agrochemical companies have
conducted lead candidate identification and optimization within their own
research departments, due to the highly proprietary nature of the activities
being conducted, the central importance of these activities to their drug
discovery and development efforts and the desire to obtain maximum patent and
other proprietary protection on the results of their internal programs. In order
to achieve its business objectives, the Company must convince these companies
that its technology and capabilities justify the outsourcing of their programs
to the Company. There can be no assurance that the Company will be able to
attract any future customers on acceptable terms for its products and services
or develop a sustainable, profitable business. Failure to do so will have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business."

LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY

The Company has had a limited operating history. For the period from May
23, 1994 (inception) to December 31, 1994, and for the years ended December 31,
1995 and 1996, and the nine months ended September 30, 1997, the Company had net
losses of approximately $0.7 million, $6.7 million, $5.1 million and $3.7
million, respectively. As of September 30, 1997, the Company had an accumulated
deficit of approximately $16.2 million. The Company's expansion of its
operations and enhancements to its Discovery Engine and related drug discovery
technology will result in significant expenses over the next several years that
may not be offset by significant revenue. The Company's ability to achieve
profitability in the near term depends entirely on its ability to enter into
additional collaborative agreements with third parties and to maintain the
agreements it currently has in place. To date, substantially all revenue
received by the Company has been from upfront fees and research and development
funding paid pursuant to existing collaborative agreements with third parties.
The Company has not yet received any revenue from the achievement of milestones
or license fees from the discovery, development or sale of a commercial drug by
a customer, and no such revenue is expected for at least several years, if at
all. An element of the Company's commercialization strategy is

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<PAGE> 8

the potential development and licensing to others of lead compounds or drug
development candidates identified by the Company through its internal programs,
at its own expense, for potential pharmaceutical development. To date, no such
license has been entered into, and there can be no assurance that any such
license will be entered into on acceptable terms in the future, if at all. The
Company is unable to predict when, or if, it will become profitable. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

DEPENDENCE OF COMPANY'S STRATEGY ON THIRD PARTIES

The Company's strategy depends upon the formation of multiple collaborative
arrangements with third parties on a regular basis. To date, the Company has
entered into five such arrangements, and substantially all of its revenue has
been from its collaborative arrangements. There can be no assurance that the
Company will be able to continue to establish additional collaborative
arrangements, that any such arrangements will be on terms favorable to the
Company, or that current or any future collaborative arrangements will
ultimately be successful. Failure to enter into additional collaborative
agreements on favorable terms would have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
CombiChem's receipt of revenue from collaborative arrangements is affected by
the timing of efforts expended by the Company and its collaborators and the
timing of lead compound identification by the Company. The Company's products
and services will only result in commercialized pharmaceutical products
generating milestone payments and royalties upon the successful outcome of
significant preclinical and clinical development, the procurement of requisite
regulatory approvals, the establishment of manufacturing, sales and marketing
capabilities and the achievement of successful marketing. The Company does not
currently intend to perform any of these activities. Therefore, the Company will
be dependent upon the expertise and dedication of sufficient resources by third
parties to develop and commercialize products based on library compounds
produced and lead compounds discovered or optimized by the Company. In addition,
there can be no assurance that any such development or commercialization efforts
by third parties would be successful. Should a collaborative partner fail to
develop or commercialize a compound or product to which it has rights from the
Company, the Company may not receive any future milestone payments and will not
receive any royalties associated with such compound or product. In addition, the
Company's collaborative arrangements with its partners do not obligate the
partners to develop or commercialize lead compounds discovered or optimized by
the Company. Each collaborative partner may independently move forward with a
competing lead candidate developed either by such partner internally or by one
of such partners, including the Company's competitors. The potential drugs
developed by a collaborative partner may be derivative of the lead compounds
provided to the customer by the Company. While the Company's existing
collaborative agreements provide that the Company retain milestone and royalty
payment rights with respect to drugs developed from certain derivative
compounds, there can be no assurance that disputes will not arise over the
application of payment provisions to such drugs. There can be no assurance that
current or future collaborative partners, if any, will not pursue alternative
technologies or develop alternative products either on their own or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by collaborative arrangements
with the Company. Furthermore, there can be no assurance that conflicts will not
arise between collaborative partners as to proprietary rights to particular
compounds. The amount and timing of resources that current and future
collaborators, if any, devote to collaborations with the Company are not within
the control of the Company. There can be no assurance that such collaborators
will perform their obligations as expected. Further, the Company's
collaborations generally may be terminated by its collaborators upon short
notice and following an uncured material breach, which terminations would result
in a loss of anticipated revenue. Termination of the Company's existing or
future collaborative agreements, if any, could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company's strategy also involves conducting its own internally funded
discovery programs by choosing biological targets of current scientific interest
and working in collaboration with screening

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<PAGE> 9

companies. There can be no assurance that the Company would continue to have
access to such targets, novel or otherwise, on an ongoing basis. Furthermore,
despite the Company's installation of independent teams to conduct each
collaborative project, there can be no assurance that conflicts will not arise
among collaborators as to the rights to overlapping lead candidate compounds
developed independently as a result of being identified through the use of the
Company's technologies. Failure to manage multiple existing and future
collaborator relationships successfully, maintain confidentiality among such
relationships or prevent the occurrence of such conflicts could lead to disputes
that result in, among other things, a significant strain on management
resources, legal claims involving significant time and expense and loss of
reputation, a loss of capital or a loss of current or future collaborators, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Strategy" and
"Business -- CombiChem's Collaborative Arrangements."

SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS

To date, all revenue received by the Company has been from the payment of
upfront fees and research and development funding paid pursuant to collaborative
agreements. The Company expects that a significant portion of its revenue for
the foreseeable future will be comprised of such payments. The timing of certain
revenue in the future will depend upon the completion of certain milestones as
provided for in the Company's collaborative agreements. In any one fiscal
quarter the Company may receive multiple or no payments from its several
collaborators. Operating results may therefore vary substantially from quarter
to quarter and will not necessarily be indicative of results in subsequent
periods. There can be no assurance that such quarterly fluctuations in revenue
or financial results will not have a material impact on the Company's stock
price.

COMPANY'S SUCCESS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS

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<PAGE> 10

that the Company or its customers will be able to obtain patent protection for
lead compounds or pharmaceutical products based upon the Company's or such
customers' technologies. There can be no assurance that any patents issued to
the Company or its collaborative partners, or for which the Company has license
rights, will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company. To the
extent that the Company or its consultants or collaborators use intellectual
property owned by others in their work for the Company, disputes may also arise
as to the rights in related or resulting know-how and inventions. Litigation may
be necessary to enforce the Company's patent and license rights or to determine
the scope and validity of others' proprietary rights. Any such litigation
whether or not the outcome thereof is favorable to the Company, could result in
substantial cost to and diversion of effort by the Company. Further, United
States patents do not provide any remedies for infringement that occurred before
the patent is issued. The commercial success of the Company will also depend
upon successfully avoiding the infringement of current and future patents issued
to competitors and upon maintaining the technology licenses upon which certain
of the Company's current products are, or any future products under development
might be, based. If competitors of the Company prepare and file patent
applications in the United States that claim inventions also claimed by the
Company or its collaborators, the Company or its collaborators may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office ("PTO") to determine the priority of invention, which could
result in substantial cost to the Company, even if the outcome is favorable to
the Company. An adverse outcome could subject the Company to significant
liabilities to third parties and require the Company to license disputed rights
from third parties or cease using the technology.

A United States patent application is maintained under conditions of
confidentiality while the application is pending in the PTO, so that the Company
cannot determine the inventions being claimed in pending patent applications
filed by its competitors in the PTO. A number of pharmaceutical and
biotechnology companies and research and academic institutions have developed
technologies, filed patent applications or received patents on various
technologies that may be related to the Company's business. Some of these
technologies, applications or patents may conflict with the Company's
technologies or patent applications. Such conflict could limit the scope of the
patents, if any, that the Company may be able to obtain, or result in the denial
of the Company's patent applications. In addition, there can be no assurance
that the Company would be able to obtain licenses to patents held by third
parties that may cover the Company's activities at a reasonable cost, if at all,
or that the Company would be able to develop or obtain any alternative
technologies. The Company currently has certain licenses from third parties and
in the future may require additional licenses from other parties in order to
refine its Discovery Engine further and to allow its collaborators to develop,
manufacture and market commercially viable products effectively. There can be no
assurance that (i) such licenses will be obtainable on commercially reasonable
terms, if at all; (ii) any patents underlying such licenses will be valid and
enforceable; or (iii) the proprietary nature of any patented technology
underlying such licenses will remain proprietary. The Company relies
substantially on certain technologies that are not patentable or proprietary and
are therefore available to the Company's competitors. The Company also relies on
certain proprietary trade secrets and know-how that are not patentable. Although
the Company has taken steps to protect its unpatented trade secrets and
know-how, in part through the use of confidentiality agreements with its
employees, consultants and certain of its contractors, there can be no assurance
that (i) these agreements will not be breached, (ii) the Company would have
adequate remedies for any breach, or (iii) the Company's trade secrets will not
otherwise become known or be independently developed or discovered by
competitors. Failure by the Company to protect all or part of its patents, trade
secrets and know-how could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Patents and Proprietary Information."

COMPETITIVE NATURE OF COMPANY'S INDUSTRY AND RISKS OF OBSOLESCENCE OF TECHNOLOGY

Many organizations are actively attempting to identify, optimize and
generate lead compounds for potential pharmaceutical development. The Company
competes with the research departments of

9
<PAGE> 11

pharmaceutical companies, biotechnology companies, combinatorial chemistry
companies and research and academic institutions as well as other
computationally based drug discovery companies. Many of these competitors have
greater financial and human resources and more experience in research and
development than the Company. Historically, large pharmaceutical companies have
maintained close control over their research activities, including the
synthesis, screening and optimization of chemical compounds. Many of these
companies, which represent one of the largest potential markets for CombiChem's
products and services, are internally developing combinatorial and computational
approaches and other methodologies to improve productivity, including major
investments in robotics technology to permit the automated parallel synthesis of
compounds. In addition, these companies may already have large collections of
compounds previously synthesized or ordered from chemical supply catalogs or
other sources against which they may screen new targets. Other sources of
compounds include compounds extracted from natural products, such as plants and
microorganisms, and compounds created using rational drug design. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which the Company is working, either on their
own or through collaborative efforts. The Company anticipates that it will face
increased competition in the future as new companies enter the market and
advanced technologies become available. The Company's processes may be rendered
obsolete or uneconomical by technological advances or entirely different
approaches developed by one or more of the Company's competitors. The existing
approaches of the Company's competitors or new approaches or technology
developed by the Company's competitors may be more effective than those
developed by the Company. See "Business -- Competition."

SUCCESS OF COMPANY DEPENDENT ON SCALE-UP AND MANAGEMENT OF GROWTH

The Company's success will depend on the expansion of its operations to
service additional collaborative arrangements and the management of these
expanded operations. To be cost-effective in its delivery of services and
products, the Company must enhance productivity through further automation of
its processes and improvements to its technology generally. In addition, the
Company must successfully structure and manage multiple additional collaborative
relationships, including maintaining the confidentiality of the research being
provided to multiple customers. There can be no assurance that the Company will
be successful in adding technical personnel as needed to meet the staffing
requirements of any additional collaborative relationship. In addition, there
can be no assurance that the Company will be successful in its engineering
efforts to automate its processes further or in its initiatives to improve its
technology. Failure to achieve any of these goals could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Business -- CombiChem's Collaborative Arrangements" and
"Business -- Employees."

DEPENDENCE OF COMPANY ON KEY EMPLOYEES

The Company is highly dependent on the principal members of its scientific
and management staff. The loss of one or more key members of the Company's
scientific or management staff could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success will also depend in part on the continued service of its key
design engineering, scientific, software and management personnel and on its
ability to identify, hire and retain any additional personnel. There is intense
competition for such qualified personnel in the areas of the Company's
activities, and there can be no assurance that the Company will be able to
continue to attract and retain such personnel necessary for the development of
the Company's business. Failure to attract and retain key personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."

GOVERNMENT REGULATION

10
<PAGE> 12

beyond the preclinical phase, by the Company. The nature and the extent to which
such regulation may apply to the Company's customers will vary depending on the
nature of any such pharmaceutical products. Virtually all pharmaceutical
products developed by the Company's customers will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures established by the United States
Food and Drug Administration (the "FDA") and by foreign regulatory authorities.
Various federal and, in some cases, state statutes and regulations also govern
or influence, among other things, the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of such
products. Non-compliance with applicable requirements can result in fines,
warning letters, recall or seizure of products, clinical study holds or delays,
total or partial suspension of production, refusal of the government to grant
approvals, and civil and criminal penalties. The process of obtaining these
approvals and the subsequent compliance with appropriate federal and foreign
statutes and regulations are time-consuming and require the expenditure of
substantial resources. Generally, in order to gain FDA approval, a company first
must conduct preclinical studies in the laboratory and in animal models to gain
preliminary information on a compound's efficacy and to identify any safety
problems. Preclinical studies must be conducted by laboratories that comply with
FDA regulations regarding Good Laboratory Practices. The results of these
studies are submitted as a part of an Investigational New Drug application (an
"IND") that the FDA must review before human clinical trials of an
investigational drug can begin. In order to commercialize any products, the
Company or its customer will be required to sponsor and file an IND and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy that are necessary to obtain FDA and foreign regulatory
authority approval of any such products. Clinical trials are normally done in
three phases and generally take two to five years but may take longer to
complete. After completion of clinical trials of a new product, FDA and foreign
regulatory authority marketing approval must be obtained. If the product is
classified as a new drug, the Company or its customer will be required to file a
New Drug Application (an "NDA") and receive approval before commercial marketing
of the drug. 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 submitted to the FDA can take, on average, two to
five years to obtain approval. If questions arise during the FDA review process,
approval can take more than five years. Even if FDA regulatory clearances are
obtained, a marketed product is still 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. Domestic manufacturing facilities of the Company or
its customers are subject to biannual inspections by the FDA and must comply
with the FDA's current Good Manufacturing Practices regulations. To comply with
such regulations, a manufacturer must spend funds, time and effort in the areas
of production and quality control to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. For marketing
outside the United States, the Company or its customer will also be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for pharmaceutical products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

11
<PAGE> 13

operating expenses. The Company's capital requirements depend on numerous
factors, including the ability of the Company to enter into additional
collaborative arrangements, competing technological and market developments,
changes in the Company's existing collaborative relationships, the cost of
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, the purchase of additional capital equipment, the
progress of the Company's drug discovery programs and the progress of the
commercialization of milestone- and royalty-bearing compounds by the Company's
customers. The Company does not currently plan independently to develop,
manufacture or market any drugs it discovers. To the extent that additional
capital is needed, it may be raised through the sale of equity or convertible
debt securities, and the issuance of such securities could result in dilution to
the Company's existing stockholders. There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all. If
adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets that the Company would not otherwise relinquish. The failure to receive
additional funding would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM

The Company expects that substantially all of its revenue in the
foreseeable future will be derived from products and services provided to the
pharmaceutical and biotechnology industries. Accordingly, the Company's success
in the foreseeable future is directly dependent upon the success of the
companies within those industries and their continued demand for the Company's
products and services. The level of revenue and profitability of pharmaceutical
companies may be affected by the continuing efforts of governmental and
third-party payors to contain or reduce the costs of health care through various
means and the initiatives of third-party payors with respect to the availability
of reimbursement. For example, in certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to governmental
control. In the United States, there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. It is uncertain what legislative proposals may be
adopted or what actions federal, state or private payors for health care goods
and services may take in response to any health care reform proposals or
legislation. To the extent that such proposals or reforms have a material
adverse effect on the business, financial condition and profitability of
pharmaceutical and biotechnology companies that are actual or prospective
collaborators for certain of the Company's products and services, the Company's
business, financial condition and results of operations may be adversely
affected.

COMPANY'S USE OF HAZARDOUS MATERIALS

The research and development processes of the Company involve the
controlled use of hazardous 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 activities currently comply with the standards 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 exceed the resources of the Company. In addition, there can
be no assurance that the Company will not be required to incur significant costs
to comply with environmental laws and regulations in the future. The occurrence
of any such event could have a material adverse effect on the Company's
business, financial condition and results of operations.

12
<PAGE> 14

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. Based on the number
of shares outstanding as of September 30, 1997 (after giving effect to the
issuance of an aggregate of 1,250,000 shares to collaborative partners in
October 1997), upon completion of this offering, the Company will have
13,168,505 shares of Common Stock outstanding, assuming no exercise of currently
outstanding options. Of these shares, the 2,250,000 shares sold in this offering
(plus any additional shares sold upon exercise of the Underwriters'
overallotment option) will be freely transferable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), unless they are held
by "affiliates" of the Company as that term is used under the Securities Act and
the regulations promulgated thereunder. Each holder who signed a lock-up
agreement has agreed, subject to certain limited exceptions, not to sell or
otherwise dispose of any of the shares held by them as of the date of this
Prospectus for a period of 180 days after the date of this Prospectus without
the prior written consent of BancAmerica Robertson Stephens. At the end of such
180-day period, approximately 11,502,437 shares of Common Stock (including
approximately 52,657 shares issuable upon exercise of vested options) will be
eligible for immediate resale, subject to compliance with Rule 144 and Rule 701.
The remainder of the approximately 1,666,068 shares of Common Stock outstanding
or issuable upon exercise of options held by existing stockholders or option
holders will become eligible for sale at various times over a period of less
than two years and could be sold earlier if the holders exercise any available
registration rights or upon vesting pursuant to the Company's standard four year
vesting schedule. The holders of 7,754,933 shares of Common Stock have the right
in certain circumstances to require the Company to register their shares under
the Securities Act for resale to the public. If such holders, by exercising
their demand registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
required to include in a Company-initiated registration shares held by such
holders pursuant to the exercise of their piggyback registration rights, such
sales may have an adverse effect on the Company's ability to raise needed
capital. In addition, the Company expects to file immediately upon the effective
date of this registration statement, a registration statement on Form S-8
registering a total of approximately 1,925,606 shares of Common Stock including
those outstanding shares which may be repurchased by the Company and shares
issuable upon exercise of outstanding stock options or reserved for issuance
under the Company's stock incentive plan and employee stock purchase plan. See
"Management -- Benefit Plans," "Description of Capital Stock -- Registration
Rights," "Shares Eligible for Future Sale" and "Underwriting."

CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS

Upon completion of this offering, the Company's executive officers,
directors and affiliated entities together will beneficially own approximately
30.1% of the outstanding shares of Common Stock (29.4% if the Underwriters'
overallotment option is exercised in full). As a result, these stockholders will
be able to exercise control over matters requiring stockholder approval,
including the election of directors and mergers, consolidations and sales of all
or substantially all of the assets of the Company. This may prevent or
discourage tender offers for Common Stock unless the terms are approved by such
stockholders. See "Principal Stockholders."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial offering
price will be determined by negotiations between the Company and the
Underwriters and is not necessarily indicative of the market price at which the
Common Stock of the Company will trade after this offering. The market prices
for securities of life sciences companies have been highly volatile, and the
market has experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Announcements of
technological

13
<PAGE> 15

innovations or new commercial products by the Company or its competitors,
developments concerning proprietary rights, including patents and litigation
matters, publicity regarding actual or potential results with respect to
products or compounds under development by the Company or its strategic
partners, regulatory developments in both the United States and foreign
countries, public concern as to the efficacy of new technologies, general market
conditions, as well as quarterly fluctuations in the Company's revenue and
financial results among other factors, may have a significant impact on the
market price of the Common Stock. In particular, the realization of any of the
risks described in these "Risk Factors" could have a dramatic and adverse impact
on such market price. See "Underwriting."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW

The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. Although the
Company has no current plans to issue any shares of Preferred Stock, the
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. In addition, the
possible issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock. The Company's Certificate of Incorporation
provides for staggered terms for the members of the Board of Directors. A
staggered Board of Directors and certain provisions of the Company's by-laws and
of Delaware law applicable to the Company could delay or make more difficult a
merger, tender offer or proxy contest involving the Company. Further, the
Company's stock option plans generally provide for the acceleration of vesting
of options granted under such plans in the event of certain transactions which
result in a change of control of the Company. In addition, the Company is
subject to Section 203 of the General Corporate Law of Delaware which, subject
to certain exceptions, restricts certain transactions and business combinations
between a corporation and a stockholder owning 15% or more of the corporation's
outstanding voting stock (an "interested stockholder") for a period of three
years from the date the stockholder becomes an interested stockholder. These
provisions may have the effect of delaying or preventing a change of control of
the Company without action by the stockholders and, therefore, could adversely
affect the price of the Company's Common Stock. See "Management," "Description
of Capital Stock -- Preferred Stock" and "Description of Capital
Stock -- Possible Anti-Takeover Effect of Certain Charter Provisions -- Delaware
Anti-Takeover Statute."

BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS

The Company's management will have broad discretion to allocate proceeds of
this offering to uses that it believes are appropriate. There can be no
assurance that the proceeds of this offering can or will be invested to yield a
positive return. See "Use of Proceeds."

RISK OF IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution estimated at $8.77 per share in the net
tangible book value of their investment from the initial offering price.
Additional dilution will occur upon exercise of outstanding options. See
"Dilution" and "Shares Eligible for Future Sale."

14
<PAGE> 16

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,250,000 shares of
Common Stock offered hereby are estimated to be approximately $24.4 million
($28.2 million if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $12.00 per share (the mid-point of the range
set forth on the front cover) and after deducting the estimated underwriting
discounts and commissions and other estimated offering expenses.

The principal purposes of this offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock in
order to facilitate future access by the Company to public equity markets as
well as to create liquidity for its existing stockholders. The Company intends
to use the net proceeds of this offering, together with its existing cash and
cash equivalents and short-term investments, to fund research and development
(approximately $10.0 million), expansion of laboratory and office facilities
(approximately $5.0 million), working capital (approximately $2.0 million) and
the remainder for general corporate purposes. The Company may also use a portion
of the net proceeds for the acquisition of businesses, technologies or products
complementary to those of the Company. There are no present arrangements or
agreements for any such acquisitions.

The amounts actually expended for each purpose may vary significantly
depending upon numerous factors, including the amount and timing of additional
collaborative agreements, the progress of the Company's development,
technological advances, the commercial potential of the Company's services and
the status of the Company's competitors. The Company believes that its existing
cash, cash equivalents and short-term investments, combined with the net
proceeds of this offering, projected funding from equipment leases and interest
income will be adequate to satisfy its capital requirements and fund operations
at least through 1998. Pending application of the net proceeds as described
above, the Company intends to invest the net proceeds of this offering in
short-term investment-grade securities.

DIVIDEND POLICY

The Company has never declared or paid dividends on its capital stock. The
Company does not anticipate paying any cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

15
<PAGE> 17

CAPITALIZATION

The following table sets forth as of September 30, 1997 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company,
after giving effect to the receipt of up-front payments and the sale of Common
Stock to ImClone and Elan/Athena in October 1997 and the conversion of all
outstanding shares of Preferred Stock into Common Stock effective upon the
closing of this offering, and (iii) pro forma as adjusted to give effect to the
sale by the Company of 2,250,000 shares of Common Stock offered hereby, assuming
a public offering price of $12.00 per share (the mid-point of the range set
forth on the front cover) less estimated underwriting discounts and commissions
and other expenses of this offering.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(2) ADJUSTED(2)(3)
-------- ------------ --------------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents............................ $ 4,287 $ 16,120 $ 40,530
Short-term investments............................... 4,115 4,115 4,115
======== ======== ========
Long-term obligations, less current portion.......... $ 2,377 $ 2,377 $ 2,377
Redeemable convertible preferred stock:
Preferred Stock, $0.001 par value; 63,196,296
shares authorized and 7,754,933 shares issued
and outstanding actual; 5,000,000 shares
authorized and no shares issued and outstanding
pro forma and pro forma as adjusted............. 23,130 -- --
Stockholders' equity (deficit):......................
Common Stock, $0.001 par value; 80,000,000 shares
authorized actual; 1,913,572 shares issued and
outstanding actual; 40,000,000 shares authorized
pro forma and pro forma as adjusted; 10,918,505
shares issued and outstanding pro forma; and
13,168,505 shares issued and outstanding pro
forma as adjusted(1)............................ 2 11 13
Additional paid-in capital......................... 1,976 32,597 57,005
Notes receivable from stockholders................. (336) (336) (336)
Deferred compensation.............................. (1,326) (1,326) (1,326)
Accumulated deficit................................ (16,168) (12,835) (12,835)
-------- -------- --------
Total stockholders' equity (deficit)............ (15,852) 18,111 42,521
-------- -------- --------
Total capitalization....................... $ 9,655 $ 20,488 $ 44,898
======== ======== ========
</TABLE>

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

(1) Includes 901,658 shares of Common Stock which are currently subject to
repurchase by the Company. Excludes: (i) 441,696 shares of Common Stock
issuable upon the exercise of stock options outstanding as of September 30,
1997, with a weighted average exercise price of $2.81 per share, all of
which are exercisable and 26,177 of which are vested; and (ii) 139,478
shares of Common Stock issuable upon the exercise of outstanding warrants,
with a weighted average exercise price of $2.27 per share.

(2) Gives effect to (i) the conversion of the Preferred Stock into Common Stock
effective upon the closing of this offering; and (ii) the receipt of $11.833
million for up-front payments and the proceeds from the sale of an aggregate
of 1,250,000 shares of Common Stock to ImClone and Elan/Athena in October
1997.

(3) Adjusted to reflect the sale of 2,250,000 shares of Common Stock offered
hereby, assuming a public offering price of $12.00 per share (the mid-point
of the range set forth on the front cover) less estimated underwriting
discounts and commissions and other expenses of this offering, resulting in
net proceeds to the Company of $24.4 million. See "Use of Proceeds."

16
<PAGE> 18

DILUTION

The pro forma net tangible book value of the Company at September 30, 1997
was $18,111,000 or $1.66 per share of Common Stock. Pro forma net tangible book
value per share of Common Stock represents the amount of total tangible assets
of the Company less total liabilities divided by the number of shares of the
Common Stock outstanding after giving effect to the conversion of all
outstanding shares of Preferred Stock into 7,754,933 shares of Common Stock upon
the completion of this offering and the sale of an aggregate of 1,250,000 shares
of Common Stock to ImClone and Elan/Athena in October 1997. After giving effect
to the sale of the 2,250,000 shares of Common Stock offered hereby assuming a
public offering price of $12.00 per share, the mid-point of the range set forth
on the front cover, less estimated underwriting discounts and commissions and
other expenses of this offering, the Company's net tangible book value as of
September 30, 1997 would have been $42,521,000 or $3.23 per share of Common
Stock. This represents an immediate increase in pro forma net tangible book
value per share of Common Stock of $1.57 to existing stockholders and immediate
dilution in pro forma net tangible book value of $8.77 per share to new
investors purchasing Common Stock in this offering. The following table
illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $12.00
Pro forma net tangible book value of Common Stock as of
September 30, 1997........................................... $1.66
Increase attributable to new investors......................... 1.57
Pro forma net tangible book value of Common Stock after this
offering.......................................................... 3.23
------
Dilution to new investors(1)........................................ $ 8.77
======
</TABLE>

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

(1) If the Underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $8.57.

The following table summarizes, on a pro forma basis as of September 30,
1997 (after giving effect to the sale of 1,250,000 shares of Common Stock to
collaborative partners in October 1997), the number of shares of Common Stock
purchased from the Company, the total consideration paid (based on value
received by the Company at the time of issuance) and the average price per share
paid by the existing stockholders and by new investors purchasing shares in this
offering (before deduction of estimated underwriting discounts and commissions
and other expenses of this offering):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 10,918,505 82.9% $31,333,859 53.7% $ 2.87
New investors............... 2,250,000 17.1 27,000,000 46.3 12.00
------------ ---- ---------- ----
Total..................... 13,168,505 100.0% $58,333,859 100.0%
============ ==== ========== ====
</TABLE>

All of the above computations assume no exercise of outstanding options or
warrants to purchase Common Stock. The shares purchased and total consideration
paid by existing shareholders reflects the proceeds from the sale of 1,250,000
shares of Common Stock to ImClone and Elan/Athena, and does not include costs
incurred by the Company to issue Common and Preferred Stock. As of September 30,
1997, options to purchase 441,696 shares of Common Stock were outstanding at a
weighted average exercise price of approximately $2.81 per share under the
Company's stock option plan and warrants to purchase 139,478 shares of Common
Stock were outstanding at a weighted average exercise price of approximately
$2.27 per share. To the extent these options become vested and are exercised, or
the warrants are exercised, there will be further dilution to new investors.

17
<PAGE> 19

SELECTED FINANCIAL DATA

The selected financial data set forth below with respect to the Company's
statements of operations for the period from May 23, 1994 (inception) to
December 31, 1994, the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997, and with respect to the Company's balance
sheets at December 31, 1995 and 1996 and September 30, 1997, are derived from
the financial statements of the Company that have been audited by Ernst & Young
LLP, which are included elsewhere herein and are qualified by reference to such
financial statements. The balance sheet data at December 31, 1994 has been
derived from the financial statements audited by Ernst & Young LLP, which are
not included herein. The unaudited statement of operations data for the nine
months ended September 30, 1996 have been derived from unaudited financial
statements also appearing herein which in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial position and results of operations for the
unaudited interim periods. The selected financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements and
notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
MAY 23, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------- -------------------
1994 1995 1996 1996 1997
-------------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenue...................... $ -- $ 50 $ 2,967 $ 1,070 $ 4,599
Expenses:
Research and development:
Collaborative................. -- -- 420 263 2,631
Proprietary................... 413 4,763 4,820 3,547 3,354
------ -------- -------- -------- --------
413 4,763 5,240 3,810 5,985
General and administrative...... 298 2,000 2,845 1,709 2,356
------ -------- -------- -------- --------
Total operating expenses........... 711 6,763 8,085 5,519 8,341
Loss from operations............... (711) (6,713) (5,118) (4,449) (3,742)
Interest income, net............... 5 38 -- (12) 273
Foreign tax expense................ -- -- -- -- (200)
------ -------- -------- -------- --------
Net loss........................... $ (706) $(6,675) $(5,118) $(4,461) $(3,669)
====== ======== ======== ======== ========
Pro forma net loss per share(1).... $ (0.66) $ (0.45)
======== ========
Shares used in computing pro forma
net loss per share(1)........... 7,797 8,192
-------- --------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
-------- -------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 1,622 $ 3,136 $ 367 $ 4,287
Short-term investments....................... -- -- 12,166 4,115
Working capital.............................. 1,420 1,990 9,271 5,288
Total assets................................. 1,796 4,150 16,658 13,363
Long-term obligations, less current
portion.................................... -- 424 1,753 2,377
Redeemable convertible preferred stock....... 2,250 9,650 23,107 23,130
Accumulated deficit.......................... (706) (7,381) (12,499) (16,168)
Total stockholders' equity (deficit)......... (682) (7,261) (12,363) (15,852)
</TABLE>

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

(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per share and shares used in computing pro
forma net loss per share.

18
<PAGE> 20

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

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.

OVERVIEW

CombiChem is a computational drug discovery company that is applying its
proprietary design technology and rapid synthesis capabilities to accelerate the
discovery process for new drugs. The Company believes its approach offers
pharmaceutical and biotechnology companies the opportunity to conduct their drug
discovery efforts in a more productive and cost-effective manner. Using its
proprietary Discovery Engine process, the Company focuses on the generation,
evolution and optimization of potential new lead candidates for its
collaborative partners, who will then develop, manufacture, market and sell any
resulting drugs. CombiChem believes that its process is widely applicable to a
variety of disease targets and therapeutic indications. Through September 30,
1997, the Company has established collaborative agreements with Teijin, Roche
Bioscience and Sumitomo, and in October 1997 the Company established
collaborative agreements with ImClone and Elan/Athena. In addition, the Company
intends to use its approach on internal programs to discover new lead candidates
and then to outlicense them to third parties, while retaining a larger economic
interest. Since inception in May 1994, and including the October 1997
collaborative agreements, the Company has raised $31.3 million through private
sales of equity securities.

The Company's revenue to date is primarily attributable to three major
corporate collaborations: Teijin, entered into in March 1996, Roche Bioscience,
entered into in October 1996, and Sumitomo, entered into in August 1997. Under
these collaborations, the Company has received aggregate payments of $8.7
million through September 30, 1997 and has recognized an aggregate of $7.5
million as revenue, including $4.5 million of technology access fees and $3.0
million of contract research revenue, of which $1.5 million was recognized in
connection with the Teijin collaboration, $3.7 million was recognized in
connection with the Roche Bioscience collaboration and $2.3 million was
recognized in connection with the Sumitomo collaboration. Revenue from milestone
payments will be recognized when the results or events stipulated in the
agreement have been achieved. To date, the Company has not achieved any
milestones under any of its collaboration agreements. Cost of services under the
Company's collaborative agreements generally approximate the research revenue
received under the agreement. The Company is also entitled to receive royalty
payments if any product is commercialized under the collaborations. To date, the
Company has not earned any revenue related to product sales, and such revenue is
not expected for the next few years, if at all.

The Company has not been profitable since inception and has incurred a
cumulative net loss of $16.2 million through September 30, 1997. Losses have
resulted principally from costs incurred in research and development activities
related to the Company's efforts to develop its technologies and from the
associated administrative costs required to support these efforts. The Company's
ability to achieve profitability is dependent on its ability to market its
technology to pharmaceutical, biotechnology or agrochemical companies.

In connection with the collaborative agreements entered into in October
1997, the Company received aggregate proceeds of $7.5 million from the sale of
Common Stock and $3.3 million for upfront technology access fees to be
recognized as revenue in the fourth quarter of 1997. Included in the upfront
technology access fees is $2.0 million representing a premium paid by the
collaborators over the fair market value of the Common Stock.

19
<PAGE> 21

RESULTS OF OPERATIONS

Nine Months Ended September 30, 1997 and 1996

Revenue

The Company's revenue for the nine-month period ended September 30, 1997
increased $3.5 million to $4.6 million from $1.1 million for the same period in
1996. The revenue for the nine-month period ended September 30, 1997 included
$2.3 million from Sumitomo, $1.8 million from Roche Bioscience and $0.5 million
from Teijin. The revenue from the nine-month period ended September 30, 1996
included $0.8 from Teijin. This was attributable to revenue related to the
Company's increased number of collaborative agreements and the technology access
fee received from Sumitomo. The Company began recognizing revenue from the
Teijin and Roche Bioscience collaborations in March and October 1996,
respectively. The Company began recognizing contract research revenue from the
Sumitomo collaboration in August 1997. In October 1997, the Company entered into
collaborations with ImClone and Elan/Athena. The collaborative activities under
these agreements for which the Company receives revenue typically occur over a
one to three-year period, although the agreements provide for earlier
termination in certain circumstances. See "Business -- CombiChem's Collaborative
Arrangements." While the termination of any individual collaboration would not
have a material adverse effect on the Company's financial condition and results
of operations, the failure of the Company to enter into additional collaborative
agreements on favorable terms would have a material adverse effect on the
Company's financial condition and results of operations.

Operating Expenses

The Company's research and development expenses for the nine-month period
ended September 30, 1997 increased $2.2 million to $6.0 million from $3.8
million for the same period in 1996. This increase reflects increased research
and development expenses incurred both on behalf of collaborators through the
addition of chemists and software application staff for each project team and in
support of the development of the Company's technology including the addition of
software development and analytical staff, the depreciation of laboratory
equipment and the establishment of an advanced technology group. The Company has
the ability to direct its scientific personnel to work either on its
collaborative agreements or on its internal research projects as needs arise.
The Company expects research and development spending to increase over the next
several years due to increased activities related to collaborations, internal
programs and technology development.

The Company's general and administrative expenses for the nine-month period
ended September 30, 1997 increased $0.7 million to $2.4 million from $1.7
million for the same period in 1996. This increase reflects increased business
development activities, including outside consulting fees and increased travel
costs, and administrative support for the Company's expansion in 1997. These
expenses will likely continue to increase in future periods to support the
projected growth of the Company.

Net Loss

The Company's net loss for the nine-month period ended September 30, 1997
decreased $0.8 million to $3.7 million from $4.5 million for the same period in
1996. The decrease is primarily attributable to additional revenue generated
from corporate collaborations during 1997.

Years Ended December 31, 1996 and 1995

Revenue

The Company's revenue for the year ended December 31, 1996 increased to
$3.0 million from $50,000 for the same period in 1995. The revenue for the year
ended December 31, 1996 included $2.0 million from Roche Bioscience and $1.0
million from Teijin. No revenue was received from the Company's collaborators in
the year ended December 31, 1995. This increase was attributable to revenue
related to the Company's collaborative agreements with Teijin and Roche
Bioscience which were entered into during 1996.

20
<PAGE> 22

Operating Expenses

The Company's research and development expenses for the year ended December
31, 1996 increased $0.4 million to $5.2 million from $4.8 million for the same
period in 1995. This increase reflects increased research and development
expenses on behalf of collaborators and for the development of the Company's
technology, including investment in the Company's discontinued automated
synthesis instruments. The Company discontinued development of its automated
synthesis instruments in the second quarter of 1996, after incurring expenses of
approximately $4.0 million from inception of the Company through discontinuance.

The Company's general and administrative expenses for the year ended
December 31, 1996 increased $0.8 million to $2.8 million from $2.0 million for
the same period in 1995. This increase was primarily due to costs associated
with increased business development activities and administrative support, which
accompanied the Company's expansion during 1996.

Net Loss

The Company's net loss for the year ended December 31, 1996 decreased $1.6
million to $5.1 million from $6.7 million for the same period in 1995. The
decrease was primarily attributable to the increase in revenue generated from
the Teijin and Roche Bioscience collaborations.

Year Ended December 31, 1995 and Eight-Month Period Ended December 31, 1994

Revenue

The Company's revenue for the year ended December 31, 1995 consisted of
$50,000 of grant revenue. No revenue was earned by the Company in 1994.

Operating Expenses

The Company's research and development expenses for the year ended December
31, 1995 increased $4.4 million to $4.8 million from $0.4 million for the
eight-month period ended December 31, 1994. This increase primarily reflects the
expansion and development of the Company's technologies and a full year of
operations in 1995.

The Company's general and administrative expenses for the year ended
December 31, 1995 increased $1.7 million to $2.0 million from $0.3 million for
the eight-month period ended December 31, 1994, reflecting increased business
development activities and administrative support as well as a full year of
operations in 1995.

Net Loss

The Company's net loss for the year ended December 31, 1995 increased $6.0
million to $6.7 million from $0.7 million for the eight-month period ended
December 31, 1994. This increase was primarily attributable to the Company's
scale-up of research and development activities and a full year of operations.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1997, the Company held cash and cash equivalents and
marketable securities with a value of $8.4 million. The Company's working
capital at September 30, 1997 was $5.3 million. After giving effect to the
execution of the two additional collaborative agreements in October 1997 cash
and cash equivalents and marketable securities would have been $20.2 million and
working capital would have been $16.1 million. The Company has funded operations
to date with sales of preferred stock and common stock totaling $31.3 million,
payments from corporate collaborators totaling $13.0 million, and the
utilization of capital equipment lease financing totaling $4.6 million. The
Company has maintained capital lease arrangements since 1994. Under these
arrangements, the Company has funded certain capital expenditures with lease
terms ranging from 36 to 48 months in duration. As of September 30, 1997, the
Company had utilized $4.6 million of the available $7.9 million financing
facility.

Net cash used in financing activities for the nine-month period ended
September 30, 1997 was $164,000, primarily reflecting payments on capital
equipment financing. Net cash provided by financing activities for the year
ended December 31, 1996 was $12.2 million, largely due to a $13.0 million equity

21
<PAGE> 23

investment. Net cash provided by financing activities for the year ended
December 31, 1995 was $7.3 million, resulting mainly from capital contributions
and proceeds from bridge financing.

Net cash used in operating activities for the nine-month period ended
September 30, 1997 and for the year ended December 31, 1996 was $3.7 million and
$2.4 million, respectively, primarily due to the Company's scale-up of research
and development activities.

Net cash provided by investing activities during the nine-month period
ended September 30, 1997 was $7.8 million, resulting primarily from maturities
of short-term investments. Net cash used in investing activities for the year
ended December 31, 1996 was $12.6 million as compared to $0.2 million for the
year ended December 31, 1995. This increase primarily reflects purchases of
short-term investments.

Although the Company anticipates that its existing capital resources,
including the proceeds from the October 1997 collaborations and the net proceeds
from this offering, will be adequate to fund the Company's operations at least
through 1998, there can be no assurance that changes will not occur that would
consume available capital resources before such time. The Company anticipates
that it will be required to raise additional capital over a period of several
years in order to continue to conduct its operations. Such capital may be raised
through additional public or private financings, as well as collaborative
arrangements, borrowings and other available sources. There can be no assurance
that the Company's collaborative arrangements will produce revenue adequate to
fund the Company's operating expenses. The Company's capital requirements depend
on numerous factors, including the ability of the Company to enter into
additional collaborative arrangements, competing technological and market
developments, changes in the Company's existing collaborative relationships, the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, the purchase of additional capital equipment, the
progress of the Company's drug discovery programs and the progress of the
commercialization of milestone- and royalty-bearing compounds by the Company's
customers. The Company does not currently plan independently to develop,
manufacture or market any drugs it discovers. To the extent that additional
capital is needed, it may be raised through the sale of equity or convertible
debt securities, and the issuance of such securities could result in dilution to
the Company's existing stockholders. There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all. If
adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets that the Company would not otherwise relinquish. The failure to receive
additional funding would have a material adverse effect on the Company's
business, financial condition and results of operations.

NET OPERATING LOSSES

At December 31, 1996, the Company had available net operating loss ("NOL")
carryforwards of approximately $11.7 million for federal and California income
tax purposes, which will begin to expire in 2009 and 2002, respectively. In
addition, the Company had federal and California research and development credit
carryforwards of approximately $104,000 and $144,000, respectively, which will
begin to expire in 2010. The Company's ability to utilize such NOL carryforwards
may be limited under Section 382 of the Internal Revenue Code in the event of
certain cumulative changes of ownership of the Company. However, the Company
does not believe such limitation will have a material effect upon the
utilization of these carryforwards.

NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128),
which supersedes APB Opinion No. 15. SFAS No. 128 replaces the presentation of
primary earnings per share (EPS) with "Basic EPS" which reflects only the
weighted-average common shares outstanding for the period. Companies with
complex capital structures, including the Company, will also be required to
present "Diluted EPS" that reflect the potential dilution, if any, of common
stock equivalents such as employee stock options and warrants to purchase common
stock. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997.

22
<PAGE> 24

BUSINESS

OVERVIEW

CombiChem is a computational drug discovery company that is applying its
proprietary design technology and rapid synthesis capabilities to accelerate the
discovery process for new drugs. The Company believes its approach offers
pharmaceutical and biotechnology companies the opportunity to conduct their drug
discovery efforts in a more productive and cost-effective manner. Using its
proprietary Discovery Engine process, the Company focuses on the generation,
evolution and optimization of potential new lead candidates for its
collaborative partners who will then develop, manufacture, market and sell any
resulting drugs. CombiChem believes that its process is widely applicable to a
variety of disease targets and therapeutic indications. To date, the Company has
established collaborative agreements with Teijin, Roche Bioscience, Sumitomo,
ImClone and Elan/Athena. In addition, the Company intends to use its approach on
internal programs to discover new lead candidates and then to outlicense them to
third parties, retaining a larger economic interest in such candidates.

INDUSTRY BACKGROUND

During the past decade, significant advances in life sciences research and
the increasing appreciation of the complexity of biological processes have
highlighted the productivity limitations of traditional approaches to drug
discovery. These limitations, together with increased competition in the
pharmaceutical and biotechnology industries, have created intense pressure on
companies involved with drug development to reconsider the allocation of their
research budgets and to improve the cost-effectiveness of their drug discovery
process.

Between 1976 and 1996, the number of new chemical entities approved by the
FDA remained relatively constant, ranging between 12 to 30 per year, despite a
more than 10-fold increase in research and development spending by
pharmaceutical and biotechnology companies. Furthermore, it typically takes 12
to 15 years from the original concept of modulating the activity of a particular
biological target to the market introduction of a drug that performs such a
function. The average cost of bringing a new drug to market has been estimated
to be in excess of $300 million.

Frustrated with the inefficiencies of traditional drug discovery
approaches, pharmaceutical and biotechnology companies are beginning to embrace
new enabling technologies, such as combinatorial chemistry, genomics,
structure-based drug design, high-throughput screening and information
technologies, in order to gain a competitive advantage by accelerating the time
to develop and commercialize new compounds. These technologies also have the
potential to reduce significantly the cost associated with drug discovery.

The Traditional Drug Discovery Process and its Limitations

The traditional path to discovering a therapeutic drug compound typically
begins with the identification of one or more biological targets that are
believed to mediate a disease state. A biological test or assay based on a
target is then developed, predicated on the scientific belief that a compound
binding with this target may have a therapeutic benefit with respect to the
disease under study. Such an assay facilitates the screening (testing to
determine which of the compounds have the desired activity against the target)
of a collection of hundreds to thousands of candidate compounds (a library) that
have been synthesized in the laboratory. Compounds that bind to the target
protein and modulate its activity are referred to as hits. Medicinal chemists
optimize these hits until they have sufficient potency to become lead candidates
and then improve their preclinical characteristics (such as potency, specificity
and in vivo profile) further with the goal of producing drug development
candidates.

23
<PAGE> 25

In summary, the traditional drug discovery process consists of the
following steps:

[LOGO]

The traditional drug discovery process shown above is extremely expensive,
inefficient and unreliable. Failure at any point during this discovery process
would typically force the scientist either to abandon the project or to return
to the initial starting point and repeat the process. As a result, the discovery
of a novel therapeutic agent for a specified target can take years or can fail
entirely.

In recent years, the advent of robotic high-throughput screening and
automated synthesis technologies, such as combinatorial chemistry and parallel
synthesis, has begun to relieve one apparent bottleneck involving screening,
synthesis and purification of compounds in the library. While these technologies
facilitate the mechanics of drug discovery, they address neither the
unreliability of the process nor its principal inefficiency: the number of
iterations required to find a lead candidate. To address these problems, a novel
approach is needed that can provide information to improve the selection of each
subsequent library of compounds to synthesize, potentially reducing the number
of iterations. Only by improving the processes of data analysis and compound
selection can a laborious, iterative procedure be forced to converge on the lead
candidates with the most desirable pharmacological profiles.

Current Combinatorial Chemistry and Computational Approaches and Their
Limitations

Combinatorial chemistry involves the rapid creation of large collections of
chemical compounds for the purpose of identifying hits through random screening.
Combinatorial chemistry has made possible the synthesis of thousands or even
millions of molecules in a short period of time instead of the traditional
approach of synthesizing only one molecule at a time. Over the last decade, the
field of combinatorial chemistry has evolved from only companies that design and
synthesize molecules to include those that develop software and automation to
facilitate design and synthesis. These companies tend to use highly varied
approaches, including: focusing on single, pure compounds versus making
mixtures; building large versus small, focused libraries; automating part versus
all of the process; and using or not using medicinal chemistry as a principal
guiding force.

Computational methods are also employed in drug discovery. These methods
involve the use of computer-based and information technologies to manage large
chemical databases, to examine X-ray crystal structures of the target when
available (structure-based drug design), to operate the assorted automated
devices available for the synthesis of libraries, to determine how changes in
the structure affect the activity of a molecule (SAR activity) and to generate
"virtual libraries" using chemical building blocks from readily available
sources.

Currently, the dominant method of pursuing drug discovery focuses on
screening large libraries to search for a lead candidate directly in the
library, or at least a hit, which can then be optimized by the more traditional
techniques of medicinal chemistry to generate a development candidate. The
Company believes this brute-force, trial-and-error approach is flawed because
limited or no information has been factored into the library design to force the
iterative drug discovery process to converge. This limitation in current
combinatorial chemistry approaches is underscored by the fact that most compound
libraries used for screening have been constructed with the sole objective of
isolating a development candidate with the highest binding affinity to a target.
In order to achieve this objective against all possible targets, it is believed
such libraries would have to contain in excess of 100 million

24
<PAGE> 26

compounds, which size is well beyond current synthesis capabilities. In
addition, the challenge of drug discovery is not only to find a lead candidate
that exhibits activity against a biological target. It is also important to
ensure that the lead candidate will have characteristics that will enable it to
overcome the more difficult in vivo hurdles of toxicity, metabolism or problems
with oral administration, none of which will become evident until early
preclinical testing. Unless information can be extracted about which
characteristics are most necessary for binding, it is difficult to know how to
modify a compound to maintain tight binding affinity while overcoming in vivo
hurdles. Furthermore, if no hits are found after the screening of a traditional
combinatorial library, a scientist has no starting point for the drug discovery
process.

While both combinatorial chemistry and computational approaches are useful
in drug discovery to some degree, they are severely taxed by the complexity of
properly using the information available for library design, as evidenced by the
following drawbacks: (i) the inability to derive and integrate information both
from compounds that are active and those that are inactive against the target;
(ii) the inability to probe the target in order to compute ways of improving the
predictive models or hypotheses; and (iii) the inability to handle the dual
requirements of speed and quality when large data sets must be analyzed. The
Company believes that these inabilities to use information efficiently
constitute fundamental reasons that current discovery approaches have been only
moderately successful in generating lead candidates and development candidates,
despite the large number of initial hits.

COMBICHEM'S SOLUTION AND ADVANTAGES

The Company believes that it offers a solution to drug discovery by
combining its proprietary design technology and rapid synthesis capabilities in
a unique way. The Company's convergent, iterative process for drug
discovery -- its Discovery Engine (see the following diagram) -- is based on
libraries designed for information.

The design of libraries for information involves the selection of compounds
that collectively probe the biological target in a systematic way to determine
the chemical characteristics required for binding to such target. By identifying
features that discriminate between active and inactive compounds, the computer
constructs predictive models, called hypotheses, and then uses those models to
select a more focused library of compounds. The computer selects compounds from
the Company's proprietary Virtual Library, a computational representation of
more than 500 billion drug-like molecules chosen for the ease of laboratory
synthesis. CombiChem believes that by repeating this process of selecting,
synthesizing and screening informative compounds and analyzing the resulting
data, the Discovery Engine quickly converges on the most predictive hypothesis.
This hypothesis describes the characteristics a compound must possess to be
active against the target and, thus, is used to select a variety of potent lead
candidates.

Each cycle of the Discovery Engine refines the computer's definition of the
best hypothesis for the target in question. After several cycles, the resulting
hypothesis can be used to design highly potent compounds from a broad range of
chemical classes including those not readily amenable to combinatorial synthesis
techniques. By facilitating the design of a variety of potent compounds for
preclinical testing, the Discovery Engine has the potential to increase greatly
the likelihood that at least one of these compounds passes the in vivo and other
downstream hurdles and eventually becomes a commercial drug.

25
<PAGE> 27

[GRAPHIC]

CombiChem believes that the advantages of its Discovery Engine include the
following:

Generating lead candidates from multiple structural series that exhibit the
same biological activity. By using predictive hypotheses to search the more than
500 billion-molecule Virtual Library, multiple structural series of compounds
that have the same effect on the target can be identified. The availability of
multiple structural series increases the likelihood that at least one of these
molecules will overcome the in vivo hurdles in preclinical development. In
addition, this provides an opportunity for the Company and its collaborators to
enhance the intellectual property position that potentially can be developed
around these compounds by having more than one patentable structural series.

Generating lead structures against a wide range of targets including those
for which little or no information is available. The Universal Informer Library
consists of a computer-designed, proprietary collection of approximately 10,000
physical compounds that can be screened against targets where little or no
information is available about the molecular structures that may be active
against those targets. Once the Universal Informer Library has been screened,
the information obtained can be used to start the Discovery Engine process. In
addition, because the technology is not dependent on having prior knowledge
about the target (e.g., an X-ray crystal structure representative of the
target), it can potentially be used to discover drugs against any target the
activity of which could be modified through binding a small molecule.

Achieving rapid generation, evolution and optimization of lead
candidates. By combining flexible design technology and rapid synthesis, the
Company's Discovery Engine can produce lead candidates for any of the three
types of drug discovery programs -- lead generation, lead evolution or lead
optimization -- with less than two years of effort. See "CombiChem's Discovery
Programs."

26
<PAGE> 28

Reducing synthesis and screening costs. The Company's design technology
facilitates the use of small, informative libraries. Use of these small
libraries decreases the costs associated with synthesis and screening. In
addition, the Virtual Library of drug-like molecules has been explicitly
constructed for the ease of laboratory synthesis.

STRATEGY

To establish multiple collaborations with large pharmaceutical and
biotechnology companies focused on biological targets chosen by the
collaborators. The Company intends to collaborate with large pharmaceutical and
biotechnology companies on fully funded programs aimed at biological targets
chosen by these collaborators. The Company's collaborative efforts are
exclusively focused on the discovery process, with a particular emphasis on the
discovery of novel compounds against biological targets. The Company believes
its technology platform provides it with opportunities to establish multiple
collaborations, which may be for the same disease state, thereby building a
portfolio of opportunities that may include upfront fees, research support,
milestone payments and royalties.

To partner with companies to apply discovery technologies to jointly
agreed-upon biological targets. In addition to collaborations on designated
biological targets, the Company intends to establish arrangements for jointly
funded discovery programs aimed at jointly agreed-upon biological targets,
typically with biotechnology companies. In these arrangements, the Company and
its partner will choose an appropriate biological target, the Company will apply
its discovery technologies to develop novel compounds against the specific
target, and the partner will fully fund and complete the drug development
process. The Company and its partner will share in the economic interest
resulting from their efforts.

To conduct internal discovery efforts aimed at selected biological targets,
retaining a larger economic interest in the subsequently outlicensed lead
candidates. The Company also intends to conduct its own internally funded
discovery programs by choosing biological targets of current scientific interest
and working in collaboration with screening companies. After identifying lead
candidates that are ready for development, the Company intends to outlicense
them, retaining a larger economic interest in such candidates as they are
developed and commercialized by a third party.

To expand collaborative opportunities in alternative industries such as the
agrochemical field. The Company has initially targeted large pharmaceutical and
biotechnology companies in its marketing efforts. The Company is considering
additional opportunities in alternative industries, including the agrochemical
field.

To maintain technology leadership in both software development and rapid
synthesis capabilities. The Company intends to continue to extend its technology
leadership through enhancements of existing software, design of future
generations of software and continued advancements of its synthesis
capabilities. The Company believes that these developments will allow it to
decrease the time required to discover lead candidates and to maintain its
technology leadership and competitive advantage.

COMBICHEM'S PROCESS: THE DISCOVERY ENGINE

The successful implementation of the Company's Discovery Engine process
requires the direct involvement of and interaction between its chemists and its
software applications team. This process consists of the following steps:

Data analysis -- the compilation and analysis of screening data, literature
information and available data about the target. The starting point for a drug
discovery program varies depending on the amount of prior information that is
available. The collaborator may have tested its corporate collection of

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compounds or some other chemical library and have information regarding
structures of compounds that are initial hits (moderately active compounds),
information regarding structures that are inactive against the particular target
or prior information about the target structure itself. On the other hand, if
little or no prior information or screening data is available on the initial
hits or target, the Company will make available for screening its proprietary
Universal Informer Library as a way of generating a relevant set of information
with which to initiate the Discovery Engine. See "CombiChem's Proprietary
Technologies -- Universal Informer Library."

The analysis of the available information is a critical step in the process
because it will determine what type of program will be undertaken -- lead
generation, lead evolution or lead optimization -- and the resources that will
be required. See "CombiChem's Discovery Programs."

Hypothesis generation -- the software-based generation of models that
predict the biological activity of molecular structures. Once the analysis of
the available data is completed by the Company's chemists and software
applications team, the information is used as input for hypothesis generation,
the first step of which involves conformational analysis.

- Conformational analysis. Conformational analysis is performed on each
active and inactive molecule to determine which shapes or conformations
such molecules can take. Because it is typically unknown which of these
shapes a particular molecule will assume when it shows its greatest
activity against a biological target, all reasonable conformations are
computationally described and analyzed. The Company's proprietary
technology allows for the analysis of large data sets and complex
molecular structures to be completed with both quality and speed.

- Hypothesis generator. Using the screening data and the results of
conformational analysis, the hypothesis generation software produces
computational models (called hypotheses) that attempt to explain the
observed differences in biological activity between active and inactive
molecules. In the early phases of a discovery program, the hypothesis
generator will often generate many hypotheses that are consistent with
the data, but the repeated application of the Discovery Engine
systematically tests the hypotheses, eliminating some while strengthening
others by providing supporting data. Repeating this procedure quickly
results in predictive hypotheses. The Company believes that its
proprietary design technology differs from others currently in use in
that it (i) includes all of the screening data (including inactives) in
generating hypotheses, (ii) takes into account a much broader
characterization of molecule-target interaction and (iii) forces
convergence to a predictive model of the important binding features by
probing the target systematically using rapid synthesis and screening.

Virtual Library search -- the computational search of the Virtual Library
to find molecular structures that fit the hypotheses. Once the hypotheses have
been generated, they are used to search the Company's proprietary Virtual
Library to identify molecular structures that have the features represented in
the hypotheses. The Virtual Library is a computational representation of more
than 500 billion drug-like molecules chosen for the ease of laboratory
synthesis. For each hypothesis that is generated, a more focused library of tens
to hundreds of molecules from the Virtual Library will be chosen by the computer
for synthesis in the laboratory. The Virtual Library is generated and searched
by proprietary design technology, which can exploit much larger libraries than
is possible with commercially available tools. See "CombiChem's Proprietary
Technologies -- Virtual Library."

Library synthesis -- the laboratory synthesis of molecular structures that
are selected from the Virtual Library using a wide range of chemistries. Once
the more focused library of compounds is designed, using molecules chosen from
the Virtual Library, the Company's chemists are responsible for synthesizing the
compounds in the laboratory. Unlike many combinatorial chemistry groups, the
chemists are not restricted to particular chemical reactions or a limited list
of structural templates, thus providing maximum flexibility to synthesize the
libraries quickly. See "CombiChem's Proprietary Technologies -- Synthesis and
Analytical Chemistry Technology."

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The above four steps in the Discovery Engine process are completed by
project teams within the Company. Once the molecules are synthesized, those
libraries are then sent to the partner (or a contract group) for screening. Data
from these assays will be available to the Company for the next iteration of the
cycle. With each such iteration, the Discovery Engine provides more information,
improving the hypotheses and increasing the likelihood of discovering active
molecules with desirable pharmacological characteristics. Eventually, the
hypotheses will converge to provide lead compounds that warrant further testing
as development candidates. It currently takes the Company's scientists
approximately three months to advance through the steps in one Discovery Engine
cycle. Depending upon the information available to start a project, it may take
two to four iterations of the cycle to generate strongly predictive hypotheses
that may eventually yield novel and highly active lead candidates.

The Company's Discovery Engine process is being validated by both its
active collaborative programs and retrospective analysis of drug discovery
examples taken from the recent scientific literature. In one such example, the
Company applied its design technology to a project where the data provided was a
compilation of third-party research into the design of HIV protease inhibitors.
The objective was to determine whether CombiChem's process could be used to
discover novel inhibitors for the enzyme given a collection of only weakly
active hits from screening. The Company generated hypotheses with distinct
features by collecting information on eight weakly active HIV protease
inhibitors and 500 randomly selected inactive molecules with the same drug-like
characteristics as the weakly active compounds. Each of these weakly active
compounds was found by either an academic or commercial team in the early phases
of trying to discover an HIV protease drug. To assess whether the generated
hypotheses are, in fact, able to predict the activities of new molecules,
several highly potent HIV protease inhibitors, including currently marketed
drugs, were added to a virtual library of several hundred inactive compounds.
Using the hypotheses, the computer searched the Virtual Library, and the search
produced a list of highly ranked protease inhibitors with a variety of chemical
structures, including some of the highly potent HIV protease inhibitors
currently under development or marketed by major pharmaceutical companies. The
structures selected from the Virtual Library differ significantly from those
used to develop the hypotheses, validating the Company's capabilities in lead
evolution. The Company has similarly validated its technology on over a dozen
other literature data sets and on several programs with collaborators. In one
lead evolution program with a collaborator, for example, the Company has already
been successful in evolving from one structural series to multiple, novel
structural series while improving the biological activity. These results and a
variety of equally successful applications of the Discovery Engine demonstrate
the viability of the Company's computational drug discovery methods and the
strength of its proprietary technology.

COMBICHEM'S PROPRIETARY TECHNOLOGIES

To implement its Discovery Engine process, CombiChem has developed and
assembled an integrated set of proprietary technologies. These include the
following:

Universal Informer Library

The use of many traditional drug discovery approaches presupposes the
existence of prior information to start the process. However, recent efforts
such as the Human Genome Project and others are producing a number of novel
targets about which there is limited prior information. In addition, there are
many known targets for which no suitable leads have been identified. To address
these situations, CombiChem developed a Universal Informer Library ("UIL"). The
UIL consists of a computer-designed, proprietary collection of approximately
10,000 physical compounds. Unlike other libraries that are used to identify lead
structures directly after screening, the UIL is used to gather information
concerning the relevant binding features that are important to the target. The
compounds in the UIL are highly promiscuous molecules, which are molecules with
the potential to bind to many different targets. Screening against the UIL is
therefore intended to provide a few, weakly active

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compounds against the background of many, varied inactive compounds. Using this
data, hypotheses may be extracted, which allow the Discovery Engine to be
initiated.

The UIL was designed to provide hits for virtually all possible targets,
but if there is some reason to expect certain structural features to be relevant
to a particular target, the UIL can be augmented with compounds that contain
those features. In this way, information gained from prior experience can be
incorporated into the UIL; this may improve the hypotheses and therefore reduce
the number of cycles required to converge.

The Company has validated its UIL approach by screening a subset of the UIL
against a wide range of targets and achieving an outcome comparable to that
typically seen in the pharmaceutical industry with libraries containing hundreds
of thousands of compounds.

Virtual Library

CombiChem's Virtual Library is a computational representation of more than
500 billion drug-like molecules chosen for the ease with which they can be
synthesized in the laboratory. To maximize the likelihood that the Virtual
Library will contain potent, patentable compounds active against most targets,
the Company has populated it with hundreds of novel structural templates, each
of which has two to four sites at which a wide variety of structural changes can
be made synthetically using available chemicals. This chemistry can also be
scaled up to give ready access to quantities of each lead candidate sufficient
to perform early preclinical testing. The Virtual Library is generated and
searched by two components of the Company's proprietary software: Virtual
Library Cascader(TM) software and Virtual Library Search software. See
"-- Design Technology."

Synthesis and Analytical Chemistry Technology

Once the Virtual Library is searched for collections of molecules that
match the hypotheses, the Company's chemists initiate synthesis of these
molecules in the laboratory. The challenge for CombiChem's chemists is to select
the technique that will most quickly achieve the synthesis of the library. While
there is considerable debate throughout the industry about the relative merits
of various methods of chemical synthesis (solid versus solution phase, for
example), CombiChem's chemists have the flexibility to use the appropriate
approach for each specific synthesis task. The Company believes it has expertise
in most or all of the readily used techniques and, in addition, has access to a
number of new proprietary methods.

As long as relatively straightforward chemistry is applied to library
production, synthesis is generally not the rate-limiting step. The challenge
lies in the isolation and purification of the library compounds. The Company
applies several approaches, including a number of proprietary semi-automated
techniques, to facilitate these procedures in order to achieve its purity
standards of greater than 85%.

Design Technology

The Company relies on its proprietary design technology in order to
complete several of the key steps in its Discovery Engine. The proprietary
design technology includes:

Conformational analysis software -- a computer program for identifying the
distinct three-dimensional shapes of a molecule. Conformational analysis is
performed on each active and inactive molecule to determine which shapes or
conformations such molecules can take. Because it is typically unknown which of
these shapes a particular molecule will assume when it shows its greatest
activity against a biological target, all reasonable conformations are
computationally described and analyzed. The Company has developed proprietary
conformational analysis software, which rapidly determines all the distinct,
reasonable shapes each molecule can assume. Both the speed and the thoroughness
of the conformational analysis software distinguish it from commercial chemistry
software and permit the Discovery Engine to handle large data sets.

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Hypothesis generation software -- a computer program for analyzing
screening data to identify the requirements a potential drug must satisfy to
bind to this target. Once conformational analysis has been applied to each of
the screened molecules, the Company's proprietary hypothesis generation software
produces computational models that can estimate the biological activity of
chemical structures. These models, called hypotheses, are generated by applying
methods from statistics, information theory, physical chemistry and computer
science to the screening data in order to identify the differences between
active compounds and inactive compounds. The predictive capabilities of the
computational models and the novel algorithms used to produce them distinguish
the Company's hypothesis generator from commercial chemistry software.

Virtual Library Cascader software -- a computer program for conveniently
describing virtual libraries. The Cascader software facilitates the rapid
specification of virtual libraries to the computer. By providing databases of
reagents and descriptions of reactions to the Cascader, a chemist can quickly
describe large libraries of compounds to the computer. The Cascader can use the
resulting description to construct explicit subsets of the large virtual library
and to present the structures to the chemist and to the Virtual Library Search
software.

Virtual Library Search software -- a computer program for selecting
molecules from the Virtual Library that, when synthesized and screened, will
provide the most information about additional binding requirements. The Virtual
Library search software uses hypotheses to estimate computationally the potency
of prospective compounds in order to increase the likelihood that the chemists
devote their synthesis efforts to compounds that fit the hypotheses and are thus
most likely to bind to the target. By using the computer to test the compounds
in the Virtual Library against the hypotheses, the Discovery Engine can rapidly
identify both putatively active compounds (which satisfy several different
hypotheses) and informative ones (which discriminate among hypotheses).
Searching virtual libraries with billions of compounds has generally not been
possible with commercial chemistry software.

Each cycle of the Discovery Engine refines the computer's assessment of the
best hypothesis for the target in question. After several cycles, the resulting
hypothesis can be used to design highly potent compounds from a broad range of
chemical classes including those not readily amenable to combinatorial synthesis
techniques. By facilitating the design of a variety of potent compounds for
preclinical testing, the Discovery Engine has the potential to increase greatly
the likelihood that at least one of these compounds passes the in vivo and other
downstream hurdles and eventually becomes a commercial drug.

COMBICHEM'S DISCOVERY PROGRAMS

The Company has applied, and intends to continue to apply, its technology
to discover lead compounds for biological targets chosen by its collaborators.
In addition, the Company will select, either jointly with a partner (most likely
a biotechnology company) or on its own, a biological target of interest.

In the first instance, where the Company is working on a target chosen by a
collaborator, the commercial terms are negotiated based on a number of factors,
including the number of targets to be included in the collaboration and the type
of program -- lead generation, lead evolution or lead optimization. Depending
upon the type of program, CombiChem will work on the program for a period of one
to two years. A dedicated project team, funded by the collaborator, consisting
of applications scientists and synthetic, medicinal and analytical chemists will
be assigned. The team composition and size is dependent upon the type of program
and its objectives. To ensure confidentiality, the Company provides target
exclusivity to each of its collaborators, and each team works in a dedicated
laboratory. At the conclusion of the program, assuming its objectives have been
met, the program team will transfer the lead structure(s) to the collaborator.
At this point, the work at CombiChem will be completed, but the partner will
continue to develop the lead candidate. As the collaborator develops the lead
candidate and reaches certain agreed-to objectives, the Company will

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receive milestone payments. Eventually, when the lead candidate becomes a
marketed drug, the Company will receive royalties on the sales of the drug.

In the jointly funded programs or the internal programs, the Company will
pay for all or part of the work to be completed and, either jointly or on its
own, will outlicense the lead structures to a partner for the development and
commercialization phases.

Depending upon the data available, the Discovery Engine can be applied to
three types of discovery programs undertaken by the Company: lead generation,
lead evolution and lead optimization. Lead generation uses the UIL to generate
information for the Discovery Engine in situations where little or no prior
information is known about the target. Lead evolution begins with existing
information (either from the collaborator or from the scientific literature)
regarding a lead candidate with the objective of identifying different
structural series that can provide either other development options or an
enhanced patent position. The evolution path may be chosen either as an
outgrowth of a lead optimization program or directly from a collaborator's
established lead candidate series. Lead optimization involves a lead candidate
provided by a collaborator that requires improvement prior to being identified
as a drug development candidate. Using CombiChem's computational drug discovery
approach, initial libraries are constructed around a given template. Using a
convergent, iterative process, subsequent libraries are increasingly focused as
increased activity (e.g., affinity, selectivity) is achieved.

Current Collaborative Discovery Programs

The Company's current collaborative discovery programs are as follows:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
COMPANY NAME TARGET OR THERAPEUTIC AREA OF FOCUS TYPE OF PROGRAM
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Teijin G-protein coupled receptor Lead evolution(1)

Roche Bioscience Protein-Protein interaction Lead optimization
Enzyme Lead evolution
Receptor Lead optimization

Sumitomo Target implicated in osteoarthritis Lead evolution
and rheumatoid arthritis

ImClone Multiple targets in oncology Lead generation, lead evolution

Elan/Athena Multiple targets in central nervous Lead generation, lead evolution,
system conditions lead optimization
- ---------------------------------------------------------------------------------------------------
</TABLE>

(1) Started as a lead optimization program.

Internal Discovery Programs

The Company intends to pursue a number of internal programs as a means of
enhancing its ability to generate revenue and profits. The Company has selected
dopamine D-4, a target believed to have a role in schizophrenia, as its first
internally funded program. The Company believes the schizophrenia market has
significant potential, as currently marketed drugs have a number of unwanted
side effects. The Company intends to identify lead candidates for the D-4
receptor (with partial D-2 activity) as well as other future internal targets
and thereafter to outlicense such lead candidates to third parties, retaining a
larger economic interest in these programs. Additional internal programs will be
identified and funded as the Company's resources allow.

COMBICHEM'S COLLABORATIVE ARRANGEMENTS

The Company's business model is to enter into collaborative arrangements
focused on drug discovery efforts to improve the Company's chances of achieving
profitability and to minimize its financing requirements. Commercial terms of a
collaborative arrangement are driven by the number

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and nature of the targets. The key components of the commercial terms typically
contained in the Company's collaborations include upfront fees, research
support, milestone payments and royalties.

The Company has the following collaborative arrangements:

Teijin Limited

In March 1996, the Company entered into a collaborative agreement with
Teijin providing for a one-year program on a G-protein coupled receptor target.
In March 1997, the Company and Teijin amended their agreement to extend the
collaboration for an additional year. While the initial focus of the
collaboration was lead optimization, the effort was redirected to lead evolution
during the course of the research. Under the agreement, Teijin made an upfront
payment to CombiChem and agreed to provide research funding and milestone
payments upon the achievement of certain preclinical and clinical milestones.
Teijin also committed internal resources to the discovery effort. Teijin will
make royalty payments on products resulting from the collaboration. CombiChem
retains the rights to the compounds arising under this collaboration in North
and South America; Teijin has rights to these compounds in Asia and Europe with
a right of first negotiation to acquire CombiChem's rights. Under the original
agreement, Teijin has rights to expand or extend the program for up to two
successive one-year terms. Either party may terminate the agreement in the event
of a material breach remaining uncured for 60 days. As of September 30, 1997,
Teijin had paid the Company an aggregate of $1.5 million.

Roche Bioscience, a division of Syntex (U.S.A.) Inc.

In October 1996, the Company entered into a collaborative agreement with
Roche Bioscience providing for a broad two-year program to perform research
against three initial targets, including a protein-protein interaction, an
enzyme and a receptor, with an option to add additional targets. Roche
Bioscience can elect one of the approaches -- lead generation, lead evolution or
lead optimization -- for each research program against each collaboration
target. A program may be initiated at any time during the term of the
collaboration, thereby extending the term to allow for completion of each
program. Under the agreement, Roche Bioscience made an upfront payment to
CombiChem and agreed to provide research funding and to make milestone payments
upon the achievement of certain preclinical and clinical milestones. Roche
Bioscience will make royalty payments on worldwide sales of products resulting
from the collaboration. Upon completion of the first year of the agreement,
Roche Bioscience may terminate the collaboration at any time upon six months'
prior written notice. Certain special conditions could also allow Roche
Bioscience to terminate with 45 days' prior written notice. As of September 30,
1997, Roche Bioscience had paid the Company an aggregate of $4.0 million.

Sumitomo Pharmaceuticals Co., Ltd.

In August 1997, the Company entered into a collaborative agreement with
Sumitomo providing for a two-year lead evolution program on a target that is
believed to play a fundamental role in osteoarthritis and rheumatoid arthritis.
Under the agreement, Sumitomo made an upfront payment and agreed to provide
research funding and milestone payments upon the achievement of certain
preclinical and clinical milestones. Sumitomo will make royalty payments on
worldwide sales of products resulting from the collaboration. Sumitomo may
extend the research period for up to four successive six-month periods upon
mutual agreement. The agreement may be terminated by either party 90 days
following an uncured material breach. As of September 30, 1997, Sumitomo had
paid the Company an aggregate of $3.3 million.

ImClone Systems Incorporated

In October 1997, the Company entered into a collaborative agreement with
ImClone providing for a two-year program to identify and characterize novel
small molecule inhibitors to multiple targets for development in oncology. The
agreement provides for ImClone's access to the Company's Universal Informer
Library and Virtual Library under the supervision of the research management
committee

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composed of representatives of the Company and ImClone. Under the terms of the
agreement, ImClone will provide the Company with research support payments,
milestone payments upon the achievement of certain program objectives and
royalties on worldwide product sales of therapeutic products that may arise out
of the collaboration. The agreement may be terminated by either party 90 days
following an uncured material breach or by ImClone within 30 days prior to the
one-year anniversary by providing 90 days' prior written notice. In connection
with the collaborative agreement, ImClone purchased 250,000 shares of Common
Stock for $2.0 million, (representing a $1.5 million equity investment, and a
$0.5 million premium over the deemed fair market value of the stock), and made
advance payments for contract research of $500,000. The Company deferred the
premium component of the equity investment which constitutes advance payments
for contract research.

Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc

In October 1997, the Company entered into a collaborative agreement with
Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc
providing for a three-year program to discover novel therapeutic compounds for
treatment of central nervous system conditions. The agreement provides for
Elan/Athena's access to the Universal Informer Library as deemed necessary by
the research management committee composed of Elan/Athena and CombiChem
representatives. Under the agreement, Elan/Athena will provide the Company with
upfront and research support payments, as well as milestone payments upon the
achievement of pre-determined objectives. Elan/Athena will also make royalty
payments on worldwide sales of products resulting from the collaboration. The
agreement may be terminated by either party 90 days following an uncured
material breach or by Elan/Athena after the one-year anniversary upon 90 days
prior written notice. In connection with the collaborative agreement, Elan
International Services Ltd., an affiliate of Elan/Athena, purchased 1,000,000
shares of Common Stock for $8.0 million, (representing a $6.0 million equity
investment, and a $2.0 million premium over the deemed fair market value of the
stock) and paid a $1.333 million up-front technology license and access fee. The
Company recognized the premium component of the equity investment as revenue
which constitutes a technology license and access fee.

RESEARCH AND DEVELOPMENT

The Company's expenses for Company-sponsored research and development
activities for the years ended December 31, 1994, 1995 and 1996 were $0.4
million, $4.8 million and $4.8 respectively. The Company's expenses for
collaborator-sponsored research and development activities for the years ended
December 31, 1994, 1995 and 1996 were $0, $0 and $0.4 million respectively.

COMPETITION

Many organizations are actively attempting to identify, optimize and
generate lead compounds for potential pharmaceutical development. The Company
competes with the research departments of pharmaceutical companies,
biotechnology companies, combinatorial chemistry companies and research and
academic institutions as well as other computationally based drug discovery
companies. Many of these competitors have greater financial and human resources
and more experience in research and development than the Company. Historically,
large pharmaceutical companies have maintained close control over their research
activities, including the synthesis, screening and optimization of chemical
compounds. Many of these companies, which represent one of the largest potential
markets for CombiChem's products and services, are internally developing
combinatorial and computational approaches and other methodologies to improve
productivity, including major investments in robotics technology to permit the
automated parallel synthesis of compounds. In addition, these companies may
already have large collections of compounds previously synthesized or ordered
from chemical supply catalogs or other sources against which they may screen new
targets. Other sources of compounds include compounds extracted from natural
products, such as plants and microorganisms, and compounds created using
rational drug design. Academic institutions, governmental agencies and other
research organizations are also conducting research in areas in which the
Company is working,

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either on their own or through collaborative efforts. The Company anticipates
that it will face increased competition in the future as new companies enter the
market and advanced technologies become available. The Company's processes may
be rendered obsolete or uneconomical by technological advances or entirely
different approaches developed by one or more of the Company's competitors. The
existing approaches of the Company's competitors or new approaches or technology
developed by the Company's competitors may be more effective than those
developed by the Company.

PATENTS AND PROPRIETARY INFORMATION

The Company's success will depend in large part on its own, its licensees'
and its licensors' ability to obtain and defend patents for each party's
respective technologies and the compounds and other products, if any, resulting
from the application of such technologies, maintain trade secrets and operate
without infringing upon the proprietary rights of others, both in the United
States and in foreign countries. The patent positions of pharmaceutical and
biotechnology companies, including the Company, are uncertain and involve
complex legal and factual questions for which important legal principles are
largely unresolved. The Company has pending United States and foreign patent
applications relating to various aspects of its technology, certain systems,
materials and methods used in screening compounds and the libraries or compounds
contained therein. These patent applications are either owned by the Company or
rights under them are licensed to the Company. To date, none of the patent
applications owned by the Company have been issued. To the extent that any
foreign patent application filed in the European Patent Office or the Japanese
Patent Office issues as a patent, a challenge to the validity of such patent may
be presented in an opposition proceeding. There can be no assurance that patents
will issue as a result of any such pending applications or that, if issued, such
patents will be sufficiently broad to afford protection against competitors with
similar technologies. The Company is aware of two United States patents issued
to a third party that claim proprietary rights in a computer-based system and
method for automatically generating chemical compounds. Although the Company
believes that its current activities do not infringe these patents, there can be
no assurance that the Company's belief would be affirmed in any litigation over
the patents or that the Company's future technological developments would be
outside the scope of these patents. Further, there can be no assurance that the
third party will not seek to assert such patent rights against the Company,
which would result in significant legal costs and require substantial management
resources, and there can be no assurance that the Company would be able to
obtain a license from the third party, if required, on commercially reasonable
terms, if at all. The inability of the Company either to demonstrate
non-infringement of these and other current and future patents, whether issued
in the United States or overseas, or to obtain the appropriate licenses, would
have a material adverse effect on the Company's business, financial condition
and operations. Moreover, there can be no assurance that the Company or its
customers will be able to obtain patent protection for lead compounds or
pharmaceutical products based upon the Company's or such customers'
technologies. There can be no assurance that any patents issued to the Company
or its collaborative partners, or for which the Company has license rights, will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company. To the extent
that the Company or its consultants or collaborators use intellectual property
owned by others in their work for the Company, disputes may also arise as to the
rights in related or resulting know-how and inventions. Litigation may be
necessary to enforce the Company's patent and license rights or to determine the
scope and validity of others' proprietary rights. Any such litigation, whether
or not the outcome thereof is favorable to the Company, could result in
substantial cost to and diversion of effort by the Company. Further, United
States patents do not provide any remedies for infringement that occurred before
the patent is issued. The commercial success of the Company will also depend
upon successfully avoiding the infringement of current and future patents issued
to competitors and upon maintaining the technology licenses upon which certain
of the Company's current products are, or any future products under development
might be, based. If competitors of the Company prepare and file patent
applications in the United States that claim inventions also claimed by the
Company or its

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collaborators, the Company or its collaborators may have to participate in
interference proceedings declared by the PTO to determine the priority of
invention, which could result in substantial cost to the Company, even if the
outcome is favorable to the Company. An adverse outcome could subject the
Company to significant liabilities to third parties and require the Company to
license disputed rights from third parties or cease using the technology.

GOVERNMENT REGULATION

Regulation by governmental entities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a customer or collaborator of
the Company or, in the event the Company decides to develop a drug beyond the
preclinical phase, by the Company. The nature and the extent to which such
regulation may apply to the Company's customers will vary depending on the
nature of any such pharmaceutical products. Virtually all pharmaceutical
products developed by the Company's customers will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures established by the FDA and by
foreign regulatory authorities. Various federal and, in some cases, state
statutes and regulations also govern or influence, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of such products. Non-compliance with
applicable requirements can result in fines, warning letters, recall or seizure
of products, clinical study holds or delays, total or partial suspension of
production, refusal of the government to grant approvals, and civil and criminal
penalties. The process of obtaining these approvals and the subsequent
compliance with appropriate federal and foreign statutes and regulations are
time-consuming and require the expenditure of substantial resources. Generally,
in order to gain FDA approval, a company first must conduct preclinical studies
in the laboratory and in animal models to gain preliminary information on a
compound's efficacy and to

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identify any safety problems. Preclinical studies must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of these studies are submitted as a part of an IND that
the FDA must review before human clinical trials of an investigational drug can
begin. In order to commercialize any products, the Company or its customer will
be required to sponsor and file an IND and will be responsible for initiating
and overseeing the clinical studies to demonstrate the safety and efficacy that
are necessary to obtain FDA and foreign regulatory authority approval of any
such products. Clinical trials are normally done in three phases and generally
take two to five years but may take longer to complete. After completion of
clinical trials of a new product, FDA and foreign regulatory authority marketing
approval must be obtained. If the product is classified as a new drug, the
Company or its customer will be required to file an NDA and receive approval
before commercial marketing of the drug. 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 submitted to the FDA
can take, on average, two to five years to obtain approval. If questions arise
during the FDA review process, approval can take more than five years. Even if
FDA regulatory clearances are obtained, a marketed product is still 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. Domestic manufacturing facilities
of the Company or its customers are subject to bannial inspections by the FDA
and must comply with the FDA's current Good Manufacturing Practices regulations.
To comply with such regulations, a manufacturer must spend funds, time and
effort in the areas of production and quality control to ensure full technical
compliance. The FDA stringently applies regulatory standards for manufacturing.
For marketing outside the United States, the Company or its customer will also
be subject to foreign regulatory requirements governing human clinical trials
and marketing approval for pharmaceutical products. The requirements governing
the conduct of clinical trials, product licensing, pricing and reimbursement
vary widely from country to country.

MARKETING

The Company markets its products directly to customers through
participation in trade conferences and seminars and publications in scientific
and trade journals.

To date, the Company has sold its product offering to its collaborative
partners primarily through the efforts of its senior management and dedicated
business development professionals. In addition, the Company utilizes outside
consultants to supplement its business development activities in targeted
geographies or industries.

FACILITIES

The Company currently leases and occupies approximately 34,000 square feet
of laboratory and office space in San Diego, California. The Company also leases
office space in Palo Alto, California at two separate locations and under two
separate leases; one lease is for approximately 4,500 square feet and the other
is for approximately 6,000 square feet. The Company is currently planning to
move its Palo Alto operations from the smaller location to the larger location
and to sublet the smaller space.

37
<PAGE> 39

The San Diego lease expires in May 2006; the Palo Alto lease for 4,500 square
feet expires in October 1998; and the Palo Alto lease for 6,000 square feet
expires in October 2002.

EMPLOYEES

As of September 30, 1997, the Company had 56 full-time employees, 31 of
whom have Ph.D. degrees. Of these employees, 42 were engaged in research and
development and 14 were engaged in marketing and general administration. None of
the Company's employees is covered by collective bargaining agreements.
Management considers its relations with its employees to be good.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

SCIENTIFIC ADVISORY BOARD

The Company has formed a Scientific Advisory Board ("SAB"), which consists
of eight individuals with demonstrated expertise in the fields of molecular
biology, medicinal and synthetic chemistry, computer science and biochemistry.

Members of the SAB review the Company's research, development and
operations activities and are available for consultation with the Company's
management and staff relating to their respective areas of expertise. The SAB
holds regular meetings. The Scientific Advisors are reimbursed for their
expenses in connection with their service and are paid for attending meetings.
In addition, the Scientific Advisors either hold options to purchase Common
Stock or own varying amounts of Common Stock of the Company that were purchased
pursuant to their individual consulting agreements with the Company. The
Scientific Advisors are expected to devote only a small portion of their time to
the business of the Company.

The Scientific Advisors are all employed by or have consulting agreements
with entities other than the Company. Each Scientific Advisor has entered into a
consulting agreement with the Company that contains confidentiality and
nondisclosure provisions that prohibit the disclosure of confidential
information to anyone outside the Company. Also, the consulting agreements
contain exclusivity provisions restricting the Scientific Advisors from
providing service to or investing in any competitor of the Company without the
Company's consent. All inventions, discoveries or other intellectual property
that comes to the attention of each Scientific Advisor while performing services
under a consulting agreement with the Company will be assigned to the Company.
The current members of the SAB are as follows:

Sydney Brenner, Ph.D. Dr. Brenner is the President and Director of Science
at The Molecular Sciences Institute, Inc. This follows an academic career at the
University of Cambridge, UK, where he pioneered many of the developments in
modern biology and molecular biology.

Dennis Curran, Ph.D. Dr. Curran is the Distinguished Service Professor of
Chemistry and the Bayer Professor of Chemistry at The University of Pittsburgh.
His research focus is fluorous chemistry.

Samuel J. Danishefsky, Ph.D. Dr. Danishefsky holds a Chair in Chemistry at
Columbia University and the Kettering Chair at The Sloan-Kettering Institute for
Cancer Research. Following the award of his Ph.D. by Harvard University in 1962,
he has had a distinguished career in synthetic and medicinal chemistry.

Kim Janda, Ph.D. Dr. Janda is the Ely R. Callaway, Jr., Professor of
Chemistry at The Scripps Research Institute ("TSRI"), Department of Chemistry
and holds a joint appointment with The Skaggs Institute for Chemical Biology at
TSRI. Dr. Janda is widely recognized for his work in combinatorial chemistry and
biochemistry. Dr. Janda received a B.S. in Clinical Chemistry from the
University of South Florida, a M.S. in Organic Chemistry from the University of
Arizona and a Ph.D. in Organic Chemistry with a minor in Medicinal Chemistry
from the University of Arizona.

38
<PAGE> 40

William Jorgensen, Ph.D. Dr. Jorgensen is the Whitehead Professor of
Chemistry at Yale University, where he has been since 1990. Dr. Jorgensen is
widely known for his work in organic and computational chemistry. He received a
B.A. in Chemistry from Princeton and a Ph.D. in Chemical Physics from Harvard
University.

Richard Lathrop, Ph.D. Dr. Lathrop is an Assistant Professor at the
University of California, Irvine in the Department of Information and Computer
Science, where he has been since July 1995. Dr. Lathrop is widely recognized for
his work in the area of advanced computational techniques with applications in
the domain of molecular biology. Dr. Lathrop received a B.A. in Mathematics from
Reed College in Portland, and an M.S. in Computer Science and a Ph.D. in
Artificial Intelligence from the Massachusetts Institute of Technology. His
research interests are focused on artificial intelligence and advanced
computational techniques.

William Scott, Ph.D. Dr. Scott received a Ph.D. in Biochemistry in 1967
from the California Institute of Technology. His subsequent career has spanned
both academia at Rockefeller University, and industry with Bristol-Myers Squibb.
Dr. Scott is also a Director of the Company. See "Management -- Executive
Officers, Key Employees and Directors."

Chi-Huey Wong, Ph.D. Dr. Wong is a Professor and Ernest W. Hahn Chair in
Chemistry at TSRI, where he has been since 1989, and holds a joint appointment
with The Skaggs Institute for Chemical Biology at TSRI. Dr. Wong has published
numerous papers in the area of Bioorganic and Synthetic Chemistry. Dr. Wong
received a B.S. in Chemistry and Biochemistry and an M.S. in Biochemistry from
National Taiwan University, received a Ph.D. in Organic Chemistry from the
Massachusetts Institute of Technology and was a Postdoctoral Fellow in Chemistry
at Harvard University.

39
<PAGE> 41

MANAGEMENT

EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS

The executive officers, key employees and directors of the Company as of
October 15, 1997, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Pierre R. Lamond(1)(3).................... 67 Chairman of the Board and Director
Vicente Anido, Jr., Ph.D.(1).............. 44 President, Chief Executive Officer and
Director
Peter L. Myers, Ph.D...................... 53 Vice President, Chief Scientific Officer,
Chief Operating Officer and Director
Karin Eastham............................. 47 Vice President, Finance and Administration
and Chief Financial Officer
Klaus Gubernator, Ph.D. .................. 44 Vice President, Special Projects
Lee R. McCracken.......................... 39 Vice President, Business Development
John Saunders, Ph.D....................... 49 Vice President, Medicinal Chemistry
Steven L. Teig............................ 36 Vice President, Advanced Technology
Philippe O. Chambon, M.D., Ph.D.(1)(2).... 39 Director
Arthur Reidel(3).......................... 46 Director
William Scott, Ph.D.(2)................... 57 Director
</TABLE>

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

(1) Member of Executive Committee.

(2) Member of Compensation Committee.

(3) Member of Audit Committee.

Pierre R. Lamond. Mr. Lamond has served as Chairman of the Board and a
Director of the Company since May 1995. Mr. Lamond is a General Partner of
Sequoia Capital, a venture capital limited partnership with over $500 million
under management. Prior to joining Sequoia Capital in 1981, Mr. Lamond was a
Vice President and Technical Director of National Semiconductor Corporation
("National Semiconductor") from 1976 to 1981. He began his career in 1957 at
Transitron Corporation and joined Fairchild Semiconductor Company in 1961. In
1967, he was one of the co-founders of National Semiconductor where he managed
the semiconductor division until 1974. From 1974 through 1975, he was President
of Coherent, Inc., a laser company. He served as President of Advent, an early
pioneer of projection television from 1975 through 1976. Mr. Lamond is Chairman
of Cypress Semiconductor Corporation and Vitesse Semiconductor Corporation,
Director of CKS Group, and a director of a number of private companies.

Vicente Anido, Jr., Ph.D. Dr. Anido has served as President and Chief
Executive Officer and as a Director of the Company since joining the Company in
March 1996. Prior to that, Dr. Anido served as President of the Americas Region
at Allergan, Inc. from June 1993, where he was responsible for that company's
commercial operations for North and South America with approximately $500
million in revenue. Prior to that, Dr. Anido spent almost 18 years at Marion
Laboratories and Marion Merrell Dow, Inc. and served as Vice President, Business
Management of its U.S. Prescription Products Division from 1991 until June 1993.
Dr. Anido holds a B.S. in Pharmacy from West Virginia University, an M.S. in
Pharmaceutical Sciences from West Virginia University and a Ph.D. in Pharmacy
Administration from the University of Missouri, Kansas City.

Peter L. Myers, Ph.D. Dr. Myers has served as a Director, Vice President
and Chief Scientific Officer of the Company since joining the Company in March
1995. Dr. Myers has also served as Chief Operating Officer of the Company since
September 1995 and served as the acting Chief Executive Officer from September
1995 to March 1996. Prior to joining the Company, Dr. Myers served as Vice
President, Drug Discovery and Development at Onyx Pharmaceuticals Inc. from
November 1993

40
<PAGE> 42

through March 1995, where he was responsible for all aspects of drug discovery
and development leading to potential novel classes of anti-cancer drugs. Prior
to that, Dr. Myers served as Vice President, Chemistry Research of Glaxo Inc.
Research Institute from January 1991 through December 1993. Dr. Myers holds a
B.S. in Chemistry and a Ph.D. in Organic Chemistry from Leeds University.

Karin Eastham. Ms. Eastham joined the Company as Vice President, Finance
and Administration and Chief Financial Officer in April 1997. Prior to joining
the Company, Ms. Eastham served as Vice President, Finance and Administration
and Chief Financial Officer of Cytel Corporation, a drug research and
development company, from October 1992 through April 1997. Prior to that, Ms.
Eastham was Vice President, Finance and Administration of Pritsker Corporation,
a simulation-based computer software company, from May 1990 through October
1992. Ms. Eastham received a B.S. in Accounting and an M.B.A. from Indiana
University. She is a Certified Public Accountant.

Klaus Gubernator, Ph.D. Dr. Gubernator joined the Company in August 1997 as
Vice President, Special Projects. Prior to joining the Company, he served as
Research Section Head in Pharmaceutical Research at F. Hoffmann-La Roche Ltd. in
Basel, Switzerland from 1987 to 1997, contributing to cardiovascular and
antibacterial projects as well as developing structure-based design and
bioinformatics technologies. Dr. Gubernator received his Ph.D. degree in
Chemistry from the University of Heidelberg.

Lee R. McCracken. Mr. McCracken has served as Vice President, Business
Development since joining the Company in May 1996. Prior to joining the Company,
Mr. McCracken served as Vice President, Business Development at Watson
Laboratories, the operating subsidiary of Watson Pharmaceuticals, from January
1996 through May 1996. Prior to that, Mr. McCracken served as Managing Director
of Pacific Pharma and as Director, Business Development, for the Americas Region
at Allergan, Inc. from May 1992 through December 1995. Prior to entering the
pharmaceutical industry, Mr. McCracken was a venture capitalist with 3i Capital
and Union Venture Corporation. Mr. McCracken received a B.S. in Marketing from
Santa Clara University, an M.S. in Computer Science from the University of
Dayton and an M.B.A. from The Anderson School at UCLA.

John Saunders, Ph.D. Dr. Saunders joined the Company in October 1995 as
Vice President, Medicinal Chemistry. Prior to joining the Company, Dr. Saunders
served as Head of Medicinal Chemistry II from August 1989 through September 1995
and also as Head of the Antiviral Research Management Committee from July 1995
through September 1995 at Glaxo-Wellcome, plc. Dr. Saunders received a first
class honors degree in Chemistry from Newcastle University in England and a
Ph.D. from Cambridge University.

Steven L. Teig. Mr. Teig has served as Vice President, Advanced Technology
since February 1997 and previously served as Vice President, Design Technology
from July 1995. Prior to joining the Company, Mr. Teig co-founded BioCAD Corp.,
a commercial developer of drug discovery software for medicinal chemists, in
June 1989 and served as its Chief Technical Officer until its merger with
Molecular Simulations, Inc. ("MSI"). Thereafter, Mr. Teig served as President
and Chief Technical Officer of Entropix Corporation, a subsidiary of MSI, from
August 1994 through July 1995. Prior to pursuing drug discovery technology, Mr.
Teig co-founded Tangent Systems Corporation, a developer of integrated circuit
design software, which was subsequently acquired by Cadence Design Systems, Inc.
Mr. Teig holds a B.S.E. in Electrical Engineering and Computer Science from
Princeton University.

Philippe O. Chambon, M.D., Ph.D. Dr. Chambon is a General Partner of the
Sprout Group. He joined Sprout in May 1995. From May 1993 to April 1995, Dr.
Chambon served as Manager in the Healthcare Practice of The Boston Consulting
Group, a leading management consulting firm. Previously, Dr. Chambon was an
executive with Sandoz Pharmaceuticals Corporation, a leading pharmaceutical
company, from September 1987 to April 1993. In his last capacity there, he was
the Executive Director of New Product Management. He is currently a director of
Transcend Therapeutics and of several private companies. Dr. Chambon received an
M.D. (with honors) and Ph.D. from the University of Paris and an M.B.A. from
Columbia University.

41
<PAGE> 43

Arthur Reidel. Mr. Reidel has served as a director of the Company since
September 1997. He currently serves as President, Chief Executive Officer and
Chairman of the Board of Pharsight Corporation, a privately held software
corporation, a position he has held since April 1996, and as a director from
April 1995. Prior to that, he was a private investor/consultant from April 1995
to March 1996. From October 1994 to March 1995, he served as Vice President,
Business Development of Viewlogic Systems, Inc., a publicly held software firm.
Mr. Reidel has served as a director of MacNeil Schwendler from December 1993 and
as a director of Formation Systems, Inc. from 1996 to the present. Mr. Reidel
has also served as President and Chief Executive Officer, Sunrise Test Systems,
Inc., a privately held software firm, from December 1992 to March 1994
(Viewlogic Systems, Inc. acquired Sunrise Test Systems, Inc. in September 1994),
and Vice President of Weitek Corporation from July 1991 to December 1992. Mr.
Reidel received an B.S. in mathematics from Massachusetts Institute of
Technology.

William Scott, Ph.D. Dr. Scott has served as a director of the Company
since January 1997. Since March 1997, Dr. Scott has served as the Chief
Executive Officer of Physiome Sciences, Inc. From 1983 until December 1996, Dr.
Scott served in various executive positions with Bristol-Myers Squibb
Pharmaceutical Research Institute and as its Senior Vice President, Drug
Discovery Research since 1991. Dr. Scott received a B.S. in Chemistry from the
University of Illinois and a Ph.D. in Biochemistry from the California Institute
of Technology and was an NIH Postdoctoral Fellow at The Rockefeller University.
Dr. Scott serves on the Board of Directors of a private company.

Members of the Board currently hold office and serve until the next annual
meeting of the stockholders of the Company or until their respective successors
have been elected. The Board is currently comprised of six directors. Under the
Company's Bylaws, as amended, beginning with the next annual meeting of
stockholders the Company's Board will be classified into three classes of
directors serving staggered three-year terms, with one class of directors to be
elected at each annual meeting of stockholders. The classification of directors
has the effect of making it more difficult to change the composition of the
Board. See "Description of Capital Stock -- Possible Anti-Takeover Effect of
Certain Charter Provisions."

All executive officers are appointed annually by and serve at the
discretion of the Board. All of the Company's executive officers are employed by
the Company at will.

Pursuant to the Company's 1997 Stock Incentive Plan, which was adopted by
the Board and approved by the Company's stockholders in October, 1997, directors
who are not officers or employees of the Company will receive periodic option
grants beginning with the next annual meeting of stockholders. See "-- Benefit
Plans."

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has a standing Compensation Committee currently composed of Dr.
Chambon and Dr. Scott. The Compensation Committee reviews and acts on matters
relating to compensation levels and benefit plans for executive officers and key
employees of the Company, including salary and stock options. The Compensation
Committee is also responsible for granting stock awards, stock options and stock
appreciation rights and other awards to be made under the Company's existing
incentive compensation plans. The Company also has a standing Audit Committee
composed of Mr. Lamond and Mr. Reidel. The Audit Committee assists in selecting
the Company's independent auditors and in designating services to be performed
by, and maintaining effective communication with, those auditors. The Company
also has a standing Executive Committee currently composed of Mr. Lamond, Dr.
Anido and Dr. Chambon. The Executive Committee has the authority to exercise all
powers of the Board of Directors not designated to another committee when the
Board of Directors is not in session.

42
<PAGE> 44

EXECUTIVE COMPENSATION

Summary of Cash and Certain Other Compensation

The following table sets forth the aggregate compensation earned by the
Company's President and Chief Executive Officer (both current and former) and
each of the other four most highly compensated executive officers whose salary
and bonus for 1996 exceeded $100,000 (the "Named Executive Officers") for
services rendered in all capacities to the Company for the year ended December
31, 1996:

SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(2) BONUS(3) COMPENSATION OPTIONS/SARS(#) COMPENSATION
- -------------------------------- --------- -------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Vicente Anido, Jr., Ph.D.(4)
President, Chief Executive
Officer and Director.......... $ 200,417 $55,226 $ -- 422,417 $ --
Peter L. Myers, Ph.D.(5)
Chief Scientific Officer
and Chief Operating Officer,
Acting Chief Executive
Officer and Director.......... 225,233 43,050 -- -- --
John Saunders, Ph.D.
Vice President,
Medical Chemistry............. 145,000 23,200 27,125(6) -- --
Lee R. McCracken(7)
Vice President,
Business Development.......... 101,740 16,917 -- 72,500 --
Steven L. Teig
Vice President,
Advanced Technology........... 137,025 21,924 -- -- --
Lynn Caporale, Ph.D.(8)
Vice President, Strategic
Development................... 144,834 22,000 -- -- 130,572(9)
</TABLE>

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

(1) Pursuant to Instruction to Item 402(b) of Regulation S-K promulgated by the
Securities and Exchange Commission (the "Commission"), information with
respect to fiscal years prior to 1996 has not been included as the Company
was not a reporting company pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
information has not been previously reported to the Commission in response
to a filing requirement.

(2) Includes amounts deferred pursuant to the Company's 401(k) Plan.

(3) Includes cash payments for bonuses earned by the Named Executive Officers
during 1996.

(4) Dr. Anido was hired in March 1996.

(5) Dr. Myers served as the Company's Chief Executive Officer from August 1995
until March 1996.

(6) Payments to cover relocation expenses.

(7) Mr. McCracken was hired in May 1996.

(8) Dr. Caporale resigned from the Company in November 1996.

43
<PAGE> 45

(9) Represents payments of $27,572 made in 1996 for accrued vacation and
severance benefits, and payments of $103,000 made in 1997 for severance
payments accrued in 1996. See "-- Employment Arrangements and Change of
Control Arrangements."

Stock Options

The following table sets forth information concerning stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1996. The Company granted no stock appreciation rights ("SARs") to Named
Executive Officers during 1996.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERMS(3)
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE(2) DATE 5% 10%
- --------------------------- ------------ ------------ ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Vicente Anido, Jr., Ph.D... 422,417 79.5% $ 0.30 03/13/06 $208,717 $343,050
Peter L. Myers, Ph.D....... -- -- -- -- -- --
John Saunders, Ph.D........ -- -- -- -- -- --
Lee R. McCracken........... 72,500 13.6 0.30 05/08/06 35,822 58,878
Steven L. Teig............. -- -- -- -- -- --
Lynn Caporale, Ph.D........ -- -- -- -- -- --
</TABLE>

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

(1) The grant dates for these options are as follows: March 14, 1996 for Dr.
Anido's option and May 9, 1996 for Mr. McCracken's option. Each option has a
maximum term of 10 years measured from the grant date, subject to earlier
termination upon the optionee's cessation of service with the Company. Each
option is immediately exercisable for all the option shares; however, any
shares purchased under the option will be subject to repurchase by the
Company, at the option exercise price paid per share, should the optionee
leave the Company prior to vesting in the shares. Dr. Anido's option was
fully vested with respect to 10% of the option shares on the grant date,
another 15% of the option shares vested upon his completion of one year of
service measured from the grant date, and the balance of the option shares
vest in a series of equal monthly installments over Dr. Anido's 36-month
period of service measured from the first anniversary of the grant date. The
shares subject to Mr. McCracken's option vest as follows: 25% upon his
completion of one year of service measured from the grant date and the
balance in a series of 36 successive equal monthly installments over his
continued period of service thereafter. The options were granted under the
1995 Stock Option/Stock Issuance Plan and will be incorporated into the new
1997 Stock Option Plan on the effective date of the Offering, but will
continue to be governed by their existing terms. See "Benefit Plans -- 1997
Stock Incentive Plan."

(2) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on the dates the respective
options were granted as determined by the Board, considering all relevant
factors. The exercise price may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date or a combination of cash
and shares or any other form of consideration approved by the Board. After
the effective date of the Registration Statement of which this Prospectus is
a part, the fair market value of shares of Common Stock will be determined
in accordance with certain provisions of the Company's 1995 Stock
Option/Stock Issuance Plan based on the closing selling price per share of
Common Stock on the date in question on the primary exchange or national
market system on which the Company's common stock is listed or reported. If
shares of the Common Stock are not listed or admitted to trading on any
stock exchange nor traded on the Nasdaq National Market, then the fair
market value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.

44
<PAGE> 46

(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Commission. The price used for computing this
appreciation is the exercise price of the options, not the price of Common
Stock in this offering. There is no assurance provided to any executive
officer or any other holder of the Company's securities that the actual
stock price appreciation over the 10-year option term will be at the assumed
5% or 10% levels or at any other defined level.

Option Exercises and Holdings

The following table provides information concerning option exercises during
1996 by the Named Executive Officers and the value of unexercised options held
by each of the Named Executive Officers as of December 31, 1996. No SARs were
exercised during 1996 or outstanding as of December 31, 1996.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1996(#) AT DECEMBER 31, 1996(3)
ACQUIRED ON VALUE ------------------------------ ------------------------------
NAME EXERCISE(#) REALIZED(1) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
- --------------------- ----------- ----------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vicente Anido, Jr.,
Ph.D............... -- $-- 422,417 -- $ 42,242 $--
Peter L. Myers,
Ph.D............... -- -- -- -- -- --
John Saunders,
Ph.D............... -- -- -- -- -- --
Lee R. McCracken..... 72,500 -- -- -- -- --
Steven L. Teig....... -- -- -- -- -- --
Lynn Caporale,
Ph.D............... -- -- -- -- -- --
</TABLE>

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

(1) "Value realized" is calculated on the basis of the fair market value of the
Common Stock on the date of exercise minus the exercise price and does not
necessarily indicate that the optionee sold such stock.

(2) The options are immediately exercisable, but any shares purchased thereunder
will be subject to repurchase by the Company, at the original option
exercise price paid per share, should Dr. Anido leave the Company prior to
vesting in the shares. As of October 15, 1997, Dr. Anido had vested in
167,204 of those shares.

(3) "Value" is defined as fair market price of the Common Stock at fiscal
year-end ($0.40) less exercise price.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the year ended December 31, 1996, the Compensation Committee of the
Company's Board established the levels of compensation for the Company's
executive officers. The current members of the Company's Compensation Committee
are Dr. Chambon and Dr. Scott. See "Certain Transactions."

EMPLOYMENT ARRANGEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

In March 1996, the Company and Dr. Anido entered into an agreement whereby
Dr. Anido is employed as President and Chief Executive Officer of the Company.
Pursuant to his agreement, Dr. Anido receives an annual base salary of $260,000,
which is reviewed annually by the Board of Directors, and is eligible for a
bonus of up to 25% of his annual base salary to be awarded at the discretion of
the Board of Directors. In the event the Company terminates Dr. Anido's
employment without "cause," Dr. Anido will be entitled to receive an aggregate
severance benefit of 12 months of his base salary and benefits less amounts
received by Dr. Anido from other full-time employment during that period. In
addition, pursuant to his employment agreement Dr. Anido received options to

45
<PAGE> 47

purchase 420,000 shares of Common Stock with an exercise price of $0.30 per
share. The shares subject to the option vest over Dr. Anido's four-year period
of service with the Company measured from the option grant date. Dr. Anido's
employment agreement also provides Dr. Anido with a right to maintain his pro
rata interest in the Company by purchasing new securities issued in a financing
other than a public offering, subject to certain exceptions.

In March 1995, the Company and Dr. Myers entered into an agreement whereby
Dr. Myers is employed as Chief Scientific Officer and Chief Operating Officer of
the Company. Pursuant to his agreement, Dr. Myers (i) received a signing bonus
of $26,250 towards the purchase of Company stock, (ii) receives an annual base
salary of $210,000, which is reviewed annually by the President and Chief
Executive Officer, and (iii) is eligible for a bonus of up to 25% of his annual
base salary to be awarded at the discretion of the Board of Directors. In
connection with the employment agreement, Dr. Myers was provided a home loan. In
the event the Company terminates Dr. Myers' employment without "cause," Dr.
Myers will be entitled to receive an aggregate severance benefit of nine months
of his base salary and benefits, unless he obtains full-time employment prior to
the end of that period, and nine months accelerated vesting to be applied to any
vesting requirements under any stock option or stock purchase agreements
outstanding between Dr. Myers and the Company at the time of his termination
without cause. Simultaneous with the execution of Dr. Myers' employment
agreement, the Company and Dr. Myers entered into a Stock Purchase Agreement
whereby Dr. Myers purchased 87,500 shares of Common Stock at $0.30 per share.
Those shares vest over Dr. Myers' four-year period of service with the Company
measured from the option grant date.

In March 1997, the Company and Ms. Eastham entered into an agreement
whereby she is employed as Vice President, Finance and Administration and Chief
Financial Officer. Pursuant to her agreement, Ms. Eastham (i) receives an annual
base salary of $186,000, which is reviewed annually by the Chief Executive
Officer and Board of Directors, and (ii) is eligible for a bonus of up to 20% of
her annual base salary to be awarded at the discretion of the Board of
Directors. In the event the Company terminates Ms. Eastham's employment without
"cause" within two years after her date of hire, Ms. Eastham will be entitled to
receive an aggregate severance benefit of her base salary and benefits for six
months, unless she obtains full-time employment prior to the end of that
six-month period. Simultaneous with the execution of Ms. Eastham's employment
agreement, the Company and Ms. Eastham entered into a Stock Option Agreement
granting her an option to purchase 87,500 shares of Common Stock with an
exercise price of $0.40 per share. The shares subject to the option vest over
her four-year period of service with the Company measured from the grant date.

In January 1996, the Company and Dr. Saunders entered into an agreement
whereby Dr. Saunders is employed as Vice President, Medicinal Chemistry of the
Company. Pursuant to his agreement, Dr. Saunders receives an annual base salary
of $145,000, which is reviewed annually by the President and Chief Executive
Officer, and is eligible for a bonus of up to 20% of his annual base salary to
be awarded at the discretion of the Board of Directors. Simultaneous with the
execution of the employment agreement, the Company and Dr. Saunders entered into
a stock option agreement granting him an option to purchase 83,825 shares of the
Company's common stock with an exercise price of $0.248 per share. The shares
subject to that option vest over Dr. Saunders' four-year period of service with
the Company measured from the option grant date.

In May 1996, the Company and Mr. McCracken entered into an agreement
whereby he is employed as Vice President, Business Development of the Company.
Pursuant to his agreement, Mr. McCracken received a signing bonus of $10,000 and
receives an annual base salary of $145,000, which is reviewed annually by the
President and Chief Executive Officer. In addition, Mr. McCracken is eligible
for a bonus of up to 20% of his annual base salary. In the event the Company
terminates Mr. McCracken's employment without "cause," Mr. McCracken will be
entitled to receive an aggregate severance benefit of nine months of his base
salary and benefits. Simultaneous with the execution of Mr. McCracken's
employment agreement, the Company and Mr. McCracken entered into a stock option
agreement granting Mr. McCracken an option to purchase 72,500 shares of Common

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<PAGE> 48

Stock with an exercise price of $0.30 per share. The shares subject to the
option vest over Mr. McCracken's four-year period of service measured from the
option grant date.

In July 1995, the Company and Mr. Teig entered into an agreement whereby he
is employed as Vice President of the Company. Pursuant to his agreement, Mr.
Teig receives an annual base salary of $135,000, which is reviewed annually by
the Board of Directors. In addition, Mr. Teig is eligible for a bonus of up to
20% of his annual base salary to be awarded at the discretion of the Board of
Directors. Simultaneous with the execution of the employment agreement, the
Company and Mr. Teig entered into a stock purchase agreement whereby Mr. Teig
purchased 50,000 shares of Common Stock at $0.30 per share. Under such stock
purchase agreement, the shares will vest, and the Company's repurchase rights
will accordingly lapse over Mr. Teig's four-year period of employment measured
from the date of issuance. Pursuant to his employment agreement, Mr. Teig was
granted, and subsequently exercised, an option to purchase 61,250 shares of
Company's Common Stock with an exercise price of $0.40 per share. Those shares
vest over Mr. Teig's four-year period of service measured from option grant
date.

In November 1994, the Company and Dr. Caporale entered into an agreement
whereby she was employed as Vice President, Strategic Development. Pursuant to
the agreement, Dr. Caporale received an annual base salary of $160,000 subject
to review and adjustments by the Board of Directors, and a bonus of up to 20% of
her annual base salary. In November 1996, Dr. Caporale resigned from the Company
and the employment agreement terminated. As a result of her termination, Dr.
Caporale received an aggregate severance benefit of nine months of her base
salary and benefits. Simultaneous with the execution of the employment
agreement, the Company and Dr. Caporale entered into a stock purchase agreement,
whereby Dr. Caporale purchased 43,750 shares of Common Stock at $0.20 per share,
and 29,785 were vested at the termination of Dr. Caporale's employment with the
Company.

In connection with an acquisition of the Company by merger or asset sale,
each outstanding option held by the Chief Executive Officer and the other Named
Executive Officers under the Predecessor Plan will terminate, unless those
options are assumed by the successor corporation. However, any options granted
to such individuals in the future under the 1997 Stock Incentive Plan will
automatically accelerate in full, except to the extent such options are to be
assumed by the successor corporation. See "Benefit Plans -- 1997 Stock Incentive
Plan." In addition, the Compensation Committee as Plan Administrator of the 1997
Stock Incentive Plan will have the authority to provide for the accelerated
vesting of the shares of Common Stock subject to outstanding options held by the
Chief Executive Officer and the Named Executive Officers, or any unvested shares
of Common Stock subject to direct issuances held by such individuals, in
connection with the termination of the officer's employment following: (i) a
merger or asset sale in which these options are assumed or the repurchase rights
applicable to those shares are assigned or (ii) certain changes in control of
the Company.

DIRECTOR COMPENSATION

The Company reimburses its directors for all reasonable and necessary
travel and other incidental expenses incurred in connection with their
attendance at meetings of the Board. Directors are not currently compensated for
serving on the Board. The Company has previously granted to certain non-employee
Board members an option to purchase 20,000 shares of Common Stock. Each
non-employee Board member who is serving as such on the effective date of the
1997 Stock Incentive Plan will receive a similar 20,000-share option, provided
he or she has not received a prior option grant from the Company. Each
individual who first becomes a non-employee Board member at any time after this
offering will receive a 20,000-share option grant on the date such individual
joins the Board. In addition, beginning with the first annual meeting of
stockholders following this offering, each such non-employee Board member who is
to continue to serve as a non-employee Board member will automatically be
granted an option to purchase 5,000 shares of Common Stock, provided such
individual has served on the Board for at least six months. These options will
have an exercise price equal to 100% of the fair market value of the Common
Stock on the grant date. The shares subject to each 20,000-share automatic
option grant will vest over a four-year period, with 25% of the option

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<PAGE> 49

shares vesting upon completion of one year of Board service from the grant date
and the balance of the option shares vesting in equal monthly installments over
the optionee's continued period of Board service over the next three years. The
shares subject to each 5,000-share annual automatic option will vest upon the
optionee's completion of one year of Board service measured from the grant date.
See "-- Benefit Plans -- 1997 Stock Incentive Plan."

BENEFIT PLANS

1997 Stock Incentive Plan

The Company's 1997 Stock Incentive Plan (the "1997 Plan") is intended to
serve as the successor equity incentive program to the Company's 1995 Stock
Option/Stock Issuance Plan, as amended (the "Predecessor Plan"). The 1997 Plan
was adopted by the Board and the stockholders on October 7, 1997. The 1997 Plan
is to become effective on the date the Underwriting Agreement for this offering
is executed (the "Plan Effective Date").

A total of 1,080,603 shares of Common Stock have been authorized for
issuance under the 1997 Plan. Such share reserve consists of (i) the number of
shares available for issuance under the Predecessor Plan on the Plan Effective
Date, including the shares subject to outstanding options, and (ii) an
additional increase of approximately 800,000 shares. To the extent any unvested
shares of Common Stock issued under the Predecessor Plan are repurchased by the
Company after the Plan Effective Date, at the exercise price paid per share, in
connection with the holder's termination of service, those repurchased shares
will be added to the reserve of Common Stock available for issuance under the
1997 Plan. In no event may any one participant in the 1997 Plan receive option
grants, separately exercisable stock appreciation rights or direct stock
issuances for more than 500,000 shares of Common Stock in the aggregate per
calendar year.

On the Plan Effective Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1997 Plan, and no
further option grants will be made under the Predecessor Plan. The incorporated
options will continue to be governed by their existing terms, unless the Plan
Administrator elects to extend one or more features of the 1997 Plan to those
options. Except as otherwise noted below, the incorporated options have
substantially the same terms as will be in effect for grants made under the
Discretionary Option Grant Program of the 1997 Plan.

The 1997 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members and
consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
100% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services, (iii) the Salary
Investment Option Grant Program which may, in the Plan Administrator's sole
discretion, be activated for one or more calendar years and, if so activated,
will allow executive officers and other highly compensated employees the
opportunity to apply a portion of their base salary to the acquisition of
special below-market stock option grants, (iv) the Automatic Option Grant
Program under which option grants will automatically be made at periodic
intervals to eligible non-employee Board members to purchase shares of Common
Stock at an exercise price equal to 100% of their fair market value on the grant
date and (v) the Director Fee Option Grant Program which may, in the Plan
Administrator's sole discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee Board members the opportunity to
apply a portion of the annual retainer fee, if any, otherwise payable to them in
cash each year to the acquisition of special below-market option grants.

The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances

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<PAGE> 50

under those programs, the time or times when such option grants or stock
issuances are to be made, the number of shares subject to each such grant or
issuance, the status of any granted option as either an incentive stock option
or a non-statutory stock option under the Federal tax laws, the vesting schedule
to be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The Compensation Committee
will also have the exclusive authority to select the executive officers and
other highly compensated employees who may participate in the Salary Investment
Option Grant Program in the event that program is activated for one or more
calendar years, but neither the Compensation Committee nor the Board will
exercise any administrative discretion with respect to option grants under the
Salary Investment Option Grant Program or under the Automatic Option Grant or
Director Fee Option Grant Program for the non-employee Board members. All grants
under those three latter programs will be made in strict compliance with the
express provisions of each such program.

The exercise price for the shares of Common Stock subject to option grants
made under the 1997 Plan may be paid in cash or in shares of Common Stock valued
at fair market value on the exercise date. The option may also be exercised
through a same-day sale program without any cash outlay by the optionee. In
addition, the Plan Administrator may provide financial assistance to one or more
optionees in the exercise of their outstanding options or the purchase of their
unvested shares by allowing such individuals to deliver a full-recourse,
interest-bearing promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise or
purchase.

The Plan Administrator will have the authority, with the consent of the
affected option holders, to effect the cancellation of outstanding options under
the Discretionary Option Grant Program (including options incorporated from the
Predecessor Plan) in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the Common Stock on the new grant date.

Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. None of the incorporated options from the
Predecessor Plan contain any stock appreciation rights.

In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Discretionary Option Grant and Stock Issuance
Programs will immediately vest, except to the extent the Company's repurchase
rights with respect to those shares are to be assigned to the successor
corporation. The Plan Administrator will have complete discretion to grant one
or more options under the Discretionary Option Grant Program which will become
fully exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with the Company or the
acquiring entity terminates within a designated period following such
acquisition. The vesting of outstanding shares under the Stock Issuance Program
may be accelerated upon similar terms and conditions. The Plan Administrator
will also have the authority to grant options which will immediately vest upon
an acquisition of the Company, whether or not those options are assumed by the
successor corporation. The Plan Administrator is also authorized under the
Discretionary Option Grant and Stock Issuance Programs to grant options and to
structure repurchase rights so that the shares subject to those options or
repurchase rights will immediately vest in connection with a change in control
of the Company (whether by successful tender offer for more than 50% of the
outstanding voting stock or a change in the majority of the Board by reason of
one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
termination of the individual's service within a designated period following
such change in control. The options

49
<PAGE> 51

incorporated from the Predecessor Plan will terminate upon an acquisition of the
Company by merger or asset sale, unless those options are assumed by the
successor entity. However, the Plan Administrator will have the discretion to
extend the acceleration provisions of the 1997 to those options.

In the event the Plan Administrator elects to activate the Salary
Investment Option Grant Program for one or more calendar years, each executive
officer and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce his
or her base salary for that calendar year by a specified dollar amount not less
than $10,000 nor more than $50,000. If such election is approved by the Plan
Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined by dividing the salary reduction amount by two-thirds of
the fair market value per share of Common Stock on the grant date. The option
will be exercisable at a price per share equal to one-third of the fair market
value of the option shares on the grant date. As a result, the total spread on
the option shares at the time of grant (the fair market value of the option
shares on the grant date less the aggregate exercise price payable for those
shares) will be equal to the amount of salary invested in that option. The
option will vest in a series of 12 equal monthly installments over the calendar
year for which the salary reduction is to be in effect and will be subject to
full and immediate vesting upon certain changes in the ownership or control of
the Company.

The Company has previously granted to certain non-employee Board members an
option to purchase 20,000 shares of Common Stock, and each non-employee Board
member who is serving as such on the Plan Effective Date and who has not
received such a grant will automatically receive an option at that time to
purchase 20,000 shares of Common Stock. Each individual who first becomes a
non-employee Board member at any time after the Plan Effective Date will also
receive a 20,000-share option grant on the date such individual joins the Board.
In addition and on the date of each Annual Stockholders Meeting held after the
Plan Effective Date, each such non-employee Board member who is to continue to
serve as a non-employee Board member will automatically be granted an option to
purchase 5,000 shares of Common Stock, provided such individual has served on
the Board for at least six months.

Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by the Company, at the exercise price paid per share,
should the optionee cease Board service prior to vesting in those shares. The
shares subject to each initial 20,000-share automatic option grant will vest
over a four-year period, as follows: (i) 25% of the option shares upon the
optionee's completion of one year of Board service measured from the grant date
and (ii) the balance of the option shares in a series of 36 successive equal
monthly installments upon the optionee's completion of each additional month of
service measured from the first anniversary of the grant date. The shares
subject to each annual 5,000-share grant will vest upon the optionee's
completion of one year of Board service measured from the grant date. However,
the shares subject to each automatic option grant will immediately vest in full
upon certain changes in control or ownership of the Company or upon the
optionee's death or disability while a Board member.

Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be made on
the first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of Common Stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will

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<PAGE> 52

become exercisable for the option shares in a series of 12 equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.

The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.

Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile tender
offer for more than 50% of the Company's outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the excess
of (i) the highest price per share of Common Stock paid in connection with the
tender offer over (ii) the exercise price payable for such share.

The Board may amend or modify the 1997 Plan at any time, subject to any
required stockholder approval. The 1997 Plan will terminate on the earliest of
(i) October 31, 2007, (ii) the date on which all shares available for issuance
under the 1997 Plan have been issued as fully vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.

1997 Employee Stock Purchase Plan

The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board and approved by the stockholders in October 1997 and will
become effective immediately upon the execution of the Underwriting Agreement
for this offering. The Purchase Plan is designed to allow eligible employees of
the Company and participating subsidiaries to purchase shares of Common Stock,
at semi-annual intervals, through their periodic payroll deductions under the
Purchase Plan, and a reserve of 150,000 shares of Common Stock has been
established for this purpose.

The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration for 12 months. However, the initial
offering period will begin on the execution date of the Underwriting Agreement
and will end on the last business day in January 1999. The next offering period
will commence on the first business day in February 1999, and subsequent
offering periods will commence as designated by the Plan Administrator.

Individuals who are eligible employees (scheduled to work more than 20
hours per week for more than 5 calendar months per year) on the start date of
any offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of February or August
each year). Individuals who become eligible employees after the start date of
the offering period may join the Purchase Plan on any subsequent semi-annual
entry date within that offering period.

Payroll deductions may not exceed 10% of the employee's base salary, and
the accumulated payroll deductions of each participant will be applied to the
purchase of shares on his or her behalf on each semi-annual purchase date (the
last business day in January and July each year) at a purchase price per share
equal to 85% of the lower of (i) the fair market value of the Common Stock on
the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 1,250 shares on any one semi-annual purchase
date.

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<PAGE> 53

Should the fair market value per share of Common Stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.

In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of such acquisition. The purchase price will be equal to 85%
of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately prior
to such acquisition.

The Purchase Plan will terminate on the earlier of (i) the last business
day in July 2007, (ii) the date on which all shares available for issuance under
the Purchase Plan shall have been sold pursuant to purchase rights exercised
thereunder or (iii) the date on which all purchase rights are exercised in
connection with an acquisition of the Company by merger or asset sale.

The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require stockholder
approval.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation eliminates, subject to certain
exceptions, directors' personal liability to the Company or its stockholders for
monetary damages for breaches of fiduciary duties. The Certificate of
Incorporation does not, however, eliminate or limit the personal liability of a
director for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation Law or (iv) any transaction from which
the director derived an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers to the fullest extent permitted under the Delaware
General Corporation Law and may indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law. In addition,
the Company has entered into indemnification agreements with its directors and
officers. The indemnification agreements contain provisions that require the
Company, among other things, to indemnify its directors and executive officers
against certain liabilities (other than liabilities arising from intentional or
knowing and culpable violations of law) that may arise by reason of their status
or service as directors or executive officers of the Company or other entities
to which they provide service at the request of the Company and to advance
expenses they may incur as a result of any proceeding against them as to which
they could be indemnified. The Company believes that these provisions and
agreements are necessary to attract and retain qualified directors and officers.
The Company has obtained an insurance policy covering directors and officers for
claims that such directors and officers may otherwise be required to pay or for
which the Company is required to indemnify them, subject to certain exclusions.

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<PAGE> 54

CERTAIN TRANSACTIONS

Since its formation in May 1994, the Company has issued, in private
placement transactions, shares of its Preferred Stock as follows (not adjusted
for the one-for-four reverse stock split): 1,000,000 shares of Series A
Preferred Stock at a price of $0.50 per share in August and November 1994;
2,226,667 shares of Series B Preferred Stock at a price of $0.75 per share in
November 1994; 17,158,486 shares of Series C Preferred Stock at a price of $0.62
per share in August 1995, September 1995 and April 1996; 9,869,205 shares of
Series D Preferred Stock at a price of $1.00 per share in November 1996; 232,500
shares of Series J Preferred Stock at a price of $0.10 per share in June 1997;
200,000 shares of Series Z Preferred Stock at a price of $0.50 in October 1994;
and 337,777 shares of Series Z as consideration pursuant to an asset purchase
agreement. The purchasers of Preferred Stock include, among others, the
following directors, executive officers and holders of more than 5% of the
Company's outstanding stock and their respective affiliates (all shares of
Preferred Stock are convertible into Common Stock on a four-for-one basis):

<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, DIRECTORS -------------------------------------------------------- TOTAL
AND 5% STOCKHOLDERS SERIES A SERIES B SERIES C SERIES D SERIES J CONSIDERATION
- ---------------------------------------- -------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pierre R. Lamond(1)..................... 400,000 1,333,334 2,169,801 948,837 -- $ 3,494,114
Philippe O. Chambon, M.D., Ph.D.(2)..... -- -- 4,838,710 1,168,198 -- 4,168,198
Vicente Anido, Jr., Ph.D................ -- -- -- 240,000 -- 240,000
Lee R. McCracken(3)..................... -- -- -- 35,000 -- 35,000
Steven L. Teig.......................... -- -- -- 20,000 122,500 32,250
Entities affiliated with Sequoia
Capital(1)............................ 400,000 1,333,334 2,169,801 948,837 -- 3,494,114
Entities affiliated with Sprout
Capital(2)............................ -- -- 4,838,710 1,168,198 -- 4,168,198
Entities affiliated with Sorrento Growth
Partners(4)........................... -- -- 2,419,357 584,099 -- 2,084,100
Entities affiliated with Brinson Venture
Capital Fund(5)....................... -- -- 3,225,807 600,000 -- 2,600,000
</TABLE>

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

(1) Includes 4,348,842 shares purchased by Sequoia Capital VI, 238,949 shares
purchased by Sequoia Technology Partners VI, 128,043 shares purchased by
Sequoia XXIV and 63,115 shares purchased by Sequoia 1995, each of which is
affiliated with Sequoia Partners. Sequoia Partners is the general partner of
Sequoia Capital VI. Sequoia Partners has eight general partners, who are
also the general partners of Sequoia Technology Partners VI. Also includes
73,023 shares issuable to the entities affiliated with Sequoia Partners upon
exercise of warrants at an exercise price of $0.62 per share. In addition,
the entities affiliated with Sequoia Partners purchased 100,000 shares of
Common Stock of the Company in November 1994 (see below). Mr. Lamond is a
Director of the Company and a general partner of Sequoia Partners. Mr.
Lamond disclaims beneficial ownership of such shares except to the extent of
his pecuniary interest therein.

(2) Includes 5,545,317 shares purchased by Sprout Capital VII, L.P. and 461,591
shares purchased by DLJ Capital Corporation. Dr. Chambon is a Director of
the Company and a general partner of Sprout Capital VII, L.P., and DLJ
Capital Corporation is the general partner of Sprout Capital VII, L.P. Dr.
Chambon is a Divisional Vice President of DLJ Capital Corporation. Dr.
Chambon disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.

(3) Held by The Rufus L. McCracken Trust, dated 6/21/91, of which Mr. McCracken
is the sole trustee.

(4) Includes 999,206 shares purchased by Sorrento Ventures II, L.P. and
2,004,250 shares purchased by Sorrento Growth Partners I, L.P.

(5) Includes 536,452 shares purchased by the First National Bank of Chicago as
Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture
Capital Fund III and 3,289,355

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<PAGE> 55

shares purchased by the First National Bank of Chicago as Custodian to the
Brinson Venture Capital Fund III, L.P.

Holders of Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights."

In November 1994, the Company sold the following number of shares of Common
Stock to the respective entities at a price of $0.20 per share: 22,750 shares to
Sequoia Capital VI; 1,250 shares to Sequoia Technology Partners VI; and 1,000
shares to Sequoia XXIV.

In October 1997, the Company sold 1,000,000 shares of its Common Stock to
Elan International Services Ltd. in conjunction with entering into a
collaborative agreement.

In February 1997, the Company made a loan in the amount of $96,000 to Dr.
Anido, the President, Chief Executive Officer and a Director of the Company,
which loan is secured by shares of Common Stock issuable to Dr. Anido upon the
exercise of options. The loan is represented by a promissory note which is due
and payable on the earlier of February 23, 2002 or the occurrence of certain
events, such as the expiration of the 190-day period following completion of an
initial public offering. The loan bears no interest. The entire amount of the
loan is currently outstanding.

In June 1997, the Company made a loan in the amount of $23,044 to Dr. Anido
which is secured by shares of Common Stock issuable to Dr. Anido upon the
exercise of options. The loan is represented by a promissory note which is due
and payable in three annual installments and is due in full upon the third
anniversary of the loan. The loan bears an interest rate of 6.14%. The entire
amount of the loan is currently outstanding.

In September 1995, the Company made a loan in the amount of $150,000 to Dr.
Myers, the Vice President, Chief Scientific Officer, Chief Operating Officer and
a Director of the Company, which loan is secured by shares of Common Stock. The
loan is represented by a promissory note which is due and payable on the earlier
of September 5, 2000 or the occurrence of certain events, such as the expiration
of the 180-day period following completion of a public offering. The loan bears
an interest equal to the applicable minimum Federal rate on the date of the
loan. The entire amount of the loan is currently outstanding.

In August 1996, the Company made a loan in the amount of $66,125 to Dr.
Saunders for relocation in connection with employment, which is secured by a
deed of trust. The loan is represented by a promissory note which is due and
payable on the earlier of August 28, 1999 or the occurrence of certain events,
such as the expiration of the 30-day period following the date Dr. Saunders
ceases to be a full-time employee of the Company. The loan bears no interest.
Dr. Saunders has made a principal payment of $22,000.

For information regarding employment agreements with Named Executive
Officers, see "Management -- Employment Agreements and Change of Control
Arrangements."

All of the Company's officers are employed by the Company at will. The
Company has entered into indemnification agreements with each of its directors
and executive officers. See "Management -- Limitations on Liability and
Indemnification Matters."

The Company expects that all future transactions between the Company and
its officers, directors and principal stockholders and their affiliates will be
approved in accordance with the Delaware General Corporation Law by a majority
of the Board, as well as by a majority of the independent and disinterested
directors of the Board, and will be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.

54
<PAGE> 56

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of October 15, 1997, and as adjusted to reflect
the sale of the shares of the Common Stock offered hereby by the Company, by (i)
all those known by the Company to be beneficial owners of more than 5% of its
outstanding Common Stock, (ii) each director of the Company, (iii) each of the
Named Executive Officers of the Company and (iv) all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
SHARES BENEFICIALLY OWNED(2)
BENEFICIALLY ----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) PRIOR TO OFFERING AFTER OFFERING
- -------------------------------------------------------- ------------ ----------------- --------------
<S> <C> <C> <C>
Sprout Capital VII, L.P. and affiliated entities(3)..... 1,501,729 13.7% 11.4%
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025
Sequoia Capital VI and affiliated entities(4)........... 1,237,999 11.3% 9.4%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Elan International Services Ltd......................... 1,000,000 9.1% 7.6%
102 St. James Court
Flatts
Smiths, FL04
Bermuda
Brinson MAP Venture Capital Fund III and affiliated
entities(5)........................................... 956,453 8.7% 7.2%
209 S. LaSalle Street
Chicago, IL 60604-1295
Sorrento Growth Partners I, L.P. and affiliated
entities(6)........................................... 750,867 6.8% 5.7%
4370 La Jolla Village Dr., Suite 1040
San Diego, CA 92122
Pierre R. Lamond(4)..................................... 1,237,999 11.3% 9.4%
Vicente Anido, Jr., Ph.D.(7)............................ 582,417 5.3% 4.4%
Peter L. Myers, Ph.D.(8)................................ 272,500 2.5% 2.0%
Philippe O. Chambon, MD., Ph.D.(3)...................... 1,501,729 13.7% 11.4%
Arthur Reidel(9)........................................ 20,000 * *
William Scott, Ph.D.(10)................................ 20,000 * *
Lee R. McCracken(11).................................... 93,750 * *
John Saunders, Ph.D..................................... 83,825 * *
Steven L. Teig(12)...................................... 246,875 2.2% 1.9%
Lynn Caporale, Ph.D..................................... 38,062 * *
One Sherman Square
New York, NY 10023
All directors and executive officers
as a group (9 persons)(13)............................ 4,067,145 36.2% 30.1%
</TABLE>

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

* Represents beneficial ownership of less than one percent of the outstanding
shares of the Company's Common Stock.

(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them. Share ownership in
each case includes shares issuable upon exercise of certain

55
<PAGE> 57

outstanding options as described in the footnotes below. The address for
those individuals for which an address is not otherwise indicated is: 9050
Camino Santa Fe, San Diego, CA 92121.

(2) Percentage of ownership is calculated pursuant to Commission Rule
13d-3(d)(1).

(3) Includes 1,386,331 shares purchased by Sprout Capital VII, L.P. and 115,398
shares purchased by DLJ Capital Corporation. DLJ Capital Corporation is the
managing general partner of Sprout Capital VII, L.P. Dr. Chambon is a
Director of the Company, a general partner of Sprout Capital VII, L.P. and
Divisional Vice President of DLJ Capital Corporation. Dr. Chambon disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.

(4) Includes 1,109,962 shares held by Sequoia Capital VI, 60,988 shares held by
Sequoia Technology Partners VI, 33,012 shares held by Sequoia XXIV and
15,780 shares held by Sequoia 1995, each of which is affiliated with
Sequoia Partners. Sequoia Partners is the general partner of Sequoia
Capital VI. Sequoia Partners has eight general partners, who are also the
general partners of Sequoia Technology Partners VI. Also includes 16,613,
913 and 731 shares held by Sequoia Capital VI, Sequoia Technology Partners
VI and Sequoia XXIV, respectively, issuable upon exercise of warrants
exercisable within 60 days of October 15, 1997. Mr. Lamond is a Director of
the Company and a general partner of Sequoia Partners. Mr. Lamond disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.

(5) Includes 134,113 shares purchased by the First National Bank of Chicago as
Custodian to the Brinson Trust Company as Trustee of the Brinson MAP
Venture Capital Fund III and 822,340 shares purchased by The First National
Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P.

(6) Includes 249,803 shares held by Sorrento Ventures II, L.P. and 501,064
shares held by Sorrento Growth Partners I, L.P.

(7) Includes 100,000 shares issuable upon exercise of options exercisable
within 60 days of October 15, 1997.

(8) Includes 50,000 shares issuable upon exercise of options exercisable within
60 days of October 15, 1997.

(9) Includes 20,000 shares issuable upon exercise of options exercisable within
60 days of October 15, 1997.

(10) Includes 20,000 shares issuable upon exercise of options exercisable within
60 days of October 15, 1997.

(11) Includes 8,750 shares held by the Rufus L. McCracken Trust, dated 6/21/91,
of which Mr. McCracken is the sole Trustee. Includes 12,500 shares issuable
upon exercise of options exercisable within 60 days of October 15, 1997.

(12) Includes 50,000 shares issuable upon exercise of options exercisable within
60 days of October 15, 1997.

(13) Includes 270,757 shares issuable upon the exercise of options or warrants
exercisable within 60 days of October 15, 1997.

56
<PAGE> 58

DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, the Company will be authorized to issue
40,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000
shares of undesignated Preferred Stock, $0.001 par value per share.

COMMON STOCK

As of September 30, 1997, there were 9,668,505 shares of Common Stock
outstanding and held of record by approximately 125 stockholders. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Subject to preferences that may
be applicable to any outstanding shares of Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board out of funds legally available. See "Dividend Policy." All outstanding
shares of Common Stock are fully paid and nonassessable.

PREFERRED STOCK

After completion of this offering, the Board will have the authority,
without further action by the stockholders, to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, priorities,
preferences, qualifications, limitations and restrictions, including dividend
rights, conversion rights, voting rights, terms of redemption, terms of sinking
funds, liquidation preferences and the number of shares constituting any series
or the designation of such series, which could decrease the amount of earnings
and assets available for distribution to holders of Common Stock or adversely
affect the rights and powers, including voting rights, of the holders of the
Common Stock. The issuance of Preferred Stock could have the effect of delaying
or preventing a change in control of the Company or make removal of management
more difficult. Additionally, the issuance of Preferred Stock may have the
effect of decreasing the market price of the Common Stock and may adversely
affect the voting and other rights of the holders of Common Stock. There are
currently no shares of Preferred Stock outstanding and the Company has no
current plans to issue any of the Preferred Stock.

WARRANTS

In December 1994, in conjunction with an equipment lease financing, the
Company issued a warrant to Comdisco, Inc. to purchase up to 20,914 shares of
Common Stock at $2.00 per share, exercisable at any time and prior to the
earlier of December 20, 2004 or five years following the Company's initial
public offering. The warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon exercise of the
warrant under certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications or consolidations. The warrant provides that
the warrant holder may exercise the warrant without payment of cash by
surrendering the warrant and receiving shares of Common Stock equal to the value
of the warrant surrendered.

In June 1995, in connection with a product development collaboration, the
Company issued a warrant to LJL BioSystems, Inc. to purchase 8,750 shares of
Common Stock, exercisable at any time and prior to June 15, 2000, at $0.30 per
share. The warrant contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon exercise of the warrant under
certain circumstances, including stock dividends, stock splits, reorganizations,
reclassifications or consolidations.

In August 1995, in connection with the Series C Preferred Stock private
placement, the Company issued warrants to five investors to purchase an
aggregate of 30,242 shares of Common Stock, exercisable at any time and prior to
August 2000 at $2.48 per share. Each warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations, reclassifications or consolidations.
Each warrant provides that the warrant holder may exercise the

57
<PAGE> 59

warrant without payment of cash by surrendering the warrant and receiving shares
of Common Stock equal to the value of the warrant surrendered.

In April 1996, in conjunction with equipment lease financings, the Company
issued warrants to Comdisco, Inc. to purchase up to an aggregate of 35,383
shares of Common Stock at $2.48 per share, exercisable at any time and prior to
the earlier of April 2003 or three years after the Company's initial public
offering. The number of shares issuable pursuant to these warrants was dependent
on the aggregate amount financed with Comdisco, and pursuant to these warrants,
Comdisco has the right to purchase an aggregate of 26,647 shares of the Company.
Each warrant contains provisions for the adjustment of the exercise price and
the aggregate number of shares issuable upon exercise of each warrant under
certain circumstances, including stock dividends, stock splits, reorganizations,
reclassifications or consolidations. Each warrant provides that the warrant
holder may exercise the warrant without payment of cash by surrendering the
warrant and receiving shares of Common Stock equal to the value of the warrant
surrendered.

In May 1996, in conjunction with an equipment lease financing, the Company
issued warrants to Silicon Valley Bank and MMC/GATX Partnership No. 1 to
purchase up to 6,896 and 21,331 shares of Common Stock, respectively, at $2.48
per share, respectively, exercisable at any time and prior to the earlier of May
2006 or five years following the Company's initial public offering. Each warrant
contains provisions for the adjustment of the exercise price and the aggregate
number of shares issuable upon exercise of each warrant under certain
circumstances, including stock dividends, stock splits, reorganizations,
reclassifications or consolidations. Each warrant provides that the warrant
holder may exercise the warrant without payment of cash by surrendering the
warrant and receiving shares of Common Stock equal to the value of the warrant
surrendered.

In June 1996, in conjunction with equipment lease financings, the Company
issued warrants to Comdisco, Inc. to purchase up to an aggregate of 24,698
shares of Common Stock at $2.48 per share, exercisable at any time and prior to
the earlier of June 2003 or three years after the Company's initial public
offering. Each warrant contains provisions for the adjustment of the exercise
price and the aggregate number of shares issuable upon exercise of each warrant
under certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications or consolidations. Each warrant provides that
the warrant holder may exercise the warrant without payment of cash by
surrendering the warrant and receiving shares of Common Stock equal to the value
of the warrant surrendered.

REGISTRATION RIGHTS

The holders of approximately 7,754,933 shares of Common Stock or their
permitted transferees (the "Holders") are entitled to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of agreements between the Company and such Holders, if the Company
proposes to register any of its securities under the Securities Act for its own
account, such Holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein, provided, among other
conditions, that the underwriters of any such offering have the right to limit
the number of shares included in such registration. In addition, Holders of at
least 50% of approximately 7,754,933 shares of Common Stock with demand
registration rights may require the Company to prepare and file a registration
statement under the Securities Act with respect to the shares entitled to demand
registration rights, and the Company is required to use its diligent best
efforts to effect such registration, subject to certain conditions and
limitations. The Company is not obligated to effect more than two of these
stockholder-initiated registrations nor to effect such a registration within 180
days following an offering of the Company's securities, including the Offering
made hereby. The Holders may also request the Company to register such shares on
Form S-3 provided the shares registered have an aggregate market value of at
least $500,000. The Company is not obligated to effect more than one of these
registrations pursuant to Form S-3 in any 12-month period. Generally, the
Company is required to bear the expense of all such registrations. The
registration rights of each Holder expires at such time after the Offering as
all shares held by such Holder can be

58
<PAGE> 60

sold within any three-month period pursuant to Rule 144. All rights of the
Holders to require registration of the resale of their shares in connection with
this Offering have been waived.

POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS

Restated Certificate of Incorporation and Restated Bylaws

The Company's Restated Certificate of Incorporation authorizes the Board to
establish one or more series of undesignated Preferred Stock, the terms of which
can be determined by the Board at the time of issuance. See "-- Preferred
Stock." The Restated Certificate of Incorporation also provides that all
stockholder action must be effected at a duly called meeting of stockholders and
not by a consent in writing. The Company's Restated Bylaws provide that the
Company's Board will be classified into three classes of directors beginning at
the next annual meeting of stockholders. See "Management -- Executive Officers,
Key Employees and Directors." In addition, the Restated Bylaws do not permit
stockholders of the Company to call a special meeting of stockholders; only the
Company's Chief Executive Officer, President, Chairman of the Board or a
majority of the Board are permitted to call a special meeting of stockholders.
The Restated Bylaws also require that stockholders give advance notice to the
Company's secretary of any nominations for director or other business to be
brought by stockholders at any stockholders' meeting and require a supermajority
vote of members of the Board and/or stockholders to amend certain Restated Bylaw
provisions. These provisions of the Restated Certificate of Incorporation and
the Restated Bylaws could discourage potential acquisition proposals and could
delay or prevent a change in control of the Company. Such provisions may also
have the effect of preventing changes in the management of the Company.

Delaware Anti-Takeover Statute

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) for a period of three years following
the time that such stockholder became an interested stockholder, unless: (i)
prior to such time, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder's
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder's becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding, for purposes of
determining the number of shares outstanding, those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the Board and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.

Section 203 defines business combination to include:. (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, lease, exchange, mortgage, transfer, pledge or other disposition involving
the interested stockholder and 10% or more of the assets of the corporation;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.

59
<PAGE> 61

SHARES ELIGIBLE FOR FUTURE SALE

Based upon the number of shares outstanding as of September 30, 1997 (after
giving effect to the issuance of an aggregate of 1,250,000 shares to
collaborative partners in October 1997), upon completion of this offering, there
will be 13,168,505 shares of Common Stock of the Company outstanding. There were
also approximately 26,177 shares covered by vested options outstanding, which
are not considered to be outstanding shares. Of the outstanding shares,
3,183,575 shares, including the 2,250,000 shares of Common Stock sold in this
offering, will be immediately eligible for resale in the public market without
restriction under the Securities Act, except that any shares purchased in this
offering by affiliates of the Company ("Affiliates"), as that term is defined in
Rule 144 under the Securities Act ("Rule 144"), may generally only be resold in
compliance with applicable provisions of Rule 144. Beginning approximately 90
days after the date of this Prospectus, approximately 867,573 additional shares
of Common Stock (including approximately 42,727 shares covered by options
exercisable within the 90-day period following the date of this Prospectus) will
become eligible for immediate resale in the public market, subject to compliance
as to certain of such shares with applicable provisions of Rules 144 and 701.

The Company, the executive officers and directors of the Company and
certain security holders have agreed pursuant to lock-up agreements that they
will not, without the prior written consent of BancAmerica Robertson Stephens,
offer, sell or otherwise dispose of the shares of Common Stock beneficially
owned by them for a period of 180 days from the date of this Prospectus. Each
holder who signed a lock-up agreement has agreed, subject to certain limited
exceptions, not to sell or otherwise dispose of any of the shares held by them
as of the date of this Prospectus for a period of 180 days after the date of
this Prospectus without the prior written consent of BancAmerica Robertson
Stephens. At the end of such 180-day period, approximately 11,502,437 shares of
Common Stock (including approximately 52,657 shares issuable upon exercise of
vested options) will be eligible for immediate resale, subject to compliance
with Rule 144 and Rule 701. The remainder of the approximately 1,666,068 shares
of Common Stock outstanding or issuable upon exercise of options held by
existing stockholders or option holders will become eligible for sale at various
times over a period of less than two years and could be sold earlier if the
holders exercise any available registration rights or upon vesting pursuant to
the Company's standard four year vesting schedule.

In general, under Rule 144 as recently amended, beginning approximately 90
days after the effective date of the Registration Statement of which this
Prospectus is a part, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined in
Rule 144) for at least one year from the later of the date such securities were
acquired from the Company or (if applicable) the date they were acquired from an
Affiliate is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock (approximately 132,000 shares immediately after the offering) or
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.

Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted prior
to this offering) are also restricted securities and, beginning 90 days after
the date of this Prospectus, may be sold by stockholders other than an Affiliate
of the Company subject only to the manner of sale provisions of Rule 144 and by
an Affiliate under Rule 144 without compliance with its one-year holding period
requirement.

60
<PAGE> 62

Prior to this offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.

In addition, the Company intends to register on the effective date of this
offering a total of 1,925,606 shares of Common Stock subject to outstanding
options or reserved for issuance under the Company's 1997 Stock Incentive Plan
or outstanding shares which are subject to repurchase by the Company plus
150,000 shares of Common Stock reserved for issuance under its 1997 Employee
Stock Purchase Plan. Further, upon expiration of such lock-up agreements,
holders of approximately 7,754,933 shares of Common Stock will be entitled to
certain registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price of the Common Stock.

61
<PAGE> 63

UNDERWRITING

The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities
Corporation and UBS Securities LLC (the "Representatives"), have severally
agreed with the Company, subject to the terms and conditions of the Underwriting
Agreement, to purchase the numbers of shares of Common Stock set forth opposite
their respective names below. The Underwriters are committed to purchase and pay
for all such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
------------------------------------------------------------------ ----------
<S> <C>
BancAmerica Robertson Stephens....................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
UBS Securities LLC................................................
---------
Total................................................... 2,250,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer shares of the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not in excess of $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 337,500
additional shares of Common Stock, at the same price per share as will be paid
for the 2,250,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 2,250,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 2,250,000 shares are being
sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.

Each officer and director and certain holders of shares of the Company's
Common Stock have agreed with the Representatives, for a period of 180 days
after the date of this Prospectus (the "Lock-Up Period"), subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock owned as
of the date of this Prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of BancAmerica Robertson
Stephens. However, BancAmerica Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. There are no agreements between the
Representatives and any of the Company's stockholders providing consent by the
Representatives to the sale of shares prior to the expiration of the Lock-Up
Period. The Company has agreed that during the Lock-Up Period, the Company will
not, subject to certain exceptions, without the prior written consent of
BancAmerica Robertson Stephens, (i) consent to the disposition of any shares
held by stockholders prior to the expiration of the Lock-Up Period or (ii)
issue, sell, contract to sell or otherwise dispose of, any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into, exercisable for or exchangeable for shares of
Common Stock, other than the Company's sale of shares in this offering, the
issuance of Common Stock upon the exercise of

62
<PAGE> 64

outstanding options and warrants and the Company's issuance of options and stock
under the existing stock option and stock purchase plans. See "Shares Eligible
for Future Sale."

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereby.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby will be determined through negotiations between the
Company and the Representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.

Certain persons participating in this offering may engage in transactions,
including syndicate covering transactions or the imposition of penalty bids,
which may involve the purchase of Common Stock on the Nasdaq National Market or
otherwise. Such transactions may stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

The offering is being conducted in accordance with Rule 2720 ("Rule 2720")
of the National Association of Securities Dealers, Inc. (the "NASD") which
provides that, among other things, when an NASD member firm participates in the
offering of equity securities of a company with whom such member has a "conflict
of interest" (as defined in Rule 2720), the initial public offering price can be
no higher than that recommended by a "qualified independent underwriter" (as
defined in Rule 2720) (a "QIU"). BancAmerica Robertson Stephens is serving as
the QIU in the offering and will recommend a price in compliance with the
requirements of Rule 2720. BancAmerica Robertson Stephens has performed due
diligence investigations and reviewed and participated in the preparation of
this Prospectus and the Registration Statement of which this Prospectus forms a
part. BancAmerica Robertson Stephens, in its capacity as QIU, will receive no
additional compensation as such in connection with the offering.

63
<PAGE> 65

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Partners of
such firm own 2,500 shares of the Company's Common Stock. Certain legal matters
will be passed upon for the Underwriters by Cooley Godward LLP, San Diego,
California.

EXPERTS

The financial statements of CombiChem for the period from May 23, 1994
(inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1997 appearing in this Prospectus and the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission the Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respect by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all of any part thereof may be obtained
at prescribed rates from the Commission's Public Reference Section at such
addresses. Also, the Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. Upon approval of the Common Stock for quotation on the Nasdaq
National Market, such reports, proxy and information statements and other
information also can be inspected at the office of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.

64
<PAGE> 66

COMBICHEM, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets at December 31, 1995 and 1996 and September 30, 1997................... F-3
Statements of Operations for the period from May 23, 1994 (inception) to December 31,
1994, the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1996 (unaudited) and 1997....................................................... F-4
Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the
period from May 23, 1994 (inception) through September 30, 1997..................... F-5
Statements of Cash Flows for the period from May 23, 1994 (inception) to December 31,
1994, the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1996 (unaudited) and 1997....................................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 67

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
CombiChem, Inc.

We have audited the accompanying balance sheets of CombiChem, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the related statements of
operations, redeemable preferred stock and stockholders' equity (deficit), and
cash flows for the period from May 23, 1994 (inception) to December 31, 1994,
the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CombiChem, Inc. at December
31, 1995 and 1996 and September 30, 1997, and the results of its operations and
its cash flows for the period from May 23, 1994 (inception) to December 31,
1994, the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

San Diego, California

October 15, 1997

F-2
<PAGE> 68

COMBICHEM, INC.

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ------------- -------------
1995 1996 1997 1997
----------- ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 3,135,588 $ 366,983 $ 4,286,957
Short-term investments....................... -- 12,166,132 4,114,700
Restricted cash.............................. -- 325,000 --
Prepaid expenses and other current assets.... 191,076 543,647 518,568
----------- ------------ ------------
Total current assets................. 3,326,664 13,401,762 8,920,225
Property and equipment, net.................... 634,230 2,899,155 4,080,130
Deposits and other assets...................... 36,018 138,095 156,481
Notes receivable from employee/stockholders.... 152,866 218,991 206,301
----------- ------------ ------------
Total assets......................... $ 4,149,778 $ 16,658,003 $ 13,363,137
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........ $ 636,033 $ 1,243,139 $ 1,422,516
Deferred revenue............................. -- 2,130,000 1,187,501
Notes payable................................ 540,000 -- --
Current portion of obligations under capital
leases.................................... 160,521 758,085 1,021,946
----------- ------------ ------------
Total current liabilities............ 1,336,554 4,131,224 3,631,963
Deferred rent.................................. -- 30,409 76,023
Obligations under capital leases, less current
portion...................................... 423,711 1,752,646 2,377,410
Commitments
Redeemable convertible preferred stock, $.001
par value, 63,196,296 shares authorized;
3,868,063, 7,696,808 and 7,754,933 shares
issued and outstanding at December 31, 1995
and 1996 and September 30, 1997, respectively
(5,000,000 shares authorized, no shares
issued and outstanding pro forma)............ 9,650,425 23,106,728 23,129,968 $ --
Stockholders' equity (deficit):
Common stock, $.001 par value, 80,000,000
shares authorized; 660,165, 711,605, and
1,913,572 shares issued and outstanding at
December 31, 1995 and 1996 and September
30, 1997, respectively, (40,000,000 shares
authorized, 9,668,505 shares issued and
outstanding pro forma).................... 660 712 1,913 9,668
Additional paid-in capital................... 119,057 135,340 1,976,428 25,098,641
Deferred compensation........................ -- -- (1,325,597) (1,325,597)
Notes receivable from stockholders........... -- -- (336,562) (336,562)
Accumulated deficit.......................... (7,380,629) (12,499,056) (16,168,409) (16,168,409)
----------- ------------ ------------ ------------
Total stockholders' equity
(deficit).......................... (7,260,912) (12,363,004) (15,852,227) 7,277,741
----------- ------------ ------------ ------------
Total liabilities and stockholders'
equity (deficit)................... $ 4,149,778 $ 16,658,003 $ 13,363,137 $ 13,363,137
=========== ============ ============ ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 69

COMBICHEM, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
MAY 23, 1994 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31 ------------------------- -------------------------
1994 1995 1996 1996 1997
-------------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Revenue under collaborative
agreements................ $ -- $ -- $ 2,920,000 $ 1,022,500 $ 4,598,999
Grant revenue................ -- 50,440 47,400 47,400 --
--------- ----------- ----------- ----------- -----------
Total revenue........ -- 50,440 2,967,400 1,069,900 4,598,999
Operating expenses:
Research and development:
Collaborative............. -- -- 420,000 262,500 2,630,775
Proprietary............... 413,305 4,763,043 4,820,253 3,547,828 3,354,590
--------- ----------- ----------- ----------- -----------
413,305 4,763,043 5,240,253 3,810,328 5,985,365
General and administrative... 297,313 2,000,652 2,845,074 1,708,842 2,355,942
--------- ----------- ----------- ----------- -----------
Total operating
expenses........... 710,618 6,763,695 8,085,327 5,519,170 8,341,307
Loss from operations........... (710,618) (6,713,255) (5,117,927) (4,449,270) (3,742,308)
Interest income................ 4,547 94,737 144,639 86,153 437,594
Interest expense............... -- (56,040) (145,139) (97,570) (164,639)
Foreign tax expense............ -- -- -- -- (200,000)
--------- ----------- ----------- ----------- -----------
Net loss....................... $ (706,071) $(6,674,558) $(5,118,427) $(4,460,687) $(3,669,353)
========= =========== =========== =========== ===========
Pro forma net loss per share... $ (0.66) $ (0.45)
=========== ===========
Shares used in calculating pro
forma net loss per share..... 7,797,050 8,191,596
=========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 70

COMBICHEM, INC.

STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE ----------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ------------------ PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- ----------- --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock........................ -- $ -- 433,125 $ 433 $ 23,567 $ --
Sale of Series A preferred stock................ 250,000 500,000 -- -- -- --
Issuance of Series Z preferred stock for
technology.................................... 50,000 100,000 -- -- -- --
Sale of Series B preferred stock................ 550,000 1,650,000 -- -- -- --
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ------ ---------- ------------
Balance at December 31, 1994...................... 850,000 2,250,000 433,125 433 23,567 --
Sale of common stock............................ -- -- 194,750 195 58,230 --
Issuance of common stock for technology......... -- -- 100,000 100 39,900 --
Sale of Series B preferred stock................ 6,669 20,000 -- -- -- --
Sale of Series C preferred stock................ 2,808,702 6,877,749 -- -- -- --
Conversion of notes payable and interest into
Series C preferred stock...................... 202,692 502,676 -- -- -- --
Repurchase and cancellation of common stock..... -- -- (67,710) (68) (2,640) --
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ------ ---------- ------------
Balance at December 31, 1995...................... 3,868,063 9,650,425 660,165 660 119,057 --
Sale of common stock............................ -- -- 74,000 74 22,126 --
Sale of Series C preferred stock................ 1,278,240 3,142,045 -- -- -- --
Sale of Series D preferred stock................ 2,467,310 9,853,345 -- -- -- --
Conversion of notes payable and interest into
Series Z preferred stock...................... 83,195 460,913 -- -- -- --
Repurchase and cancellation of common stock..... -- -- (22,560) (22) (5,843) --
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ------ ---------- ------------
Balance at December 31, 1996...................... 7,696,808 23,106,728 711,605 712 135,340 --
Sale of common stock............................ -- -- 32,500 32 19,718 --
Sale of Series J preferred stock................ 58,125 23,240
Deferred compensation related to stock
options....................................... -- -- -- -- 1,401,075 (1,401,075)
Amortization of deferred compensation........... -- -- -- -- -- 75,478
Sale of common stock for notes receivable....... -- -- 1,169,467 1,169 420,295 --
Repayment of notes receivable................... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ------ ---------- ------------
Balance at September 30, 1997..................... 7,754,933 $23,129,968 1,913,572 $1,913 $1,976,428 $(1,325,597)
======== ========== ======== ====== ========== =============

NOTES
RECEIVABLE TOTAL
FROM ACCUMULATED STOCKHOLDERS'
STOCKHOLDERS DEFICIT EQUITY (DEFICIT)
------------ ------------ ----------------
<S> <C> <C> <C>
Issuance of common stock........................ $ -- $ -- $ 24,000
Sale of Series A preferred stock................ -- -- --
Issuance of Series Z preferred stock for
technology.................................... -- -- --
Sale of Series B preferred stock................ -- -- --
Net loss........................................ -- (706,071) (706,071)
------------ ------------ ----------------
Balance at December 31, 1994...................... -- (706,071) (682,071)
Sale of common stock............................ -- -- 58,425
Issuance of common stock for technology......... -- -- 40,000
Sale of Series B preferred stock................ -- -- --
Sale of Series C preferred stock................ -- -- --
Conversion of notes payable and interest into
Series C preferred stock...................... -- -- --
Repurchase and cancellation of common stock..... -- -- (2,708)
Net loss........................................ -- (6,674,558) (6,674,558)
------------ ------------ ----------------
Balance at December 31, 1995...................... -- (7,380,629) (7,260,912)
Sale of common stock............................ -- -- 22,200
Sale of Series C preferred stock................ -- -- --
Sale of Series D preferred stock................ -- -- --
Conversion of notes payable and interest into
Series Z preferred stock...................... -- -- --
Repurchase and cancellation of common stock..... -- -- (5,865)
Net loss........................................ -- (5,118,427) (5,118,427)
------------ ------------ ----------------
Balance at December 31, 1996...................... -- (12,499,056) (12,363,004)
Sale of common stock............................ -- -- 19,750
Sale of Series J preferred stock................
Deferred compensation related to stock
options....................................... -- -- --
Amortization of deferred compensation........... -- -- 75,478
Sale of common stock for notes receivable....... (421,464) -- --
Repayment of notes receivable................... 84,902 -- 84,902
Net loss........................................ -- (3,669,353) (3,669,353)
------------ ------------ ----------------
Balance at September 30, 1997..................... $ (336,562) $(16,168,409) $(15,852,227)
============ ============ ===============
</TABLE>

See accompanying notes.

F-5
<PAGE> 71

COMBICHEM, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
MAY 23, 1994 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------- -------------------------
1994 1995 1996 1996 1997
-------------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $ (706,071) $(6,674,558) $(5,118,427) $(4,460,687) $(3,669,353)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 4,946 106,763 310,765 211,094 559,823
Deferred rent.................................... -- -- 30,409 -- 45,614
Deferred revenue................................. -- -- 2,130,000 212,500 (942,499)
In-process research and development acquired for
convertible notes payable and accrued
interest....................................... -- 591,358 -- -- --
In-process research and development acquired for
note payable................................... 35,000 -- -- -- --
Amortization of deferred compensation............ -- -- -- -- 75,478
Stock issued for technology...................... 100,000 40,000 -- -- --
Interest payable converted to preferred stock.... -- 2,676 20,913 20,913 --
Change in operating assets and liabilities:
Prepaid expenses and other current assets...... (26,081) (135,440) (352,571) (333,809) 25,079
Accounts payable and accrued expenses.......... 192,938 443,095 607,106 (50,909) 179,377
---------- ----------- ----------- ----------- -----------
Net cash used in operating activities..... (399,268) (5,626,106) (2,371,805) (4,400,898) (3,726,481)
Cash flows from investing activities:
Purchases of short-term investments.............. -- -- (12,166,132) -- (3,601,045)
Maturities of short-term investments............. -- -- -- -- 11,652,477
Purchases of property and equipment.............. (107,061) -- (238,315) (237,590) (235,203)
Deposits and other assets........................ (45,941) 9,923 (102,077) 7,444 (18,386)
Notes receivable from employees.................. -- (179,555) (66,125) (79,165) 12,690
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. (153,002) (169,632) (12,572,649) (309,311) 7,810,533
Cash flows from financing activities:
Principal payments under capital lease
obligations.................................... -- (108,870) (410,876) (176,528) (616,970)
Issuance of redeemable convertible preferred
stock, net of issuance costs................... 2,150,000 6,897,749 12,995,390 3,151,156 11,063
Issuance of common stock, net of repurchased
shares......................................... 24,000 55,717 16,335 (2,195) 116,829
Payments on note payable......................... -- (35,000) (100,000) (100,000) --
Restricted cash given as collateral for letter of
credit......................................... -- -- (325,000) (325,000) 325,000
Proceeds from convertible notes payable.......... -- 750,000 -- -- --
Repayments of convertible notes payable.......... -- (250,000) -- -- --
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 2,174,000 7,309,596 12,175,849 2,547,433 (164,078)
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... 1,621,730 1,513,858 (2,768,605) (2,162,776) 3,919,974
Cash and cash equivalents at beginning of period... -- 1,621,730 3,135,588 3,135,588 366,983
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period......... $1,621,730 $ 3,135,588 $ 366,983 $ 972,812 $ 4,286,957
========== =========== =========== =========== ===========
Supplemental disclosures of cash flow information
Interest paid...................................... $ -- $ 56,040 $ 124,226 $ 64,636 $ 169,329
========== =========== =========== =========== ===========
Supplemental schedule of noncash investing and
financing activities
Capital lease obligations entered into for
equipment........................................ $ -- $ 693,102 $ 2,337,375 $ 1,168,828 $ 1,523,627
========== =========== =========== =========== ===========
Conversion of convertible notes payable and
interest payable to redeemable convertible
preferred stock.................................. $ -- $ 502,676 $ 440,000 $ 440,000 $ --
========== =========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 72

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

CombiChem, Inc. is a computational drug discovery company that is applying
its proprietary design technology and rapid synthesis capabilities to accelerate
the discovery process for new drugs. The Company believes its approach offers
pharmaceutical and biotechnology companies the opportunity to conduct their drug
discovery efforts in a more productive and cost-effective manner. Using its
Discovery Engine(TM) process, the Company focuses on the generation, evolution
and optimization of potential new lead candidates for its collaborative
partners, who will then develop, manufacture, market and sell any resulting
drugs. CombiChem believes that its process is widely applicable to a variety of
disease targets and therapeutic indications. In addition, the Company intends to
use its approach on internal programs to discover new lead candidates and then
to outlicense them to third parties, retaining a larger economic interest in
such candidates.

Cash, Cash Equivalents and Short-term Investments

Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less when purchased. The Company generally
invests its excess cash in U.S. government securities. Short-term investments
are recorded at amortized cost plus accrued interest which approximates market
value.

The Company applies Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115)
to its investments. Under SFAS No. 115, the Company classifies its short-term
investments as "Available-for-Sale" and records such assets at estimated fair
value in the balance sheet, with unrealized gains and losses, if any, reported
in stockholders' equity. As of December 31, 1996 and September 30, 1997, the
cost of cash equivalents and short-term investments approximated estimated fair
value.

Concentration of Credit Risk

The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. The Company historically has not experienced any material
losses on its cash equivalents or short-term investments.

Property and Equipment

Property and equipment are carried at cost. Depreciation of equipment is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to seven years. Leasehold improvements are amortized
over the shorter of the estimated useful lives of the assets or the remaining
term of the lease. Amortization of equipment under capital leases is reported
with depreciation of property and equipment.

Impairment of Long-Lived Assets

In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS No. 121), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for

F-7
<PAGE> 73

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

long-lived assets that are expected to be disposed of. The adoption had no
impact on the Company's financial statements.

New Accounting Standards

Revenues under Collaborative Agreements and Research and Development Costs

The Company currently generates revenue primarily through its collaborative
agreements, which provide for the analysis of data, design of informative
compound libraries and synthesis of compounds utilizing the Company's
proprietary technology. Contract research revenue is recognized at the time that
research activities are performed under the terms of the research contracts.
Contract payments are generally received in advance of the performance of the
related research activities. Such payments received in excess of amounts earned
are recorded as deferred contract research revenue. Technology access fees are
recognized as revenue when earned. These fees are nonrefundable, and the Company
has no future performance obligations related to such fees.

Research and development costs are expensed as incurred. Costs of services
under the Company's collaborative agreements generally approximate the research
revenue received under such agreements.

Net Loss Per Share

Historical net loss per share is computed using the weighted average number
of common shares outstanding during the periods presented. Common equivalent
shares resulting from stock options, warrants to purchase redeemable convertible
preferred stock and redeemable convertible preferred stock are excluded from the
computation as their effect would be antidilutive, except that the Securities
and Exchange Commission requires common and common share equivalents issued
during the twelve-month period prior to the initial filing of a proposed public
offering to be included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and the assumed initial
public offering price).

Historical net loss per share information is as follows:

<TABLE>
<CAPTION>
PERIOD FROM
MAY 23, 1994
(INCEPTION) TO YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ------------------------ -----------------------
1994 1995 1996 1996 1997
-------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss per share......................... $ (0.29) $ (2.33) $ (1.73) $ (1.51) $ (1.24)
========= ========= ========= ========= =========
Shares used in computing net loss per
share.................................... 2,406,794 2,869,475 2,962,113 2,962,113 2,962,113
========= ========= ========= ========= =========
</TABLE>

F-8
<PAGE> 74

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Pro Forma Net Loss Per Share

Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of the redeemable convertible preferred stock,
which will convert to common stock upon completion of the Company's initial
public offering, using the as if-converted method from the original date of
issuance.

Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards No. 123, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related Interpretations
in accounting for its employee stock options. Under APB 25, when the exercise
price of the Company's employee stock options is not less than the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.

Use of Estimates

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

Interim Financial Information

The accompanying financial statements for the nine months ended September
30, 1996 are unaudited but include all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
statement of the operating results and cash flows for such period.

Pro Forma Stockholders' Equity

In September 1997, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission for the Company to sell shares of its common stock in an initial
public offering. If the initial public offering contemplated by this Prospectus
is consummated under the terms presently anticipated, all outstanding shares of
redeemable convertible preferred stock at September 30, 1997 will automatically
convert into 7,754,933 common shares. The pro forma stockholders' equity does
not reflect the equity investments made in conjunction with the collaboration
agreements described in Note 10.

2. BALANCE SHEET INFORMATION

Investments

There were no realized gains or losses on the sale of securities for either
the period ended September 30, 1997 or the year ended December 31, 1996.

F-9
<PAGE> 75

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

2. BALANCE SHEET INFORMATION (CONTINUED)

The amortized cost of debt securities at September 30, 1997, by contractual
maturity, are shown below. The amortized costs approximates fair value. Actual
maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations with out prepayment
penalties.

<TABLE>
<CAPTION>
COST
----------
<S> <C>
Available for sale:
Due in one year or less........................................ $3,610,293
Due in one to five years....................................... 504,407
----------
$4,114,700
==========
</TABLE>

Property and Equipment

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------
1995 1996 1997
--------- ---------- -------------
<S> <C> <C> <C>
Laboratory and computer equipment......... $ 670,948 $1,759,990 $ 3,055,611
Leasehold improvements.................... -- 1,373,465 1,689,685
Office furniture, fixtures and
equipment............................... 74,991 188,174 317,131
--------- ----------- -----------
745,939 3,321,629 5,062,427
Less accumulated depreciation and
amortization............................ (111,709) (422,474) (982,297)
--------- ----------- -----------
$ 634,230 $2,899,155 $ 4,080,130
========= =========== ===========
</TABLE>

3. NOTES PAYABLE

During 1996, the Company repaid a $100,000 non-interest bearing note with
cash and converted two notes payable totaling $440,000 and the related accrued
interest into 83,195 shares of Series Z convertible preferred stock.

4. COMMITMENTS

Leases

The Company leases its facilities under an operating lease agreement that
expires in May 2006. Rent expense was approximately $86,000, $383,000, $232,000
and $395,000 for the years ended December 31, 1995 and 1996, and the nine months
ended September 30, 1996 and 1997, respectively. Lease payments are subject to
future increases based upon the Consumer Price Index.

The Company leases certain equipment under capital lease obligations. Cost
and accumulated amortization of equipment under capital leases were $349,000 and
$104,000 at December 31, 1995, $3,054,000 and $349,000 at December 31, 1996 and
$4,578,000 and $845,000 at September 30, 1997, respectively.

F-10
<PAGE> 76

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

4. COMMITMENTS
Annual future minimum obligations for operating and capital leases as of
September 30, 1997 are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- -----------
<S> <C> <C>
Three months ending December 31:
1997.................................. $ 113,524 $ 358,431
Year ending December 31:
1998.................................. 458,365 1,433,722
1999.................................. 421,201 1,194,044
2000.................................. 437,638 641,923
2001.................................. 449,966 296,634
2002.................................. 346,207 --
Thereafter....................................... 1,862,189 --
---------- -----------
Total minimum lease payments....................... $4,089,090 3,924,754
==========
Less amount representing interest.................. (525,398)
-----------
Present value of obligations under capital
leases........................................... 3,399,356
Less current portion............................... (1,021,946)
-----------
Long-term obligations under capital leases......... $ 2,377,410
===========
</TABLE>

Consulting Agreements

The Company has entered into various consulting agreements with members of
its Scientific Advisory Board and others for aggregate minimum annual fees of
approximately $118,000. The agreements are cancelable by either party with
limited notice. During the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997, the Company expensed approximately
$27,000, $43,000, $35,000 and $42,000, respectively, for fees and expense
reimbursements paid to these consultants.

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

Changes in Capitalization

In September 1997, the Company's Board of Directors approved the
reincorporation of the Company in Delaware which was accomplished through a
merger of the existing California corporation into a new Delaware corporation.
The ratio of exchange was one share of the California corporation to one share
of the Delaware corporation. Subsequent to the reincorporation, the Company
effected a one-for-four reverse stock split of the Common Stock. The number of
authorized shares of the new Delaware corporation are 40,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. All share and per share
amounts and stock option data have been restated to retroactively give effect to
the reincorporation, the reverse stock split and the related change in shares
outstanding.

F-11
<PAGE> 77

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)

Redeemable Convertible Preferred Stock

A summary of redeemable convertible preferred stock issued and outstanding
is as follows:

<TABLE>
<CAPTION>
LIQUIDATION
SHARES PREFERENCE
---------- -----------
<S> <C> <C>
Series A.............................................. 250,000 $ 500,000
Series B.............................................. 556,669 1,670,000
Series C.............................................. 4,289,634 10,638,261
Series D.............................................. 2,467,310 9,869,205
--------- -----------
7,563,613 $22,677,466
========= ===========
</TABLE>

In 1994, the Company issued Series A and B redeemable convertible preferred
stock for cash at $2.00 and $3.00 per share, respectively. In October 1994, the
Company acquired certain intellectual property rights in exchange for 50,000
shares of the Company's Series Z convertible preferred stock valued at $2.00 per
share. During 1996, the Company converted two outstanding notes and related
accrued interest totalling $460,913 into 83,195 shares of Series Z convertible
preferred stock.

In August 1995, the Company received approximately $6.9 million in net
proceeds from the issuance of 2,808,702 shares of Series C redeemable
convertible preferred stock at $2.48 per share. Pursuant to the terms of certain
promissory notes, the Company converted $502,676 of principal and accrued
interest into 202,692 shares of Series C redeemable convertible preferred stock
at $2.48 per share. In April 1996, upon the achievement of certain milestones,
the Company received an additional $3.1 million in net proceeds from the
issuance of an additional 1,278,240 shares of Series C redeemable convertible
preferred stock at $2.48 per share.

In November 1996, the Company received approximately $9.9 million in net
proceeds from the issuance of 2,467,310 shares of Series D redeemable
convertible preferred stock at $4.00 per share.

At the option of the holder, the shares of Series A, B, C and D redeemable
convertible preferred stock and Series Z convertible preferred stock are
convertible at any time into common stock on a one-for-four basis, subject to
certain anti-dilution adjustments. The preferred shares automatically convert
into common stock upon the earlier of: 1) the closing of an underwritten public
offering of common stock at not less than $16.00 per common share and an
aggregate offering price of not less than $12 million or 2) the written election
of at least 70% of the preferred stockholders. The preferred stockholders have
voting rights equal to the common shares they would own upon conversion. The
Company has reserved 7,563,613 shares of common stock for issuance upon
conversion of the Series A, B, C and D redeemable convertible preferred stock.

The Company's Amended and Restated Articles of Incorporation provide for
redemption of Series A, B, C and D redeemable convertible preferred stock at any
time after December 31, 1998, at the request of at least 70% of the holders of
such series. The redemption price is equal to the original issue price plus any
declared but unpaid dividends.

The preferred shareholders are entitled to noncumulative annual dividends
of $0.16, $0.24, $0.20, $0.32 and $0.16 per share of Series A, B, C and D
redeemable convertible preferred stock and Series Z convertible preferred stock,
respectively, if and when such dividends are declared by the Board of Directors.
No dividends have been declared to date.

In connection with employment agreements, certain employees received
options to purchase the Company's Series J convertible preferred stock
exercisable upon the achievement of certain mile-

F-12
<PAGE> 78

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)

stones. Some of the milestones were met during 1997, and in connection
therewith, the Company issued 58,125 shares of Series J convertible preferred
stock to the employees.

1995 Stock Option/Stock Issuance Plan

In 1995, the Board of Directors adopted the 1995 Stock Option/Stock
Issuance Plan (the Plan), under which 2,355,069 shares of common stock are
reserved for issuance upon exercise of options or stock issuances by the Company
to certain employees of and consultants to the Company. Under the stock option
program, options may be designated as incentive stock options or nonstatutory
stock options. Options under the Plan have a term of up to ten years from the
date of grant. The exercise price of incentive stock options must equal at least
the fair market value on the date of grant, and the exercise price of
nonstatutory stock options may be no less than 85% of the fair market value on
the date of grant. Options generally vest over four to five years.

The Company recorded $1,401,075 of deferred compensation for options
granted during the nine months ended September 30, 1997, representing the
difference between the option exercise price and the deemed fair value for
financial statement presentation purposes. The Company is amortizing the
deferred compensation over the vesting period of the options. The Company
recorded $75,476 of compensation expense during the nine months ended September
30, 1997.

The Company recorded $53,474 of additional deferred compensation
representing the difference between the option exercise price and the deemed
fair value for financial statement presentation purposes for stock options
granted in October 1997.

Under the stock issuance program, selected employees and consultants may be
issued shares of common stock at no less than 85% of the fair market value on
the date of grant. The vesting schedule for each share issuance is determined by
the Board of Directors as Plan Administrator. The Company has the option to
repurchase, at the original issue price, the unvested shares in the event of
termination of service. At September 30, 1997, 901,658 shares were subject to
repurchase by the Company.

Information with respect to the Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Granted........................................... 562,980 $ 0.30
Exercised......................................... -- --
Cancelled......................................... -- --
----------
Balance at December 31, 1995........................ 562,980 0.30
Granted........................................... 531,479 0.30
Exercised......................................... (72,589) 0.30
Cancelled......................................... (12,536) 0.30
----------
Balance at December 31, 1996........................ 1,009,334 0.30
Granted........................................... 621,813 2.15
Exercised......................................... (1,159,377) 0.36
Cancelled......................................... (30,074) 0.33
---------- -----
Balance at September 30, 1997....................... 441,696 $ 2.81
========== =====
</TABLE>

F-13
<PAGE> 79

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)

At September 30, 1997, options to purchase 441,696 shares were exercisable
and 681,407 shares remain available for grant.

Following is a further breakdown of the options outstanding as of September
30, 1997:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED EXERCISE
RANGE OF AVERAGE AVERAGE PRICE OF
EXERCISE OPTIONS REMAINING EXERCISE OPTIONS OPTIONS
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE EXERCISABLE
- ------------- ----------- ------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.30 - $0.40 107,195 8.54 $ 0.33 107,195 $0.33
$1.00 29,375 9.81 1.00 29,375 1.00
$2.00 - $3.00 28,879 8.45 2.43 28,879 2.43
$4.00 276,247 4.90 4.00 276,247 4.00
------- ---- ----- ------- -----
441,696 6.37 $ 2.81 441,696 $2.81
======= ==== ===== ======= =====
</TABLE>

Adjusted pro forma information regarding net loss and net loss per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options and stock purchase plan under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using the "Minimum Value" method for option pricing with the following
assumptions for 1995, 1996 and 1997: risk-free interest rates of 6.50%; dividend
yield of 0%; and a weighted-average expected life of the options of five years.

For purposes of adjusted pro forma disclosures, the estimated fair value of
the options are amortized to expense over the vesting period. The Company's
adjusted pro forma information is as follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
Adjusted pro forma net loss............ $(6,678,067) $(5,137,253) $(3,692,783)
Adjusted pro forma net loss per
share................................ $ (2.33) $ (0.66) $ (0.45)
</TABLE>

The weighted-average fair value of options granted during 1995 and 1996 was
$.08 and during 1997 was $0.56.

The pro forma effect on net loss for 1995, 1996 and 1997 is not likely to
be representative of the pro forma effects on reported net income or loss in
future years because these amounts reflect less than four year of vesting.

Warrants

At September 30, 1997, the Company has issued warrants to purchase an
aggregate of 130,728 shares of redeemable convertible preferred stock at prices
ranging from $2.00 to $2.48 per share. The warrants are exercisable in whole or
in part through various dates.

The Company also has issued warrants to purchase 8,750 shares of common
stock at $0.30 per share. The warrants are exercisable in whole or in part at
any time at or prior to June 2000.

F-14
<PAGE> 80

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

6. NOTES RECEIVABLE FROM EMPLOYEE/STOCKHOLDERS

During 1995, the Company lent $150,000 to an employee and stockholder for
the purchase of a residence in connection with the individual's employment
agreement. The note bears interest at approximately 5.8% and matures on the
earlier of (i) September 5, 2000, (ii) 30 days following cessation of
employment, (iii) 180 days following the date at which the Company completes a
successful initial public offering of shares of its common stock, or (iv) the
date on which more than 50% of the Company's outstanding shares of common stock
are acquired by a single purchaser or a group of purchasers. The note is secured
by 87,500 shares of the Company's common stock owned by the employee at the date
of the note, plus any capital stock thereafter acquired.

In August 1996, the Company lent $66,125 to an employee for relocation in
connection with employment, which is secured by a deed of trust. The loan is
represented by a promissory note which is due and payable on the earlier of
August 28, 1999 or the occurrence of certain events, such as expiration of the
30-day period following the date the individual ceases to be a full time
employee of the Company. The loan bears no interest, and principal payments of
$22,000 have been made to date.

During 1997, the Company instituted an employee loan program whereby the
proceeds of the loan are used to purchase common stock from the exercise of the
employee's stock options. Under the program, the employee pays 25% of the total
exercise price, and the Company loans the employee the remaining 75% of the
purchase price. The loans bear interest at an adjustable rate that is the
minimum rate allowable by the Internal Revenue Service, subject to quarterly
adjustments by the Company. The loans will be repaid through 3 equal payments on
the first three anniversary dates of the loan. The Company has $337,000 in loans
outstanding at September 30, 1997.

7. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS

Teijin Limited

In March 1996, the Company entered into a collaborative agreement with
Teijin Limited ("Teijin") providing for a one-year program on a G-protein
coupled receptor target. In March 1997, the Company and Teijin amended their
agreement to extend the collaboration for an additional year. While the initial
focus of the collaboration was lead optimization, the effort was redirected to
lead evolution during the course of the research. Under the agreement, Teijin
made an upfront payment to CombiChem and agreed to provide research funding and
milestone payments upon the achievement of certain preclinical and clinical
milestones. Teijin also committed internal resources to the discovery effort.
Teijin will make royalty payments on products resulting from the collaboration.
CombiChem retains the rights to the compounds arising under this collaboration
in North and South America; Teijin has rights to these compounds in Asia and
Europe with a right of first negotiation to acquire CombiChem's rights. Under
the original agreement, Teijin has rights to expand or extend the program for up
to two successive one-year terms. Either party may terminate the agreement in
the event of a material breach remaining uncured for 60 days. As of September
30, 1997, Teijin had paid the Company an aggregate of $1.5 million.

Roche Bioscience, a division of Syntex (U.S.A.) Inc.

F-15
<PAGE> 81

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

7. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
during the term of the collaboration, thereby extending the term to allow for
completion of each program. Under the agreement, Roche Bioscience made an
upfront payment to CombiChem and agreed to provide research funding and to make
milestone payments upon the achievement of certain preclinical and clinical
milestones. Roche Bioscience will make royalty payments on worldwide sales of
products resulting from the collaboration. Upon completion of the first year of
the agreement, Roche Bioscience may terminate the collaboration at any time upon
six months' prior written notice. Certain special conditions could also allow
Roche Bioscience to terminate with 45 days' prior written notice. As of
September 30, 1997, Roche Bioscience had paid the Company an aggregate of $4.0
million.

Sumitomo Pharmaceuticals Co., Ltd.

In August 1997, the Company entered into a collaborative agreement with
Sumitomo Pharmaceuticals, Co., Ltd. (Sumitomo) providing for a two-year lead
evolution program on a target that is believed to play a fundamental role in
osteoarthritis and rheumatoid arthritis. Under the agreement, Sumitomo made an
upfront payment and agreed to provide research funding and milestone payments
upon the achievement of certain preclinical and clinical milestones. Sumitomo
will make royalty payments on worldwide sales of products resulting from the
collaboration. Sumitomo may extend the research period for up to four successive
six-month periods upon mutual agreement. The agreement may be terminated by
either party 90 days following an uncured material breach. As of September 30,
1997, Sumitomo had paid the Company an aggregate of $3.3 million.

8. BENEFIT PLAN

Company sponsors a benefit plan which covers employees who meet certain age
and service requirements. Employees may contribute a portion of their earnings
each plan year subject to certain Internal Revenue Service limitations. The
Company made no contributions to the Plan for the years ended December 31, 1994,
1995 and 1996, and the nine months ended September 30, 1996 and 1997,
respectively.

9. INCOME TAXES

At December 31, 1996, the Company had federal and California income tax net
operating loss carryforwards of approximately $11,694,000 and $11,652,000,
respectively.

The federal and California tax loss carryforwards will begin to expire in
2009 and 2002, respectively, unless previously utilized. The Company also has
federal and California research tax credit carryforwards of approximately
$104,000 and $144,000, respectively, which will begin to expire in 2010 unless
previously utilized.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use
of the Company's net operating loss and credit carryforwards may be limited
because of cumulative changes in ownership of more than 50% which occurred
during 1995. However, the Company does not believe such limitation will have a
material effect upon the utilization of these carryforwards.

Significant components of the Company's deferred tax assets are shown
below. A valuation allowance, which was increased by $2,253,000 in 1996, has
been recognized to offset the deferred tax assets as of December 31, 1995 and
1996 as realization of such assets is uncertain.

F-16
<PAGE> 82

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

9. INCOME TAXES (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 2,651,000 $ 4,792,000
Research and development credits................ 179,000 198,000
Other........................................... 29,000 122,000
----------- -----------
Total deferred tax assets......................... 2,859,000 5,112,000
Valuation allowance for deferred tax assets....... (2,859,000) (5,112,000)
----------- -----------
Net deferred tax assets........................... $ -- $ --
=========== ===========
</TABLE>

The Company recorded foreign tax expense of $200,000 in the nine months
ended September 30, 1997 for taxes payable to a Japanese tax authority resulting
from the revenue recognized on the Sumitomo collaboration.

10. SUBSEQUENT EVENTS

Collaborative Agreements

ImClone Systems Incorporated

In October 1997, the Company entered into a collaborative agreement with
ImClone Systems Incorporated (ImClone) providing for a two-year program to
identify and characterize novel small molecule inhibitors to multiple targets
for development in oncology. The agreement provides for ImClone's access to the
Company's Universal Informer Library and Virtual Library under the supervision
of the research management committee composed of representatives of the Company
and ImClone. Under the terms of the agreement, ImClone will provide the Company
with research support payments, milestone payments upon the achievement of
certain program objectives and royalties on worldwide product sales of
therapeutic products that may arise out of the collaboration. The agreement may
be terminated by either party 90 days following an uncured material breach or by
ImClone within 30 days prior to the one-year anniversary by providing 90 days'
prior written notice. In connection with the collaborative agreement, ImClone
purchased 250,000 shares of Common Stock for $2.0 million, (representing a $1.5
million equity investment, and a $0.5 million premium over the deemed fair
market value of the stock), and made advance payments for contract research of
$500,000. The Company deferred the premium component of the equity investment
which constitutes advance payments for contract research.

Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc

In October 1997, the Company entered into a collaborative agreement with
Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc.
(Elan/Athena) providing for a three-year program to discover novel therapeutic
compounds for treatment of central nervous system conditions. The agreement
provides for Elan/Athena's access to the Universal Informer Library as deemed
necessary by the research management committee composed of Elan/Athena and
CombiChem representatives. Under the agreement, Elan/Athena will provide the
Company with upfront and research support payments, as well as milestone
payments upon the achievement of pre-determined objectives. Elan/Athena will
also make royalty payments on worldwide sales of products resulting from the
collaboration. The agreement may be terminated by either party 90 days following
an uncured material breach or by Elan/Athena after the one-year anniversary upon
90 days prior written notice. In connection with the collaborative agreement,
Elan International Services Ltd., an affiliate of Elan/Athena, purchased
1,000,000 shares of Common Stock for $8.0 million, (representing a

F-17
<PAGE> 83

COMBICHEM, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)

10. SUBSEQUENT EVENTS (CONTINUED)

$6.0 million equity investment, and a $2.0 million premium over the deemed fair
market value of the stock) and paid a $1.333 million up-front technology license
and access fee. The Company recognized the premium component of the equity
investment as revenue which constitutes a technology license and access fee.

1997 Stock Incentive Plan

The Company's 1997 Stock Incentive Plan (the 1997 Plan) is intended to
serve as the successor equity incentive program to the Company's 1995 Stock
Option/Stock Issuance Plan, as amended (the "Predecessor Plan"). The 1997 Plan
was adopted by the Board and the stockholders on October 7, 1997, and a total of
1,080,603 shares of Common Stock have been authorized for issuance under the
1997 Plan. Under the stock option program, options may be designated as
incentive stock options or nonstatutory stock options. Options under the plan
have a term of up to ten years from the date of grant. The exercise price of
options shall be fixed by the plan administrator, but shall not be less than
100% of the fair market value per share of common stock on the option grant
dates.

1997 Employee Stock Purchase Plan

In October 1997, the Company adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 150,000 shares for issuance, thereunder. The
Purchase Plan permits eligible employees of the Company to purchase shares of
Common Stock, at semi-annual intervals, through periodic payroll deductions.
Payroll deductions may not exceed 10% of the participant's base salary, and the
purchase price will not be less than 85% of the lower of the fair market value
of the stock at either the beginning or the end of the semi-annual intervals.

F-18
<PAGE> 84

[DEPICTIONS OF ACTIVE SITES AND COMPOUNDS]

Using only the structures of compounds screened against a known HIV
protease target, CombiChem's Discovery Engine(TM) has generated a hypothesis (a
computational model), as depicted here, which illustrates potentially important
characteristics of the HIV protease active site.

X-ray crystallography has determined the actual three-dimensional structure
of the active site of the HIV protease target, as shown here.

CombiChem's computer-generated hypothesis has accurately identified the
important characteristics of the HIV protease active site in detail as
demonstrated by the lock-and-key structural fit depicted in this overlay.
<PAGE> 85

[LOGO]
<PAGE> 86

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

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

<TABLE>
<S> <C>
Registration fee.................................................. $ 10,194
Nasdaq National Market fee........................................ 50,000
NASD fee.......................................................... 3,864
Blue Sky fees and expenses........................................ 10,000
Printing and engraving expenses................................... 180,000
Legal fees and expenses........................................... 250,000
Accounting fees and expenses...................................... 125,000
Transfer Agent and Registrar fees................................. 5,000
Miscellaneous expenses............................................ 65,942
--------
TOTAL................................................... $700,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Section 145 of the Delaware General Corporation Law permits indemnification
of officers and directors of the Company under certain conditions and subject to
certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against such
person and incurred by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability under the provisions of Section 145 of the
Delaware General Corporation Law.

Article VII, Section 1 of the Restated Bylaws of the Company provides that
the Company shall indemnify its directors and executive officers to the fullest
extent not prohibited by the Delaware General Corporation Law. The rights to
indemnity thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she is
or was a director or officer of the Company (or was serving at the Company's
request as a director or officer of another corporation) shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Company as authorized by the relevant section
of the Delaware General Corporation Law.

As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article V, Section (A) of the Company's Restated Certificate of Incorporation
provides that a director of the Company shall not be personally liable for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or acts or
omissions that involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived any improper personal benefit.

The Company has entered into indemnification agreements with each of its
directors and executive officers. Generally, the indemnification agreements
attempt to provide the maximum

II-1
<PAGE> 87

protection permitted by Delaware law as it may be amended from time to time.
Moreover, the indemnification agreements provide for certain additional
indemnification. Under such additional indemnification provisions, however, an
individual will not receive indemnification for judgments, settlements or
expenses if he or she is found liable to the Company (except to the extent the
court determines he or she is fairly and reasonably entitled to indemnity for
expenses), for settlements not approved by the Company or for settlements and
expenses if the settlement is not approved by the court. The indemnification
agreements provide for the Company to advance to the individual any and all
reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding. In order to
receive an advance of expenses, the individual must submit to the Company copies
of invoices presented to him or her for such expenses. Also, the individual must
repay such advances upon a final judicial decision that he or she is not
entitled to indemnification.

The Company has purchased directors' and officers' liability insurance. The
Company intends to enter into additional indemnification agreements with each of
its directors and executive officers to effectuate these indemnity provisions.

The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by
which the Underwriters have agreed to indemnify the Company, each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act, each director of the Company, and each officer of the Company who signs
this Registration Statement, with respect to information furnished in writing by
or on behalf of the Underwriters for use in the Registration Statement.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since September 30, 1994, the Company has sold and issued the following
unregistered securities (which numbers have not been adjusted for the
one-for-four reverse stock split effected in October 1997).

(1) From September 30, 1994 to September 30, 1997, the Company issued an
aggregate of 6,694,638 options to purchase Common Stock with exercise
prices ranging from $0.062 to $0.25 per share under the Predecessor Plan
and an aggregate of 4,927,858 shares of Common Stock were issued through
the exercise of options granted under the Predecessor Plan for an aggregate
exercise price of $405,241. For additional information concerning these
transactions, reference is made to the information contained under the
caption "Management -- Benefit Plans" in the form of the Prospectus
included herein.

(2) On October 12, 1995, the Company issued 200,000 shares of Series Z
Preferred Stock to Sydney Brenner for an aggregate consideration of
$100,000.

(3) On October 18, 1994, the Company issued 500,000 shares of Common Stock to
Robert A. Curtis, former Chief Executive Officer of the Company, at $.01
per share, of which 229,160 were vested as of the date of the termination
of his employment in October 1995.

(4) On October 18, 1994, the Company issued an aggregate of 2,500 shares of
Common Stock to one investor for an aggregate consideration of $25.

(5) On November 1, 1994, the Company issued an aggregate of 400,000 shares of
Series A Preferred Stock to certain funds advised by Sequoia Capital for an
aggregate consideration of $200,000.

(6) From November 23, 1994 through January 15, 1995, the Company issued an
aggregate of 2,226,667 shares of Series B Preferred Stock to certain funds
advised by Sequoia Capital, Forward Ventures II, L.P. and an individual
investor for an aggregate consideration of $1,670,000.

(7) On November 1, 1994, the Company issued an aggregate of 100,000 shares of
Common Stock to certain venture funds advised by Sequoia Capital for an
aggregate consideration of $5,000.

(8) On November 8, 1994, the Company issued an aggregate of 175,000 shares of
Common Stock to one investor for an aggregate consideration of $8,750.

II-2
<PAGE> 88

(9) On November 18, 1994, the Company issued an aggregate of 10,000 shares of
Common Stock to one investor for an aggregate consideration of $500.

(10) In December 1994, the Company issued a warrant to purchase 83,655 shares of
Series Z Preferred Stock to Comdisco, Inc. at an exercise price of $0.50
per share in connection with an equipment lease financing.

(11) From January 1, 1995 through April 24, 1995, the Company issued an
aggregate of 130,000 shares of Common Stock to eight investors for an
aggregate consideration of $9,750.

(12) On March 20, 1995, the Company issued an aggregate of 400,000 shares of
Common Stock to The Scripps Research Institute for an aggregate
consideration of $40,000.

(13) From April 25, 1995 through July 30, 1995, the Company issued an aggregate
of 650,000 shares of Common Stock to three investors for an aggregate
consideration of $48,750.

(14) On June 15, 1995, the Company issued a warrant to purchase 35,000 shares of
Common Stock to LJL BioSystems, Inc. at an exercise price of $0.075.

(15) In connection with an asset purchase agreement dated August 4, 1995, the
Company issued an aggregate of 332,777 shares of Series Z Preferred Stock
to Molecular Simulations, Inc. from June 1996 through July 1996 in
consideration for certain technology rights.

(16) On August 5, 1995, the Company issued 6,000 shares of Common Stock to Ken
Rubenstein at $.075 per share in connection with a consulting agreement.

(17) On August 17, 1995, August 25, 1995 and September 11, 1995, the Company
issued an aggregate of 12,045,576 shares of Series C Preferred Stock to
various venture capital funds and certain other investors for an aggregate
consideration of $7,468,257.

(18) On August 17, 1995, the Company issued warrants to purchase 120,968 shares
of Series C Preferred Stock at an exercise price of $0.62 per share.

(19) On September 7, 1995, the Company issued 8,065 shares of Series C Preferred
Stock to one investor for an aggregate consideration of $5,000.

(20) In December 1995, the Company issued an aggregate of 232,500 shares of
Series J Preferred Stock to three employees upon the exercise of options to
purchase Series J Preferred Stock at an exercise price of $0.10.

(21) On April 9, 1996, the Company issued an aggregate of 5,104,845 shares of
Series C Preferred Stock to various venture capital funds and certain other
investors for an aggregate consideration of $3,165,003.

(22) In April 1996 and June 1996, the Company issued warrants to purchase an
aggregate of 240,321 shares of Series C Preferred Stock to Comdisco, Inc.
at an exercise price of $0.62 per share in connection with an equipment
lease financing.

(23) In May 1996, the Company issued warrants to purchase an aggregate of
112,903 shares of Series Z Preferred Stock to Silicon Valley Bank and
MMC/GATX Partnership No. 1 at an exercise price of $0.62 per share in
connection with an equipment lease financing.

(24) On November 15, 1996, the Company issued an aggregate of 9,869,205 shares
of Series D Preferred Stock to various venture capital funds and certain
other investors for an aggregate consideration of $9,869,205.

(25) On January 23, 1997, the Company issued an aggregate of 5,000 shares of
Common Stock to one investor at $0.10 per share pursuant to a Restricted
Stock Issuance Agreement for an aggregate consideration of $500.

II-3
<PAGE> 89

(26) On June 11, 1997, the Company issued an aggregate of 40,000 shares of
Common Stock to one investor at $0.10 per share for an aggregate
consideration of $4,000.

(27) On July 1, 1997, the Company issued an aggregate of 45,000 shares of Common
Stock to the University of Pittsburgh for technology rights valued at
$11,250.

(28) On October 7, 1997, the Company issued an aggregate of 50,000 shares of
Common Stock to two investors for past services rendered to the Company.

(29) On October 10, 1997, the Company issued an aggregate of 1,000,000 shares of
Common Stock to ImClone Systems Incorporated in conjunction with a
collaboration agreement.

(30) On October 15, 1997, the Company issued an aggregate of 4,000,000 shares of
Common Stock to Elan International Services Ltd., in conjunction with a
collaboration agreement.

The sales and issuances of securities in the above transactions were deemed
to be exempt under the Act by virtue of Section 4(2) thereof and/or Regulation D
and Rule 701 promulgated thereunder as transactions not involving any public
offering. The purchasers in each case represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. Similar representations of investment intent were obtained and
similar legends imposed in connection with any subsequent transfers of any such
securities. The Company believes that all recipients had adequate access,
through employment or other relationships, to information about the Company to
make an informed investment decision.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1++ Certificate of Incorporation of the Company, as amended.
3.2++ Form of Amended and Restated Certificate of Incorporation of the Company to
become effective immediately prior to the Offering.
3.3++ Bylaws of the Company, as amended.
3.4++ Form of Restated Bylaws of the Company to be effective upon completion of the
Offering.
4.1 Form of Certificate for Common Stock.
5.1++ Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock
being registered.
10.1++ Preferred Stock Purchase Agreement for Series A Preferred Stock between the
Company and Forward Ventures II, L.P., dated August 26, 1994.
10.2++ Preferred Stock Purchase Agreement for Shares of Series Z Preferred Stock
between the Company and Sydney Brenner, dated October 14, 1994.
10.3++ Stock Purchase Agreement for Shares of Series A Preferred Stock and Common Stock
between the Company and the investors listed on Exhibit A thereto, dated
November 1, 1994.
10.4++ Stock Purchase Agreement Series B Preferred Stock between the Company and the
purchasers listed on Exhibit A thereto, dated November 29, 1994.
10.5++ Series C Preferred Stock Purchase Agreement between the Company and the
purchasers listed on Schedule A thereto, dated August 17, 1995.
10.6++ Stock Purchase Agreement for Series C Preferred Stock between the Company and
Todd Schmidt dated September 7, 1995.
</TABLE>

II-4
<PAGE> 90

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<S> <C>
10.7*++ Supplemental Purchase Agreement between the Company and the purchasers on
Schedule A thereto, dated April 8, 1996.
10.8*++ Series D Preferred Stock Purchase Agreement between the Company and the
purchasers listed on Schedule A thereto, dated November 15, 1996.
10.9++ Amended and Restated Investors' Rights Agreement between the Company and the
stockholders listed on Schedule A thereto, dated November 15, 1996.
10.10++ Series J Preferred Stock Purchase Agreement between the Company and Steve Teig,
dated June 10, 1997. '
10.11++ Series J Preferred Stock Purchase Agreement between the Company and Jonathan
Greene, dated June 11, 1997.
10.12++ Series J Preferred Stock Purchase Agreement between the Company and Andrew
Smellie, dated June 11, 1997.
10.13++ Warrant Agreement to Purchase Shares of the Series Z Preferred Stock, as amended
between the Company and Comdisco, Inc., dated December 20, 1994.
10.14++ Common Stock Purchase Warrant between the Company and LJL BioSystems, Inc.,
dated June 15, 1995.
10.15++ Form of Warrant to Purchase Shares of Series C Preferred Stock between the
Company and the purchasers listed on Schedule A thereto, dated August 17, 1995.
10.16++ Form of Warrant Agreement to Purchase Shares of Series C Preferred Stock of the
Company, between the Company and Comdisco, Inc. in the amounts listed on
Schedule A thereto.
10.17++ Form of Warrant to Purchase Shares of Series Z Preferred Stock between the
Company and the purchasers listed on Schedule A thereto, dated May 20, 1996.
10.18++ Master Lease Agreement with the Company and Comdisco Inc., dated November 6,
1994, Schedule VL-1, dated November 11, 1994, Schedule VL-2 dated April 15, 1996
and Schedule VL-3 dated April 15, 1996.
10.19*++ Collaboration Agreement between the Company and Teijin Limited, dated March 29,
1996, as amended.
10.20*++ Collaborative Research and License Agreement between the Company and Roche
Bioscience, dated October 25, 1996.
10.21*++ Research and Technology Development Agreement between the Company and Sumitomo
Pharmaceuticals Co., Ltd., dated August 18, 1997.
10.22*++ Collaborative Research and License Agreement between the Company and ImClone
Systems Incorporated, dated October 10, 1997.
10.23*++ Collaborative Research and License Agreement between the Company and Athena
Neurosciences, Inc., dated October 15, 1997.
10.24++ Full Recourse Secured Promissory Note and Stock Pledge Agreement between the
Company and Peter Myers, dated September 5, 1995.
10.25++ Promissory Note Secured by Deed of Trust between the Company and John Saunders,
dated August 30, 1996.
10.26++ Promissory Note between the Company and Vicente Anido, Jr., dated February 24,
1997.
10.27++ Pledge Agreement between the Company and Vicente Anido, Jr., dated February 24,
1997.
10.28++ Promissory Note Secured by Stock Pledge Agreement between the Company and
Vicente Anido, Jr., dated June 6, 1997
10.29++ Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6,
1997.
10.30++ Employment Agreement with Peter Myers, dated March 1, 1995.
</TABLE>

II-5
<PAGE> 91

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<S> <C>
10.31++ Employment Agreement with John Saunders, dated January 1, 1996.
10.32++ Employment Agreement with Steven Teig, dated July 1, 1995.
10.33++ Employment Agreement with Vicente Anido, Jr., dated March 14, 1996.
10.34++ Employment Agreement with Lee R. McCracken, dated May 13, 1996.
10.35++ Employment Letter with Karin Eastham, dated March 14, 1997.
10.36++ Standard Industrial/Commercial Single-Tenant Lease between the Company and
Campson corporation, dated December 22, 1995.
10.37++ Standard Office Lease-Full Service between the Company and Nearon Enterprises,
LLC, dated October 24, 1996.
10.38++ Lease Agreement between Harbor Investment Partners and the Company, dated
October 6, 1997.
10.39++ 1995 Stock Option/Stock Issuance Plan.
10.40++ 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.41++ 1995 Stock Option/Stock Issuance Plan Form of Stock Option Agreement.
10.42++ 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase Agreement.
10.43++ 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock Issuance
Agreement.
10.44 1997 Stock Incentive Plan.
10.45 1997 Employee Stock Purchase Plan.
10.46++ Form of Indemnification Agreement between the Company and each of its directors.
10.47++ Form of Indemnification Agreement between the Company and each of its officers.
10.48 1997 Stock Incentive Plan Form of Notice of Grant of Stock Option
10.49 1997 Stock Incentive Plan Form of Stock Option Agreement
10.50 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement
(Involuntary Termination Following Corporate Transaction/Change in Control)
10.51 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Limited
Stock Appreciation Right)
10.52 1997 Stock Incentive Plan Form of Stock Issuance Agreement
10.53 1997 Stock Incentive Plan Form of Addendum to Stock Issuance Agreement
(Involuntary Termination Following Corporate Transaction/Change in Control)
10.54 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option
(Initial Grant)
10.55 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option
(Annual Grant)
10.56 1997 Stock Incentive Plan Form of Automatic Stock Option Agreement
10.57 1997 Employee Stock Purchase Plan Form of Stock Purchase Agreement
11.1 Statement of Computation of pro forma net loss per share.
23.1++ Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as
Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney (see page II-8).
27.1++ Financial Data Schedule.
</TABLE>

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

++ Previously filed with the Commission.

II-6
<PAGE> 92

* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Company's Application Requesting Confidential Treatment under Rule 406
under the Securities Act.

(b) Financial Statement Schedules included separately in the Registration
Statement.

All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or Notes
thereto.

ITEM 17. UNDERTAKINGS.

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

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

The undersigned registrant hereby undertakes that:

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

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

II-7
<PAGE> 93

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 2 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, County of San Diego, State of California, on the 3rd day of December,
1997.

COMBICHEM, INC.

By: /s/ VICENTE ANIDO, JR.
------------------------------------
Vicente Anido, Jr.
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------ -----------------
<S> <C> <C>

/s/ VICENTE ANIDO, JR. President, Chief Executive Officer December 3, 1997
- ------------------------------------ and Director (Principal Executive
(Vicente Anido, Jr.) Officer)

Vice President of December 3, 1997
Finance and Administration and Chief
/s/ KARIN EASTHAM Financial Officer (Principal
- ------------------------------------ Financial
(Karin Eastham) and Accounting Officer)

* Chairman of the Board and Director December 3, 1997
- ------------------------------------
(Pierre Lamond)

/s/ PETER L. MYERS Director December 3, 1997
- ------------------------------------
(Peter L. Myers)

* Director December 3, 1997
- ------------------------------------
(Philippe O. Chambon)

* Director December 3, 1997
- ------------------------------------
(Arthur Reidel)

* Director December 3, 1997
- ------------------------------------
(William Scott)
</TABLE>

By: /s/ VICENTE ANIDO, JR.
----------------------------------
Vicente Anido, Jr.,
Attorney-in-fact

II-8
<PAGE> 94

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1++ Certificate of Incorporation of the Company, as amended.
3.2++ Form of Amended and Restated Certificate of Incorporation of the
Company to become effective immediately prior to the Offering.
3.3++ Bylaws of the Company, as amended.
3.4++ Form of Restated Bylaws of the Company to be effective upon
completion of the Offering.
4.1 Form of Certificate for Common Stock.
5.1++ Opinion of Brobeck, Phleger & Harrison LLP with respect to the
Common Stock being registered.
10.1++ Preferred Stock Purchase Agreement for Series A Preferred Stock
between the Company and Forward Ventures II, L.P., dated August 26,
1994.
10.2++ Preferred Stock Purchase Agreement for Shares of Series Z Preferred
Stock between the Company and Sydney Brenner, dated October 14,
1994.
10.3++ Stock Purchase Agreement for Shares of Series A Preferred Stock and
Common Stock between the Company and the investors listed on
Exhibit A thereto, dated November 1, 1994.
10.4++ Stock Purchase Agreement Series B Preferred Stock between the
Company and the purchasers listed on Exhibit A thereto, dated
November 29, 1994.
10.5++ Series C Preferred Stock Purchase Agreement between the Company and
the purchasers listed on Schedule A thereto, dated August 17, 1995.
10.6++ Stock Purchase Agreement for Series C Preferred Stock between the
Company and Todd Schmidt dated September 7, 1995.
10.7*++ Supplemental Purchase Agreement between the Company and the
purchasers on Schedule A thereto, dated April 8, 1996.
10.8*++ Series D Preferred Stock Purchase Agreement between the Company and
the purchasers listed on Schedule A thereto, dated November 15,
1996.
10.9++ Amended and Restated Investors' Rights Agreement between the
Company and the stockholders listed on Schedule A thereto, dated
November 15, 1996.
10.10++ Series J Preferred Stock Purchase Agreement between the Company and
Steve Teig, dated June 10, 1997.
10.11++ Series J Preferred Stock Purchase Agreement between the Company and
Jonathan Greene, dated June 11, 1997.
10.12++ Series J Preferred Stock Purchase Agreement between the Company and
Andrew Smellie, dated June 11, 1997.
10.13++ Warrant Agreement to Purchase Shares of the Series Z Preferred
Stock, as amended between the Company and Comdisco, Inc., dated
December 20, 1994.
10.14++ Common Stock Purchase Warrant between the Company and LJL
BioSystems, Inc., dated June 15, 1995.
10.15++ Form of Warrant to Purchase Shares of Series C Preferred Stock
between the Company and the purchasers listed on Schedule A
thereto, dated August 17, 1995.
</TABLE>

<PAGE> 95

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ------------------------------------------------------------------- ------------
<C> <S> <C>
10.16++ Form of Warrant Agreement to Purchase Shares of Series C Preferred
Stock of the Company, between the Company and Comdisco, Inc. in the
amounts listed on Schedule A thereto.
10.17++ Form of Warrant to Purchase Shares of Series Z Preferred Stock
between the Company and the purchasers listed on Schedule A
thereto, dated May 20, 1996.
10.18++ Master Lease Agreement with the Company and Comdisco Inc., dated
November 6, 1994, Schedule VL-1, dated November 11, 1994, Schedule
VL-2 dated April 15, 1996 and Schedule VL-3 dated April 15, 1996.
10.19*++ Collaboration Agreement between the Company and Teijin Limited,
dated March 29, 1996, as amended.
10.20*++ Collaborative Research and License Agreement between the Company
and Roche Bioscience, dated October 25, 1996.
10.21*++ Research and Technology Development Agreement between the Company
and Sumitomo Pharmaceuticals Co., Ltd., dated August 18, 1997.
10.22*++ Collaborative Research and License Agreement between the Company
and ImClone Systems Incorporated, dated October 10, 1997.
10.23*++ Collaborative Research and License Agreement between the Company
and Athena Neurosciences, Inc., dated October 15, 1997.
10.24++ Full Recourse Secured Promissory Note and Stock Pledge Agreement
between the Company and Peter Myers, dated September 5, 1995.
10.25++ Promissory Note Secured by Deed of Trust between the Company and
John Saunders, dated August 30, 1996.
10.26++ Promissory Note between the Company and Vicente Anido, Jr., dated
February 24, 1997.
10.27++ Pledge Agreement between the Company and Vicente Anido, Jr., dated
February 24, 1997.
10.28++ Promissory Note Secured by Stock Pledge Agreement between the
Company and Vicente Anido, Jr., dated June 6, 1997
10.29++ Stock Pledge Agreement between the Company and Vicente Anido, Jr.,
dated June 6, 1997.
10.30++ Employment Agreement with Peter Myers, dated March 1, 1995.
10.31++ Employment Agreement with John Saunders, dated January 1, 1996.
10.32++ Employment Agreement with Steven Teig, dated July 1, 1995.
10.33++ Employment Agreement with Vicente Anido, Jr., dated March 14, 1996.
10.34++ Employment Agreement with Lee R. McCracken, dated May 13, 1996.
10.35++ Employment Letter with Karin Eastham, dated March 14, 1997.
10.36++ Standard Industrial/Commercial Single-Tenant Lease between the
Company and Campson corporation, dated December 22, 1995.
10.37++ Standard Office Lease-Full Service between the Company and Nearon
Enterprises, LLC, dated October 24, 1996.
10.38++ Lease Agreement between Harbor Investment Partners and the Company,
dated October 6, 1997.
10.39++ 1995 Stock Option/Stock Issuance Plan.
10.40++ 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant.
</TABLE>

<PAGE> 96

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ------------------------------------------------------------------- ------------
<C> <S> <C>
10.41++ 1995 Stock Option/Stock Issuance Plan Form of Stock Option
Agreement.
10.42++ 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase
Agreement.
10.43++ 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock
Issuance Agreement.
10.44 1997 Stock Incentive Plan.
10.45 1997 Employee Stock Purchase Plan.
10.46++ Form of Indemnification Agreement between the Company and each of
its directors.
10.47++ Form of Indemnification Agreement between the Company and each of
its officers.
10.48 1997 Stock Incentive Plan Form of Notice of Grant of Stock Option
10.49 1997 Stock Incentive Plan Form of Stock Option Agreement
10.50 1997 Stock Incentive Plan Form of Addendum to Stock Option
Agreement (Involuntary Termination Following Corporate
Transaction/Change in Control)
10.51 1997 Stock Incentive Plan Form of Addendum to Stock Option
Agreement (Limited Stock Appreciation Right)
10.52 1997 Stock Incentive Plan Form of Stock Issuance Agreement
10.53 1997 Stock Incentive Plan Form of Addendum to Stock Issuance
Agreement (Involuntary Termination Following Corporate
Transaction/Change in Control)
10.54 1997 Stock Incentive Plan Form of Notice of Grant of Automatic
Stock Option (Initial Grant)
10.55 1997 Stock Incentive Plan Form of Notice of Grant of Automatic
Stock Option (Annual Grant)
10.56 1997 Stock Incentive Plan Form of Automatic Stock Option Agreement
10.57 1997 Employee Stock Purchase Plan Form of Stock Purchase Agreement
11.1 Statement of Computation of pro forma net loss per share.
23.1++ Consent of Brobeck, Phleger & Harrison LLP (contained in their
opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney (see page II-8).
27.1++ Financial Data Schedule.
</TABLE>

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

++ Previously filed with the Commission.

<PAGE> 1
EXHIBIT 1.1

2,250,000 SHARES(1)

COMBICHEM, INC.

COMMON STOCK

UNDERWRITING AGREEMENT

____________, 1997

BancAmerica Robertson Stephens
Donaldson, Lufkin & Jenrette Securities Corporation
UBS Securities LLC
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104

Ladies and Gentlemen:

COMBICHEM, INC., a Delaware corporation (the "Company"), addresses you as
the Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirms its agreement with the several Underwriters as follows:

1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
2,250,000 shares of its authorized and unissued Common Stock, par value $.001
per share (the "Firm Shares") to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 337,500
additional shares of the Company's Common Stock, par value $.001 per share (the
"Option Shares"), as provided in Section 7 hereof. As used in this Agreement,
the term "Shares" shall include the Firm Shares and the Option Shares. All
shares of Common Stock, par value $.001 per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby, including the
Shares, are hereinafter referred to as "Common Stock."

- --------
1 Plus an option to purchase up to 337,500 additional shares from the
Company to cover over-allotments.

1.
<PAGE> 2
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.

(a) registration statement on Form S-1 (File No. 333-37981) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
as may hereafter be required. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the "Preliminary
Prospectuses") and of any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations have been delivered to you.

If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a), (i) pursuant to subparagraph (1), (4) or (7)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to the registration statement (including a final form of prospectus)
or (ii) if BancAmerica Robertson Stephens, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. If
the registration statement relating to the Shares has not been declared
effective under the Act by the Commission, the Company will prepare and promptly
file an amendment to the registration statement, including a final form of
prospectus, or, if BancAmerica Robertson Stephens, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The
term "Registration Statement" as used in this Agreement shall mean such
registration statement, including financial statements, schedules and exhibits,
in the form in which it became or becomes, as the case may be, effective
(including, if the Company omitted information from the registration statement
pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules
and Regulations, the information deemed to be a part of the registration
statement at the time it became effective pursuant to Rule 430A(b) or Rule
434(d) of the Rules and Regulations) and, in the event of any amendment thereto
or the filing of any abbreviated registration statement pursuant to Rule 462(b)
of the Rules and Regulations relating thereto after the effective date of such
registration statement,

2.
<PAGE> 3
shall also mean (from and after the effectiveness of such amendment or the
filing of such abbreviated registration statement) such registration statement
as so amended, together with any such abbreviated registration statement. The
term "Prospectus" as used in this Agreement shall mean the prospectus relating
to the Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
however, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of BancAmerica Robertson Stephens, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus shall
be provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
BancAmerica Robertson Stephens, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement.

(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements

3.
<PAGE> 4
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.

(c) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus; the Company has no subsidiaries; the Company is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; the Company is in possession
of and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect; the Company is not in violation of its
charter or bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by which it or
its properties may be bound; and the Company is not in material violation of any
law, order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or over its properties of which it has knowledge.
The Company does not own or control, directly or indirectly, any corporation,
association or other entity.

4.
<PAGE> 5
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a material
default under, (i) any bond, debenture, note or other evidence of indebtedness,
or under any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which the Company
is a party or by which it or its properties may be bound, (ii) the charter or
bylaws of the Company, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or over its
properties. No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or over its properties is required for the
execution and delivery of this Agreement and the consummation by the Company of
the transactions herein contemplated, except such as may be required under the
Act or under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.

(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company or
any of its officers or any of its properties, assets or rights before any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or over its officers or properties or otherwise
which (i) is reasonably likely to result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company or is reasonably likely to materially and adversely
affect its properties, assets or rights, (ii) might reasonably be expected to
prevent consummation of the transactions contemplated hereby or (iii) is
required to be disclosed in the Registration Statement or Prospectus and is not
so disclosed; and there are no agreements, contracts, leases or documents of the
Company of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement.

(f) All outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable,
have been issued

5.
<PAGE> 6
in compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the authorized and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption "Capitalization"
and conforms in all material respects to the statements relating thereto
contained in the Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the capitalization of
the Company); the Firm Shares and the Option Shares have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right,
co-sale right, registration right, right of first refusal or other similar right
of stockholders exists with respect to any of the Firm Shares or Option Shares
or the issuance and sale thereof other than those that have been expressly
waived prior to the date hereof and those that will automatically expire upon
and will not apply to the consummation of the transactions contemplated on the
Closing Date. No further approval or authorization of any stockholder, the Board
of Directors of the Company or others is required for the issuance and sale or
transfer of the Shares except as may be required under the Act or under state or
other securities or Blue Sky laws. Except as disclosed in the Prospectus and the
financial statements of the Company, and the related notes thereto, included in
the Prospectus, the Company does not have outstanding any options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.

(g) Ernst & Young LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of September 30, 1997 and for each of the years in the three (3) years
ended December 31, 1996 filed with the Commission as a part of the Registration
Statement, which are included in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; the audited
consolidated financial statements of the Company, together with the related
schedules and

6.
<PAGE> 7
notes, and the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.

(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (ii) any transaction
that is material to the Company, except transactions entered into in the
ordinary course of business, (iii) any obligation, direct or contingent, that is
material to the Company, incurred by the Company, except obligations incurred in
the ordinary course of business, (iv) any change in the capital stock or
outstanding indebtedness of the Company that is material to the Company, (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company, or (vi) any loss or damage (whether or not insured) to the
property of the Company which has been sustained or will have been sustained
which is reasonably likely to have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company.

(i) Except as set forth in the Registration Statement and
Prospectus (i) the Company has good and marketable title to all properties and
assets described in the Registration Statement and Prospectus as owned by it,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company, (ii) the agreements to which the Company is a
party described in the Registration Statement and Prospectus are valid
agreements, enforceable by the Company, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) the Company has valid
and enforceable leases for all material properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration Statement
and Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted.

7.
<PAGE> 8
(j) The Company has timely filed (including extensions) all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes shown thereon as due, and there is no tax deficiency that has
been or, to the best of the Company's knowledge, might be asserted against the
Company that might have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company;
and all tax liabilities are adequately provided for on the books of the Company.

(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its business and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect;
the Company has not been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company.

(l) To the best of Company's knowledge, no labor disturbance by
the employees of the Company exists or is imminent; and the Company is not aware
of any existing or imminent labor disturbance by the employees of any of its
principal suppliers, that might be expected to result in a material adverse
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company. No collective bargaining agreement exists
with any of the Company's employees and, to the best of the Company's knowledge,
no such agreement is imminent.

(m) The Company owns or possesses adequate rights to use all
patents, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names and copyrights which are necessary to conduct its businesses
as described in the Registration Statement and Prospectus; the expiration of any
patents, patent rights, trademarks, service marks, trade names or copyrights
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company;
the Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the

8.
<PAGE> 9
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.

(n) To the Company's knowledge, none of the material patent rights
owned or licensed by the Company, as set forth on Schedule B, are unenforceable
or invalid. The Company has duly and properly filed or caused to be filed with
the U.S. Patent and Trademark Office (the "PTO") and appropriate foreign and
international patent authorities all patent applications described or referred
to in the Prospectus and as set forth on Schedule B, and has complied with the
PTO's duty of candor and disclosure for each of the U.S. patent applications set
forth on Schedule B; the Company is unaware of any facts which would preclude
their grant of a patent from each of the patent applications set forth on
Schedule B; the Company has no knowledge of any facts which would preclude it
from having clear title to its patent applications referenced in the Prospectus.
The Company is not aware of the granting of any patent rights to third parties
or the filing of patent applications by third parties or any other rights to any
of the Company's intellectual property.

(o) The Common Stock has been approved for quotation on The Nasdaq
National Market, subject to official notice of issuance.

(p) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.

(q) The Company has not distributed and will not distribute prior
to the later of (i) the Closing Date, or any date on which Option Shares are to
be purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.

(r) The Company has not at any time during the last five (5) years
(i) made any unlawful contribution to any candidate for foreign office or failed
to disclose fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments required
or permitted by the laws of the United States or any jurisdiction thereof.

9.
<PAGE> 10
(s) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.

(t) Each officer and director of the Company and each beneficial
owner of 200,000 or more shares of Common Stock has agreed in writing that such
person will not, for a period of one hundred eighty (180) days from the date
that the Registration Statement is declared effective by the Commission (the
"Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or stockholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, or (iii) with the prior written consent of
BancAmerica Robertson Stephens. The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder. The Company
has provided to counsel for the Underwriters true, accurate and complete copies
of all of the agreements pursuant to which its officers, directors and
stockholders have agreed to such or similar restrictions (the "Lock-up
Agreements") presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers, directors
or other stockholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of BancAmerica Robertson
Stephens.

(u) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all current rules, laws and
regulations relating to

10.
<PAGE> 11
the use, treatment, storage and disposal of toxic substances and protection of
health or the environment ("Environmental Laws") which are applicable to its
business and which might reasonably be expected to have a material adverse
effect on the Company's business, financial condition or results of operations,
(ii) the Company has received no notice from any governmental authority or third
party of an asserted claim under Environmental Laws, which claim is required to
be disclosed in the Registration Statement and the Prospectus, (iii) the Company
will not be required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site
under applicable state or local law.

(v) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

(w) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus and except
such as individually do not exceed $50,000 or, in the aggregate, exceed
$150,000.

3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).

Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks

11.
<PAGE> 12
drawn in same-day funds, payable to the order of the Company, at the offices of
Brobeck, Phleger & Harrison LLP, 550 West C Street, Suite 1300, San Diego,
California 92101 (or at such other place as may be agreed upon among the
Representatives and the Company), at 7:00 a.m., San Francisco time (a) on the
third (3rd) full business day following the first day that Shares are traded,
(b) if this Agreement is executed and delivered after 1:30 p.m., San Francisco
time, the fourth (4th) full business day following the day that this Agreement
is executed and delivered or (c) at such other time and date not later than
seven (7) full business days following the first day that Shares are traded as
the Representatives and the Company may determine (or at such time and date to
which payment and delivery shall have been postponed pursuant to Section 10
hereof), such time and date of payment and delivery being herein called the
"Closing Date"; provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representatives. The certificates for the
Firm Shares to be so delivered will be made available to you at such office or
such other location including, without limitation, in San Francisco or New York
City, as you may reasonably request for checking at least one (1) full business
day prior to the Closing Date and will be in such names and denominations as you
may request, such request to be made at least two (2) full business days prior
to the Closing Date. If the Representatives so elect, delivery of the Firm
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.

It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.

After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of [$_____] per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.

The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters, and
under the first, second, sixth, eighth, ninth and tenth paragraphs under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitutes the only information furnished

12.
<PAGE> 13
by the Underwriters to the Company for inclusion in any Preliminary Prospectus,
the Prospectus or the Registration Statement, and you, on behalf of the
respective Underwriters, represent and warrant to the Company that the
statements made therein do not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.

4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:

(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or

13.
<PAGE> 14
supplements to the Registration Statement or Prospectus which, in the opinion of
counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary
or advisable in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; in
case any Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations and the
provisions of this Agreement.

(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.

(c) The Company will use its best efforts to cooperate with you to
qualify the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in effect
for so long as may be required for purposes of the distribution of the Shares,
except that the Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service of
process. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be required by the laws of such jurisdiction.

(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time

14.
<PAGE> 15
reasonably request. Notwithstanding the foregoing, if BancAmercia Robertson
Stephens, on behalf of the several Underwriters, shall agree to the utilization
of Rule 434 of the Rules and Regulations, the Company shall provide to you
copies of a Preliminary Prospectus updated in all respects through the date
specified by you in such quantities as you may from time to time reasonably
request.

(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.

(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its stockholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's stockholders, (ii) concurrently with furnishing to
its stockholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of stockholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to stockholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v)
every material press release and every material news item or article in respect
of the Company or its affairs which was generally released to stockholders or
prepared by the Company or its subsidiaries, if any, and (vi) any additional
information of a public nature concerning the Company or its subsidiaries, if
any, or its business which you may reasonably request. During such five (5) year
period, if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.

(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.

15.
<PAGE> 16
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.

(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, or if the Company shall
terminate this Agreement pursuant to Section 11(a) hereof, or if the
Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the
Company will reimburse the several Underwriters for all reasonable out-of-pocket
expenses (including fees and disbursements of Underwriters' Counsel) incurred by
the Underwriters in investigating or preparing to market or marketing the
Shares.

(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
reasonable opinion the market price of the Common Stock has been, or is likely
to be, materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.

(k) During the Lock-up Period, the Company will not, without the
prior written consent of BancAmerica Robertson Stephens, effect the Disposition
of, directly or indirectly, any Securities other than the sale of the Firm
Shares and the Option Shares hereunder, and the Company's issuance of options or
Common Stock under the Company's presently authorized 1997 Stock Incentive Plan,
the Company's issuance of Common Stock under the Company's presently authorized
1997 Employee Stock Purchase Plan, presently outstanding warrants and up to
_____________ shares in connection with an acquisition of technology or
companies or a corporate partnering transaction.

5. EXPENSES.

(a) The Company agrees with each Underwriter that:

(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
copying and/or printing of

16.
<PAGE> 17
this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement,
the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and Power of Attorney, and any instruments related
to any of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars' fees;
the fees and disbursements of counsel for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus, and
any amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and fees and disbursements of Underwriters'
Counsel in connection with such NASD filings and Blue Sky qualifications); and
all other expenses directly incurred by the Company in connection with the
performance of their obligations hereunder.

(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.

(b) In addition to their other obligations under Section 8(b)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b) hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the

17.
<PAGE> 18
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.

(c) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 5(a)(ii) and
5(b) hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 8(d) hereof.

6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder and to the following additional
conditions:

(a) The Registration Statement shall have become effective not
later than 2:00 p.m., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.

18.
<PAGE> 19
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.

(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus; and

(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company, dated as of the Closing Date or
such later date on which Option Shares are to be purchased addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:

(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with full corporate power and authority to own or lease it properties
and conduct its business as described in the Registration Statement and
Prospectus.

(ii) The Company is duly qualified to do business as a
foreign corporation and is in good standing in the State of California. To such
counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity.

(iii) The authorized capital stock of the Company conforms as
to legal matters in all material respects to the description thereof contained
in the Registration Statement and Prospectus.

(iv) The authorized and (to such counsel's knowledge) issued
and outstanding capital stock of the Company was as set forth in the Prospectus
under the caption "Capitalization" as of the dates stated therein. Such
outstanding shares of capital stock of the Company have been duly and validly
authorized and issued, are nonassessable and (to such counsel's knowledge) fully
paid, and are not subject to any preemptive or similar right pursuant to any
agreement to which the Company is a party.

19.
<PAGE> 20
(v) The Registration Statement has become effective under
the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or threatened or are pending under the
Act.

(vi) This Agreement has been duly authorized, executed and
delivered by the Company.

(vii) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will not
contravene any provision of applicable law or the certificate of incorporation
or bylaws of the Company or, to such counsel's knowledge, any judgment, order,
writ or decree of any governmental body, agency or court having jurisdiction
over the Company or any of its property, or, to such counsel's knowledge,
constitute a breach or default under any agreement or other instrument binding
upon the Company and identified to such counsel by the Company as material, and
no consent, approval, authorization or order of or qualification with any United
States federal or California court, government or governmental body or agency is
required for the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or blue sky laws of
the various states (on which such counsel expresses no opinion) in connection
with the purchase and distribution of the Shares by the Underwriters.

(viii) The Shares have been duly authorized and, upon issuance
and delivery against payment therefor in accordance with the terms hereof, will
be duly and validly issued and fully paid and nonassessable, and will not have
been issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right.

(ix) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder.

(x) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the form of certificate evidencing the Common
Stock and filed as an exhibit to the Registration Statement complies with the
laws of the State of Delaware.

(xi) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the Act and the
applicable Rules and Regulations.

20.
<PAGE> 21
(xii) Such counsel does not know of any legal or governmental
proceeding pending or overtly threatened to which the Company is or may become a
party or to which any of the properties of the Company is or may become subject
that is required to be described in the Registration Statement or the Prospectus
and is not so described, or of any statute, regulation, contract or other
document that is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described or filed as required.

(xiii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights.

In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.

Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of California or
the State of Delaware upon opinions of local counsel, and as to questions of
fact upon representations or

21.
<PAGE> 22
certificates of officers of the Company, and of government officials, in which
case their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.

(e) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Townsend and Townsend and Crew LLP, patent counsel for the
Company, dated the Closing Date or such later date on which Option Shares are
purchased, addressed to the Underwriters and in form and substance satisfactory
to counsel for the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:

(i) The statements in the eighth, ninth, tenth and eleventh
sentences under the captions "Risk Factors - Company's Success Dependent on
Intellectual Property Rights" and "Business - Patents and Proprietary
Information" (collectively, the "Patent Sentences") in the Registration
Statement and the Prospectus, respectively, referring to certain patents held by
a third party (the "Third-Party Patents") insofar as such statements constitute
statements or summaries of matters of law, to such counsel's knowledge, are, in
all material respects, accurate and complete statements or summaries, as the
case may be, of the matters referred to therein.

(ii) To such counsel's knowledge, the Company has not
received any notice of infringement of or conflict with asserted rights with
respect to the Third-Party Patents. To such counsel's knowledge, the Company's
practice of its [3D Technology] does not infringe on or otherwise violate the
patent rights under the Third-Party Patents.

In addition, although such counsel have not independently verified
the accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus, and based upon and subject to the
foregoing, nothing has come to such counsel's attention that leads such counsel
to believe that the Patent Sentences of the Registration Statement, at the time
the Registration Statement became effective or at the date hereof, contained or
contain an untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Patent Sentences of the Prospectus, as of
the date of the Prospectus or at the date hereof, contained or contain an untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.

22.
<PAGE> 23
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Lyon & Lyon, patent counsel for the Company, dated the
Closing Date or such later date on which Option Shares are purchased, addressed
to the Underwriters and in form and substance satisfactory to counsel for the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:

(i) The statements under the captions "Risk Factors -
Company's Success Dependent on Intellectual Property Rights" and "Business -
Patents and Proprietary Information," other than the eighth, ninth, tenth and
eleventh sentences thereof, concerning which such counsel need not express an
opinion (collectively, the "Patent Paragraphs") in the Registration Statement
and the Prospectus, respectively, insofar as such statements constitute
statements or summaries of matters of law related to patents and patent
applications of the Company as to which we have been retained to advise the
Company, to such counsel's knowledge, are, in all material respects, accurate
and complete statements or summaries, as the case may be, of the matters
referred to therein; provided, however, that such counsel need not express an
opinion with respect to the eighth, ninth, tenth and eleventh sentences of the
Patent Paragraphs.

(ii) To such counsel's knowledge, there are no judicial
proceedings pending relating to patents or patent applications to which the
Company is a party, and, to such counsel's knowledge, no such judicial
proceedings are threatened by any person. To such counsel's knowledge, the
Company has not received any notice of infringement of or conflict with asserted
rights of others with respect to any patents.

(iii) To such counsel's knowledge, the Company's patent
applications set forth on Schedule C hereto have been properly prepared and
filed on behalf of the Company, and to such counsel's knowledge, each of the
applications is held by the Company, and, to such counsel's knowledge, except as
set forth in the Prospectus, no other entity or individual has any right or
claim in any of the applications or any patent to be issued therefrom by virtue
of any contract, license or other agreement known to such counsel entered into
between such entity or individual and the Company. To such counsel's knowledge,
all information submitted to the PTO in the relevant applications, and in
connection with the prosecution of the relevant applications, was accurate; to
such counsel's knowledge, neither such counsel nor the Company made any
misrepresentations or concealed any material information from the PTO in any
such applications, or in connection with the prosecution of such applications in
violation of 37 C.F.R. Section 1.56.

23.
<PAGE> 24
come to such counsel's attention that leads such counsel to believe that the
Patent Paragraphs of the Registration Statement, at the time the Registration
Statement became effective or at the date hereof, contained or contain an untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Patent Paragraphs of the Prospectus, as of the date of
the Prospectus or at the date hereof, contained or contain an untrue statement
of a material fact or omitted or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.

(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Cooley Godward LLP, in form and substance satisfactory to you, with respect
to the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.

(h) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a letter
from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in the letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The Original
Letter from Ernst & Young LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning

24.
<PAGE> 25
of the Act and the applicable published Rules and Regulations, (ii) set forth
their opinion with respect to their examination of the consolidated balance
sheet of the Company as of December 31, 1996 and related consolidated statements
of operations, stockholders' equity, and cash flows for the twelve (12) months
ended December 31, 1996, (iii) state that Ernst & Young LLP has performed the
procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a
review of interim financial information and providing the report of Ernst &
Young LLP as described in SAS 71 on the financial statements for the nine (9)
months period ended September 30, 1997 (the "Quarterly Financial Statements"),
(iv) state that in the course of such review, nothing came to their attention
that leads them to believe that any material modifications need to be made to
any of the Quarterly Financial Statements in order for them to be in compliance
with generally accepted accounting principles consistently applied across the
periods presented, and (v) address other matters agreed upon by Ernst & Young
LLP and you. In addition, you shall have received from Ernst & Young LLP a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of September 30, 1997, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.

(i) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:

(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing Date or
any later date on which Option Shares are to be purchased, as the case may be,
and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;

(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;

(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and

25.
<PAGE> 26
Regulations and in all material respects conformed to the requirements of the
Act and the Rules and Regulations, the Registration Statement, and any amendment
or supplement thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the Prospectus, and any
amendment or supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and

(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (b) any
transaction that is material to the Company, (c) any obligation, direct or
contingent, that is material to the Company, incurred by the Company, (d) any
change in the capital stock or outstanding indebtedness of the Company that is
material to the Company, (e) any dividend or distribution of any kind declared,
paid or made on the capital stock of the Company , or (f) any loss or damage
(whether or not insured) to the property of the Company which has been sustained
or will have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company.

(j) The Company shall have obtained and delivered to you a Lock-up
Agreement from each officer and director of the Company and each beneficial
owner of 200,000 or more shares of Common Stock in writing prior to the date
hereof.

(k) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request, including
certificates of officers of the Company, as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.

All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.

7. OPTION SHARES.

(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby

26.
<PAGE> 27
grants to the several Underwriters, for the purpose of covering over-allotments
in connection with the distribution and sale of the Firm Shares only, a
nontransferable option to purchase up to an aggregate of 337,500 Option Shares
at the purchase price per share for the Firm Shares set forth in Section 3
hereof. Such option may be exercised by the Representatives on behalf of the
several Underwriters on one (1) or more occasions in whole or in part during the
period of thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The number of
Option Shares to be purchased by each Underwriter upon the exercise of such
option shall be the same proportion of the total number of Option Shares to be
purchased by the several Underwriters pursuant to the exercise of such option as
the number of Firm Shares purchased by such Underwriter (set forth in Schedule A
hereto) bears to the total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule A hereto), adjusted by the Representatives
in such manner as to avoid fractional shares.

Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in same-day funds, payable to the order of the Company. Such
delivery and payment shall take place at the offices of Brobeck, Phleger &
Harrison LLP, 550 West C Street, Suite 1300, San Diego, California 92101, or at
such other place as may be agreed upon among the Representatives and the Company
(i) on the Closing Date, if written notice of the exercise of such option is
received by the Company at least two (2) full business days prior to the Closing
Date, or (ii) on a date which shall not be later than the third (3rd) full
business day following the date the Company receives written notice of the
exercise of such option, if such notice is received by the Company less than two
(2) full business days prior to the Closing Date.

The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in San Francisco or New York City, as you may reasonably request for
checking at least one (1) full business day prior to the date of payment and
delivery and will be in such names and denominations as you may request, such
request to be made at least two (2) full business days prior to such date of
payment and delivery. If the Representatives so elect, delivery of the Option
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.

It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.

27.
<PAGE> 28
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 6 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may request in order to evidence the accuracy and completeness of any of the
representations, warranties or statements, the performance of any of the
covenants or agreements of the Company or the satisfaction of any of the
conditions herein contained.

8. INDEMNIFICATION AND CONTRIBUTION.

(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the

28.
<PAGE> 29
preparation thereof and, provided further, that the indemnity agreement provided
in this Section 8(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.

The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.

(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act or otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or based
upon (i) any breach of any representation, warranty, agreement or covenant of
such Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action.

The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, and each person, if any, who controls the Company within the meaning of
the Act or the Exchange

29.
<PAGE> 30
Act. This indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.

(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8, unless, and only to the extent that, such
omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. In case any such action is brought against any indemnified
party, and it notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it shall elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a)
or 8(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld or delayed. No indemnifying party
shall, without the prior written consent of the indemnified party, which shall
not be unreasonably withheld or delayed, effect any settlement of any pending or
threatened proceeding in respect of which any

30.
<PAGE> 31
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.

(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the initial public
offering price, and the Company are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(d)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the Company.

(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.

9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange

31.
<PAGE> 32
Act, or by or on behalf of the Company or any of its officers, directors or
controlling persons within the meaning of the Act or the Exchange Act, and shall
survive the delivery of the Shares to the several Underwriters hereunder or
termination of this Agreement.

10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.

If any Underwriter or Underwriters so defaults and the aggregate number of
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or underwriters
shall have been substituted as aforesaid by such postponed Closing Date, the
Closing Date may, at the option of the Company, be postponed for a further
twenty-four (24) hours, if necessary, to allow the Company the privilege of
finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 10, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement, supplements to the Prospectus
or other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the

32.
<PAGE> 33
Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.

In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company shall be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company, and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).

The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.

11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.

(a) This Agreement shall become effective at the earlier of (i)
6:30 a.m., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.

(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company shall have failed, refused or been unable to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse, or (ii) if additional material
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York

33.
<PAGE> 34
Stock Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been suspended
on either such exchange or in the over the counter market by the NASD, or if a
banking moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.

If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.

12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, Suite 2600, San Francisco, California 94104, facsimile number (415)
781-0278, Attention: General Counsel; if sent to the Company, such notice shall
be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to CombiChem, Inc. facsimile number (619) 271-9339,
Attention: Vicente Anido, Jr., Ph.D., President and Chief Executive Officer.

13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or entity, other
than the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons

34.
<PAGE> 35
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase. In all dealings with the
Company under this Agreement, you shall act on behalf of each of the several
Underwriters, and the Company shall be entitled to act and rely upon any
statement, request, notice or agreement made or given by you jointly or by
BancAmerica Robertson Stephens on behalf of you.

14. APPLICABLE LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California, without regard to its
choice of laws provisions.

15. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.

35.
<PAGE> 36
If the foregoing correctly sets forth the understanding among the Company
and the several Underwriters, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
the Company and the several Underwriters.

Very truly yours,

COMBICHEM, INC.

By ______________________________________
Vicente Anido, Jr., Ph.D.
President and Chief Executive Officer

Accepted as of the date first above written:

BANCAMERICA ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
UBS SECURITIES LLC

On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.

By: BANCAMERICA ROBERTSON STEPHENS

By: ___________________________________
Authorized Signatory

36.
<PAGE> 37
SCHEDULE A

<TABLE>
<CAPTION>
NUMBER OF FIRM
SHARES TO BE
UNDERWRITERS PURCHASED
<S> <C>

BancAmerica Robertson Stephens...............................................
Donaldson, Lufkin & Jenrette Securities Corporation..........................
UBS Securities LLC...........................................................

Total...................................................................
</TABLE>

<PAGE> 1
EXHIBIT 4.1

[Certificate Face]
[Logo]
COMBICHEM
NUMBER
CBC
SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 20009P 10 3
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR
VALUE OF
CombiChem, Inc.
transferable on the books of the Corporation by the holder hereof
in person or by duly authorized Attorney upon surrender of this
certificate properly endorsed. This certificate is not valid
until countersigned by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[Faye H. Russell]
Secretary
[Corporate Seal]
[Vicente Anido, Jr.,]
President and Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
(New York, New York)
Transfer Agent and Registrar
By
Authorized Signature

<PAGE> 2
[Certificate Back]
CombiChem, Inc.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations: TEN COM - as tenants in common TEN
ENT - as tenants by the entireties JT TEN - as joint tenants with the right of
survivorship and not as tenants in common UNIF GIFT MIN ACT ___Custodian_____
(Cust) (Minor) under Uniform Gifts to Minors Act_________ (State) Additional
abbreviations may also be used though not in the above list. For Value Received,
_________________________hereby sell(s), assign(s), and transfer(s) unto PLEASE
INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE_________________________________________________________

PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF
ASSIGNEE(S)______________________________________________________ of shares of
capital stock represented by the within Certificate and do(es) hereby
irrevocably constitute and
appoint__________________________________________________Attorney,
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated____________________________________________________________ NOTE: The
signature to this assignment must correspond with the name as written upon the
face of the certificate in every particular, without alteration or enlargement
or any change whatever. Signature must be guaranteed. Signature(s) Guaranteed
By_______________________________________________________________ THE
SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKER, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad.15.

<PAGE> 1
EXHIBIT 10.44
COMBICHEM, INC.
1997 STOCK INCENTIVE PLAN

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

This 1997 Stock Incentive Plan is intended to promote the interests
of CombiChem, Inc., a Delaware corporation, by providing eligible persons with
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.

Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into five separate equity programs:

- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,

- the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special option grants,

- the Stock Issuance Program under which eligible persons may,
at the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the immediate purchase of such shares or as a bonus for
services rendered the Corporation (or any Parent or Subsidiary),

- the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock, and

- the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option grant.

<PAGE> 2
B. The provisions of Articles One and Seven shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.

III. ADMINISTRATION OF THE PLAN

A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.

B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.

C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.

D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.

E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no

2.
<PAGE> 3
Plan Administrator shall exercise any discretionary functions with respect to
any option grants or stock issuances made under those programs.

IV. ELIGIBILITY

A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

(i) Employees,

(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and

(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).

B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.

C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.

D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals serving
as non-employee Board members on the Underwriting Date who have not previously
received a stock option grant from the Corporation, (ii) those individuals who
first become non-employee Board members after the Underwriting Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (iii) those individuals who continue to serve as non-employee Board members
at one or more Annual Stockholders Meetings held after the Underwriting Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
option grant under the Automatic Option Grant

3.
<PAGE> 4
Program at the time he or she first becomes a non-employee Board member, but
shall be eligible to receive periodic option grants under the Automatic Option
Grant Program while he or she continues to serve as a non-employee Board member.

F. All non-employee Board members shall be eligible to participate
in the Director Fee Option Grant Program.

V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
1,080,603 shares, which shall consist of (i) the number of shares which remained
available for issuance, as of the Plan Effective Time, under the Predecessor
Plan as last approved by the Corporation's stockholders, including the shares
subject to outstanding options under that Predecessor Plan, and (ii) an
additional increase of approximately 800,000 shares authorized by the Board and
the stockholders prior to the Section 12 Registration Date. To the extent any
unvested shares of Common Stock outstanding under the Predecessor Plan as of the
Plan Effective Time are subsequently repurchased by the Corporation, at the
option exercise price paid per share, in connection with the holder's
termination of service prior to vesting in the shares, those repurchased shares
shall be added to the reserve of Common Stock available for issuance under the
Plan.

B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1997 calendar year.

C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation (including unvested shares issued under the
Predecessor Plan and repurchased by the Corporation at or after the Plan
Effective Time), at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock

4.
<PAGE> 5
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two of the Plan shall NOT be
available for subsequent issuance under the Plan.

D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year, (iii) the number and/or
class of securities for which grants are subsequently to be made under the
Automatic Option Grant Program to new and continuing non-employee Board members,
(iv) the number and/or class of securities and the exercise price per share in
effect under each outstanding option under the Plan and (v) the number and/or
class of securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.

5.
<PAGE> 6
ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM

I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

A. EXERCISE PRICE.

1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Six and the documents evidencing the option, be payable in one or more
of the forms specified below:

(i) cash or check made payable to the Corporation,

(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date,
or

(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.

Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

6.
<PAGE> 7
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

C. EFFECT OF TERMINATION OF SERVICE.

1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.

(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.

(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.

(iv) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.

2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or

7.
<PAGE> 8
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested had the Optionee continued in Service.

D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.

II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.

A. ELIGIBILITY. Incentive Options may only be granted to Employees.

B. EXERCISE PRICE. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.

8.
<PAGE> 9
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully vested shares of Class A Common Stock. However, an outstanding
option shall NOT become exercisable on such an accelerated basis if and to the
extent: (i) such option is, in connection with the Corporate Transaction, to be
assumed by the successor corporation (or parent thereof) or (ii) such option is
to be replaced with a cash incentive program of the successor corporation which
preserves the spread existing at the time of the Corporate Transaction on any
shares for which the option is not otherwise at that time exercisable and
provides for subsequent payout in accordance with the same exercise/vesting
schedule applicable to those option shares or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan Administrator at the
time of the option grant.

B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.

C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the

9.
<PAGE> 10
number and class of securities which would have been issuable to the Optionee in
consummation of such Corporate Transaction had the option been exercised
immediately prior to such Corporate Transaction. Appropriate adjustments to
reflect such Corporate Transaction shall also be made to (i) the exercise price
payable per share under each outstanding option, provided the aggregate exercise
price payable for such securities shall remain the same, (ii) the maximum number
and/or class of securities available for issuance over the remaining term of the
Plan and (iii) the maximum number and/or class of securities for which any one
person may be granted stock options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year.

E. The Plan Administrator shall have the discretionary authority to
provide for the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed in the Corporate
Transaction, so that each such option shall, immediately prior to the effect
date of such Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to that option and
may be exercised for any or all of those shares as fully vested shares of Common
Stock. In addition, the Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Discretionary Option Grant Program so that those rights shall not be
assignable in connection with such Corporate Transaction and shall accordingly
terminate upon the consummation of such Corporate Transaction, and the shares
subject to those terminated rights shall thereupon vest in full.

F. The Plan Administrator shall have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed and do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may provide that one or more of the Corporation's
outstanding repurchase rights with respect to shares held by the Optionee at the
time of such Involuntary Termination shall immediately terminate, and the shares
subject to those terminated repurchase rights shall accordingly vest in full.

G. The Plan Administrator shall have the discretionary authority to
provide for the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program upon the occurrence of a Change in
Control so that each such option shall, immediately prior to the effect date of
such Change in Control, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to that option and may be
exercised for any or all of those shares as fully vested shares of Common Stock.
In addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the

10.
<PAGE> 11
Corporation's repurchase rights under the Discretionary Option Grant Program so
that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control. Each option so
accelerated shall remain exercisable for fully vested shares until the earlier
of (i) the expiration of the option term or (ii) the expiration of the one (1)
year period measured from the effective date of Optionee's cessation of Service.

H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.

I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.

V. STOCK APPRECIATION RIGHTS

A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.

B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:

(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution from
the Corporation in an amount equal to the excess of (a) the Fair Market
Value (on the option

11.
<PAGE> 12
surrender date) of the number of shares in which the Optionee is at the
time vested under the surrendered option (or surrendered portion thereof)
over (b) the aggregate exercise price payable for such shares.

(ii) No such option surrender shall be effective unless it
is approved by the Plan Administrator, either at the time of the actual
option surrender or at any earlier time. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be made
in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.

(iii) If the surrender of an option is not approved by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion thereof)
on the option surrender date and may exercise such rights at any time
prior to the later of (a) five (5) business days after the receipt of the
rejection notice or (b) the last day on which the option is otherwise
exercisable in accordance with the terms of the documents evidencing such
option, but in no event may such rights be exercised more than ten (10)
years after the option grant date.

C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:

(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.

(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from
the Corporation in an amount equal to the excess of (A) the Take-Over
Price of the shares of Common Stock which are at the time vested under
each surrendered option (or surrendered portion thereof) over (B) the
aggregate exercise price payable for such shares. Such cash distribution
shall be paid within five (5) days following the option surrender date.

(iii) The grant of such limited stock appreciation right
shall automatically constitute pre-approval by the Plan Administrator of
any subsequent exercise of that right in accordance with the terms of this
Paragraph C. Accordingly, no further approval of the Plan Administrator or
the Board shall be required at the time of the actual option surrender and
cash distribution.

12.
<PAGE> 13
(iv) The balance of the option (if any) shall remain
outstanding and exercisable in accordance with the documents evidencing
such option.

13.
<PAGE> 14
ARTICLE THREE

SALARY INVESTMENT OPTION GRANT PROGRAM

I. OPTION GRANTS

The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for those calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete
discretion to determine whether to approve the filed authorization in whole or
in part. To the extent the Primary Committee approves the authorization, the
individual who filed that authorization shall automatically be granted an option
under the Salary Investment Grant Program on the first trading day in January of
the calendar year for which the salary reduction is to be in effect.

II. OPTION TERMS

Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
that each such document shall comply with the terms specified below.

A. EXERCISE PRICE.

1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.

2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

14.
<PAGE> 15
X = A / (B x 66-2/3%), where

X is the number of option shares,

A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and

B is the Fair Market Value per share of Common Stock on the
option grant date.

C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.

D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
(3)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER

A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor corporation (or parent
thereof) in the Corporate

15.
<PAGE> 16
Transaction and shall remain exercisable for the fully-vested shares until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of the Optionee's
cessation of Service.

B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earlier of (i) the expiration
of the ten (10)-year option term, (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service or (iii)
the surrender of the option in connection with a Hostile Take-Over.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.

D. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.

16.
<PAGE> 17
ARTICLE FOUR

STOCK ISSUANCE PROGRAM

I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.

A. PURCHASE PRICE.

1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.

2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

(i) cash or check made payable to the Corporation, or

(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).

B. VESTING PROVISIONS.

1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:

(i) the Service period to be completed by the Participant
or the performance objectives to be attained,

(ii) the number of installments in which the shares are
to vest,

(iii) the interval or intervals (if any) which are to lapse
between installments, and

17.
<PAGE> 18
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting
schedule,

shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.

2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.

5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

18.
<PAGE> 19
II. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).

C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.

III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.

19.
<PAGE> 20
ARTICLE FIVE

AUTOMATIC OPTION GRANT PROGRAM

I. OPTION TERMS

A. GRANT DATES. Option grants shall be made on the dates specified
below:

1. Each individual serving as a non-employee Board member on
the Underwriting Date shall automatically be granted at that time a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary and has not previously received a stock option grant from
the Corporation.

2. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.

3. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 5,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 5,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received a stock
option grant from the Corporation prior to the Underwriting Date shall be
eligible to receive one or more such annual option grants over their period of
continued Board service.

B. EXERCISE PRICE.

1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.

20.
<PAGE> 21
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial 20,000-share automatic option
grant shall vest, and the Corporation's repurchase right shall lapse, as
follows: (i) twenty-five percent (25%) upon Optionee's completion of one (1)
year of Board service measured from the grant date and (ii) the balance in a
series of thirty-six (36) successive equal monthly installments upon the
Optionee's completion of each additional month of Board service over the
thirty-six (36)-month period measured from the first anniversary of the option
grant date. Each annual 5,000-share automatic option shall vest, and the
Corporation's repurchase right shall lapse, upon the Optionee's completion of
one (1) year of Board service measured from the grant date.

E. TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:

(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution) shall have a
twelve (12)-month period following the date of such cessation of Board
service in which to exercise each such option.

(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.

(iii) Should the Optionee cease to serve as a Board member
by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.

(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Board
service for any reason other than death or Permanent Disability, terminate
and cease to be outstanding to the extent the option is not otherwise at
that time exercisable for vested shares.

21.
<PAGE> 22
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER

A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.

C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.

D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.

E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

22.
<PAGE> 23
F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

23.
<PAGE> 24
ARTICLE SIX

DIRECTOR FEE OPTION GRANT PROGRAM

I. OPTION GRANTS

Each non-employee Board member may elect to apply all or any portion
of the annual retainer fee otherwise payable in cash for his or her service on
the Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to first day of the calendar year for which the annual
retainer fee which is the subject of that election is otherwise payable. Each
non-employee Board member who files such a timely election shall automatically
be granted an option under this Director Fee Option Grant Program on the first
trading day in January in the calendar year for which the annual retainer fee
which is the subject of that election would otherwise be payable in cash.

II. OPTION TERMS

Each option shall be a Non-Statutory Option governed by the terms
and conditions specified below.

A. EXERCISE PRICE.

1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.

B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

X = A / (B x 66-2/3%), where

X is the number of option shares,

A is the portion of the annual retainer fee subject to the
non-employee Board member's election, and

24.
<PAGE> 25
B is the Fair Market Value per share of Common Stock on the
option grant date.

C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each month of Board service over the twelve (12)-month period
measured from the grant date. Each option shall have a maximum term of ten (10)
years measured from the option grant date.

D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.

Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution. Such right of exercise shall lapse,
and the option shall terminate, upon the earlier of (i) the expiration of the
ten (10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Board service.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER

A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the

25.
<PAGE> 26
total number of shares of Common Stock at the time subject to such option and
may be exercised for any or all of those shares as fully-vested shares of Common
Stock. Each such outstanding option shall be assumed by the successor
corporation (or parent thereof) in the Corporate Transaction and shall remain
exercisable for the fully-vested shares until the earlier of (i) the expiration
of the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Board service.

B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock. The
option shall remain so exercisable until the earlier or (i) the expiration of
the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required in connection with such option surrender and
cash distribution.

D. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

IV. REMAINING TERMS

The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

26.
<PAGE> 27
ARTICLE SEVEN

MISCELLANEOUS

I. FINANCING

The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.

II. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.

B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or both of the
following formats:

Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.

Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

27.
<PAGE> 28
III. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan shall become effective immediately at the Plan Effective
Time. However, the Salary Investment Option Grant Program shall not be
implemented until such time as the Primary Committee may deem appropriate.
Options may be granted under the Discretionary Option Grant or Automatic Option
Grant Program at any time at or after the Plan Effective Time. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Time, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.

B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options outstanding
under the Predecessor Plan on the Section 12 Registration Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.

C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.

D. The Plan shall terminate upon the earliest to occur of (i)
October 31, 2007, (ii) the date on which all shares available for issuance under
the Plan shall have been issued as fully-vested shares or (iii) the termination
of all outstanding options in connection with a Corporate Transaction. Should
the Plan terminate on October 31, 2007, then all option grants and unvested
stock issuances outstanding at that time shall continue to have force and effect
in accordance with the provisions of the documents evidencing such grants or
issuances.

IV. AMENDMENT OF THE PLAN

A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

28.
<PAGE> 29
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.

V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.

VI. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.

B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

29.
<PAGE> 30
APPENDIX

The following definitions shall be in effect under the Plan:

A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.

B. BOARD shall mean the Corporation's Board of Directors.

C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders, or

(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.

E. COMMON STOCK shall mean the Corporation's common stock.

F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or

A-1.
<PAGE> 31
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.

G. CORPORATION shall mean CombiChem, Inc., a Delaware corporation, and its
successors.

H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
grant in effect for non-employee Board members under Article Six of the Plan.

I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
grant program in effect under the Plan.

J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

L. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.

M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.

A-2.
<PAGE> 32
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.

N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.

O. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.

P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:

(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or

(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her duties and responsibilities or the level of management
to which he or she reports, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and target bonus
under any corporate-performance based bonus or incentive programs) by more
than fifteen percent (15%) or (C) a relocation of such individual's place
of employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation without the
individual's consent.

Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).

R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

A-3.
<PAGE> 33
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.

T. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.

U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

V. PARTICIPANT shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.

W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant and Director
Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall
mean the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.

X. PLAN shall mean the Corporation's 1997 Stock Incentive Plan, as set
forth in this document.

Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

Z. PLAN EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and finally priced.

AA. PREDECESSOR PLAN shall mean the Corporation's pre-existing Stock
Option Plan in effect immediately prior to the Plan Effective Time hereunder.

AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment

A-4.
<PAGE> 34
Option Grant Program solely with respect to the selection of the eligible
individuals who may participate in such program.

AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment option grant program in effect under the Plan.

AD. SECONDARY COMMITTEE shall mean a committee of one or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.

AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common
Stock is first registered under Section 12 of the 1934 Act.

AF. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

AG. SERVICE shall mean the performance of services for the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.

AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
under the Plan.

AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

A-5.
<PAGE> 35
AM. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.

AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

AO. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

AP. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.

A-6.

<PAGE> 1
EXHIBIT 10.45

COMBICHEM, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN

I. PURPOSE OF THE PLAN

This Employee Stock Purchase Plan is intended to promote the
interests of CombiChem, Inc. by providing eligible employees with the
opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll-deduction based employee stock purchase plan designed
to qualify under Section 423 of the Code.

Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.

II. ADMINISTRATION OF THE PLAN

The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.

III. STOCK SUBJECT TO PLAN

A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed One Hundred Fifty
Thousand (150,000) shares.

B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date and (iii) the number and class of
securities and the price per share in effect under each outstanding purchase
right in order to prevent the dilution or enlargement of benefits thereunder.

IV. OFFERING PERIODS

A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.

<PAGE> 2
B. Each offering period shall be of such duration (not to exceed
twelve (12) months) as determined by the Plan Administrator prior to the start
date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in January
1999. The next offering period shall commence on the first business day in
February 1999, and subsequent offering periods shall commence as designated by
the Plan Administrator.

C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February each year to the last business day in July of the same
year and from the first business day in August each year to the last business
day in January of the following year. However, the first Purchase Interval in
effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in July 1998.

D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twelve (12) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.

V. ELIGIBILITY

A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.

B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.

C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.

D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.

2.
<PAGE> 3
VI. PAYROLL DEDUCTIONS

A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Base Salary paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of ten
percent (10%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:

(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Interval.

(ii) The Participant may, prior to the commencement of any
new Purchase Interval within the offering period, increase the rate of his
or her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the ten percent (10%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.

B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.

C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.

D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.

3.
<PAGE> 4
VII. PURCHASE RIGHTS

A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.

Under no circumstances shall purchase rights be granted under the
Plan to any Eligible Employee if such individual would, immediately after the
grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.

B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.

C. PURCHASE PRICE. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.

D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed One Thousand Two Hundred Fifty (1,250) shares, subject to periodic
adjustments in the event of certain changes in the Corporation's capitalization.

E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of

4.
<PAGE> 5
Common Stock by reason of the limitation on the maximum number of shares
purchasable by the Participant on the Purchase Date shall be promptly refunded.

F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
govern the termination of outstanding purchase rights:

(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions shall
be collected from the Participant with respect to the terminated purchase
right. Any payroll deductions collected during the Purchase Interval in
which such termination occurs shall, at the Participant's election, be
immediately refunded or held for the purchase of shares on the next
Purchase Date. If no such election is made at the time such purchase right
is terminated, then the payroll deductions collected with respect to the
terminated right shall be refunded as soon as possible.

(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before his or her scheduled Entry Date into that
offering period.

(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service, his or her payroll deductions
under the Plan shall automatically resume at the rate in effect at the
time the leave began, unless the Participant withdraws from the Plan prior
to his or her return.

G. CORPORATE TRANSACTION. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Interval in which such

5.
<PAGE> 6
Corporate Transaction occurs to the purchase of whole shares of Common Stock at
a purchase price per share equal to eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into the offering period in which such Corporate Transaction occurs or (ii)
the Fair Market Value per share of Common Stock immediately prior to the
effective date of such Corporate Transaction. However, the applicable limitation
on the number of shares of Common Stock purchasable per Participant shall
continue to apply to any such purchase.

The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.

H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.

I. ASSIGNABILITY. The purchase right shall be exercisable only by
the Participant and shall not be assignable or transferable by the Participant.

J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.

VIII. ACCRUAL LIMITATIONS

A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.

B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:

6.
<PAGE> 7
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on
each successive Purchase Date during the offering period on which such
right remains outstanding.

(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.

C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.

D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.

IX. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan was adopted by the Board on October 7, 1997 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.

B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2007, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.

7.
<PAGE> 8
X. AMENDMENT OF THE PLAN

The Board may alter, amend, suspend or discontinue the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Board may not, without the approval of the Corporation's
stockholders, (i) increase the number of shares of Common Stock issuable under
the Plan or the maximum number of shares purchasable per Participant on any one
Purchase Date, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, (ii) alter the purchase price
formula so as to reduce the purchase price payable for the shares of Common
Stock purchasable under the Plan or (iii) modify eligibility requirements for
participation in the Plan.

XI. GENERAL PROVISIONS

A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.

B. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.

C. The provisions of the Plan shall be governed by the laws of the
State of Delaware without resort to that State's conflict-of-laws rules.

8.
<PAGE> 9
SCHEDULE A

CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME

CombiChem, Inc.

<PAGE> 10
APPENDIX

The following definitions shall be in effect under the Plan:

A. BASE SALARY shall mean the (i) regular base salary paid to a
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. The
following items of compensation shall NOT be included in Base Salary: (i) all
overtime payments, bonuses, commissions (other than those functioning as base
salary equivalents), profit-sharing distributions and other incentive-type
payments and (ii) any and all contributions (other than Code Section 401(k) or
Code Section 125 contributions) made on the Participant's behalf by the
Corporation or any Corporate Affiliate under any employee benefit or welfare
plan now or hereafter established.

B. BOARD shall mean the Corporation's Board of Directors.

C. CODE shall mean the Internal Revenue Code of 1986, as amended.

D. COMMON STOCK shall mean the Corporation's common stock.

E. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.

F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation.

G. CORPORATION shall mean CombiChem, Inc., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or voting
stock of CombiChem, Inc. which shall by appropriate action adopt the Plan.

A-1.
<PAGE> 11
H. EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed and finally priced. Any Corporate Affiliate which becomes
a Participating Corporation after such Effective Time shall designate a
subsequent Effective Time with respect to its employee-Participants.

I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).

J. ENTRY DATE shall mean the date an Eligible Employee first
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.

K. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.

(iii) For purposes of the initial offering period which begins at
the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.

L. 1933 ACT shall mean the Securities Act of 1933, as amended.

M. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.

A-2.
<PAGE> 12
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.

O. PLAN shall mean the Corporation's 1997 Employee Stock Purchase
Plan, as set forth in this document.

P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
Board members appointed by the Board to administer the Plan.

Q. PURCHASE DATE shall mean the last business day of each Purchase
Interval. The initial Purchase Date shall be July 31, 1998.

R. PURCHASE INTERVAL shall mean each successive six (6)-month period
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.

S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
February and August each year on which an Eligible Employee may first enter an
offering period.

T. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.

U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

A-3.

<PAGE> 1
EXHIBIT 10.48

COMBICHEM, INC.
NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of CombiChem, Inc. (the
"Corporation"):

Optionee:_____________________________________________________

Grant Date:___________________________________________________

Vesting Commencement Date:____________________________________

Exercise Price: $__________________________________ per share

Number of Option Shares:_______________________________ shares

Expiration Date:______________________________________________

Type of Option: ______ Incentive Stock Option

______ Non-Statutory Stock Option

Exercise Schedule: The Option shall become exercisable for
twenty-five percent (25%) of the Option Shares upon Optionee's
completion of one (1) year of Service measured from the
Vesting Commencement Date and shall become exercisable for the
balance of the Option Shares in thirty-six (36) successive
equal monthly installments upon Optionee's completion of each
additional month of Service over the thirty-six (36) month
period measured from the first anniversary of the Vesting
Commencement Date. In no event shall the Option become
exercisable for any additional Option Shares after Optionee's
cessation of Service.

Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the CombiChem, Inc. 1997 Stock
Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms
of the Plan and the terms of the Option as set forth in the Stock Option
Agreement attached hereto as Exhibit A. Optionee hereby acknowledges receipt
of a copy of the official prospectus for the Plan in the form attached hereto
as Exhibit B. A copy of the Plan is available upon request made to the
Corporate Secretary at the Corporation's principal offices.

<PAGE> 2

No Employment or Service Contract. Nothing in this Notice or
in the attached Stock Option Agreement or in the Plan shall confer upon
Optionee any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee's Service at any time for any reason, with or without cause.

Definitions. All capitalized terms in this Notice shall have
the meaning assigned to them in this Notice or in the attached Stock Option
Agreement.

DATED: _________________________, 199 ___

COMBICHEM, INC.

By:________________________________

Title:_____________________________

___________________________________
OPTIONEE

Address:___________________________

___________________________________

ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - PLAN SUMMARY AND PROSPECTUS

<PAGE> 3
EXHIBIT A

STOCK OPTION AGREEMENT

<PAGE> 4
EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

<PAGE> 1

EXHIBIT 10.49

COMBICHEM, INC.
STOCK OPTION AGREEMENT

RECITALS

A. The Board has adopted the Plan for the purpose of retaining
the services of selected Employees, non-employee members of the Board or of the
board of directors of any Parent or Subsidiary and consultants and other
independent advisors who provide services to the Corporation (or any Parent or
Subsidiary).

B. Optionee is to render valuable services to the Corporation (or
a Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.

C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. The Corporation hereby grants to
Optionee, as of the Grant Date, an option to purchase up to the number of
Option Shares specified in the Grant Notice. The Option Shares shall be
purchasable from time to time during the option term specified in Paragraph 2
at the Exercise Price.

2. OPTION TERM. This option shall have a maximum term
of ten (10) years measured from the Grant Date and shall accordingly expire at
the close of business on the Expiration Date, unless sooner terminated in
accordance with Paragraph 5 or 6.

3. LIMITED TRANSFERABILITY. This option shall be
neither transferable nor assignable by Optionee other than by will or by the
laws of descent and distribution following Optionee's death and may be
exercised, during Optionee's lifetime, only by Optionee. However, if this
option is designated a Non-Statutory Option in the Grant Notice, then this
option may, in connection with the Optionee's estate plan, be assigned in whole
or in part during Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established for the exclusive benefit of one or
more such family members. The assigned portion shall be exercisable only by
the person or persons who acquire a proprietary interest in the option pursuant
to such assignment. The terms applicable to the assigned portion shall be the
same as those in effect for this option immediately prior to such assignment.

<PAGE> 2

4. DATES OF EXERCISE. This option shall become
exercisable for the Option Shares in one or more installments as specified in
the Grant Notice. As the option becomes exercisable for such installments,
those installments shall accumulate and the option shall remain exercisable for
the accumulated installments until the Expiration Date or sooner termination of
the option term under Paragraph 5 or 6.

5. CESSATION OF SERVICE. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to be outstanding)
prior to the Expiration Date should any of the following provisions become
applicable:

(a) Should Optionee cease to
remain in Service for any reason (other than death, Permanent
Disability or Misconduct) while holding this option, then Optionee
shall have a period of three (3) months (commencing with the date of
such cessation of Service) during which to exercise this option, but
in no event shall this option be exercisable at any time after the
Expiration Date.

(b) Should Optionee die while
holding this option, then the personal representative of Optionee's
estate or the person or persons to whom the option is transferred
pursuant to Optionee's will or in accordance with the laws of
inheritance shall have the right to exercise this option. Such right
shall lapse, and this option shall cease to be outstanding, upon the
earlier of (i) the expiration of the twelve (12)-month period measured
from the date of Optionee's death or (ii) the Expiration Date.

(c) Should Optionee cease Service
by reason of Permanent Disability while holding this option, then
Optionee shall have a period of twelve (12) months (commencing with
the date of such cessation of Service) during which to exercise this
option. In no event shall this option be exercisable at any time
after the Expiration Date.

(d) During the limited period of
post-Service exercisability, this option may not be exercised in the
aggregate for more than the number of vested Option Shares for which
the option is exercisable at the time of Optionee's cessation of
Service. Upon the expiration of such limited exercise period or (if
earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding for any vested Option Shares for which the
option has not been exercised. However, this option shall,
immediately upon Optionee's cessation of Service for any reason,
terminate and cease to be outstanding with respect to any Option
Shares in which Optionee is not otherwise at that time vested or for
which this option is not otherwise at that time exercisable.

<PAGE> 3
(e) Should Optionee's Service be
terminated for Misconduct, then this option shall terminate
immediately and cease to remain outstanding.

6. SPECIAL ACCELERATION OF OPTION.

(a) This option to the extent outstanding at the
time of a Corporate Transaction, but not otherwise fully exercisable, shall
automatically accelerate so that this option shall, immediately prior to the
effective date of such Corporate Transaction, become exercisable for all of the
Option Shares at the time subject to this option and may be exercised for any
or all of those Option Shares as fully vested shares of Common Stock. No such
acceleration of this option shall occur, however, if and to the extent: (i)
this option is, in connection with the Corporate Transaction, to be assumed by
the successor corporation (or parent thereof) or (ii) this option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing at the time of the Corporate Transaction on the
Option Shares for which this option is not otherwise at that time exercisable
(the excess of the Fair Market Value of those Option Shares over the aggregate
Exercise Price payable for such shares) and provides for subsequent payout in
accordance with the same option exercise/vesting schedule set forth in the
Grant Notice.

(b) Immediately following the Corporate
Transaction, this option shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) in
connection with the Corporate Transaction.

(c) If this option is assumed in connection with
a Corporate Transaction, then this option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable to Optionee in consummation of
such Corporate Transaction had the option been exercised immediately prior to
such Corporate Transaction, and appropriate adjustments shall also be made to
the Exercise Price, provided the aggregate Exercise Price shall remain the
same.

(d) This Agreement shall not in any way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.

7. ADJUSTMENT IN OPTION SHARES.

Should any change be made to the Common Stock by
reason of any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of

<PAGE> 4

consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price
in order to reflect such change and thereby preclude a dilution or enlargement
of benefits hereunder.

8. STOCKHOLDER RIGHTS. The holder of this option shall
not have any stockholder rights with respect to the Option Shares until such
person shall have exercised the option, paid the Exercise Price and become a
holder of record of the purchased shares.

9. MANNER OF EXERCISING OPTION.

(a) In order to exercise this option with respect
to all or any part of the Option Shares for which this option is at the time
exercisable, Optionee (or any other person or persons exercising the option)
must take the following actions:

(i) Execute and deliver to the
Corporation a Notice of Exercise for the Option Shares for which the
option is exercised.

(ii) Pay the aggregate Exercise
Price for the purchased shares in one or more of the following forms:

(A) cash or check made payable to
the Corporation;

(B) a promissory note payable to
the Corporation, but only to the extent authorized by the Plan
Administrator in accordance with Paragraph 13;

(C) shares of Common Stock held by
Optionee (or any other person or persons exercising the
option) for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date; or

(D) through a special sale and
remittance procedure pursuant to which Optionee (or any other
person or persons exercising the option) shall concurrently
provide irrevocable instructions (I) to a
Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate Exercise Price payable
for the purchased shares plus all applicable Federal, state
and local income and employment taxes required

<PAGE> 5

to be withheld by the Corporation by reason of such exercise
and (II) to the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order
to complete the sale.

Except to the extent the sale and remittance
procedure is utilized in connection with the option exercise,
payment of the Exercise Price must accompany the Notice of
Exercise delivered to the Corporation in connection with the
option exercise.

(iii) Furnish to the Corporation
appropriate documentation that the person or persons exercising the
option (if other than Optionee) have the right to exercise this
option.

(iv) Make appropriate
arrangements with the Corporation (or Parent or Subsidiary employing
or retaining Optionee) for the satisfaction of all Federal, state and
local income and employment tax withholding requirements applicable to
the option exercise.

(b) As soon as practical after the Exercise Date,
the Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.

10. COMPLIANCE WITH LAWS AND REGULATIONS.

(a) The exercise of this option and the issuance
of the Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the
Nasdaq National Market, if applicable) on which the Common Stock may be listed
for trading at the time of such exercise and issuance.

(b) The inability of the Corporation to obtain
approval from any regulatory body having authority deemed by the Corporation to
be necessary to the lawful issuance and sale of any Common Stock pursuant to
this option shall relieve the Corporation of any liability with respect to the
non-issuance or sale of the Common Stock as to which such approval shall not
have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.

11. SUCCESSORS AND ASSIGNS. Except to the extent
otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and Optionee, Optionee's assigns and the legal
representatives, heirs and legatees of Optionee's estate.

<PAGE> 6
12. NOTICES. Any notice required to be given or
delivered to the Corporation under the terms of this Agreement shall be in
writing and addressed to the Corporation at its principal corporate offices.
Any notice required to be given or delivered to Optionee shall be in writing
and addressed to Optionee at the address indicated below Optionee's signature
line on the Grant Notice. All notices shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, postage prepaid and properly
addressed to the party to be notified.

13. FINANCING. The Plan Administrator may, in its
absolute discretion and without any obligation to do so, permit Optionee to pay
the Exercise Price for the purchased Option Shares by delivering a
full-recourse promissory note payable to the Corporation. The terms of any
such promissory note (including the interest rate, the requirements for
collateral and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion.

14. CONSTRUCTION. This Agreement and the option
evidenced hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject to the terms of the Plan. All decisions of the
Plan Administrator with respect to any question or issue arising under the Plan
or this Agreement shall be conclusive and binding on all persons having an
interest in this option.

15. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.

16. EXCESS SHARES. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may without stockholder approval be issued under the Plan, then this
option shall be void with respect to those excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.

17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION.
In the event this option is designated an Incentive Option in the Grant Notice,
the following terms and conditions shall also apply to the grant:

(a) This option shall cease to
qualify for favorable tax treatment as an Incentive Option if (and to
the extent) this option is exercised for one or more Option Shares:
(A) more than three (3) months after the date Optionee ceases to be an
Employee for any reason other than death or Permanent Disability or
(B) more than twelve (12) months after the date Optionee ceases to be
an Employee by reason of Permanent Disability.

<PAGE> 7
(b) No installment under this
option shall qualify for favorable tax treatment as an Incentive
Option if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which such
installment first becomes exercisable hereunder would, when added to
the aggregate value (determined as of the respective date or dates of
grant) of the Common Stock or other securities for which this option
or any other Incentive Options granted to Optionee prior to the Grant
Date (whether under the Plan or any other option plan of the
Corporation or any Parent or Subsidiary) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate. Should such One Hundred Thousand Dollar
($100,000) limitation be exceeded in any calendar year, this option
shall nevertheless become exercisable for the excess shares in such
calendar year as a Non-Statutory Option.

(c) Should the exercisability of
this option be accelerated upon a Corporate Transaction, then this
option shall qualify for favorable tax treatment as an Incentive
Option only to the extent the aggregate Fair Market Value (determined
at the Grant Date) of the Common Stock for which this option first
becomes exercisable in the calendar year in which the Corporate
Transaction occurs does not, when added to the aggregate value
(determined as of the respective date or dates of grant) of the Common
Stock or other securities for which this option or one or more other
Incentive Options granted to Optionee prior to the Grant Date (whether
under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate. Should the applicable One Hundred Thousand Dollar
($100,000) limitation be exceeded in the calendar year of such
Corporate Transaction, the option may nevertheless be exercised for
the excess shares in such calendar year as a Non-Statutory Option.

(d) Should Optionee hold, in
addition to this option, one or more other options to purchase Common
Stock which become exercisable for the first time in the same calendar
year as this option, then the foregoing limitations on the
exercisability of such options as Incentive Options shall be applied
on the basis of the order in which such options are granted.

<PAGE> 8
EXHIBIT I
NOTICE OF EXERCISE

I hereby notify CombiChem, Inc. (the "Corporation") that I
elect to purchase _________________ shares of the Corporation's Common Stock
(the "Purchased Shares") at the option exercise price of $
______________________ per share (the "Exercise Price") pursuant to that
certain option (the "Option") granted to me under the Corporation's 1997 Stock
Incentive Plan on _______________________________, 199___.

Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise. Alternatively, I may utilize the special broker-dealer sale and
remittance procedure specified in my agreement to effect payment of the
Exercise Price.

__________________________, 199__
Date

___________________________________
Optionee

Address:___________________________

___________________________________

Print name in exact manner
it is to appear on the
stock certificate: ___________________________________

Address to which certificate
is to be sent, if different
from address above: ___________________________________

___________________________________

Social Security Number: ___________________________________

Employee Number: ___________________________________

<PAGE> 9
APPENDIX

The following definitions shall be in effect under the
Agreement:

A. AGREEMENT shall mean this Stock Option Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. COMMON STOCK shall mean shares of the Corporation's common
stock.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.

E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.

F. CORPORATION shall mean CombiChem, Inc., a Delaware
corporation.

G. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

H. EXERCISE DATE shall mean the date on which the option shall
have been exercised in accordance with Paragraph 9 of the Agreement.

I. EXERCISE PRICE shall mean the exercise price per Option Share
as specified in the Grant Notice.

J. EXPIRATION DATE shall mean the date on which the option
expires as specified in the Grant Notice.

K. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be deemed
equal to the closing selling price per share of Common Stock on the
date in question, as the price is reported

A-1.

<PAGE> 10

by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be deemed equal to
the closing selling price per share of Common Stock on the date in
question on the Stock Exchange determined by the Plan Administrator to
be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such
quotation exists.

L. GRANT DATE shall mean the date of grant of the option as
specified in the Grant Notice.

M. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.

O. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or
any Parent or Subsidiary), or any other intentional misconduct by Optionee
adversely affecting the business or affairs of the Corporation (or any Parent
or Subsidiary) in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or
discharge of Optionee or any other individual in the Service of the Corporation
(or any Parent or Subsidiary).

P. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.

Q. NOTICE OF EXERCISE shall mean the notice of exercise in the
form attached hereto as Exhibit I.

R. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.

S. OPTIONEE shall mean the person to whom the option is granted
as specified in the Grant Notice.

A-2.

<PAGE> 11
T. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

U. PERMANENT DISABILITY shall mean the inability of Optionee to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.

V. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.

W. PLAN ADMINISTRATOR shall mean either the Board or a committee
of the Board acting in its capacity as administrator of the Plan.

X. SERVICE shall mean the Optionee's performance of services for
the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.

Y. STOCK EXCHANGE shall mean the American Stock Exchange or the
New York Stock Exchange.

Z. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

A-3.

<PAGE> 1

EXHIBIT 10.50

ADDENDUM
TO
STOCK OPTION AGREEMENT

The following provisions are hereby incorporated into, and are
hereby made a part of, that certain Stock Option Agreement (the "Option
Agreement") by and between CombiChem, Inc. (the "Corporation") and
_____________________________________ ("Optionee") evidencing the stock option
(the "Option") granted on _____________________, 199___ to Optionee under the
terms of the Corporation's 1997 Stock Incentive Plan, and such provisions shall
be effective immediately. All capitalized terms in this Addendum, to the
extent not otherwise defined herein, shall have the meanings assigned to them
in the Option Agreement.

INVOLUNTARY TERMINATION FOLLOWING
CORPORATE TRANSACTION/CHANGE IN CONTROL

1. To the extent the Option is, in connection with a
Corporate Transaction, to be assumed in accordance with Paragraph 6 of the
Option Agreement, the Option shall not accelerate upon the occurrence of that
Corporate Transaction, and the Option shall accordingly continue, over
Optionee's period of Service after the Corporate Transaction, to become
exercisable for the Option Shares in one or more installments in accordance
with the provisions of the Option Agreement. However, immediately upon an
Involuntary Termination of Optionee's Service within eighteen (18) months
following such Corporate Transaction, the assumed Option, to the extent
outstanding at the time but not otherwise fully exercisable, shall
automatically accelerate so that the Option shall become immediately
exercisable for all the Option Shares at the time subject to the Option and may
be exercised for any or all of those Option Shares as fully vested shares.

2. The Option shall not accelerate upon the occurrence
of a Change in Control, and the Option shall, over Optionee's period of Service
following such Change in Control, continue to become exercisable for the Option
Shares in one or more installments in accordance with the provisions of the
Option Agreement. However, immediately upon an Involuntary Termination of
Optionee's Service within eighteen (18) months following the Change in Control,
the Option, to the extent outstanding at the time but not otherwise fully
exercisable, shall automatically accelerate so that the Option shall become
immediately exercisable for all the Option Shares at the time subject to the
Option and may be exercised for any or all of those Option Shares as fully
vested shares.

3. The Option as accelerated under Paragraph 1 or 2
shall remain so exercisable until the earlier of (i) the Expiration Date or
(ii) the expiration of the one (1)-year period measured from the date of the
Optionee's Involuntary Termination.

<PAGE> 2
4. For purposes of this Addendum the following
definitions shall be in effect:

(i) An INVOLUNTARY TERMINATION shall mean the
termination of Optionee's Service by reason of:

(A) Optionee's involuntary dismissal or
discharge by the Corporation for reasons other than
Misconduct, or

(B) Optionee's voluntary resignation
following (A) a change in Optionee's position with the
Corporation (or Parent or Subsidiary employing Optionee) which
materially reduces Optionee's duties and responsibilities or
the level of management to which Optionee reports, (B) a
reduction in Optionee's level of compensation (including base
salary, fringe benefits and target bonus under any corporate
performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of Optionee's place
of employment by more than fifty (50) miles, provided and only
if such change, reduction or relocation is effected by the
Corporation without Optionee's consent.

(ii) A CHANGE IN CONTROL shall be deemed to occur
in the event of a change in ownership or control of the Corporation
effected through either of the following transactions:

(A) the acquisition, directly or
indirectly, by any person or related group of persons (other
than the Corporation or a person that directly or indirectly
controls, is controlled by, or is under common control with,
the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's
stockholders, or

(B) a change in the composition of the
Board over a period of thirty-six (36) consecutive months or
less such that a majority of the Board members ceases, by
reason of one or more contested elections for Board
membership, to be comprised of individuals who either (i) have
been Board members continuously since the beginning of such
period or (ii) have been elected or nominated for election as
Board members during such period by at least a majority of the
Board members described in clause (i) who were still in office
at the time the Board approved such election or nomination.

<PAGE> 3
5. The provisions of Paragraph 1 of this Addendum shall
govern the period for which the Option is to remain exercisable following the
Involuntary Termination of Optionee's Service within eighteen (18) months after
the Corporate Transaction or Change in Control and shall supersede any
provisions to the contrary in Paragraph 5 of the Option Agreement.

IN WITNESS WHEREOF, CombiChem, Inc. has caused this Addendum
to be executed by its duly-authorized officer as of the Effective Date
specified below.

COMBICHEM, INC.

By:________________________________

Title:_____________________________

EFFECTIVE DATE: _________________, 199__

<PAGE> 1

EXHIBIT 10.51

ADDENDUM
TO
STOCK OPTION AGREEMENT

The following provisions are hereby incorporated into, and are
hereby made a part of, that certain Stock Option Agreement (the "Option
Agreement") by and between CombiChem, Inc. (the "Corporation") and
___________________ ("Optionee") evidencing the stock option (the "Option")
granted on ______________________, 199____ to Optionee under the terms of the
Corporation's 1997 Stock Incentive Plan, and such provisions shall be effective
immediately. All capitalized terms in this Addendum, to the extent not
otherwise defined herein, shall have the meanings assigned to them in the
Option Agreement.

LIMITED STOCK APPRECIATION RIGHT

1. Optionee is hereby granted a limited stock
appreciation right exercisable upon the following terms and conditions:

(i) Optionee shall have the
unconditional right, exercisable at any time during the thirty (30)-
day period immediately following a Hostile Take-Over, to surrender the
Option to the Corporation, to the extent the Option is at the time
exercisable for one or more shares of Common Stock. In return for the
surrendered Option, Optionee shall receive a cash distribution from
the Corporation in an amount equal to the excess of (A) the Take-Over
Price of the shares of Common Stock for which the surrendered option
(or surrendered portion) is at the time exercisable over (B) the
aggregate Exercise Price payable for such shares.

(ii) To exercise this limited stock
appreciation right, Optionee must, during the applicable thirty
(30)-day exercise period, provide the Corporation with written notice
of the option surrender in which there is specified the number of
Option Shares as to which the Option is being surrendered. Such
notice must be accompanied by the return of Optionee's copy of the
Option Agreement, together with any written amendments to such
Agreement. The cash distribution shall be paid to Optionee within
five (5) business days following such delivery date. The exercise of
the limited stock appreciation right in accordance with the terms of
this Addendum is hereby approved by the Plan Administrator, in advance
of such exercise, and no further approval of the Plan Administrator or
the Board shall be required at the time of the actual option surrender
and cash distribution. Upon receipt of such cash distribution, the
Option shall be cancelled with respect to the Option Shares for which
the Option has been surrendered, and Optionee shall cease to have any
further right to acquire those Option Shares

<PAGE> 2

under the Option Agreement. The Option shall, however, remain
outstanding and exercisable for the balance of the Option Shares (if
any) in accordance with the terms of the Option Agreement, and the
Corporation shall issue a replacement stock option agreement
(substantially in the same form of the surrendered Option Agreement)
for those remaining Option Shares.

(iii) In no event may this limited stock
appreciation right be exercised when there is not a positive spread
between the Fair Market Value of the Option Shares subject to the
surrendered option and the aggregate Exercise Price payable for such
shares. This limited stock appreciation right shall in all events
terminate upon the expiration or sooner termination of the Option term
and may not be assigned or transferred by Optionee, except to the
extent the Option is transferable in accordance with the provisions of
the Option Agreement.

2. For purposes of this Addendum, the following
definitions shall be in effect:

(i) A HOSTILE TAKE-OVER shall be deemed
to occur upon the acquisition, directly or indirectly, by any person
or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within
the meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept.

(ii) The TAKE-OVER PRICE per share shall
be deemed to be equal to the greater of (A) the Fair Market Value per
Option Share on the option surrender date or (B) the highest reported
price per share of Common Stock paid by the tender offeror in
effecting the Hostile Take-Over. However, if the surrendered Option
is designated as an Incentive Option in the Grant Notice, then the
Take-Over Price shall not exceed the clause (A) price per share.

<PAGE> 3
IN WITNESS WHEREOF, CombiChem, Inc. has caused this Addendum
to be executed by its duly-authorized officer as of the Effective Date
specified below.

COMBICHEM, INC.

By:________________________________

Title:_____________________________

EFFECTIVE DATE: ___________________, 199__

<PAGE> 1

EXHIBIT 10.52

COMBICHEM, INC.

STOCK ISSUANCE AGREEMENT

AGREEMENT made this _____ day of ___________________ 19____,
by and between CombiChem, Inc., a Delaware corporation, and
__________________________________________________, a Participant in the
Corporation's 1997 Stock Incentive Plan.

All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.

A. PURCHASE OF SHARES

1. PURCHASE. Participant hereby purchases _____________
shares of Common Stock (the "Purchased Shares") pursuant to the provisions of
the Stock Issuance Program at the purchase price of $______ per share (the
"Purchase Price").

2. PAYMENT. Concurrently with the delivery of this
Agreement to the Corporation, Participant shall pay the Purchase Price for the
Purchased Shares in cash or check payable to the Corporation and shall deliver
a duly-executed blank Assignment Separate from Certificate (in the form
attached hereto as Exhibit I) with respect to the Purchased Shares.

3. STOCKHOLDER RIGHTS. Until such time as the
Corporation exercises the Repurchase Right, Participant (or any successor in
interest) shall have all the rights of a stockholder (including voting,
dividend and liquidation rights) with respect to the Purchased Shares, subject,
however, to the transfer restrictions of this Agreement.

4. ESCROW. The Corporation shall have the right to hold
the Purchased Shares in escrow until those shares have vested in accordance
with the Vesting Schedule.

5. COMPLIANCE WITH LAW. Under no circumstances shall
shares of Common Stock or other assets be issued or delivered to Participant
pursuant to the provisions of this Agreement unless, in the opinion of counsel
for the Corporation or its successors, there shall have been compliance with
all applicable requirements of Federal and state securities laws, all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which the Common Stock is at the time listed for
trading and all other requirements of law or of any regulatory bodies having
jurisdiction over such issuance and delivery.

<PAGE> 2
B. TRANSFER RESTRICTIONS

1. RESTRICTION ON TRANSFER. Except for any Permitted
Transfer, Participant shall not transfer, assign, encumber or otherwise dispose
of any of the Purchased Shares which are subject to the Repurchase Right.

2. RESTRICTIVE LEGEND. The stock certificate for the
Purchased Shares shall be endorsed with the following restrictive legend:

"The shares represented by this certificate are
unvested and subject to certain repurchase rights granted to the
Corporation and accordingly may not be sold, assigned, transferred,
encumbered, or in any manner disposed of except in conformity with the
terms of a written agreement dated ____________, 199__ between the
Corporation and the registered holder of the shares (or the
predecessor in interest to the shares). A copy of such agreement is
maintained at the Corporation's principal corporate offices."

3. TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of a
Permitted Transfer must, as a condition precedent to the validity of such
transfer, acknowledge in writing to the Corporation that such person is bound
by the provisions of this Agreement and that the transferred shares are subject
to the Repurchase Right to the same extent such shares would be so subject if
retained by Participant.

C. REPURCHASE RIGHT

1. GRANT. The Corporation is hereby granted the right
(the "Repurchase Right"), exercisable at any time during the ninety (90)-day
period following the date Participant ceases for any reason to remain in
Service, to repurchase at the Purchase Price all or any portion of the
Purchased Shares in which Participant is not, at the time of his or her
cessation of Service, vested in accordance with the Vesting Schedule or the
special vesting accleration provisions of Paragraph C.5 of this Agreement (such
shares to be hereinafter referred to as the "Unvested Shares").

2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase
Right shall be exercisable by written notice delivered to each Owner of the
Unvested Shares prior to the expiration of the ninety (90)-day exercise period.
The notice shall indicate the number of Unvested Shares to be repurchased and
the date on which the repurchase is to be effected, such date to be not more
than thirty (30) days after the date of such notice. The certificates
representing the Unvested Shares to be repurchased shall be delivered to the
Corporation on or before the close of business on the date specified for the
repurchase. Concurrently with the receipt of such stock certificates, the
Corporation shall pay to Owner, in cash or cash equivalent (including the
cancellation of any purchase-money indebtedness), an amount equal to the
Purchase Price previously paid for the Unvested Shares to be repurchased from
Owner.

<PAGE> 3
3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase
Right shall terminate with respect to any Unvested Shares for which it is not
timely exercised under Paragraph C.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Participant vests in accordance with the following Vesting
Schedule:

(i) Upon Participant's completion of one
(1) year of Service measured from ______________, 199__, Participant
shall acquire a vested interest in, and the Repurchase Right shall
lapse with respect to, twenty-five percent (25%) of the Purchased
Shares.

(ii) Participant shall acquire a vested
interest in, and the Repurchase Right shall lapse with respect to, the
remaining Purchased Shares in a series of thirty six (36) successive
equal monthly installments upon Participant's completion of each
additional month of Service over the thirty-six (36)-month period
measured from the initial vesting date under subparagraph (i) above.

4. RECAPITALIZATION. Any new, substituted or additional
securities or other property (including cash paid other than as a regular cash
dividend) which is by reason of any Recapitalization distributed with respect
to the Purchased Shares shall be immediately subject to the Repurchase Right
and any escrow requirements hereunder, but only to the extent the Purchased
Shares are at the time covered by such right or escrow requirements.
Appropriate adjustments to reflect such distribution shall be made to the
number and/or class of securities subject to this Agreement and to the price
per share to be paid upon the exercise of the Repurchase Right in order to
reflect the effect of any such Recapitalization upon the Corporation's capital
structure; provided, however, that the aggregate purchase price shall remain
the same.

5. CORPORATE TRANSACTION.

(a) Immediately prior to the consummation of any
Corporate Transaction, the Repurchase Right shall automatically lapse in its
entirety and the Purchased Shares shall vest in full, except to the extent the
Repurchase Right is to be assigned to the successor corporation (or parent
thereof) in connection with the Corporate Transaction.

(b) To the extent the Repurchase Right remains in
effect following a Corporate Transaction, such right shall apply to the new
capital stock or other property (including any cash payments) received in
exchange for the Purchased Shares in consummation of the Corporate Transaction,
but only to the extent the Purchased Shares are at the time covered by such
right. Appropriate adjustments shall be made to the price per share payable
upon exercise of the Repurchase Right to reflect the effect of the Corporate
Transaction upon the Corporation's capital structure; provided, however, that
the aggregate purchase price shall remain the same. The new securities or
other property (including cash payments) issued or distributed with respect to
the Purchased Shares in consummation of the Corporate Transaction shall
immediately be

<PAGE> 4

deposited in escrow with the Corporation (or the successor entity) and shall
not be released from escrow until Participant vests in such securities or other
property in accordance with the same Vesting Schedule in effect for the
Purchased Shares.

(c) The Repurchase Right may also be subject to
termination in whole or in part on an accelerated basis, and the Purchased
Shares subject to immediate vesting, in accordance with the terms of any
special Addendum attached to this Agreement.

D. SPECIAL TAX ELECTION

1. SECTION 83(b) ELECTION. Under Code Section 83, the
excess of the fair market value of the Purchased Shares on the date any
forfeiture restrictions applicable to such shares lapse over the Purchase Price
paid for such shares will be reportable as ordinary income on the lapse date.
For this purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase
Right. Participant may elect under Code Section 83(b) to be taxed at the time
the Purchased Shares are acquired, rather than when and as such Purchased
Shares cease to be subject to such forfeiture restrictions. Such election must
be filed with the Internal Revenue Service within thirty (30) days after the
date of this Agreement. Even if the fair market value of the Purchased Shares
on the date of this Agreement equals the Purchase Price paid (and thus no tax
is payable), the election must be made to avoid adverse tax consequences in the
future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO.
PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE
THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE
FORFEITURE RESTRICTIONS LAPSE.

2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT
IT IS PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A
TIMELY ELECTION UNDER CODE SECTION 83(B), EVEN IF PARTICIPANT REQUESTS THE
CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

E. GENERAL PROVISIONS

1. ASSIGNMENT. The Corporation may assign the
Repurchase Right to any person or entity selected by the Board, including
(without limitation) one or more stockholders of the Corporation.

2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this
Agreement or in the Plan shall confer upon Participant any right to continue in
Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining Participant) or of Participant, which rights are hereby
expressly reserved by each, to terminate Participant's Service at any time for
any reason, with or without cause.

<PAGE> 5
3. NOTICES. Any notice required to be given under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, registered or certified, postage
prepaid and properly addressed to the party entitled to such notice at the
address indicated below such party's signature line on this Agreement or at
such other address as such party may designate by ten (10) days advance written
notice under this paragraph to all other parties to this Agreement.

4. NO WAIVER. The failure of the Corporation in any
instance to exercise the Repurchase Right shall not constitute a waiver of any
other repurchase rights that may subsequently arise under the provisions of
this Agreement or any other agreement between the Corporation and Participant.
No waiver of any breach or condition of this Agreement shall be deemed to be a
waiver of any other or subsequent breach or condition, whether of like or
different nature.

5. CANCELLATION OF SHARES. If the Corporation shall
make available, at the time and place and in the amount and form provided in
this Agreement, the consideration for the Purchased Shares to be repurchased in
accordance with the provisions of this Agreement, then from and after such
time, the person from whom such shares are to be repurchased shall no longer
have any rights as a holder of such shares (other than the right to receive
payment of such consideration in accordance with this Agreement). Such shares
shall be deemed purchased in accordance with the applicable provisions hereof,
and the Corporation shall be deemed the owner and holder of such shares,
whether or not the certificates therefor have been delivered as required by
this Agreement.

6. PARTICIPANT UNDERTAKING. Participant hereby agrees
to take whatever additional action and execute whatever additional documents
the Corporation may deem necessary or advisable in order to carry out or effect
one or more of the obligations or restrictions imposed on either Participant or
the Purchased Shares pursuant to the provisions of this Agreement.

7. AGREEMENT IS ENTIRE CONTRACT. This Agreement
constitutes the entire contract between the parties hereto with regard to the
subject matter hereof. This Agreement is made pursuant to the provisions of
the Plan and shall in all respects be construed in conformity with the terms of
the Plan.

8. GOVERNING LAW. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of California without
resort to that State's conflict-of-laws rules.

9. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.

10. SUCCESSORS AND ASSIGNS. The provisions of this
Agreement shall inure to the benefit of, and be binding upon, the Corporation
and its successors and assigns and upon

<PAGE> 6
Participant, Participant's assigns and the legal representatives, heirs and
legatees of Participant's estate, whether or not any such person shall have
become a party to this Agreement and have agreed in writing to join herein and
be bound by the terms hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first indicated above.

COMBICHEM, INC.

By:________________________________

Title:_____________________________

Address:___________________________

___________________________________
PARTICIPANT

Address:___________________________

___________________________________

<PAGE> 7
SPOUSAL ACKNOWLEDGMENT

The undersigned spouse of the Participant has read and hereby approves
the foregoing Stock Issuance Agreement. In consideration of the Corporation's
granting the Participant the right to acquire the Purchased Shares in
accordance with the terms of such Agreement, the undersigned hereby agrees to
be irrevocably bound by all the terms of such Agreement, including (without
limitation) the right of the Corporation (or its assigns) to purchase any
Purchased Shares in which the Participant is not vested at the time of his or
her termination of Service.

___________________________________
PARTICIPANT'S SPOUSE

Address:___________________________

___________________________

<PAGE> 8

EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED ______________________ hereby sell(s),
assign(s) and transfer(s) unto CombiChem, Inc. (the "Corporation"),
__________________(_______) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No. ___________________ herewith and do(es) hereby irrevocably
constitute and appoint _______________________________ Attorney to transfer the
said stock on the books of the Corporation with full power of substitution in
the premises. Dated: ________________, 199__.

Signature__________________________

INSTRUCTION: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Participant.

<PAGE> 9

EXHIBIT II

SECTION 83(b) TAX ELECTION

This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.

(1) The taxpayer who performed the services is:

Name:
Address:
Taxpayer Ident. No.:

(2) The property with respect to which the election is being made is
____________ shares of the common stock of CombiChem, Inc.

(3) The property was issued on _____________, 199___.

(4) The taxable year in which the election is being made is the calendar
year 199__.

(5) The property is subject to a repurchase right pursuant to which the
issuer has the right to acquire the property at the original purchase
price if for any reason taxpayer's service with the issuer terminates.
The issuer's repurchase right lapses in a series of annual and monthly
installments over a four (4)-year period ending on ______________.

(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its terms
will never lapse) is $_____________per share.

(7) The amount paid for such property is $____________ per share.

(8) A copy of this statement was furnished to CombiChem, Inc. for whom
taxpayer rendered the services underlying the transfer of property.

(9) This statement is executed on ________________________, 199__.

_________________________ ___________________________________
Spouse (if any) Taxpayer

This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Issuance Agreement.
This filing should be made by registered or certified mail, return receipt
requested. Participant must retain two (2) copies of the completed form for
filing with his or her Federal and state tax returns for the current tax year
and an additional copy for his or her records.

<PAGE> 10

APPENDIX

The following definitions shall be in effect under the
Agreement:

A. AGREEMENT shall mean this Stock Issuance Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. COMMON STOCK shall mean shares of the Corporation's common
stock.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.

E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions:

(i) a merger or consolidation in which
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or

(ii) the sale, transfer or other
disposition of all or substantially all of the Corporation's assets in
complete liquidation or dissolution of the Corporation.

F. CORPORATION shall mean CombiChem, Inc., a Delaware
corporation.

G. OWNER shall mean Participant and all subsequent holders of the
Purchased Shares who derive their chain of ownership through a Permitted
Transfer from Participant.

H. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

I. PARTICIPANT shall mean the person to whom the Purchased Shares
are issued under the Stock Issuance Program.

A-1.

<PAGE> 11

J. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if Participant obtains the Corporation's
prior written consent to such transfer, (ii) a transfer of title to the
Purchased Shares effected pursuant to Participant's will or the laws of
intestate succession following Participant's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness incurred
by Participant in connection with the acquisition of the Purchased Shares.

K. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.

L. PLAN ADMINISTRATOR shall mean either the Board or a committee
of the Board acting in its administrative capacity under the Plan.

M. PURCHASE PRICE shall have the meaning assigned to such term in
Paragraph A.1.

N. PURCHASED SHARES shall have the meaning assigned to such term
in Paragraph A.1.

O. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.

P. REPURCHASE RIGHT shall mean the right granted to the
Corporation in accordance with Article C.

Q. SERVICE shall mean the Participant's performance of services
for the Corporation (or any Parent or Subsidiary) in the capacity of an
employee, subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of performance, a
non-employee member of the board of directors or a consultant.

R. STOCK ISSUANCE PROGRAM shall mean the Stock Issuance Program
under the Plan.

S. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

T. VESTING SCHEDULE shall mean the vesting schedule specified in
Paragraph C.3, subject to the special vesting acceleration provisions of
Paragraph C.5.

U. UNVESTED SHARES shall have the meaning assigned to such term
in Paragraph C.1.

A-2.

<PAGE> 1

EXHIBIT 10.53

ADDENDUM
TO
STOCK ISSUANCE AGREEMENT

The following provisions are hereby incorporated into, and are
hereby made a part of, that certain Stock Issuance Agreement dated
____________________, 199___(the "Issuance Agreement") by and between
CombiChem, Inc. (the "Corporation") and ____________________ ("Participant")
evidencing the stock issuance made on such date to Participant under the terms
of the Corporation's 1997 Stock Incentive Plan, and such provisions shall be
effective immediately. All capitalized terms in this Addendum, to the extent
not otherwise defined herein, shall have the meanings assigned to such terms in
the Issuance Agreement.

INVOLUNTARY TERMINATION FOLLOWING
CORPORATE TRANSACTION/CHANGE IN CONTROL

1. To the extent the Repurchase Right is assigned to the
successor corporation (or parent thereof) in connection with a Corporate
Transaction, no accelerated vesting of the Purchased Shares shall occur upon
such Corporate Transaction, and the Repurchase Right shall continue to remain
in full force and effect in accordance with the provisions of the Issuance
Agreement. The Participant shall, over Participant's period of Service
following the Corporate Transaction, continue to vest in the Purchased Shares
in one or more installments in accordance with the provisions of the Issuance
Agreement.

2. No accelerated vesting of the Purchased Shares shall
occur upon a Change in Control, and the Repurchase Right shall continue to
remain in full force and effect in accordance with the provisions of the
Issuance Agreement. The Participant shall, over Participant's period of
Service following the Change in Control, continue to vest in the Purchased
Shares in one or more installments in accordance with the provisions of the
Issuance Agreement.

3. Immediately upon an Involuntary Termination of
Participant's Service within eighteen (18) months following the Corporate
Transaction or Change in Control, the Repurchase Right shall terminate
automatically and all the Purchased Shares shall vest in full.

4. For purposes of this Addendum, the following
definitions shall be in effect:

An INVOLUNTARY TERMINATION shall mean the termination
of Participant's Service by reason of:

(i) Participant's involuntary dismissal
or discharge by the Corporation for reasons other than Misconduct, or

<PAGE> 2
(ii) Participant's voluntary resignation
following (A) a change in Participant's position with the Corporation
(or Parent or Subsidiary employing Participant) which materially
reduces Participant's duties and responsibilities or the level of
management to which Participant reports, (B) a reduction in
Participant's level of compensation (including base salary, fringe
benefits and target bonus under any corporate performance based bonus
or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of Participant's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without Participant's consent.

A CHANGE IN CONTROL shall be deemed to occur in the
event of a change in ownership or control of the Corporation effected through
either of the following transactions:

(i) the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation) of
beneficial ownership (within the meaning of Rule 13d-3 of the 1934
Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders, or

(ii) a change in the composition of the
Board over a period of thirty-six (36) consecutive months or less such
that a majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.

MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Participant, any unauthorized use or
disclosure by the Participant of confidential information or trade secrets of
the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by the Participant adversely affecting the business or affairs of
the Corporation (or any Parent or Subsidiary) in a material manner. The
foregoing definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary) may consider as
grounds for the dismissal or discharge of the Participant or other person in
the Service of the Corporation (or any Parent or Subsidiary).

<PAGE> 3
IN WITNESS WHEREOF, CombiChem, Inc. has caused this Addendum
to be executed by its duly-authorized officer as of the Effective Date
specified below.

COMBICHEM, INC.

By:________________________________

Title:_____________________________

EFFECTIVE DATE: _________________, 199__

<PAGE> 1

EXHIBIT 10.54

INITIAL GRANT

COMBICHEM, INC.
NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR
AUTOMATIC STOCK OPTION

Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of CombiChem, Inc. (the
"Corporation"):

Optionee:_____________________________________________________

Grant Date:___________________________________________________

Exercise Price: $__________________________________ per share

Number of Option Shares: 20,000 shares

Expiration Date:______________________________________________

Type of Option: Non-Statutory Stock Option

Date Exercisable: Immediately Exercisable

Vesting Schedule: The Option Shares shall initially be
unvested and subject to repurchase by the Corporation at the
Exercise Price paid per share. Optionee shall acquire a
vested interest in, and the Corporation's repurchase right
shall accordingly lapse with respect to, the Option Shares as
follows: (i) twenty-five percent (25%) upon Optionee's
completion of one (1) year of service as a member of the
Corporation's Board of Directors (the "Board") measured from
the Grant Date and (ii) the balance in a series of thirty-six
(36) successive equal monthly installments upon Optionee's
completion of each additional month of Board service over the
thirty-six (36) month period measured from the first
anniversary of the Grant Date. In no event shall any
additional Option Shares vest after Optionee's cessation of
Board service.

Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the automatic option grant
program under the CombiChem, Inc. 1997 Stock Incentive Plan (the "Plan").
Optionee further agrees to be bound by the terms of the Plan and the terms of
the Option as set forth in the Automatic Stock Option Agreement attached hereto
as Exhibit A.

<PAGE> 2

Optionee hereby acknowledges receipt of a copy of the official
prospectus for the Plan in the form attached hereto as Exhibit B. A copy of
the Plan is available upon request made to the Corporate Secretary at the
Corporation's principal offices.

REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED
OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO A
REPURCHASE RIGHT EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF
SUCH RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND
SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF
THE OPTION EXERCISE.

No Impairment of Rights. Nothing in this Notice or the
attached Automatic Stock Option Agreement or in the Plan shall interfere with
or otherwise restrict in any way the rights of the Corporation and the
Corporation's stockholders to remove Optionee from the Board at any time in
accordance with the provisions of applicable law.

Definitions. All capitalized terms in this Notice shall have
the meaning assigned to them in this Notice or in the attached Automatic Stock
Option Agreement.

________________________, 199__
Date

COMBICHEM, INC.

By:________________________________

Title:_____________________________

___________________________________
OPTIONEE

Address:___________________________

___________________________________

ATTACHMENTS
Exhibit A - Automatic Stock Option Agreement
Exhibit B - Plan Summary and Prospectus

<PAGE> 3

EXHIBIT A

AUTOMATIC STOCK OPTION AGREEMENT

<PAGE> 4

EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

<PAGE> 1

EXHIBIT 10.55

ANNUAL GRANT

COMBICHEM, INC.
NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR
AUTOMATIC STOCK OPTION

Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of CombiChem, Inc. (the
"Corporation"):

Optionee:_____________________________________________________

Grant Date:___________________________________________________

Exercise Price: $__________________________________ per share

Number of Option Shares: 5,000 shares

Expiration Date:______________________________________________

Type of Option: Non-Statutory Stock Option

Date Exercisable: Immediately Exercisable

<PAGE> 2

Definitions. All capitalized terms in this Notice shall have
the meaning assigned to them in this Notice or in the attached Automatic Stock
Option Agreement.

________________________, 199__
Date

COMBICHEM, INC.

By:________________________________

Title:_____________________________

___________________________________
OPTIONEE

Address: __________________________

___________________________________

ATTACHMENTS
Exhibit A - Automatic Stock Option Agreement
Exhibit B - Plan Summary and Prospectus

<PAGE> 3

EXHIBIT A

AUTOMATIC STOCK OPTION AGREEMENT

<PAGE> 4

EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

<PAGE> 1

EXHIBIT 10.56

COMBICHEM, INC.
AUTOMATIC STOCK OPTION AGREEMENT

RECITALS

A. The Corporation has implemented an automatic option grant
program under the Plan pursuant to which eligible non-employee members of the
Board will automatically receive special option grants at periodic intervals
over their period of Board service in order to provide such individuals with a
meaningful incentive to continue to serve as members of the Board.

B. Optionee is an eligible non-employee Board member, and this
Agreement is executed pursuant to, and is intended to carry out the purposes
of, the Plan in connection with the automatic grant of an option to purchase
shares of Common Stock under the Plan.

C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. The Corporation hereby grants to
Optionee, as of the Grant Date, a Non-Statutory Option to purchase up to the
number of Option Shares specified in the Grant Notice. The Option Shares shall
be purchasable from time to time during the option term specified in Paragraph
2 at the Exercise Price.

2. OPTION TERM. This option shall have a term of ten
(10) years measured from the Grant Date and shall accordingly expire at the
close of business on the Expiration Date, unless sooner terminated in
accordance with Paragraph 5, 6 or 7.

3. LIMITED TRANSFERABILITY. This option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during Optionee's lifetime to one or more members of the Optionee's immediate
family or to a trust established for the exclusive benefit of one or more such
family members. The assigned portion shall be exercisable only by the person or
persons who acquire a proprietary interest in the option pursuant to such
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for this option immediately prior to such assignment. Should
the Optionee die while holding this option, then this option shall be
transferred in accordance with Optionee's will or the laws of descent and
distribution.

<PAGE> 2
4. EXERCISABILITY/VESTING.

(a) This option shall be immediately exercisable
for any or all of the Option Shares, whether or not the Option Shares are at
the time vested in accordance with the Vesting Schedule, and shall remain so
exercisable until the Expiration Date or sooner termination of the option term
under Paragraph 5, 6 or 7.

(b) Optionee shall, in accordance with the
Vesting Schedule set forth in the Grant Notice, vest in the Option Shares in
one or more installments over his or her period of Board service. Vesting in
the Option Shares may be accelerated pursuant to the provisions of Paragraph 5,
6 or 7. In no event, however, shall any additional Option Shares vest
following Optionee's cessation of service as a Board member.

5. CESSATION OF BOARD SERVICE. Should Optionee's
service as a Board member cease while this option remains outstanding, then the
option term specified in Paragraph 2 shall terminate (and this option shall
cease to be outstanding) prior to the Expiration Date in accordance with the
following provisions:

(a) Should Optionee cease to serve as a Board
member for any reason (other than death or Permanent Disability) while this
option is outstanding, then the period for exercising this option shall be
reduced to a twelve (12)-month period (commencing with the date of such
cessation of Board service), but in no event shall this option be exercisable
at any time after the Expiration Date. During such limited period of
exercisability, this option may not be exercised in the aggregate for more than
the number of Option Shares (if any) in which Optionee is vested on the date of
his or her cessation of Board service. Upon the earlier of (i) the expiration
of such twelve (12)- month period or (ii) the specified Expiration Date, the
option shall terminate and cease to be exercisable with respect to any vested
Option Shares for which the option has not been exercised.

(b) Should Optionee die during the twelve
(12)-month period following his or her cessation of Board service and hold this
option, at the time of his or her death, then the personal representative of
Optionee's estate or the person or persons to whom the option is transferred
pursuant to Optionee's will or in accordance with the laws of descent and
distribution shall have the right to exercise this option for any or all of the
Option Shares in which Optionee is vested at the time of Optionee's cessation
of Board service (less any Option Shares purchased by Optionee after such
cessation of Board service but prior to death). Such right of exercise shall
terminate, and this option shall accordingly cease to be exercisable for such
vested Option Shares, upon the earlier of (i) the expiration of the twelve
(12)- month period measured from the date of Optionee's cessation of Board
service or (ii) the specified Expiration Date.

(c) Should Optionee cease service as a Board
member by reason of death or Permanent Disability, then all Option Shares at
the time subject to this option but not otherwise vested shall vest in full so
that this option may be exercised for any or all of the Option Shares as fully
vested shares of Common Stock at any time prior to the earlier of (i) the

<PAGE> 3
expiration of the twelve (12)-month period measured from the date of Optionee's
cessation of Board service or (ii) the specified Expiration Date, whereupon
this option shall terminate and cease to be outstanding.

(d) Upon Optionee's cessation of Board service
for any reason other than death or Permanent Disability, this option shall
immediately terminate and cease to be outstanding with respect to any and all
Option Shares in which Optionee is not otherwise at that time vested in
accordance with the normal Vesting Schedule or the special vesting acceleration
provisions of Paragraph 6 or 7 below.

6. CORPORATE TRANSACTION.

(a) In the event of a Corporate Transaction, all
Option Shares at the time subject to this option but not otherwise vested shall
automatically vest so that this option shall, immediately prior to the
specified effective date for the Corporate Transaction, become exercisable for
all of the Option Shares at the time subject to this option and may be
exercised for all or any portion of such shares as fully vested shares of
Common Stock. Immediately following the consummation of the Corporate
Transaction, this option shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation or its parent company.

(b) All outstanding repurchase rights shall also
terminate automatically, and the unvested shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Corporate Transaction.

7. CHANGE IN CONTROL/HOSTILE TAKE-OVER.

(a) All Option Shares subject to this option at
the time of a Change in Control but not otherwise vested shall automatically
vest so that this option shall, immediately prior to the effective date of such
Change in Control, become exercisable for all of the Option Shares at the time
subject to this option and may be exercised for all or any portion of such
shares as fully-vested shares of Common Stock. This option shall remain
exercisable for such fully-vested Option Shares until the earliest to occur of
(i) the specified Expiration Date, (ii) the sooner termination of this option
in accordance with Paragraph 5 or 6 or (iii) the surrender of this option under
Paragraph 7(b).

<PAGE> 4
(b) All outstanding repurchase rights shall also
terminate automatically, and the unvested shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Change in Control.

(c) Optionee shall have an unconditional right,
exercisable at the time during the thirty (30)-day period immediately following
the consummation of a Hostile Take-Over to surrender this option to the
Corporation in exchange for a cash distribution from the Corporation in an
amount equal to the excess of (i) the Take-Over Price of the Option Shares at
the time subject to the surrendered option (whether or not those Option Shares
are otherwise at the time vested) over (ii) the aggregate Exercise Price
payable for such shares. This Paragraph 7(b) limited stock appreciation right
shall in all events terminate upon the expiration or sooner termination of the
option term and may not be assigned or transferred by Optionee.

(d) To exercise the Paragraph 7(b) limited stock
appreciation right, Optionee must, during the applicable thirty (30)-day
exercise period, provide the Corporation with written notice of the option
surrender in which there is specified the number of Option Shares as to which
the option is being surrendered. Such notice must be accompanied by the return
of Optionee's copy of this Agreement, together with any written amendments to
such Agreement. The cash distribution shall be paid to Optionee within five
(5) business days following such delivery date. The exercise of such limited
stock appreciation right in accordance with the terms of this Paragraph 7 has
been pre-approved pursuant to the express provisions of the Automatic Option
Grant Program, and neither the approval of the Plan Administrator nor the
consent of the Board shall be required at the time of the actual option
surrender and cash distribution. Upon receipt of the cash distribution, this
option shall be cancelled with respect to the shares subject to the surrendered
option (or the surrendered portion), and Optionee shall cease to have any
further right to acquire those Option Shares under this Agreement. The option
shall, however, remain outstanding for the balance of the Option Shares (if
any) in accordance with the terms and provisions of this Agreement, and the
Corporation shall accordingly issue a replacement stock option agreement
(substantially in the same form as this Agreement) for those remaining Option
Shares.

8. ADJUSTMENT IN OPTION SHARES. Should any change be
made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to (i) the
total number and/or class of securities subject to this option and (ii) the
Exercise Price in order to reflect such change and thereby preclude a dilution
or enlargement of benefits hereunder.

9. STOCKHOLDER RIGHTS. The holder of this option shall
not have any stockholder rights with respect to the Option Shares until such
person shall have exercised the option, paid the Exercise Price and become a
holder of record of the purchased shares.

<PAGE> 5
10. MANNER OF EXERCISING OPTION.

(i) To the extent the option is
exercised for vested Option Shares, execute and deliver to the
Corporation a Notice of Exercise for the Option Shares for which the
option is exercised. To the extent this option is exercised for
unvested Option Shares, execute and deliver to the Corporation a
Purchase Agreement for those unvested Option Shares.

(ii) Pay the aggregate Exercise
Price for the purchased shares in one or more of the following forms:

(A) cash or check made payable to
the Corporation,

(B) shares of Common Stock held by
Optionee (or any other person or persons exercising the
option) for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date, or

(C) to the extent the option is
exercised for vested Option Shares, through a special sale and
remittance procedure pursuant to which Optionee (or any other
person or persons exercising the option) shall concurrently
provide irrevocable instructions (I) to a
Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out
of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate Exercise Price payable
for the purchased shares plus all applicable Federal, state
and local income and employment taxes required to be withheld
by the Corporation by reason of such exercise and (II) to the
Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete
the sale.

(iii) Furnish to the Corporation
appropriate documentation that the person or persons exercising the
option (if other than Optionee) have the right to exercise this
option.

(b) Except to the extent the sale and remittance
procedure is utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Notice

<PAGE> 6

of Exercise (or the Purchase Agreement) delivered to the Corporation in
connection with the option exercise.

(c) As soon after the Exercise Date as practical,
the Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto. To the extent any such Option
Shares are unvested, the certificates for those Option Shares shall be endorsed
with an appropriate legend evidencing the Corporation's repurchase rights and
may be held in escrow with the Corporation until such shares vest.

(d) In no event may this option be exercised for
any fractional shares.

11. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in
any way affect the right of the Corporation to adjust, reclassify, reorganize
or otherwise make changes in its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets. In addition, this Agreement shall not in any way be
construed or interpreted so as to affect adversely or otherwise impair the
right of the Corporation or the stockholders to remove Optionee from the Board
at any time in accordance with the provisions of applicable law.

12. COMPLIANCE WITH LAWS AND REGULATIONS.

13. SUCCESSORS AND ASSIGNS. Except to the extent
otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and Optionee, Optionee's assigns and the legal
representatives, heirs and legatees of Optionee's estate.

14. NOTICES. Any notice required to be given or
delivered to the Corporation under the terms of this Agreement shall be in
writing and addressed to the Corporation at its principal corporate offices.
Any notice required to be given or delivered to Optionee shall be in writing
and addressed to Optionee at the address indicated below Optionee's signature
line on the

<PAGE> 7

Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.

15. CONSTRUCTION. This Agreement and the option
evidenced hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject to the terms of the Plan.

16. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.

<PAGE> 8
EXHIBIT I

NOTICE OF EXERCISE

I hereby notify CombiChem, Inc. (the "Corporation") that I
elect to purchase __________ shares of the Corporation's Common Stock (the
"Purchased Shares") at the option exercise price of $___________ per share (the
"Exercise Price") pursuant to that certain option (the "Option") granted to me
under the Corporation's 1997 Stock Incentive Plan on ____________________,
199___.

_______________________, 199__
Date

___________________________________
Optionee

Address:___________________________

___________________________________

Print name in exact manner
it is to appear on the
stock certificate: ___________________________________

Address to which certificate
is to be sent, if different
from address above: ___________________________________

___________________________________

Social Security Number: ___________________________________

<PAGE> 9
APPENDIX

The following definitions shall be in effect under the Agreement:

A. AGREEMENT shall mean this Automatic Stock Option Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly, by
any person or related group of persons (other than the Corporation or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders, or

(ii) a change in the composition of the Board over
a period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.

D. COMMON STOCK shall mean shares of the Corporation's common
stock.

E. CODE shall mean the Internal Revenue Code of 1986, as amended.

F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of
all or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.

A-2.

<PAGE> 10
G. CORPORATION shall mean CombiChem, Inc., a Delaware
corporation.

H. EXERCISE DATE shall mean the date on which the option shall
have been exercised in accordance with Paragraph 10 of the Agreement.

I. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.

J. EXPIRATION DATE shall mean the date on which the option
expires as specified in the Grant Notice.

K. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on
the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as the price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.

(ii) If the Common Stock is at the time listed on
any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange which serves as the primary market for the Common
Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date
for which such quotation exists.

L. GRANT DATE shall mean the date of grant of the option as
specified in the Grant Notice.

M. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock
Option accompanying the Agreement, pursuant to which Optionee has been informed
of the basic terms of the option evidenced hereby.

N. HOSTILE TAKEOVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept.

A-3.

<PAGE> 11

O. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.

P. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.

Q. NOTICE OF EXERCISE shall mean the notice of exercise in the
form of Exhibit I.

R. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option.

S. OPTIONEE shall mean the person to whom the option is granted
as specified in the Grant Notice.

T. PERMANENT DISABILITY shall mean the inability of Optionee to
perform his or her usual duties as a member of the Board by reason of any
medically determinable physical or mental impairment which is expected to
result in death or has lasted or can be expected to last for a continuous
period of twelve (12) months or more.

U. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.

V. PURCHASE AGREEMENT shall mean the stock purchase agreement (in
form and substance satisfactory to the Corporation) which grants the
Corporation the right to repurchase, at the Exercise Price, any and all
unvested Option Shares held by Optionee at the time of Optionee's cessation of
Board service and which precludes the sale, transfer or other disposition of
any purchased Option Shares while those shares are unvested and subject to such
repurchase right.

W. STOCK EXCHANGE shall mean the American Stock Exchange or the
New York Stock Exchange.

X. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting the
Hostile Take-Over.

Y. VESTING SCHEDULE shall mean the vesting schedule specified in
the Grant Notice, pursuant to which the Option Shares will vest in one or more
installments over the Optionee's period of Board service, subject to
acceleration in accordance with the provisions of the Agreement.

A-4.

<PAGE> 1
EXHIBIT 10.57

COMBICHEM, INC.
STOCK PURCHASE AGREEMENT

I hereby elect to participate in the 1997 Employee Stock Purchase Plan
(the "ESPP") for the offering period specified below, and I hereby subscribe to
purchase shares of Common Stock of CombiChem, Inc. (the "Corporation") in
accordance with the provisions of this Agreement and the ESPP. I hereby
authorize payroll deductions from each of my paychecks following my entry into
the offering period in the 1% multiple of my salary (not to exceed a maximum of
10%) specified in my attached Enrollment Form.

The offering period is divided into a series of consecutive purchase
intervals. With the exception of the initial purchase interval which begins at
the time of the initial public offering of the Common Stock, those purchase
intervals will be of six months duration and begin on the first business day of
February and August each year during the offering period. My participation
will automatically remain in effect from one purchase interval to the next
during the term of the ESPP in accordance with my payroll deduction
authorization, unless I withdraw from the ESPP or change the rate of my payroll
deduction or unless my employment status changes. I may reduce the rate of my
payroll deductions on one occasion per purchase interval and I may increase my
rate of payroll deductions to become effective at the beginning of any
subsequent purchase interval.

My payroll deductions will be accumulated for the purchase of shares
of the Corporation's Common Stock on the last business day of each purchase
interval within the offering period. The purchase price per share will be
equal to 85% of the lower of (i) the fair market value per share of Common
Stock on my entry date into the offering period or (ii) the fair market value
per share on the purchase date. However, the clause (i) amount will in no
event be less than the fair market value per share of Common Stock on the start
date of the offering period. I will also be subject to ESPP restrictions (i)
limiting the maximum number of shares which I may purchase during any purchase
interval and (ii) prohibiting me from purchasing more than $25,000 worth of
Common Stock for each calendar year my purchase right remains outstanding.

I may withdraw from the ESPP at any time prior to the last business
day of a purchase interval and elect either to have the Corporation refund all
my payroll deductions for that interval or to have such payroll deductions
applied to the purchase of Common Stock at the end of such interval. However,
I may not rejoin that particular offering period at any later date. Upon the
termination of my employment for any reason including death or disability or my
loss of eligible employee status, my participation in the ESPP will immediately
cease and all my payroll deductions for the purchase interval in which my
employment terminates or my loss of eligibility occurs will automatically be
refunded.

If I take an unpaid leave of absence, my payroll deductions will
immediately cease, and any payroll deductions for the purchase interval in
which my leave begins will, at my election, either be refunded or applied to
the purchase of shares of Common Stock at the end of that purchase interval.
Upon my return to active service, my payroll deductions will automatically
resume at the rate in effect when my leave began. The Corporation will issue a
stock certificate for the shares purchased on my behalf after the end of each
purchase interval. The certificate will be issued in the name or names I have
selected on the Enrollment Form accompanying this Agreement or will be
deposited directly in my brokerage account. I will notify the Corporation of
any disposition of shares purchased under the ESPP and I will satisfy all
applicable income and employment tax withholding requirements at the time of
such disposition.

The Corporation has the right, exercisable in its sole discretion, to
amend or terminate the ESPP at any time, with such amendment or termination to
become effective immediately following the exercise of outstanding purchase
rights at the end of any current purchase interval. Should the Corporation
elect to terminate the ESPP, I will have no further rights to purchase shares
of Common Stock pursuant to this Agreement.

I have received a copy of the official Plan Prospectus summarizing the
major features of the ESPP. I have read this Agreement and the Prospectus and
hereby agree to be bound by the terms of both this Agreement and the ESPP. The
effectiveness of this Agreement is dependent upon my eligibility to participate
in the ESPP.

Date: ___________________, 199__

___________________________________
Signature of Employee

Printed Name:______________________

Duration of Offering Period: From: __________________, 1997 to
January 31, 1999

Entry Date into Offering Period: _____________________, 1997

<PAGE> 1
EXHIBIT 11.1

STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Period From
May 23, 1994 Year Ended Nine Months Ended
(inception) to December 31, September 30,
December 31, ----------------- ------------------
1994 1995 1996 1996 1997
-------------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
HISTORICAL NET LOSS PER SHARE:
Net Loss $ (706) $(6,675) $(5,118) $(4,461) $(3,669)
====== ======= ======= ======= =======

Weighted average common shares
outstanding 82 544 637 637 637

Adjustments to reflect
requirements of the
Securities and Exchange
Commission (Effect of
SAB 83) 2,325 2,325 2,325 2,325 2,325
------ ------- ------- ------- -------
Adjusted shares outstanding 2,407 2,869 2,962 2,962 2,962
====== ======= ======= ======= =======
Historical net loss per share $(0.29) $ (2.33) $ (1.73) $ (1.51) $ (1.24)
====== ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
1996 1997
------------- -----------------
<S> <C> <C>
PRO FORMA NET LOSS PER SHARE:
Net loss $(5,118) $(3,669)
======= =======
Weighted average common shares outstanding 637 637

Effect of assumed conversion of preferred
shares, excluding 2,525 shares which are
included using the treasury stock method
in the Adjustments to reflect
requirements of the Securities and
Exchange Commission (Effect of SAB 83) 4,835 5,230

Adjustments to reflect requirements of
the Securities and Exchange Commission
(Effect of SAB 83) 2,325 2,325
------- -------
Adjusted shares outstanding 7,797 8,192
======= =======
Pro forma net loss per share $ (0.66) $ (0.45)
======= =======
</TABLE>

<PAGE> 1
EXHIBIT 23.2

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated October 15, 1997, in
Amendment No. 2 to the Registration Statement (Form S-1) and related Prospectus
of CombiChem, Inc. for the registration of 2,587,500 shares of its common stock.

San Diego, California /s/ Ernst & Young LLP
December 3, 1997