CLOSURE MEDICAL CORP, 424B1, 1997-03-28

CLOSURE MEDICAL CORP
424B1, 1997-03-28
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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<PAGE>
Filed under Rule 424(b)(1) & (3)
Registration No. 333-22981

PROSPECTUS

1,500,000 SHARES

(CLOSURE MEDICAL CORPORATION(TM) LOGO APPEARS HERE)

COMMON STOCK

Of the 1,500,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby, 800,000 shares are being offered by Closure
Medical Corporation ("Closure" or the "Company") and 700,000 shares are being
offered by a stockholder of the Company (the "Selling Stockholder"). See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of Common Stock by the Selling Stockholder.

The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CLSR." On March 26, 1997, the last reported sale price of the Common
Stock was $12.875 per share. See "Price Range of Common Stock."

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.

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

[CAPTION]
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................... $12.875 $0.80 $12.075
Total(3).................... $19,312,500 $1,200,000 $9,660,000

<CAPTION>
PROCEEDS TO
SELLING
STOCKHOLDER
<S> <C>
Per Share................... $12.075
Total(3).................... $8,452,500
</TABLE>

(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $295,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
225,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholder will be
$22,209,375, $1,380,000, $12,376,875 and $8,452,500, respectively. See
"Underwriting."

The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about April 2, 1997.

LEHMAN BROTHERS
OPPENHEIMER & CO., INC.
SANDS BROTHERS & CO., LTD.

March 26, 1997

<PAGE>
TRAUMASEAL(TM) WILL NOT BE COMMERCIALLY AVAILABLE IN THE U.S. UNTIL FDA APPROVAL
IS RECEIVED. THERE IS NO ASSURANCE OF SUCH APPROVAL.

TRAUMASEAL(TM) SIMPLIFIES AND
SPEEDS WOUND CLOSURE.

TRAUMASEAL(TM) IS A NONABSORBABLE, LIQUID TISSUE
COHESIVE DESIGNED TO CLOSE WOUNDS CAUSED BY
LACERATIONS, INCISIONS, MINIMALLY INVASIVE SURGERY
AND PLASTIC SURGERY.

[PHOTO OF
TRAUMASEAL IN
APPLICATOR]

FOR MANY EXTERNAL WOUNDS,
TRAUMASEAL(TM) WOULD MEAN NO
MORE NEEDLES, SUTURES,
STAPLES, TAPE OR ANTIBIOTICS.

DECREASES TREATMENT TIME AND
REDUCES SCARRING.

TOPICAL WOUND CLOSURE

<TABLE>
<S> <C>
[SIDE BY SIDE PHOTOS OF SIMILAR
LACERATIONS CLOSED BY SUTURES ON LEFT
AND TRAUMASEAL(TM) ON RIGHT]
TRADITIONAL TRAUMASEAL(TM)
SUTURE COHESIVE
CLOSURE CLOSURE
</TABLE>

TRAUMASEAL(TM) WILL BE
DISTRIBUTED
BY ETHICON, A
SUBSIDIARY OF JOHNSON
& JOHNSON.

[PHOTO OF CHILD
WITH NURSE]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK PRIOR TO THE
PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON
STOCK, THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE
OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE
PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A
DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK.
REFERENCES IN THIS PROSPECTUS TO THE COMPANY OR CLOSURE ALSO INCLUDE, UNLESS THE
CONTEXT REQUIRES OTHERWISE, CLOSURE'S PREDECESSOR, TRI-POINT MEDICAL L.P. (THE
"PARTNERSHIP"). EFFECTIVE JANUARY 13, 1997, THE COMPANY CHANGED ITS NAME FROM
TRI-POINT MEDICAL CORPORATION TO CLOSURE MEDICAL CORPORATION. UNLESS OTHERWISE
INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS
HAVE NOT EXERCISED THE OVER-ALLOTMENT OPTION. "OCTYLDENT" AND "NEXABAND" ARE
FEDERALLY REGISTERED TRADEMARKS OF THE COMPANY. "TRAUMASEAL," "NEXACRYL,"
"NEXABAND S/C" AND "NEXABAND QUICKSEAL" ARE TRADEMARKS OF THE COMPANY. ALL OTHER
TRADE NAMES AND TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY OF
THEIR RESPECTIVE HOLDERS.

THE COMPANY

Closure develops, commercializes and manufactures medical tissue cohesive
products based on its proprietary cyanoacrylate technology. The Company's
medical tissue cohesives can be used to close and seal wounds and incisions
rapidly and stop leakage of blood and other body fluids from injured tissue. The
Company's NONABSORBABLE products can be used to replace sutures and staples for
certain topical wound closure applications, while the Company's ABSORBABLE
products can potentially be used as surgical sealants and surgical tissue
cohesives for internal wound closure and management. Closure's medical tissue
cohesive products align injured tissue without the trauma caused by suturing or
stapling and allow natural healing to proceed. In addition, Closure believes
that its medical tissue cohesive products result in lower overall procedure
costs and are easier and quicker to prepare and use than sutures or staples. The
worldwide market for sutures and staples for topical and internal applications
is currently estimated to be $2.6 billion annually, and the Company expects that
it will compete for a portion of this market.

The Company has three products for human use and has a product line for
veterinary uses, which are described below:

TRAUMASEAL is a topical tissue cohesive used to close wounds
from skin lacerations and incisions. The Company filed a
premarket approval ("PMA") application for TRAUMASEAL with the
U.S. Food and Drug Administration (the "FDA") in December 1996,
which application was granted "expedited processing." The
Company has entered into a marketing agreement with Ethicon,
Inc. ("Ethicon"), a subsidiary of Johnson & Johnson, for
exclusive worldwide marketing and distribution of TRAUMASEAL.
Product launch of TRAUMASEAL is expected in France, Italy and
Australia in mid-1997 and in Canada in late 1997, subject to
receipt of regulatory approval.

OCTYLDENT is a topical sealant currently used in conjunction
with Actisite(Register mark), a site-specific drug delivery
system manufactured by ALZA Corporation ("ALZA"), to treat adult
periodontal disease. OCTYLDENT received 510(k) clearance
("510(k)") for use as a cohesive for the temporary fixing of
periodontal fibers to teeth or other hard surface abutments from
the FDA in 1990 and is marketed with Actisite(Register mark) in
the United States by Procter & Gamble/ALZA, Partners for Oral
Health Care (the "Procter & Gamble/ALZA Partnership") and
outside the United States by ALZA.

NEXACRYL is a topical sealant to be used in the repair of
corneal ulcers and lacerations. The Company received an FDA
approvable letter for NEXACRYL in January 1996. If approved, the
Company believes NEXACRYL will be the first cyanoacrylate
cohesive product to receive PMA approval from the FDA. The
Company has entered into a marketing agreement with Chiron
Vision Corporation ("Chiron") for exclusive worldwide marketing
and distribution of NEXACRYL.

NEXABAND is a product line of five topical tissue cohesives
currently used in veterinary wound closure and management.
NEXABAND products have been marketed by Farnam Companies, Inc.
("Farnam") since 1993.

Closure is also developing absorbable products for internal applications.
The Company has two products in development, a surgical sealant to be used to
control post-surgical leakage from coronary artery bypass graft and bowel
resection procedures and a surgical tissue cohesive to be used to close internal
surgical incisions and traumatic wounds. These future products require further
development, clinical trials and regulatory clearance or approval prior to
commercialization.

<PAGE>
Using its technology, Closure has overcome several obstacles to regulatory
approval, including demonstrating that its cyanoacrylates are safe for human
use. The Company's ability to manufacture highly purified base material allows
Closure to satisfy toxicity tests and, the Company believes, to meet
biocompatability standards. Closure has also developed novel assays to
demonstrate sterility. In addition, Closure has patented a "scavenger" process
that permits degradation of cyanoacrylates without a cytotoxic reaction,
enabling the Company to develop absorbable formulations for internal
applications. Closure's technology allows it to customize the physical and
chemical properties of cyanoacrylates, such as viscosity and setting times, to
meet specific market needs. Closure's products perform consistently and
reproducibly, do not require special preparation or refrigeration and have
shelf-lives of 18 to 24 months. Closure has also developed delivery technology
to enhance the utility of its products. The Company's TRAUMASEAL applicator
contains a catalyst that controls the polymerization process and allows the
cohesive film to be applied in multiple layers, which enhances bond strength.
The Company is building a strong portfolio of patent and trade secret protection
on its cyanoacrylate technology, delivery technology and manufacturing
processes. The Company has nine U.S. patents with expiration dates ranging from
2004 to 2013 and has filed applications for five additional U.S. patents, as
well as certain corresponding patent applications outside the United States.

The Company's objective is to become the leader in the medical tissue
cohesive market by capitalizing on its proprietary cyanoacrylate technology. The
Company's strategy is to focus initially on commercializing and launching
topical tissue cohesive products based on its nonabsorbable formulations.
Initial target markets are topical wound closure in emergency rooms and
operating rooms and for plastic surgery procedures. For its nonabsorbable
products, the Company has entered into agreements with market leaders to market
and distribute the Company's products. The Company is also pursuing the
development and commercialization of absorbable formulations. The Company
intends to implement this strategy by (i) expanding and accelerating its
research and development activities, (ii) expanding manufacturing capacity by
adding facilities, equipment and personnel and continuing to research processes
to improve manufacturing capacity and efficiency, (iii) seeking rapid regulatory
approval by targeting product applications classified as medical devices and
(iv) establishing a focused sales force to market its absorbable products, or,
where appropriate, establishing partnerships with recognized market leaders.

The Company completed its initial public offering of 3,000,000 shares of
Common Stock, of which 2,550,000 shares were sold by the Company, in September
1996, raising net proceeds of approximately $17.9 million. Immediately prior to
the initial public offering, the Company consummated an exchange of obligations
of and interests in Tri-Point Medical L.P., the Company's predecessor, for
9,600,000 shares of Common Stock (the "Exchange"). See "Prior Partnership
Status." The Company's executive offices are located at 5265 Capital Boulevard,
Raleigh, North Carolina 27616, and its telephone number is (919) 876-7800.

RISK FACTORS

The shares of Common Stock offered hereby involve a high degree of risk,
including but not limited to the Company's history of operating losses; early
stage of product commercialization; dependence on new products and technologies;
uncertainty of market acceptance of its products; uncertainty of regulatory
approval for TRAUMASEAL; dependence on marketing partners; potential adverse
effect of competition and technological change; limited manufacturing
experience; dependence on a sole source supplier; dependence on patents, trade
secrets and proprietary rights; effects of FDA and other government regulation;
effects of international sales; future capital needs and uncertainty of
additional financing; dependence upon key personnel; product liability exposure
and potential unavailability of insurance; control by existing stockholders;
anti-takeover provisions; broad discretion in application of proceeds;
volatility of the stock price; dilution; substantial number of shares eligible
for future sale; substantial registration rights; potential adverse impact on
future market price from sales of shares; adverse impact from potential release
of shares subject to lock-up; and absence of dividends. See "Risk Factors" for a
more complete discussion of risk factors which should be considered by potential
investors.

Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" including, without limitation, those
concerning (i) the Company's strategy, (ii) the Company's future net losses and
(iii) the product launch of TRAUMASEAL, contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause such differences include,
but are not limited to, those discussed under "Risk Factors."
4

<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by:
The Company......................................... 800,000 shares
The Selling Stockholder............................. 700,000 shares
Common Stock to be outstanding after the
Offering (1)........................................ 12,955,029 shares
Use of proceeds....................................... To fund research and development, clinical trials and capital
expenditures, and for working capital and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol (2)..................... "CLSR"
</TABLE>

(1) Excludes (i) 588,576 shares of Common Stock issuable upon the exercise of
options outstanding as of March 7, 1997 under the Company's Amended and
Restated 1996 Equity Compensation Plan (the "Equity Compensation Plan") at a
weighted average exercise price of $5.90 per share and (ii) 406,395 shares
reserved for future option grants under the Equity Compensation Plan. See
"Management -- Equity Compensation Plan."

(2) Prior to the change of the Company's name on January 13, 1997, the Common
Stock was traded under the symbol "TPMC."
5

<PAGE>
SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Product sales........................................................... $ 648 $ 1,048 $ 1,478 $ 1,380 $ 496
License and product development revenues................................ 230 162 25 -- 3,500
Total revenues................................................... 878 1,210 1,503 1,380 3,996
Cost of products sold................................................... 386 366 528 531 460
Gross profit and license and product development revenues............... 492 844 975 849 3,536
Research, development and regulatory affairs expenses................... 895 863 1,231 1,637 3,167
Selling and administrative expenses..................................... 912 1,037 1,366 1,589 2,879
Charges related to Partnership capital changes (1)...................... -- -- -- 3,500 14,210
Payments to CRX Medical, Inc. and Caratec, L.L.C........................ 150 150 150 250 293
Total operating expenses......................................... 1,957 2,050 2,747 6,976 20,549
Loss from operations.................................................... (1,465) (1,206) (1,772) (6,127) (17,013)
Interest expense to Sharpoint Development Corporation................... (235) (342) (445) (847) (138)
Investment and interest income.......................................... 1 -- 2 2 337
Net loss................................................................ $(1,699) $(1,548) $(2,215) $(6,972) $(16,814)
Pro forma net loss per common share (2)................................. $ (.69) $ (1.59)
Shares used in computation of pro forma net loss per common
share (2)............................................................. 10,150 10,545
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
ACTUAL AS ADJUSTED (3)
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments............................................... $17,651 $27,016
Working capital.................................................................................... 15,175 24,540
Total assets....................................................................................... 19,512 28,877
Long-term debt and capital lease obligations, less current portion................................. 14 14
Total stockholders' equity......................................................................... 16,455 25,820
</TABLE>

(1) Includes for 1995 a one-time non-cash charge of $3,500,000 which represented
the estimated fair value of the limited partnership interests of certain
employee limited partners admitted to the Partnership on December 31, 1995.
In connection with the Exchange on September 25, 1996, Caratec, L.L.C.
exchanged its right to receive various payments from the Partnership and its
limited partnership interest for 1,776,250 shares of Common Stock. This
transaction resulted in a non-cash expense for 1996 of $14,210,000 which
equaled the difference between the value of the Common Stock issued to
Caratec, L.L.C. and its basis in the Partnership. The resulting charge to
accumulated deficit was offset by a credit to additional paid-in capital.
See "Prior Partnership Status" and Note 1 to Notes to Financial Statements.

(2) See Note 2 to Notes to Financial Statements for a discussion of the basis
for reported pro forma net loss per share.

(3) Adjusted to reflect the sale by the Company of 800,000 shares of Common
Stock (at a public offering price of $12.875 per share) and the application
of the net proceeds therefrom. See "Use of Proceeds."
6

<PAGE>
RISK FACTORS

THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL
INVESTORS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY.

HISTORY OF OPERATING LOSSES. The Company has incurred net losses in each
year since its inception, including net losses of approximately $16.8 million
for the year ended December 31, 1996 (including a one-time non-cash charge of
$14.2 million). These losses have resulted primarily from expenses associated
with the Company's research and development activities, including preclinical
and clinical trials and general and administrative expenses. The Company
anticipates that its recurring operating expenses will increase for the next
several years, as it expects its research and development expenses to increase
in order to develop new products and fund additional clinical trials. The
Company expects to continue to incur a loss in 1997 and may incur losses in
subsequent years, although the amount of future net losses and time required by
the Company to reach profitability are highly uncertain. The Company's ability
to generate significant revenue and become profitable is dependent in large part
on its success in obtaining regulatory approvals or clearances for its products,
commercializing the Company's lead product, TRAUMASEAL, expanding its
manufacturing capacity, developing and marketing new products and entering into
additional marketing agreements where appropriate and the ability of its
marketing partners to commercialize successfully products incorporating the
Company's technologies. There can be no assurance that the Company will generate
significant revenue or become profitable on a sustained basis, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

EARLY COMMERCIALIZATION; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES;
UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early stage of product
commercialization and has derived only limited revenue from sales of certain
products to its marketing partners. The Company has submitted a PMA application
to market TRAUMASEAL in the United States and has several potential products in
development. The Company believes that its long-term viability and growth will
depend in large part on receiving regulatory clearances or approvals for and the
successful commercialization of TRAUMASEAL and other new products resulting from
its research and development activities. The Company presently is pursuing
product opportunities that will require extensive additional capital investment,
research, development, clinical testing and regulatory clearances or approvals
prior to commercialization. There can be no assurance that the Company's
development programs will be successfully completed or that required regulatory
clearances or approvals will be obtained on a timely basis, if at all. Moreover,
commercial applications of the Company's absorbable formulations are relatively
new and evolving. The successful development and market acceptance of the
Company's proposed products are subject to inherent developmental risks,
including ineffectiveness or lack of safety, unreliability, failure to receive
necessary regulatory clearances or approvals, high commercial cost and
preclusion or obsolescence resulting from third parties' proprietary rights or
superior or equivalent products, as well as general economic conditions
affecting purchasing patterns.

There can be no assurance that the Company and its marketing partners will
be able to commercialize successfully or achieve market acceptance of the
Company's technologies or products, or that the Company's competitors will not
develop competing technologies that are less expensive or otherwise superior to
those of the Company. The failure to develop and market successfully new
products would have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Products,"
"Business -- Sales and Marketing" and "Business -- Manufacturing."

UNCERTAINTY OF REGULATORY APPROVAL FOR TRAUMASEAL. The Company recently
completed clinical trials for TRAUMASEAL and submitted a PMA application to the
FDA. Although the FDA granted "expedited processing" of the TRAUMASEAL PMA
application, the regulatory process is lengthy, expensive and uncertain. There
can be no assurance that the Company will be able to obtain the necessary
approval from the FDA to market and manufacture TRAUMASEAL in the United States
for its intended use on a timely basis, if at all. A delay in receipt of or
failure to receive such approval would have a material adverse effect on the
Company's results of operations and financial condition. The Company will
similarly require approval in those foreign jurisdictions where TRAUMASEAL will
be marketed. A delay in receipt of or failure to receive such approvals could
have a material adverse effect on the Company's results of operations and
financial condition. See " -- Effects of FDA and Other Government Regulation"
and "Business -- Government Regulations."

DEPENDENCE ON MARKETING PARTNERS. The Company has limited experience in
sales, marketing and distribution. Therefore, the Company's strategy for
commercialization of its nonabsorbable products has included entering into
agreements with other companies to market current and certain future products
incorporating the Company's technology. To date, the Company has entered into
five such agreements, and the Company derived all of its fiscal 1996 revenues
from the receipt of license and product development fees under the supply and
distribution agreement for TRAUMASEAL and the sale of products to its marketing
partners. The Company intends to establish a sales force to market its
absorbable products as these products

<PAGE>
progress toward commercialization. There can be no assurance that the Company
will be able to establish marketing, distribution and sales capabilities or make
arrangements with third parties to perform such activities on acceptable terms,
if at all. There can be no assurance that the Company will be able to enter into
additional marketing agreements on terms favorable to the Company, if at all, or
that current or future agreements will ultimately be beneficial to the Company.

The Company is dependent for product sales revenues for its nonabsorbable
products upon the success of the Company's marketing partners in performing
their responsibilities. The amount and timing of resources which may be devoted
to the performance of their contractual responsibilities by its marketing
partners are not within the control of the Company. There can be no assurance
that such marketing partners will perform their obligations as expected, pay any
additional option or license fees to the Company or market any products under
the marketing agreements, or that the Company will derive any revenue from such
arrangements. Moreover, certain of the agreements provide for termination under
certain circumstances. For example, Ethicon may terminate its agreement to
purchase TRAUMASEAL from the Company should the Company be unable to provide an
adequate supply, and Ethicon may itself then manufacture TRAUMASEAL and only pay
the Company royalties on sales. The resulting loss of payments from Ethicon for
the purchase of TRAUMASEAL from the Company would have a material adverse effect
on the Company's results of operations and financial condition. In addition,
there can be no assurance that TRAUMASEAL will be launched in the manner and on
the timetable expected by the Company. Certain agreements also permit the
marketing partners to pursue existing or alternative technologies in preference
to the Company's technology. There can be no assurance that the interests of the
Company will continue to coincide with those of its marketing partners or that
the marketing partners will not develop independently or with third parties
products which could compete with the Company's products, or that disagreements
over rights or technology or other proprietary interests will not occur. To the
extent that the Company chooses not to or is unable to enter into future
agreements, it would experience increased capital requirements to undertake the
marketing or sale of its current and future products. There can be no assurance
that the Company will be able to market or sell its current or future products
independently in the absence of such agreements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Marketing Partners."

POTENTIAL ADVERSE EFFECT OF COMPETITION AND TECHNOLOGICAL CHANGE. The
Company competes with many domestic and foreign competitors in various rapidly
evolving and technologically advanced fields in developing its technology and
products, including medical device, pharmaceutical and biopharmaceutical
companies. For example, in the worldwide wound closure market, the Company's
products will compete with the suture products of Ethicon, the world leader in
the wound closure market, and American Home Products Corporation. In addition,
the Company believes its products will compete with the staple products of
United States Surgical Corporation and Ethicon Endo-Surgery, Inc., a subsidiary
of Johnson & Johnson. The Company's products may also compete with Histoacryl, a
cyanoacrylate-based topical adhesive marketed by B. Braun GmbH, and with a
similar adhesive marketed by Loctite Corporation. In the surgical sealants
market, the Company's products may compete with the fibrin-based sealants of
Immuno AG and Behringwerke AG, and most likely with fibrin-based sealants being
developed by Baxter Healthcare Corporation and Bristol-Myers Squibb Company. The
Company's surgical sealants also may compete with collagen-based hemostatic
products of, among others, Collagen Corporation, Fusion Medical Technologies,
Inc. and MedChem Products Inc., a division of C.R. Bard Inc.

Many of the Company's competitors and potential competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources than the Company. In addition to those
mentioned above, other recently developed technologies or procedures are, or may
in the future be, the basis of competitive products. There can be no assurance
that the Company's competitors will not succeed in developing alternative
technologies and products that are more effective, easier to use or more
economical than those which have been or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. These competitors may also have greater
experience in developing products, conducting clinical trials, obtaining
regulatory clearances or approvals, and manufacturing and marketing such
products. Certain of these competitors may obtain patent protection, approval or
clearance by the FDA or product commercialization earlier than the Company, any
of which could materially adversely affect the Company. Furthermore, if the
Company commences significant commercial sales of its products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it currently has limited experience. Finally, under the terms of
the Company's marketing agreements, the Company's marketing partners may pursue
parallel development of other technologies or products, which may result in a
marketing partner developing additional products that will compete with the
Company's products. See "Business -- Competition and Technological Change."

LIMITED MANUFACTURING EXPERIENCE. The Company has limited manufacturing
capacity and has limited experience in manufacturing its products. The Company's
future success is dependent in significant part on its ability to manufacture
its products in commercial quantities, in compliance with regulatory
requirements and in a cost-effective manner. The Company

<PAGE>
intends to expand its manufacturing capabilities by using a portion of the net
proceeds from this Offering to acquire large-scale manufacturing and formulation
equipment by the end of 1997. Production of commercial-scale quantities may
involve technical challenges for the Company and will require significant
scale-up expenses for additions to facilities and personnel. There can be no
assurance that the Company will be able to achieve large-scale manufacturing
capabilities or to manufacture its products in a cost-effective manner or in
quantities necessary to allow the Company to achieve profitability. If the
Company is unable to expand sufficiently its manufacturing capacity to meet
Ethicon's requirements for TRAUMASEAL as set forth under their agreement,
Ethicon may itself then manufacture TRAUMASEAL and only pay the Company
royalties on sales. The resulting loss of payments from Ethicon for the purchase
of TRAUMASEAL from the Company would have a material adverse effect on the
Company's results of operations and financial condition. See
"Business -- Marketing Partners."

In addition, the manufacture of the Company's products will be subject to
periodic inspection by regulatory authorities and certain marketing partners,
and the Company's manufacture of its products for human use is subject to
regulation and inspection from time to time by the FDA for compliance with Good
Manufacturing Practices ("GMPs"), as well as equivalent requirements and
inspections by state and foreign regulatory authorities. There can be no
assurance that the FDA or other authorities will not, during the course of an
inspection of existing or new facilities, identify what they consider to be
deficiencies in GMPs or other requirements and request, or seek, remedial
action. Failure to comply with such regulations or delay in attaining compliance
may adversely affect the Company's manufacturing activities and could result in,
among other things, Warning Letters, injunctions, civil penalties, FDA refusal
to grant premarket approvals or clearances of future or pending product
submissions, fines, recalls or seizures of products, total or partial
suspensions of production and criminal prosecution. Additionally, certain
modifications of the Company's manufacturing facilities and processes, such as
those made in preparation for commercial-scale production of products, will
subject the Company to further FDA inspections and review prior to final
approval of its products for commercial sale. There can be no assurance that the
Company will be able to obtain necessary regulatory approvals or clearances on a
timely basis, if at all. Delays in receipt of or failure to receive such
approvals or clearances or the loss of previously received approvals or
clearances would have a material adverse effect on the Company's results of
operations and financial condition. See " -- FDA and Other Government
Regulation," "Use of Proceeds" and "Business -- Manufacturing."

DEPENDENCE ON SOLE SOURCE SUPPLIER. The Company currently purchases
cyanoacetate, the primary raw material used in manufacturing most of the
Company's products, from a single qualified source. Upon manufacturing scale-up
there can be no assurance that the Company will be able to obtain adequate
increased commercial quantities within a reasonable period of time or at
commercially reasonable rates. Lack of adequate commercial quantities or
inability to develop alternative sources meeting regulatory requirements at
similar prices and terms within a reasonable time or any interruptions in supply
in the future could have a material adverse effect on the Company's ability to
manufacture its products, including TRAUMASEAL, and, consequently, could have a
material adverse effect on the Company's results of operations and financial
condition. See
" -- Dependence on Marketing Partners," "Business -- Marketing Partners" and
"Business -- Manufacturing."

DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS. The Company's
success depends in large part on whether it can obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties. The Company has nine U.S. patents with expiration dates ranging
from 2004 to 2013 and has filed applications for five additional U.S. patents,
as well as certain corresponding patent applications outside the United States,
relating to the Company's technology. There can be no assurance that any of the
pending patent applications will be approved, that the Company will develop
additional proprietary products that are patentable, that any patents issued to
the Company will provide the Company with competitive advantages or will not be
challenged by any third parties or that the patents of others will not prevent
the commercialization of products incorporating the Company's technology.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate any of the Company's products or design
around the Company's patents. Any of the foregoing results could have a material
adverse effect on the Company's results of operations and financial condition.

The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license for any
technology that it may require to commercialize its products could have a
material adverse effect on the Company's results of operations and financial
condition.

<PAGE>
If competitors of the Company that claim technology also claimed by the Company
prepare and file patent applications in the United States, the Company may have
to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial costs to and diversion of effort by the Company, even if the
eventual outcome is favorable to the Company. Any such litigation or
interference proceeding, regardless of outcome, could be expensive and time
consuming. Litigation could subject the Company to significant liabilities to
third parties, require disputed rights to be licensed from third parties or
require the Company to cease using certain technology and, consequently, could
have a material adverse effect on the Company's results of operations and
financial condition.

In addition to patent protection, the Company relies on unpatented trade
secrets and proprietary technological expertise. There can be no assurance that
others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or that
the Company can ultimately protect its rights to such unpatented trade secrets
and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach or
that the Company's unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent or trade secret protection,
for any reason, could have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Patents, Trade Secrets and
Proprietary Rights."

EFFECTS OF FDA AND OTHER GOVERNMENT REGULATION. As newly developed medical
devices, the Company's medical tissue cohesives must receive regulatory
clearances or approvals from the FDA and, in many instances, from foreign and
state governments, prior to their sale. In order to obtain such clearances or
approvals, medical tissue cohesives must be shown to be efficacious and safe for
use in humans. The Company's current and future medical tissue cohesives for
humans are subject to stringent government regulation in the United States by
the FDA under the Federal Food, Drug, and Cosmetic Act, as amended (the "FDC
Act"). The FDA regulates the clinical testing, manufacture, safety, labeling,
sale, distribution and promotion of medical devices. Included among these
regulations are premarket clearance and premarket approval requirements and
GMPs. Other statutory and regulatory requirements govern, among other things,
establishment registration and inspection, medical device listing, prohibitions
against misbranding and adulteration, labeling and postmarket reporting.

The regulatory process is lengthy, expensive and uncertain. Before any new
medical device may be introduced to the market, the manufacturer generally must
obtain FDA approval through either the 510(k) premarket notification process or
the lengthier PMA approval process. It generally takes from four to 12 months
from submission to obtain 510(k) premarket clearance, although it may take
longer. Approval of a PMA could take two or more years from the date of
submission of the application. In addition, FDA approval of color additives used
to color a medical device, such as the D & C Violet No. 2 in TRAUMASEAL, often
must be obtained through the color additive petition ("CAP") process. The
510(k), PMA and CAP processes can be expensive, uncertain and lengthy, and there
is no guarantee of ultimate approval. It is expected that most of the Company's
future products under development will be subject to the lengthier PMA process.
There can be no assurance that the Company will obtain the necessary clearances
or approvals to market its products. Securing FDA clearances and approvals may
require the submission of extensive clinical data and supporting information to
the FDA, and there can be no guarantee of ultimate clearance or approval.
Failure to comply with applicable requirements can result in Warning Letters,
application integrity proceedings, fines, recalls or seizures of products,
injunctions, civil penalties, total or partial suspensions of production,
withdrawals of existing product approvals or clearances, refusals to approve or
clear new applications or notifications and criminal prosecution.

Medical devices also are subject to postmarket reporting requirements for
deaths or serious injuries when the device may have caused or contributed to the
death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.

The Company's current human medical devices are at different stages of FDA
review. There can be no assurance that the Company will be able to obtain the
necessary 510(k) clearances or PMA and CAP approvals to market and manufacture
its products in the United States for their intended use on a timely basis, if
at all, and delays in receipt of or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on the Company's results of operations and financial

<PAGE>
condition. See " -- Uncertainty of Regulatory Approval for TRAUMASEAL,"
" -- Limited Manufacturing Experience" and "Business -- Government Regulations."

EFFECTS OF INTERNATIONAL SALES. The Company and its marketing partners
intend to market the Company's current and future products outside the United
States as well as domestically. A number of risks are inherent in international
transactions. In order for the Company to market its products in Europe,
Australia, Canada and certain other foreign jurisdictions, the Company must
obtain required regulatory approvals or clearances and otherwise comply with
extensive regulations regarding safety, manufacturing processes and quality.
These regulations, including the requirements for approvals or clearances to
market, may differ from the FDA regulatory scheme. There can be no assurance
that the Company will obtain regulatory approvals or clearances in such
countries or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals or clearances. Delays
in receipt of approvals or clearances to market the Company's products in
foreign countries, failure to receive such approvals or clearances or the future
loss of previously received approvals or clearances could have a material
adverse effect on the Company's results of operations and financial condition.
International sales also may be limited or disrupted by political instability,
price controls, trade restrictions and changes in tariffs. The Company's
royalties from international sales of TRAUMASEAL are based on net sales in
foreign currencies, but payable in U.S. dollars, and thus may be adversely
affected by fluctuations in currency exchange rates. Additionally, fluctuations
in currency exchange rates may adversely affect demand for the Company's
products by increasing the price of the Company's products in the currency of
the countries in which the products are sold. There can be no assurance that the
Company will be able to successfully commercialize its current or future
products in any foreign market. See "Business -- Government Regulations,"
"Business -- Marketing Partners" and "Business -- Sales and Marketing."

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING. The Company
has expended and expects to continue to expend substantial funds to complete the
research, development and clinical testing of its products and to establish
commercial-scale manufacturing facilities. The Company believes that existing
cash and cash equivalents and short-term investments, which totaled $17.7
million as of December 31, 1996, together with net proceeds of approximately
$9.4 million from this Offering, will be sufficient to finance its capital
requirements for at least 24 months. There can be no assurance that the Company
will not be required to seek additional capital to finance its operations
following the Offering. Other than the Company's equipment financing lines of
credit, the Company currently has no commitments for any additional financing,
and there can be no assurance that adequate funds for the Company's operations
from any such additional financing, the Company's revenues, financial markets,
arrangements with marketing partners or from other sources will be available
when needed or on terms attractive to the Company. The inability to obtain
sufficient funds may require the Company to delay, scale back or eliminate some
or all of its research and product development programs, manufacturing
operations, clinical studies or regulatory activities or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself, and could have a material adverse effect on
the Company's results of operations and financial condition. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent on the
principal members of its management and scientific staff. The Company does not
maintain key person life insurance for any of its employees. In addition, the
Company believes that its future success in developing marketable products and
achieving a competitive position will depend in large part upon whether it can
attract and retain additional qualified management and scientific personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to continue to attract and retain such personnel. The
loss of services of one or more members of the management or scientific staff or
the inability to attract and retain additional personnel and develop expertise
as needed could have a material adverse effect on the Company's results of
operations and financial condition. See "Management."

PRODUCT LIABILITY EXPOSURE AND POTENTIAL UNAVAILABILITY OF INSURANCE. The
testing, manufacturing, marketing and sale of the products being developed by
the Company involve an inherent risk that product liability claims will be
asserted against the Company, its marketing partners or licensees. There can be
no assurance that the Company's current clinical trial and commercial product
liability insurance in the amount of $3 million per claim with an annual
aggregate limit of $3 million is adequate or will continue to be available in
sufficient amounts or at an acceptable cost, if at all. A product liability
claim, product recall or other claim, as well as any claims for uninsured
liabilities or in excess of insured liabilities, could have a material adverse
effect on the Company's results of operations and financial condition. See
"Business -- Legal Proceedings."

CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS. Upon completion
of this Offering, Rolf D. Schmidt, Chairman of the Board of Directors of the
Company and a co-founder, and F. William Schmidt, a director of the Company and
a

<PAGE>
co-founder, and their affiliates, will beneficially own approximately 43.6% of
the outstanding Common Stock (or approximately 42.9% of the outstanding Common
Stock assuming exercise in full of the Underwriters' over-allotment option), and
the other directors and officers of the Company will beneficially own
approximately 15.9% of the outstanding Common Stock after the Offering (or
approximately 15.7% of the outstanding Common Stock assuming exercise in full of
the Underwriters' over-allotment option). Accordingly, the Schmidts, either
acting alone or together with the other directors and officers of the Company,
would be able to exert considerable influence over the management and policies
of the Company. Such a concentration of ownership may have the effect of
delaying, deferring or preventing a change of control of the Company and
consequently could adversely affect the market price of the Common Stock.
Additionally, the Company's Restated Certificate of Incorporation, as amended
(the "Certificate of Incorporation"), and By-Laws contain certain provisions
that could prevent or delay the acquisition of the Company by means of a tender
offer, proxy contest or otherwise, or could discourage a third party from
attempting to acquire control of the Company, even if such events would be
beneficial to the interests of the stockholders. These provisions, among other
things, (i) prohibit stockholders of the Company from taking any action required
or permitted to be taken by the stockholders by written consent, (ii) provide
that special meetings of stockholders may only be called by the Board of
Directors or the Chairman of the Board, (iii) do not allow cumulative voting for
directors, (iv) divide the Board of Directors into three classes, each of which
serves for a staggered three-year term, (v) prohibit the removal of directors
without cause by the stockholders and without the approval of at least 75% of
the voting power of the then outstanding shares entitled to vote in the election
of directors, voting as a single class, (vi) provide supermajority voting
requirements with respect to the approval of certain fundamental corporate
changes and transactions, including, among others, amendment of certain
provisions of the Certificate of Incorporation and amendment of the By-Laws by
the stockholders, and (vii) grant the Board of Directors the authority, without
action by the stockholders, to fix the rights and preferences of and issue
shares of preferred stock. The Company is also subject to Section 203 of the
Delaware General Corporation Law which contains certain anti-takeover provisions
which prohibit a "business combination" between a corporation and an "interested
stockholder" within three years of the stockholder becoming an "interested
stockholder" except in certain limited circumstances. The business combination
provisions of Section 203 of the Delaware General Corporation Law may have the
effect of deterring merger proposals, tender offers or other attempts to effect
changes in control of the Company that are not negotiated and approved by the
Board of Directors. See "Management," "Principal and Selling Stockholders" and
"Description of Capital Stock."

BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to use
approximately $1.4 million, or 15%, of the net proceeds to the Company from the
Offering (or approximately $4.1 million, or 34%, if the Underwriters'
over-allotment option is exercised in full) for working capital and general
corporate purposes, and the Company has not yet finally identified more specific
uses for such net proceeds. In addition, a portion of the $1.4 million of net
proceeds may be used for the acquisition of complementary businesses or
products. Accordingly, the specific uses for the net proceeds will be at the
complete discretion of management of the Company and the Board of Directors and
may be allocated based upon circumstances arising from time to time in the
future. See "Use of Proceeds."

VOLATILITY OF STOCK PRICE; DILUTION. Factors such as announcements
concerning the Company or its competitors, including the results of testing and
clinical trials, technological innovations and the attainment of (or failure to
attain) milestones in the commercialization of new products, government
regulations, developments concerning proprietary rights, including new patents,
changes in existing patents or litigation matters, a change in status of a
marketing partner, investor perception of the Company or the commercial value or
safety of its products, fluctuations in the Company's operating results and
general market conditions in the industry may cause the market price of the
Common Stock to fluctuate significantly. From the Company's initial public
offering on September 25, 1996 through March 26, 1997, the sales price per share
of Common Stock as quoted on the Nasdaq National Market ranged from a low of
$5.75 to a high of $21.50. Furthermore, the stock market has experienced extreme
price and volume fluctuations, which recently have particularly affected the
market prices of the shares of medical technology companies and which have often
been unrelated to the operating performance of such companies. These broad
market fluctuations also may adversely affect the market price of the Common
Stock. Purchasers of Common Stock in this Offering will experience immediate and
substantial dilution of $10.90 per share in the net tangible book value per
share of the Common Stock (based on a public offering price of $12.875 per share
and after deducting underwriting discounts and commissions and other estimated
offering expenses). See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL ADVERSE
IMPACT ON MARKET PRICE FROM SALES OF SHARES. Sales of substantial amounts of
Common Stock in the public market following this Offering could adversely affect
the market price of the Common Stock and adversely affect the Company's ability
to raise capital at a time and on terms favorable to the Company. Of the
12,955,029 shares to be outstanding after this Offering, the 1,500,000 shares of
Common Stock offered hereby and an additional 3,005,029 shares of Common Stock
will be freely tradeable without restriction in the public market

<PAGE>
unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144(a) under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 8,450,000 shares of Common Stock to be
outstanding after this Offering are restricted securities under the Securities
Act and may be sold in the public market upon the expiration in September 1997
of the one-year holding period under Rule 144 subject to the volume, manner of
sale and other limitations of Rule 144. The Securities and Exchange Commission
(the "Commission") recently adopted revisions to Rule 144, the effect of which
substantially shortened the holding periods under Rule 144. In addition, as of
March 7, 1997, there were outstanding options to purchase 588,576 shares of
Common Stock, of which 138,420 were fully vested and exercisable. An additional
406,395 shares were reserved for issuance under the Equity Compensation Plan.
All of the shares issued, issuable or reserved for issuance under the Equity
Compensation Plan are covered by an effective registration statement.

Certain holders of 8,820,000 shares of Common Stock, of which 700,000
shares are to be sold by the Selling Stockholder in the Offering, are entitled
to certain rights with respect to the registration of such shares for resale
under the Securities Act. 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 an adverse effect on the market price of the
Common Stock. Such rights may not be exercised prior to the expiration of 180
days from the date of this Prospectus. See "Description of Capital
Stock -- Registration Rights" and "Shares Eligible for Future Sale."

ADVERSE IMPACT FROM POTENTIAL RELEASE OF SHARES SUBJECT TO LOCK-UP. All
directors and executive officers and certain other stockholders of the Company
who will beneficially own an aggregate 8,343,220 shares of Common Stock upon
completion of this Offering, and the Company, with certain limited exceptions,
have agreed with the Underwriters not to offer for sale, sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock for a period of
180 days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. The release of such shares from the lock-up prior to the
expiration of the 180-day period could adversely affect the market price of the
Common Stock.

ABSENCE OF DIVIDENDS. The Company has never declared or paid cash dividends
on its Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements and such other factors as the Board of
Directors deems relevant. See "Dividend Policy."

<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale and issuance of the 800,000
shares of Common Stock offered by the Company hereby, after deducting estimated
expenses payable by the Company in connection with this Offering (at a public
offering price of $12.875 per share), are estimated to be approximately $9.4
million (or $12.1 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Stockholder. See "Principal and Selling
Stockholders."

The Company expects to use approximately $6.0 million of the net proceeds
for research and development and clinical trials related to absorbable products
and approximately $2.0 million for capital expenditures related to laboratories
and manufacturing equipment. The Company expects to use the remaining net
proceeds of approximately $1.4 million for working capital and general corporate
purposes. A portion of the net proceeds may also be used for the acquisition of
complementary businesses or products, although the Company has not entered into
any definitive agreements or letters of intent with respect to any such
transactions and is not in any negotiations with respect to any written or oral
agreements or understandings regarding such transactions. The Company believes
that existing cash and cash equivalents and short-term investments, which
totaled $17.7 million as of December 31, 1996, together with net proceeds of
approximately $9.4 million from this Offering, will be sufficient to finance its
capital requirements for at least 24 months.

Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds of this Offering in short-term,
interest-bearing, investment-grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its business. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, operating results, capital
requirements and such other factors as the Board of Directors deems relevant.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CLSR." Prior to the change of the Company's name on January 13,
1997, the Common Stock was traded under the symbol "TPMC." The following table
sets forth, for the periods indicated, the high and low sales price per share of
the Common Stock, as reported on the Nasdaq National Market, commencing with the
Company's initial public offering on September 25, 1996. Prior to that date,
there was no public market for the Common Stock.

<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1996
Third Quarter (from September 25, 1996).......................................... $ 8.13 $ 8.00
Fourth Quarter................................................................... 17.75 5.75
1997
First Quarter (through March 26, 1997)........................................... $21.50 $12.50
</TABLE>

As of March 6, 1997, there were approximately 126 holders of record of
Common Stock.

<PAGE>
CAPITALIZATION

The following table sets forth as of December 31, 1996 (i) the actual
capitalization of the Company and (ii) the as adjusted capitalization of the
Company reflecting the sale of the 800,000 shares of Common Stock offered by the
Company hereby (at a public offering price of $12.875 per share) and receipt of
the proceeds therefrom, after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company. See "Use of Proceeds."
This table should be read in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements, including the notes thereto,
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
ACTUAL AS ADJUSTED (1)
<S> <C> <C>
(IN THOUSANDS)
Long-term debt and capital lease obligations, less current portion................................ $ 14 $ 14
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000,000 shares authorized.................................... -- --
Common Stock, $.01 par value; 35,000,000 shares authorized; 12,150,000 shares issued and
outstanding; 12,950,000 shares as adjusted (2)............................................... 122 130
Additional paid-in capital........................................................................ 33,579 42,936
Accumulated deficit............................................................................... (16,246) (16,246)
Deferred compensation on stock options............................................................ (1,000) (1,000)
Total stockholders' equity...................................................................... 16,455 25,820
Total capitalization......................................................................... $ 16,469 $ 25,834
</TABLE>

(1) Adjusted to reflect the sale by the Company of 800,000 shares of Common
Stock (at a public offering price of $12.875 per share) and the application
of the net proceeds therefrom. See "Use of Proceeds."

(2) Excludes 588,576 shares of Common Stock issuable upon the exercise of
options outstanding as of March 7, 1997 at a weighted average exercise price
of $5.90 per share, of which 138,420 were fully vested and exercisable. See
"Management -- Equity Compensation Plan."

DILUTION

As of December 31, 1996, the net tangible book value of the Company was
$16,242,000 or $1.34 per share of Common Stock. "Net tangible book value" per
share represents the amount of total tangible assets of the Company reduced by
the amount of its total liabilities, divided by the number of shares of Common
Stock outstanding. As of December 31, 1996, the as adjusted net tangible book
value of the Company, after giving effect to the estimated net proceeds from the
sale by the Company of the 800,000 shares of Common Stock offered by the Company
hereby (based on a public offering price of $12.875 per share and after
deducting underwriting discounts and commissions and other estimated offering
expenses), would have been approximately $1.98 per share of Common Stock. This
represents an immediate increase of $0.64 per share to existing stockholders and
an immediate dilution of $10.90 per share to new investors. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share (1)......................................................................... $12.88
Net tangible book value per share before Offering......................................................... $1.34
Increase per share attributable to new investors.......................................................... .64
Net tangible book value per share after Offering............................................................ 1.98
Dilution to new investors................................................................................... $10.90
</TABLE>

(1) Before deduction of underwriting discounts and commissions and other
offering expenses to be paid by the Company.

The above table excludes 588,576 shares of Common Stock issuable upon the
exercise of options outstanding as of March 7, 1997 at a weighted average
exercise price of $5.90 per share, of which 138,420 were fully vested and
exercisable. To the extent that these options are exercised, there will be
further dilution to new investors.

<PAGE>
SELECTED FINANCIAL DATA

The selected financial data set forth below for each year in the five year
period ended December 31, 1996 have been derived from financial statements
audited by Price Waterhouse LLP, independent accountants. The balance sheets as
of December 31, 1995 and 1996 and the related statements of operations and of
cash flows for the years ended December 31, 1994, 1995 and 1996 and notes
thereto appear elsewhere in this Prospectus. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements, including the
notes thereto, and the other financial information included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Product sales.......................................................... $ 648 $ 1,048 $ 1,478 $ 1,380 $ 496
License and product development revenues............................... 230 162 25 -- 3,500
Total revenues....................................................... 878 1,210 1,503 1,380 3,996
Cost of products sold.................................................. 386 366 528 531 460
Gross profit and license and product development revenues.............. 492 844 975 849 3,536
Research, development and regulatory affairs expenses.................. 895 863 1,231 1,637 3,167
Selling and administrative expenses.................................... 912 1,037 1,366 1,589 2,879
Charges related to Partnership capital changes (1)..................... -- -- -- 3,500 14,210
Payments to CRX Medical, Inc. and Caratec, L.L.C....................... 150 150 150 250 293
Total operating expenses............................................. 1,957 2,050 2,747 6,976 20,549
Loss from operations................................................... (1,465) (1,206) (1,772) (6,127) (17,013)
Interest expense to Sharpoint Development Corporation.................. (235) (342) (445) (847) (138)
Investment and interest income......................................... 1 -- 2 2 337
Net loss............................................................... $(1,699) $(1,548) $(2,215) $(6,972) $(16,814)
Pro forma net loss per common share (2)................................ $ (.69) $ (1.59)
Shares used in computation of pro forma net loss per common share
(2).................................................................. 10,150 10,545
</TABLE>

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1996
AS OF DECEMBER 31, AS
1992 1993 1994 1995 1996 ADJUSTED (3)
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments $ 26 $ 11 $ 30 $ 20 $17,651 $ 27,016
Working capital (deficit)............................... (181) (392) (10) (395) 15,175 24,540
Total assets............................................ 750 764 784 908 19,512 28,877
Long-term debt and capital lease obligations, less
current portion....................................... 3,942 5,232 7,851 10,088 14 14
Total partners' capital (deficit) and stockholders'
equity................................................ (3,615) (5,163) (7,378) (10,850) 16,455 25,820
</TABLE>

(2) See Note 2 to Notes to Financial Statements for a discussion of the basis
for reported pro forma net loss per share.

<PAGE>

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

The following discussion should be read in conjunction with the Company's
financial statements, including the notes thereto, included elsewhere in this
Prospectus.

OVERVIEW

Since its inception in May 1990, the Company has been developing,
commercializing and manufacturing medical tissue cohesive products for use in
wound closure on humans and animals. The Company's products are based on its
proprietary cyanoacrylate technology, and a substantial portion of the Company's
historical expenses has consisted of research and development and clinical trial
expenses. Through the closing of the Company's initial public offering of Common
Stock on September 30, 1996, the Company funded its operations with cash
borrowed from Sharpoint Development Corporation ("Sharpoint"), sales of the
Company's OCTYLDENT and NEXABAND products and license and product development
revenues from marketing partners. On September 30, 1996, the Company completed
its initial public offering, issuing 2,550,000 shares of Common Stock and
generating net proceeds of approximately $17,926,000.

The Company has been unprofitable since its inception and has incurred net
losses in each year, including a net loss of approximately $16,814,000 for the
year ended December 31, 1996, or $2,604,000 excluding a one-time non-cash charge
of $14,210,000. The Company anticipates that its recurring operating expenses
will increase for the next several years, as it expects its research and
development expenses to increase in order to develop new products and fund
additional clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities. The Company expects to
continue to incur a loss in 1997 and may incur losses in subsequent years,
although the amount of future net losses and time required by the Company to
reach profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable will depend on its success in
commercializing TRAUMASEAL, including the receipt of all regulatory clearances
and approvals, expanding its manufacturing capabilities, developing new products
and entering into additional marketing agreements and the ability of its
marketing partners to commercialize successfully products incorporating the
Company's technologies. No assurance can be given that the Company will generate
significant revenue or become profitable on a sustained basis, if at all.

In connection with the Exchange on September 25, 1996, obligations of and
interests in the Partnership were contributed to the Company in exchange for an
aggregate of 9,600,000 shares of Common Stock. As of March 29, 1996, the
long-term debt of the Partnership held by Sharpoint, including accrued interest,
was contributed to the Partnership as $11,483,000 of partners' capital. During
the period from May 1990 through the consummation of the Exchange on September
25, 1996, CRX Medical, Inc. ("CRX") and its successor, Caratec, L.L.C.
("Caratec"), as limited partners of the Partnership, received payments of
approximately $993,000 based on net revenues pursuant to the partnership
agreement. These payment obligations ceased upon the consummation of the
Exchange. As part of the Exchange, Caratec exchanged its right to receive
payments based on net revenues and its right to receive, as a limited partner in
the Partnership, a percentage of the proceeds of a sale of all or substantially
all of the assets of the Partnership for 1,776,250 shares of Common Stock. This
transaction resulted in a one-time non-cash charge of $14,210,000 which equaled
the difference between the value of the Common Stock issued to Caratec and its
basis in the Partnership. The resulting charge to accumulated deficit was offset
by a credit to additional paid-in capital. See "Prior Partnership Status."

Historically, there was no provision for federal or state income taxes in
the financial statements of the Company's predecessor, Tri-Point Medical L.P.,
because income or loss generated by the Partnership was included by the partners
in their personal income tax returns. Since the Company's incorporation on
February 20, 1996, the Company has been subject to federal and state corporate
income taxes.

The Company was formed on February 20, 1996 and substantially all of the
assets of the Partnership were transferred to the Company as of March 1, 1996.
The net operating losses to March 1, 1996 will not be available to the Company
to offset any future taxable income for federal income tax purposes because it
was a partnership for that period.

The Company incurred compensation expense of $500,000 for the year ended
December 31, 1996 in connection with options for Common Stock granted to
employees, consultants and directors because such options had a weighted average
exercise price of $2.73 per share below the fair market value of the Common
Stock. Such expense will be approximately $300,000 per year in the next three
years and $120,000 in the subsequent year as the options vest. Such expense
could increase during a given year if the vesting of options were to accelerate
upon the occurrence of certain events. See "Management -- Equity Compensation
Plan."

<PAGE>
RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Total revenues for 1996 increased 189% to $3,996,000 from $1,380,000 for
1995. This increase was primarily the result of the receipt of $3,500,000 in
license and product development revenues under the supply and distribution
agreement for TRAUMASEAL entered into with Ethicon in March 1996. This increase
was partially offset by a decrease in product sales from $1,380,000 for 1995 to
$496,000 for 1996. This decrease was attributable to decreased sales volume of
OCTYLDENT as a result of the inventory build-up by the Company's marketing
partner during 1995. The Company is unable to predict future prospects for this
product with the current marketing partner.

Cost of products sold decreased 13% to $460,000 for 1996 as compared to
$531,000 for 1995. This decrease was primarily a result of decreased sales
volume of OCTYLDENT, as discussed above. Cost of products sold as a percentage
of product sales increased to 93% for 1996 from 38% for 1995. This increase was
primarily a result of the decreased sales volume of OCTYLDENT, resulting in the
fixed portion of production costs being allocated over a lower volume of units
produced.

Operating expenses for 1996 increased 195% to $20,549,000 from $6,976,000
for 1995. Included in operating expenses for 1996 was a one-time non-cash charge
of $14,210,000 related to the exchange by Caratec, a former limited partner of
the Company's predecessor, Tri-Point Medical L.P., of its right to receive
various payments from the Partnership and its limited partnership interest for
Common Stock of the Company. See "Prior Partnership Status." Included in
operating expenses for 1995 was a one-time non-cash charge of $3,500,000
representing the estimated fair value of the limited partnership interests of
certain employee limited partners admitted into the Partnership on December 31,
1995. Excluding these non-cash charges, total operating expenses for 1996
increased 82% to $6,339,000 from $3,476,000 for 1995. This increase was
primarily related to costs associated with the conduct of clinical trials for
TRAUMASEAL, as well as financial advisory and professional fees and the
amortization of deferred compensation related to employee and director stock
options.

Interest expense for 1996 decreased 84% to $138,000 from $847,000 for 1995.
This decrease was a result of the related debt being converted into capital as
of March 29, 1996.

Investment and interest income for 1996 increased to $337,000 from $2,000
for 1995. This increase resulted from interest earned from higher average cash
and investment balances resulting from the Company's receipt of the net proceeds
of its initial public offering.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Total revenues for 1995 decreased 8% to $1,380,000 from $1,503,000 for
1994. This decrease in total revenues was the result of a decrease in product
sales revenues, which was primarily due to decreased sales volume of OCTYLDENT
as a result of the initial product launch and the related inventory build-up by
the Company's marketing partner during the year ended December 31, 1994.

Cost of products sold increased 1% to $531,000 for 1995 as compared to
$528,000 for 1994. This increase was primarily a result of decreased
efficiencies and related costs associated with the expansion of the Company's
manufacturing capabilities.

Operating expenses for 1995 increased 154% to $6,976,000 from $2,747,000
for 1994. This increase was primarily a result of a non-cash compensation
expense of $3,500,000 related to the grant of limited partnership interests in
the Partnership to employees of the Company, as well as costs for development
and preparation for clinical trials for TRAUMASEAL and increased financial
advisory and professional fees. Offsetting these increases were reductions in
clinical trial costs upon the completion of such trials for OCTYLDENT and
NEXACRYL. Payments to CRX increased as a result of an increase in the stipulated
minimum amount payable to CRX under the partnership agreement.

Interest expense for 1995 increased 90% to $847,000 from $445,000 for 1994.
This increase resulted primarily from additional long-term borrowings from
Sharpoint during 1995 and 1994 to provide working capital.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date primarily through the sale
of equity securities, borrowings from Sharpoint, license and product development
revenues and product sales revenues. Through March 29, 1996, the Partnership had
borrowed $9,571,000 from Sharpoint, which excludes accrued interest of $932,000
converted to long-term debt on

<PAGE>
December 31, 1994. As of March 29, 1996, all such long-term debt, including
accrued interest, was contributed as partners' capital to the Partnership.

The Company believes that existing cash and cash equivalents and short-term
investments, which totaled $17,651,000 at December 31, 1996, together with
estimated net proceeds of approximately $9,365,000 from this Offering, will be
sufficient to finance its capital requirements for at least 24 months.

Cash provided by operating activities was $287,000 for 1996. The Company
used cash of $2,113,000 and $1,533,000 for operating activities during 1995 and
1994, respectively. This decrease in cash used by operations was primarily due
to the receipt of $3,500,000 from Ethicon under the supply and distribution
agreement for TRAUMASEAL discussed above.

Cash used for investing activities was $5,637,000 for 1996, up from
$104,000 for 1995 and $130,000 for 1994, primarily as a result of the receipt of
proceeds from the initial public offering. The increase was primarily used to
purchase short-term investments, as well as to acquire capital equipment and
obtain and protect patents. Although the Company has no material commitments for
capital expenditures, the Company anticipates using approximately $2,000,000 of
the net proceeds from this Offering for capital expenditures related to
laboratories and manufacturing equipment. See "Use of Proceeds."

Cash provided by financing activities was $18,354,000 for 1996, up from
$2,207,000 and $1,682,000 for 1995 and 1994, respectively. The Company's primary
financing activity during 1996 was its initial public offering. During 1995 and
1994, the Company's financing activities primarily were borrowings from
Sharpoint.

The Company has entered into a capital lease agreement with an equipment
finance company that provides for up to $1,500,000 of equipment financing.

The Company expects to incur expenses related to the further research and
development of its technology and the development of current and additional
products, including outside testing and preclinical and clinical trials. See
"Use of Proceeds."

The Company's future capital requirements will depend on numerous factors,
including (i) the progress of its research and product development programs,
including clinical studies, (ii) the effectiveness of product commercialization
activities and marketing agreements, including the development and progress of
sales and marketing efforts and manufacturing operations, (iii) the ability of
the Company to maintain existing marketing agreements and establish and maintain
new marketing agreements, (iv) the costs involved in preparing, filing,
prosecuting, defending and enforcing intellectual property rights and complying
with regulatory requirements, (v) the effect of competing technological and
market developments and (vi) general economic conditions. If the proceeds of
this Offering, together with the Company's currently available funds and
internally generated cash flow, are not sufficient to satisfy its financing
needs, the Company will be required to seek additional funding through bank
borrowings and additional public or private sales of its securities, including
equity securities, or through other arrangements with marketing partners. Other
than the Company's equipment financing lines of credit, the Company has no
credit facility or other committed sources of capital. There can be no assurance
that additional funds, if required, will be available to the Company on
favorable terms, if at all. See "Risk Factors -- Future Capital Needs and
Uncertainty of Additional Financing" and "Use of Proceeds."

<PAGE>
BUSINESS

GENERAL

Closure develops, commercializes and manufactures medical tissue cohesive
products based on its proprietary cyanoacrylate technology. The Company's
medical tissue cohesives can be used to close and seal wounds and incisions
rapidly and stop leakage of blood and other body fluids from injured tissue. The
Company's nonabsorbable products can be used to replace sutures and staples for
certain topical wound closure applications, while the Company's absorbable
products can potentially be used as surgical sealants and surgical tissue
cohesives for internal wound closure and management. Closure's medical tissue
cohesive products align injured tissue without the trauma caused by suturing or
stapling and allow natural healing to proceed. In addition, Closure believes
that its medical tissue cohesive products result in lower overall procedure
costs and are easier and quicker to prepare and use than sutures or staples. The
worldwide market for sutures and staples for topical and internal applications
is currently estimated to be $2.6 billion annually, and the Company expects that
it will compete for a portion of this market.

The Company has three products for human use and has a product line for
veterinary uses, which are described below:

TRAUMASEAL is a topical tissue cohesive used to close wounds
from skin lacerations and incisions. The Company filed a PMA
application for TRAUMASEAL with the FDA in December 1996, which
application was granted "expedited processing." The Company has
entered into a marketing agreement with Ethicon for exclusive
worldwide marketing and distribution of TRAUMASEAL. Product
launch of TRAUMASEAL is expected in France, Italy and Australia
in mid-1997 and in Canada in late 1997, subject to receipt of
regulatory approval.

OCTYLDENT is a topical sealant currently used in conjunction
with Actisite(Register mark), a site-specific drug delivery
system manufactured by ALZA, to treat adult periodontal disease.
OCTYLDENT received 510(k) clearance for use as a cohesive for
the temporary fixing of periodontal fibers to teeth or other
hard surface abutments from the FDA in 1990 and is marketed with
Actisite(Register mark) in the United States by the Procter &
Gamble/ALZA Partnership and outside the United States by ALZA.

NEXACRYL is a topical sealant to be used in the repair of
corneal ulcers and lacerations. The Company received an FDA
approvable letter for NEXACRYL in January 1996. If approved, the
Company believes NEXACRYL will be the first cyanoacrylate
cohesive product to receive PMA approval from the FDA. The
Company has entered into a marketing agreement with Chiron for
exclusive worldwide marketing and distribution of NEXACRYL.

NEXABAND is a product line of five topical tissue cohesives
currently used in veterinary wound closure and management.
NEXABAND products have been marketed by Farnam since 1993.

TECHNOLOGY OVERVIEW

Closure's medical tissue cohesive products are based on its proprietary
cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that
react under a variety of conditions to form polymer films with strong adhesive
properties. Industrial adhesives based on cyanoacrylates were first introduced
in 1958 and are widely used in the aerospace and automotive industries, as well
as in consumer products such as super glue.

Medical tissue cohesives have not been widely used because, unlike
industrial adhesives, medical tissue cohesives must be shown to be safe for use
in humans and approved by regulatory authorities. The major obstacles to
achieving regulatory approval have been meeting biocompatibility standards and
demonstrating sterility. Using its proprietary cyanoacrylate technology, Closure
believes it has demonstrated biocompatibility as defined by ISO Toxicology
Testing Standards for the Biological Evaluation of Medical Devices. A key
element in the Company's compliance with these standards is its ability to
manufacture highly purified base material which allows the Company to satisfy
toxicity tests. In addition, Closure's products are synthetic, thereby
eliminating the risk of contamination inherent in products such as fibrin glues
or collagen-based products, which are derived from human blood or animal tissue.
Closure has also developed novel assays to demonstrate sterility, which is
required for regulatory approval and enhances the safety profile of its
products.

<PAGE>
Closure's technology enables it to develop NONABSORBABLE formulations for
topical use and ABSORBABLE formulations for internal use. Nonabsorbable
formulations close and seal skin wounds and incisions for the duration of
healing, then fall off naturally as new skin cells are produced and the wound
bed heals. Absorbable formulations can be used to close or seal internal wounds
and degrade, in a predictable manner, into biocompatible components that are
eliminated from the body naturally. Closure has been able to develop absorbable
formulations by controlling biodegradability of cyanoacrylates.

The key obstacle in developing an absorbable formulation has been that
certain byproducts of the degradation process are toxic. In particular,
degradation of cyanoacrylates produces formaldehyde, which is toxic at
relatively low concentrations in the body. Closure has patented a "scavenger"
process that permits degradation without a cytotoxic reaction. In this process,
the Company adds agents to its formulations that reduce formaldehyde to
biologically acceptable levels.

The Company's proprietary technology allows it to customize the physical
and chemical properties of cyanoacrylates to meet specific market needs. These
properties include viscosity, flexibility, bond strength, stability, setting
time, porosity and biodegradation. For example, TRAUMASEAL has been formulated
with the high bond strength of cyanoacrylates, yet has enough flexibility to
adhere and adjust as needed to the tension of the skin on different areas of the
body. Additional formulations of TRAUMASEAL with higher viscosity and varied
setting times may be developed to enhance ease of use in specialized procedures
in cosmetic and dermatologic surgery. The Company's products for the treatment
of moist areas, such as the eyes, mouth and internal tissue, may be formulated
to have faster setting times to control the flow of fluids. The Company's
absorbable products may be formulated with controlled biodegradation rates to
match the healing rates of various tissues. In addition, the Company's products
perform consistently and reproducibly, do not require special preparation or
refrigeration and have shelf-lives of 18 to 24 months.

Closure has also developed delivery technology to deliver TRAUMASEAL and
other products to wound sites in order to enhance the utility of its products.
The current TRAUMASEAL applicator is a small, pen-like instrument that is easy
to use and facilitates the application of the product. This applicator contains
a catalyst that controls the polymerization process and allows the cohesive film
to be applied in multiple layers, which enhances bond strength. The Company has
also developed a spray applicator for equine wound management, which permits
fast delivery of the NEXABAND tissue cohesive to a large surface area of the
animal. Closure intends to continue investigating and developing delivery
technologies as various needs arise.

The Company is building a strong portfolio of patent and trade secret
protection on the basic properties, formulations and medical uses of its
proprietary tissue cohesive and delivery technologies. The Company has been
issued five U.S. patents relating to the Company's scavenger process for its
absorbable formulations. In addition, the Company has four patents directed to
other areas of tissue cohesive and delivery technology. The Company has filed
five U.S. patent applications covering other aspects of the scavenger process,
delivery technology, biodegradation rate control processes, high strength wound
closure tissue cohesives and formulation and delivery additives. Counterparts of
certain of these patents and patent applications have been filed in other
countries. The Company also relies on its trade secrets and technological
expertise in order to protect its proprietary technology.

During the years ended December 31, 1994, 1995 and 1996, the Company spent
$546,000, $652,000 and $861,000, respectively, on Company-sponsored research and
development activities.

BUSINESS STRATEGY

The Company is also pursuing the development and commercialization of
absorbable formulations. Implementing this strategy involves the following
activities:

EXPAND AND ACCELERATE RESEARCH AND DEVELOPMENT. Closure's
research and development efforts are primarily focused on
developing absorbable tissue cohesives, as well as product line
extensions of its nonabsorbable tissue cohesives. The Company
intends to increase its research and development staff,
significantly expand its research facilities and acquire
additional laboratory and analytical equipment.

<PAGE>
EXPAND MANUFACTURING CAPACITY. The Company believes its ability
to manufacture highly purified cyanoacrylate-based medical
tissue cohesives is a key competitive advantage. Closure intends
to retain manufacturing rights to all its products and will
expand its manufacturing capacity by adding facilities,
equipment and personnel. In addition, the Company is researching
other processes to improve manufacturing capacity and
efficiency.

SEEK RAPID REGULATORY APPROVAL. The Company targets product
applications classified as medical devices that are eligible for
regulatory approval under a less time-consuming process than
that required for pharmaceuticals. The Company's laboratory,
animal and human studies have generated an extensive database
which the Company believes will facilitate the regulatory
approval process of current and future products. The Company
engages clinical research organizations to utilize the extensive
experience and technical expertise of such organizations in
planning and managing clinical trials.

ESTABLISH FOCUSED SALES FORCE. As the Company's absorbable
surgical sealant and surgical tissue cohesive products progress
toward commercialization, the Company intends to establish a
focused sales force to market these products. Where appropriate
based on the indication for its absorbable products, the Company
may establish partnerships with recognized market leaders to
take advantage of their resources and distribution channels.

PRODUCTS

The Company's medical tissue cohesive products are an alternative to the
traditional method of closing topical and internal wounds and incisions.
Suturing and stapling involve puncturing healthy tissue in order to align and
close the wound, may cause leakage or additional scarring at the small puncture
sites, may require anesthetics, are time-consuming to apply, and often require
return patient visits and physician time to remove the sutures or staples.
Medical tissue cohesives may be applied quickly, may not require anesthetics, do
not induce trauma to surrounding tissues and do not require return visits to the
physician.

<TABLE>
<CAPTION>
PRODUCT MARKET STATUS MARKETING PARTNER
NONABSORBABLE
<S> <C> <C> <C> <C>
TRAUMASEAL Topical wound PMA pending (granted Ethicon
closure expedited processing)
OCTYLDENT Periodontal Marketed in U.S. and Procter & Gamble/ALZA
sealant European-Union countries in Partnership; ALZA
conjunction with
Actisite(Register mark)
NEXACRYL Corneal repair PMA pending Chiron
NEXABAND (5 products) Veterinary Marketed in U.S. Farnam
ABSORBABLE
SURGICAL SEALANT Coronary Preclinicals None
artery bypass
graft and
bowel
resection
SURGICAL TISSUE COHESIVES Internal wound Preclinicals None
closure
</TABLE>

TRAUMASEAL

The Company's lead product, TRAUMASEAL, is a topical tissue cohesive used
to close wounds from skin lacerations and incisions, minimally invasive surgery
and plastic surgery. The Company believes, based on market research, that there
are approximately 11 million skin lacerations annually in the United States. In
addition, there were an estimated 7.6 million minimally invasive surgical
procedures in 1995 and approximately 1.4 million plastic surgery procedures in
1994. The Company believes, based on industry sources, that approximately 25
million other surgical procedures are performed annually in the United States.
The Company expects that TRAUMASEAL will compete for a portion of these markets
as a replacement for, or in conjunction with, sutures or staples. TRAUMASEAL is
intended to be used topically for wound closure where a 5.0 or smaller

<PAGE>
diameter suture would normally be used and is not intended for use on the hands,
feet or across joints. TRAUMASEAL can also be used topically for lacerations or
incisions requiring subcutaneous sutures or staples. Although the purchase cost
of TRAUMASEAL will be greater than sutures or staples, the Company believes that
the use of TRAUMASEAL will result in lower overall procedure costs because of
reduced treatment time, elimination of the need for anesthetics, simplification
of post-closure wound care and elimination of suture or staple removal.

The Company submitted a PMA application for TRAUMASEAL in December 1996.
Based on the FDA's initial review, this application was determined to be
suitable for filing and was granted "expedited processing." The Company
completed controlled, randomized clinical trials of TRAUMASEAL at ten sites
throughout the United States with an enrollment of 818 patients. The clinical
trials were conducted by a clinical research organization and compared wound
closure utilizing TRAUMASEAL with wound closure utilizing sutures or staples.
The clinical trials demonstrated TRAUMASEAL to be at least equivalent to
nonabsorbable 5.0 or smaller diameter sutures, staples or adhesive strips/tapes
in wound closure, wound healing, cosmetic outcome and infection rate and also
demonstrated that the use of TRAUMASEAL substantially reduced procedure time. In
February 1997, the Company submitted a CAP to the FDA for use of a color
additive in TRAUMASEAL.

Product launch of TRAUMASEAL is expected in France, Italy and Australia in
mid-1997 and in Canada in late 1997, subject to regulatory approval. A
controlled, randomized 300-patient clinical study of TRAUMASEAL conducted in
Canada in late 1995 and early 1996 similarly demonstrated TRAUMASEAL to be at
least equivalent to nonabsorbable 5.0 or smaller diameter sutures. There were no
reports of unanticipated adverse effects.

In March 1996, the Company entered into an agreement with Ethicon, a
subsidiary of Johnson & Johnson and a world leader in wound closure products, to
market and distribute TRAUMASEAL.

OCTYLDENT

OCTYLDENT, the Company's first human product introduction, is a topical
sealant used in conjunction with site-specific sustained release antibacterial
drug therapy to treat adult periodontal disease. The American Dental Association
estimated that approximately 14 million scaling and planing procedures were
performed in 1990 (the most recent year for which data are available) in the
United States to help prevent the progression of periodontal disease. OCTYLDENT
is currently used to seal the pocket of a diseased gum where
Actisite(Register mark), a therapeutic drug delivery system manufactured by
ALZA, has been inserted, thereby allowing the system to remain in place over a
ten-day period.

OCTYLDENT received FDA marketing clearance in August 1990, and the FDA
issued approval to market Actisite(Register mark) in March 1994. The Company
entered into supply agreements in 1991 and 1993 with the Procter & Gamble/ALZA
Partnership and ALZA to market OCTYLDENT with Actisite(Register mark) in the
United States and outside the United States, respectively. The U.S. product
launch of OCTYLDENT, sold in combination with Actisite(Register mark), commenced
in July 1994. The Actisite(Register mark)/OCTYLDENT product is marketed in
several European countries, where the first launch occurred in May 1993, and
ALZA is pursuing registration and distribution arrangements for
Actisite(Register mark) in a number of other European markets. The Company
received authorization to display the CE mark for OCTYLDENT in the European
Union in August 1995, which allows OCTYLDENT to be marketed throughout the
European Union.

The Company entered into an agreement in March 1994 with On-Site
Therapeutics, Inc. ("On-Site") pursuant to which On-Site provides exclusive
services to identify potential purchasers of OCTYLDENT for use in conjunction
with site-specific sustained release antibacterial drug therapy for adult
periodontal disease. Under the agreement, On-Site receives royalties on sales of
OCTYLDENT.

NEXACRYL

NEXACRYL is a topical sealant to be used in the repair of corneal ulcers
and lacerations. NEXACRYL received orphan device status to treat a condition
known as "melting cornea" for which no FDA-approved product is presently
available. NEXACRYL is applied directly to the cornea to seal fluids and allow
the corneal tissue to heal.

A clinical study of NEXACRYL has been completed in which 262 patients were
treated at 23 clinical study sites with no reports of leakage or infections
attributable to NEXACRYL. Based on this study, the Company filed a PMA
application with the FDA and received an approvable letter from the FDA in
January 1996 for the product. A PMA is anticipated following sterilization
validation studies, FDA inspection of the manufacturing site and FDA labeling
review. If approved, the Company believes NEXACRYL will be the first
cyanoacrylate cohesive to obtain a PMA from the FDA.

The Company intends to develop an additional formulation of NEXACRYL for
use in cataract and other related corneal procedures. There are approximately
two million cataract procedures performed in the United States each year. If
NEXACRYL

<PAGE>
receives marketing approval from the FDA, the Company intends to broaden the
indication for NEXACRYL to cover such procedures. The Company believes this can
be accomplished by submitting a PMA Supplement to the FDA, which may include
clinical data to be generated from a limited clinical study. There can be no
assurance that a limited clinical study will be acceptable to the FDA or that
the Company will be able to obtain FDA approval of a PMA Supplement for this or
any additional indication.

The Company's marketing partner for NEXACRYL is Chiron.

NEXABAND VETERINARY PRODUCTS

The Company has five topical tissue cohesive products sold under the
NEXABAND trade name used in veterinary wound closure and management procedures.
There were an estimated 11 million surgical procedures performed on animals in
the United States in 1990 and for which the Company believes NEXABAND products
could have been used. The Company estimates that NEXABAND products were used in
approximately 1.3 million veterinary procedures in the United States in 1996.

NEXABAND products seal the wound and provide a flexible, waterproof barrier
against dirt, fluids and contaminants. The tissue cohesive falls off as the
wound is healed. The products are differentiated by type of applicator, setting
time, viscosity and packaging. NEXABAND S/C is used for the topical closure of
lacerations and spay and neuter incisions. NEXABAND QUICKSEAL is used as a
sealant for minor grooming cuts. NEXABAND PUMP SPRAY is used as a sealant for
large surface area wounds, particularly equine abrasion wounds. NEXABAND LIQUID
is used for wound closure in cat declawing procedures. NEXABAND OPHTHALMIC is
used as a hemostatic agent and for the protection of damaged corneas. The
NEXABAND products are distributed through Farnam, a leader in large animal
over-the-counter products and small and large animal ethical product markets.

PRODUCTS IN DEVELOPMENT

The Company has several absorbable products under development which will
require further development, clinical trials and regulatory clearance or
approval prior to commercialization. See " -- Government Regulations."

SURGICAL SEALANT

The Company is developing an absorbable surgical sealant to be used to
control post-surgical leakage at suture closure sites, a problem that is not
effectively addressed by current medical technology. Closure's surgical sealant
is being developed initially for use in coronary artery bypass graft and bowel
resection surgery, of which approximately 1.2 million procedures were performed
in the United States in 1992. The Company believes its absorbable formulations
could also serve as effective sealants for repairing bladder or spleen defects,
diffusing bleeding from the liver, sealing air leakage from lung defects,
repairing skin graft sites and managing chronic skin ulcers.

The Company is conducting preliminary animal studies to test the
feasibility of using absorbable tissue cohesive sealants to prevent leakage
during coronary artery bypass graft procedures.

A number of major medical firms are seeking to develop blood-based fibrin
products to prevent leakage at suture closure sites. The Company believes that
its surgical sealant has advantages over such products in that it will be
significantly easier to manufacture, control and manipulate than human blood,
which must be harvested, processed and screened for contaminants, and eliminates
the risk of contamination inherent in blood-derived products. In addition,
several companies are seeking to develop collagen-based products, which are
derived from animal tissue, to act as an internal sealant for human tissue. The
Company believes that its surgical sealants have similar advantages over
collagen-based products and that such products will pose many of the same
contamination risks described above. In addition, the Company believes that its
cyanoacrylate-based tissue cohesives have greater bond strength than either
fibrin-based or collagen-based products.

SURGICAL TISSUE COHESIVE

The Company is developing an absorbable surgical tissue cohesive for the
closure of internal surgical incisions and traumatic wounds. There were
approximately 50 million surgical procedures performed globally in 1995, with an
estimated growth rate of 2% to 3% annually. The Company believes that its
absorbable tissue cohesive for surgical closure of soft tissue would be fast,
safe and easy to use, and would provide advantages over sutures and staples such
as cost effectiveness, enhanced wound sealing and closing, maintenance of the
healing environment, reduced trauma, pain and patient discomfort and superior
tissue adherence. In addition, the Company believes that its absorbable surgical
tissue cohesive would be well-suited for internal closure in laparoscopic
procedures.

<PAGE>
The Company has initiated preliminary animal studies to test the
feasibility of absorbable formulations to close internal wounds, including soft
tissue wounds.

ADDITIONAL PRODUCT OPPORTUNITIES

The Company believes that there are other potential medical applications
for its proprietary cyanoacrylate technology. The Company has not yet developed
any programs or committed any funds for research and development of these
potential applications. Moreover, any potential products will be subject to
extensive and rigorous regulatory review. There can be no assurance that any
funds will be available for research programs for such potential products or
that any potential products will be successfully developed, be proven to be safe
and efficacious in clinical trials, meet applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable costs or be
successfully marketed.

The Company believes that many consumers of over-the-counter ("OTC") wound
closure products would prefer the sealing and wound protection characteristics
of a cohesive as compared to the wound covering capabilities of a topical
bandage. The Company believes that incorporating its topical wound closure
product, TRAUMASEAL, into an OTC product could provide a fundamental
differentiating characteristic and marketing advantage over products currently
offered in the OTC market. FDA approval of a PMA Supplement would be required
prior to marketing TRAUMASEAL for OTC use.

The Company also believes that its cohesive technology could be used as a
site-specific drug delivery system to deliver growth factors to stimulate tissue
regeneration, various hormones or pharmaceuticals to promote healing,
antibiotics or antivirals to inhibit infection or chemotherapeutic agents to
slow or stop tumor growth. Based on preliminary analyses, the Company believes
that encapsulations, matrix vehicles, liquids and other formed products may be
developed from its cohesive material.

In addition, the Company believes its technology could be useful for
certain orthopedic repair procedures.

MARKETING PARTNERS

An important element of the Company's strategy for its nonabsorbable
products is to enter into marketing agreements to enable it to take advantage of
the wide range of opportunities created by its technology. To exploit these
opportunities, the Company has entered into the agreements described below for
the supply and distribution of certain products. The Company is dependent on its
marketing partners to market and distribute its products. Although the Company
believes that its marketing partners have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within the control of the
Company. See "Risk Factors -- Dependence on Marketing Partners."

ETHICON, INC.

In March 1996, the Company entered into a renewable, eight-year supply and
distribution agreement with Ethicon, a subsidiary of Johnson & Johnson, which
provides Ethicon with exclusive worldwide rights to market, distribute and sell
TRAUMASEAL, the Company's nonabsorbable wound closure tissue cohesive. The
agreement provides for certain up-front and milestone payments to the Company,
provides for the reimbursement of certain expenses associated with clinical
trials, requires Ethicon to make minimum purchases that escalate annually after
receipt of FDA or European Community approval and requires Ethicon to pay
royalties based upon net sales.

Ethicon may renew the agreement for additional one-year periods. The
agreement is terminable upon specified events, including (i) material breach by
either party, (ii) insolvency of either party and (iii) failure to obtain
regulatory approval for TRAUMASEAL in the United States within two years from
the date of submission of the Company's 510(k) notification or PMA. The Company
completed human clinical trials of TRAUMASEAL in late 1996 and submitted a PMA
application in December 1996. The Office of Device Evaluations of the FDA
subsequently notified the Company that the PMA was granted "expedited
processing" by the FDA. Upon certain events of default, including failure to
provide an adequate supply of product, Ethicon may terminate its arrangement to
purchase TRAUMASEAL from the Company, and Ethicon may itself then manufacture
TRAUMASEAL and only pay the Company royalties based on sales. See "Risk
Factors -- Dependence on Marketing Partners," "Risk Factors -- Limited
Manufacturing Experience" and " -- Manufacturing."

PROCTER & GAMBLE/ALZA, PARTNERS FOR ORAL HEALTH CARE AND ALZA CORPORATION

The Company entered into a supply agreement with the Procter & Gamble/ALZA
Partnership in March 1991, which was subsequently amended in April 1992. The
agreement grants the Procter & Gamble/ALZA Partnership the non-exclusive
worldwide rights to market and distribute OCTYLDENT with
Actisite(Register mark), a product manufactured by ALZA. The first shipment

<PAGE>
under this agreement was in May 1994. In March 1993, the Company entered into a
supply agreement with ALZA, which grants ALZA non-exclusive rights to market
OCTYLDENT worldwide, except in the United States, Canada, Mexico and Venezuela,
where the Procter & Gamble/ALZA Partnership has marketing rights. The first
shipment under this agreement was in May 1993. The agreements guarantee the
Company minimum purchases annually and provide for specified prices per unit for
OCTYLDENT, which may be increased annually subject to certain limitations.

The agreements each have a term of three years from the first shipment
date, with automatic renewal for additional one-year periods, and each agreement
is terminable upon specified events, including (i) material breach by either
party, (ii) the publication of a scientific study, undertaken or reported by a
nationally recognized health research agency or government body, that links any
component of OCTYLDENT to any health or safety hazard and (iii) any revocation
or suspension of the Company's 510(k) clearance for OCTYLDENT.

CHIRON VISION CORPORATION

The Company entered into a supply and distribution agreement with Chiron
effective July 1992, and amended in April 1995, which provides Chiron with the
exclusive rights to market, sell and distribute certain human ophthalmic
products on a worldwide basis. The agreement provides Chiron with an option to
expand its coverage to include new products. The Company received a payment upon
the execution of the agreement, and will receive a milestone payment upon FDA
marketing approval of its first ophthalmic product, NEXACRYL. The agreement
guarantees the Company minimum purchases that escalate annually. Pursuant to the
agreement, pricing may be adjusted annually to reflect increases in the U.S.
Department of Labor Producer's Price Index. The agreement has a term of 10 years
from the effective date of U.S. regulatory approval of the last-approved
product. The agreement is terminable upon specified events, including (i)
material breach by either party, (ii) Chiron's providing 30 days' notice as to
any product for which FDA clearance or approval is then pending, or (iii)
Chiron's providing 180 days' notice for products for which FDA clearance or
approval is obtained. In certain circumstances, Chiron may terminate its
arrangement to purchase products from the Company, and may itself then
manufacture such products and only pay the Company royalties based on sales.

FARNAM COMPANIES, INC.

In December 1992, the Company entered into a renewable, seven-year
development and distribution agreement with Farnam. The Company granted Farnam
the exclusive rights to market, sell and distribute its NEXABAND line of
veterinary products to the ethical veterinary market in North America. In
addition to the existing nonabsorbable NEXABAND products covered by this
agreement, Farnam has exclusive rights in North America to any absorbable
veterinary cohesive products developed by the Company. Prices and minimum sales
volumes for new products will be negotiated upon product development completion.
Pursuant to the agreement, the Company received a nonrefundable research,
testing and development fee. The agreement also provides for minimum purchases,
which increase annually, and allows the Company to adjust prices annually, but
not in excess of increases in the U.S. Department of Labor Wholesale Price
Index. The agreement is terminable upon specified events, including material
breach by either party. The agreement will automatically renew for successive
one-year periods contingent on Farnam meeting required levels of purchases.

PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS

The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has nine U.S. patents with
expiration dates ranging from 2004 to 2013 and has filed applications for five
additional U.S. patents, as well as certain patent applications outside the
United States, relating to the Company's technology. Five of the issued U.S.
patents relate to the Company's scavenger process for its absorbable
formulations and pending U.S. patent applications relate to other aspects of the
scavenger process. In addition, the Company has four patents directed to other
areas of tissue cohesive and delivery technology. Other U.S. patent applications
relate to the Company's delivery technology, biodegradation rate control
processes, high strength wound closure tissue cohesives and formulation and
delivery additives.

There can be no assurance that any of the pending patent applications will
be approved, that the Company will develop additional proprietary products that
are patentable, that any patents issued to the Company will provide the Company
with competitive advantages or will not be challenged by any third parties or
that the patents of others will not prevent the commercialization of products
incorporating the Company's technology. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products or design around the Company's patents. Any of the
foregoing results could have a material adverse effect on the Company's results
of operations and financial condition.

<PAGE>
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license for any
technology that it may require to commercialize its products could have a
material adverse impact on the Company's results of operations and financial
condition.

Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial costs to and diversion of effort by the
Company, even if the eventual outcome is favorable to the Company. Any such
litigation or interference proceeding, regardless of outcome, could be expensive
and time consuming. Litigation could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require the Company to cease using such technology and, consequently,
could have a material adverse effect on the Company's results of operations and
financial condition.

In addition to patent protection, the Company relies on unpatented trade
secrets and proprietary technological expertise. There can be no assurance that
others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or that
the Company can ultimately protect its rights to such unpatented trade secrets
and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach or
that the Company's unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent and trade secret protection,
for any reason, could have a material adverse effect on the Company's results of
operations and financial condition.

GOVERNMENT REGULATIONS

The Company's products and operations are subject to substantial government
regulation in the United States and foreign countries.

FDA REGULATION

Most medical devices, including the Company's medical tissue cohesives for
humans, are subject to stringent government regulation in the United States by
the FDA under the FDC Act, and, in many instances, by foreign and state
governments. The FDA regulates the clinical testing, manufacture, safety,
labeling, sale, distribution and promotion of medical devices. Included among
these regulations are premarket clearance and premarket approval requirements
and GMPs. Other statutory and regulatory requirements govern, among other
things, establishment registration and inspection, medical device listing,
prohibitions against misbranding and adulteration, labeling and postmarket
reporting. The regulatory process is lengthy, expensive and uncertain. Securing
FDA approvals and clearances may require the submission of extensive clinical
data and supporting information to the FDA. Failure to comply with applicable
requirements can result in Warning Letters, application integrity proceedings,
fines, recalls or seizures of products, injunctions, civil penalties, total or
partial suspensions of production, withdrawals of existing product approvals or
clearances, refusal to approve or clear new applications or notifications and
criminal prosecution. See "Risk Factors -- FDA and Other Government Regulation."

Under the FDC Act, medical devices are classified into one of three classes
(Class I, II or III) on the basis of the controls necessary to reasonably ensure
their safety and effectiveness. Class I devices are subject to general controls
(e.g., labeling, premarket notification and adherence to GMPs). Class II devices
are subject to general and special controls (e.g., performance standards,
postmarket surveillance and patient registries). Generally, Class III devices
must receive premarket approval from the FDA (e.g., certain life-sustaining,
life-supporting and implantable devices or new devices which have been found not
to be substantially equivalent to certain legally marketed devices). OCTYLDENT
is a Class II medical device and TRAUMASEAL and NEXACRYL are Class III medical
devices.

Before any new medical device may be introduced to the market, the
manufacturer generally must obtain either premarket clearance through the 510(k)
premarket notification process or premarket approval through the lengthier PMA
process. If a color additive is used to color the medical device, the
manufacturer may be required to submit a CAP and obtain

<PAGE>
FDA approval for use of the color additive in production of the device. A 510(k)
premarket notification will be granted if the submitted data establish that the
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device, or to a Class III medical device for which the FDA has
not called for PMAs. The FDA may request extensive data, including clinical
studies of the device's safety and effectiveness, before a substantial
equivalence determination can be made. It generally takes from four to 12 months
from submission to obtain 510(k) premarket clearance, although it may take
longer. A PMA application must be filed if a product is found to be not
substantially equivalent to a legally marketed Class I or II device or if it is
a Class III device for which the FDA has called for PMAs. A PMA application must
be supported by extensive data, including laboratory, preclinical and clinical
trial data, to demonstrate the safety and efficacy of the device, as well as
extensive manufacturing information. Similarly, a CAP must be supported with
extensive data and information demonstrating the safety of the color additive
under the conditions of intended use in the device. Before initiating human
clinical trials, the manufacturer often must first obtain an Investigational
Device Exemption ("IDE") for the proposed medical device. Toward the end of the
PMA review process, after issuing a preliminary approvable letter, the FDA will
generally conduct an inspection of the manufacturer's facilities to ensure
compliance with GMPs. Additionally, the FDA requires sterility validation and
that final labeling be reviewed by the FDA prior to granting a PMA. Approval of
a PMA or a CAP could take two or more years from the date of submission of the
application or petition. The PMA and CAP processes can be expensive, uncertain
and lengthy, and there is no guarantee of ultimate approval.

Modifications or enhancements to products that are either cleared through
the 510(k) process or approved through the PMA process that could affect safety
or effectiveness or effect a major change in the intended use of the device may
require further FDA review through new 510(k) or PMA submissions. Additionally,
certain modifications of the Company's manufacturing facilities and processes,
such as those made in preparation for commercial-scale production of its
products, will subject the Company to further FDA inspections and review prior
to final approval of such products for commercial sale.

The Company's current human medical devices are at different stages of FDA
review. OCTYLDENT, the Company's product sold to the Proctor & Gamble/ALZA
Partnership and ALZA for use as a cohesive in conjunction with
Actisite(Register mark), received 510(k) clearance in 1990, and is subject to
GMP, postmarket reporting and other FDA requirements. NEXACRYL, the Company's
ophthalmic product, has received an approvable letter from the FDA and is
pending FDA review of sterilization validation studies, FDA inspection of the
manufacturing site and FDA labeling review before the product can receive final
FDA approval for commercialization. Clinical trials for TRAUMASEAL were
completed in late 1996. The Company submitted to the FDA a PMA application in
December 1996, which was granted "expedited processing," and a CAP in February
1997. The Company expects that it will need to make significant modifications to
its manufacturing facilities and processes in order to manufacture TRAUMASEAL on
a commercial scale, which will subject the Company to an additional FDA
inspection of its manufacturing facility prior to final approval for commercial
sales of this product.

There can be no assurance that the Company will be able to obtain necessary
510(k) clearances or PMA and CAP approvals to market its products in the United
States for their intended use on a timely basis, if at all, and delays in
receipt of or failure to receive such clearances or approvals, the loss of
previously received clearances or approvals, or failure to comply with existing
or future regulatory requirements could have a material adverse effect on the
Company's results of operations and financial condition. See "Risk
Factors -- Limited Manufacturing Experience" and "Risk Factors -- FDA and Other
Government Regulation."

FOREIGN REGULATORY MATTERS

In order for the Company to market its products in Europe, Canada and
certain other foreign jurisdictions, the Company must obtain required regulatory
approvals or clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearances to market, may differ
from the FDA regulatory scheme. The time required to obtain approval or
clearance for sale of the Company's products in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. In addition, there may be foreign regulatory barriers
other than premarket approval or clearance. There can be no

<PAGE>
assurance that the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Delays in receipt of approvals to
market the Company's products in foreign countries, failure to receive such
approvals or the future loss of previously received approvals could have a
material adverse effect on the Company's results of operations and financial
condition.

Previously, the FDC Act provided that the FDA must grant authorization to
export an unapproved device. In April 1996, the FDC Act was amended to allow a
non-FDA approved medical device to be exported to any country, provided that the
device (i) complies with the laws of that country and (ii) has valid marketing
authorization or the equivalent from the appropriate authority in a "listed
country." The listed countries are Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa and countries in the European Union and the
European Economic Area. Export of unapproved devices that do not have marketing
approval or clearance in a listed country will continue to require FDA export
authorization.

Medical devices that are marketed or put into service within the European
Union are required to comply with Council Directive 93/42/EEC, the medical
devices directive ("MDD"). Compliance with the MDD entitles a device to make use
of the CE mark and allows the device to be marketed, put into service and
circulated freely within the European Union. The Company received authorization
to display the CE mark for OCTYLDENT in the European Union in August 1995. The
Company plans to pursue the right to affix the CE mark on TRAUMASEAL, as well as
on future human products that the Company may develop. There can be no assurance
that the Company will be successful in obtaining the right to affix the CE mark
on any additional medical devices. Failure to obtain the right to affix the CE
mark on its medical devices could have a material adverse effect on the
Company's results of operations and financial condition. See "Risk
Factors -- FDA and Other Government Regulation."

ENVIRONMENTAL REGULATIONS

The Company's activities involve the controlled use of hazardous materials
and chemicals. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such material and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply in all
material respects with the standards prescribed by such laws and regulations,
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 such liability could have a material
adverse effect on the Company's results of operations and financial condition
and potentially could exceed the resources of the Company. Environmental
protection has been an area of substantial concern in recent years, and
regulation of activities involving the use and disposal of potentially hazardous
materials has increased. There can be no assurance that such regulation will not
increase in the future or that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.

SALES AND MARKETING

Currently, the Company's nonabsorbable cohesive products are marketed and
sold by its marketing partners. The Company has entered into marketing
agreements with Ethicon for worldwide distribution of TRAUMASEAL, the topical
tissue cohesive that seals wounds from skin lacerations and incisions, plastic
surgery and skin puncture sites from minimally invasive surgery such as
laparoscopy; with the Procter & Gamble/ALZA Partnership and ALZA for worldwide
distribution of OCTYLDENT, the topical sealant which is sold in conjunction with
Actisite(Register mark), a site-specific sustained release product for adult
periodontal disease; with Chiron for worldwide distribution of NEXACRYL, the
topical sealant for use in repair of corneal ulcers and abrasions; and with
Farnam for distribution in North America of NEXABAND, the Company's veterinary
line of products.

The Company's future products, which will primarily be absorbable
formulations, will be sold through a direct sales force or additional marketing
partners in the United States and through other distributors outside the United
States. The Company intends to develop its own internal sales capacity as its
absorbable surgical sealant and surgical tissue cohesive progress toward
commercialization.

MANUFACTURING

The Company has devoted considerable resources to the development of
manufacturing processes and technologies capable of providing its products with
clinical efficacy, ease of use and suitable shelf life. The Company has
developed a manufacturing process designed to produce a highly purified base
material which is not achievable by other existing methodologies. The Company
relies heavily on internal trade secrets and technological expertise and expects
to keep aspects of its manufacturing process in-house and, where applicable,
seek patent protection for specific manufacturing applications.

<PAGE>
The Company currently manufactures all of its products in a 15,000 square
foot facility located adjacent to its corporate offices in Raleigh, North
Carolina. This facility integrates production, bottling, labeling and packaging
capabilities for products currently being marketed. The Company recently entered
into a new lease for a 50,000 square foot facility in Raleigh for, among other
things, the expansion of manufacturing capacity. Upon completion of this
facility in the second half of 1997, the Company will relocate its manufacturing
and other operations. See " -- Facilities."

As production requirements increase with the receipt of additional product
approvals and clearances and the initiation of new clinical trials, additional
personnel, equipment and space will be necessary in virtually all phases of the
production process. The Company is formulating plans for a significant expansion
of its manufacturing capabilities in conjunction with the anticipated future
launch of TRAUMASEAL in France, Italy, Australia and Canada and, eventually, the
remainder of Europe and the United States, as well as for the manufacture of
additional products which may be commercialized in the future by the Company.
Such expansion and scale-up is expected to occur over the next two years. The
Company expects to invest resources in chemical manufacturing equipment and
packaging machinery. Production of commercial-scale quantities may involve
technical challenges for the Company and will require significant scale-up
expenses for additions to facilities and personnel. There can be no assurance
that the Company will be able to achieve large-scale manufacturing capabilities
or to manufacture its products in a cost-effective manner or in quantities
necessary to allow the Company to achieve profitability. If the Company is
unable to expand sufficiently its manufacturing capacity to meet Ethicon's
requirements for TRAUMASEAL as set forth under their agreement, Ethicon may
itself then manufacture TRAUMASEAL and only pay the Company royalties based on
sales. See " -- Marketing Partners."

The Company presently purchases cyanoacetate, the primary raw material used
in the manufacture of the Company's medical cohesives, from one source. The
Company has the capability of manufacturing cyanoacetate if necessary, and
cyanoacetate may be available from a second supplier. The Company would be
required to qualify the quality assurance systems of an additional supplier
prior to its use as a source of supply. The other raw materials used in
manufacturing and packaging the Company's products are readily available from
multiple sources, as are its process equipment and controls.

The Company presently hires filling and packaging employees on a temporary
basis, and the Company expects that a significant portion of the Company's
future packaging requirements will be completed by outside providers.

COMPETITION AND TECHNOLOGICAL CHANGE

The Company competes with many domestic and foreign competitors in various
rapidly evolving and technologically advanced fields in developing its
technology and products, including medical device, pharmaceutical and
biopharmaceutical companies. In the worldwide wound closure market, the
Company's products will compete with the suture products of Ethicon, the world
leader in the wound closure market, and American Home Products Corporation. The
Company also believes its products will compete with the staple products of
United States Surgical Corporation and Ethicon Endo-Surgery, Inc., a subsidiary
of Johnson & Johnson. In addition, there are two other cyanoacrylate-based
topical adhesives with which the Company's products may compete, neither of
which is approved for sale in the United States. B. Braun GmbH markets
Histoacryl(Register mark) as a topical closure adhesive for small lacerations
and incisions in low skin tension areas of the body. Loctite Corporation has
recently test marketed a similar adhesive in the United Kingdom. In the surgical
sealants market, the Company's products may compete with the fibrin-based
sealants of Immuno AG and Behringwerke AG, and most likely with fibrin-based
sealants being developed by Baxter Healthcare Corporation and Bristol-Myers
Squibb Company. The Company's surgical sealants also may compete with
collagen-based hemostatic products of, among others, Collagen Corporation,
Fusion Medical Technologies, Inc. and MedChem Products Inc., a division of C.R.
Bard Inc. In addition, the Company's surgical sealants may compete with
synthetic products being developed by such biotechnology companies as Protein
Polymer Technologies, Inc. and Focal, Inc. Many of the Company's competitors and
potential competitors have substantially greater financial, technological,
research and development, marketing and personnel resources than the Company. In
addition to those mentioned above, other recently developed technologies or
procedures are, or may in the future be, the basis of competitive products.

There can be no assurance that the Company's competitors will not succeed
in developing alternative technologies and products that are more effective,
easier to use or more economical than those which have been or are being
developed by the Company or that would render the Company's technology and
products obsolete and noncompetitive in these fields. These competitors may also
have greater experience in developing products, conducting clinical trials,
obtaining regulatory approvals, and manufacturing and marketing such products.
Certain of these competitors may obtain patent protection, approval or clearance
by the FDA or foreign countries or product commercialization earlier than the
Company, any of which could

<PAGE>
materially adversely affect the Company. Furthermore, if the Company commences
significant commercial sales of its products, it will also be competing with
respect to manufacturing efficiency and marketing capabilities, areas in which
it currently has limited experience. Finally, under the terms of the Company's
marketing agreements, the Company's marketing partners may pursue parallel
development of other technologies or products, which may result in a marketing
partner developing additional products that will compete with the Company's
products.

SCIENTIFIC ADVISORS

The Company has established a team of scientific advisors (the "Scientific
Advisors") who provide consulting services to the Company. The Scientific
Advisors consist of independent professionals who meet on an individual basis
with management when so requested. The Scientific Advisors have recognized
expertise in relevant sciences or clinical medicine and advise the Company about
present and long-term scientific planning, research and development.

There is no fixed term of service for the Scientific Advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. Members do not serve on an exclusive basis with the Company, are not
under contract (other than with respect to confidentiality obligations) and are
not obligated to present corporate opportunities to the Company. To management's
knowledge, none of the members is working on the development of competitive
products. Inventions or products developed by a Scientific Advisor who is not
otherwise affiliated with the Company will not become the Company's property,
but will remain the Scientific Advisor's property.

Scientific Advisors who are not affiliated with the Company receive up to
$5,000 per year for their services. All members receive reimbursement for
expenses incurred in traveling to and attending meetings on behalf of the
Company. One of the Scientific Advisors, Anthony V. Seaber, held an interest in
the Partnership that was exchanged for shares of Common Stock in connection with
the Exchange. The current Scientific Advisors and their professional
affiliations are as follows:

<TABLE>
<CAPTION>
NAME AFFILIATION
<S> <C>
Robert E. Clark, M.D., Ph.D................................... Director of the Dermatologic Surgical Unit
Duke University Medical Center
Gary N. Foulks, M.D........................................... Department of Ophthalmology
University of Pittsburgh Medical Center
Robert F. McConnell, D.V.M., P.A.............................. Pathology Consultant
James V. Quinn, M.D., CCCFP................................... Clinical Assistant Professor
University of Michigan Medical Center
Frederick Reno, Ph.D.......................................... Toxicology Consultant
Anthony V. Seaber............................................. Director of Orthopedic Research Laboratories
Duke University Medical Center
Dean M. Toriumi, M.D.......................................... Associate Professor Plastic and Reconstructive Surgery College
of Medicine at University of Illinois-Chicago
</TABLE>

EMPLOYEES

As of March 1, 1997, the Company had 40 full-time employees, of whom 31
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and nine were dedicated to administrative activities. Five
members of the Company's research and development staff have doctoral or
advanced degrees. The Company intends to recruit additional personnel in
connection with the research, development and manufacturing of its products.
None of the Company's employees is represented by a union, and the Company
believes relationships with its employees are good.

FACILITIES

The Company leases and occupies approximately 15,000 square feet of office,
laboratory and manufacturing space in Raleigh, North Carolina. This facility
integrates production, bottling, labeling and packaging capabilities for
products currently being marketed. In addition, the Company leases a 5,800
square foot facility that serves as the Company's research and development
laboratory. These facilities are leased through August 1998 and September 1997,
respectively.

On February 14, 1997, the Company entered into a new ten-year lease for
approximately 50,000 square feet of office, laboratory and manufacturing space
for, among other things, the expansion of manufacturing capacity. Upon
completion, all of the Company's operations will be relocated to and maintained
at this location. The term of this lease will begin upon the Company's occupancy
of the facility, estimated to be September 1997.

<PAGE>
LEGAL PROCEEDINGS

In March 1997, the Company was served with a complaint filed in the
Superior Court Department of the Trial Court of the Commonwealth of
Massachusetts alleging personal injury as a result of negligence by the Company
in the design, testing and distribution of AVACRYL, an n-butyl cyanoacrylate
used in a medical procedure in 1993 as part of a clinical trial conducted by the
Company pursuant to an IDE. The Company's insurer has assumed the defense of
this lawsuit. The Company has not yet answered the complaint, and discovery in
the case has not yet commenced. Accordingly, the Company is not yet able to
assess its potential exposure in this case. However, based on the limited
information available to it, the Company intends to vigorously defend the
lawsuit and management believes the outcome of this case will not have a
material adverse effect on the Company.

The Company is currently not a party to any other legal proceedings.

<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The table below sets forth the names, ages and titles of the persons who
are the executive officers and directors of the Company as of March 1, 1997.

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Rolf D. Schmidt(1) 64 Chairman of the Board of Directors
Robert V. Toni(1) 56 President and Chief Executive Officer and Director
J. Blount Swain 40 Vice President of Finance and Chief Financial Officer
Jeffrey G. Clark 43 Vice President of Research and Development
Joe B. Barefoot 46 Vice President of Regulatory Affairs and Quality
Assurance
Dennis C. Carey, Ph.D.(1)(2)(3) 47 Director
Michael K. Lorelli(3) 45 Director
F. William Schmidt(3) 57 Director
Randy H. Thurman(2) 47 Director
</TABLE>

(1) Member of Executive Committee.

(2) Member of the Audit Committee.

(3) Member of the Compensation Committee.

ROLF D. SCHMIDT, a co-founder of the Company in 1990, has served as
Chairman of the Board of Directors of the Company since February 1996. Mr.
Schmidt has served as Chief Executive Officer and Chairman of Performance Sports
Apparel, Inc. since 1995. In 1986, a significant portion of the business of
Sharpoint, Inc., a developer and manufacturer of surgical needles and sutures
co-founded by Mr. Schmidt and his brother, F. William Schmidt, was sold to its
primary distributor, Alcon Laboratories, Inc. In 1991, the remainder of such
business was sold to a management group. Since 1990, Mr. Schmidt has invested
primarily in and devoted substantial time and attention to healthcare-related
entities, including the Company. Mr. Schmidt is a senior level executive who
brings over 30 years of engineering and management experience to the Company.

ROBERT V. TONI has served as President and Chief Executive Officer of the
Company since June 1994 and as a director of the Company since February 1996.
From 1989 to 1994, Mr. Toni was General Manager and Vice President of Sales and
Marketing for IOLAB Corporation, a Johnson & Johnson company that marketed and
manufactured surgical devices, equipment and pharmaceuticals for the ophthalmic
market. From 1987 to 1989, he served as President of Cooper Vision-CILCO, and
also served as its Executive Vice President of Operations and Chief Financial
Officer from 1984 to 1987. Mr. Toni holds a B.S. degree in Finance from Iona
College.

J. BLOUNT SWAIN has served as Vice President of Finance and Chief Financial
Officer of the Company since September 1992. From 1983 until 1992, Mr. Swain was
Chief Financial Officer and Treasurer of The Record Bar, Inc., a national music
retailing entity. Prior to 1983, Mr. Swain served as a Senior Accountant with
Price Waterhouse in Raleigh, North Carolina. Mr. Swain holds a B.S. degree from
the University of North Carolina at Chapel Hill and is a certified public
accountant.

JEFFREY G. CLARK has served as Vice President of Research and Development
of the Company since 1990. Prior to that time, Mr. Clark spent seven years at
Sharpoint, Inc. and its successor where he developed bioabsorbable and
polypropylene suture technology. From 1977 to 1983, Mr. Clark worked at
Extracorporeal Inc., a division of Johnson & Johnson. Mr. Clark holds a M.S.
degree in Organic Chemistry from Drexel University.

JOE B. BAREFOOT has served as Vice President of Regulatory Affairs and
Quality Assurance of the Company since 1990. From 1986 to 1990, Mr. Barefoot
managed the quality assurance program and regulatory submissions for Sharpoint,
Inc. and its successor. From 1982 to 1986, he was a member of the quality
assurance staff at C.R. Bard Inc. Prior to that time, he was a member of the
quality assurance staff at Becton, Dickinson & Co. Mr. Barefoot holds a B.S.
degree in Microbiology from Emporia State University.

DENNIS C. CAREY, PH.D has served as a director of the Company since May
1996. Mr. Carey serves as Vice Chairman of Spencer Stuart US, an executive
search firm, and has overseen the firm's board consulting practice since 1988.
Prior to joining Spencer Stuart, he served as a National Practice Director for
The Hay Group, a global compensation firm, and was

<PAGE>
Secretary of Labor to former Governor Pierre S. duPont, IV of Delaware. Mr.
Carey holds a Ph.D. in finance and administration from the University of
Maryland. He was a co-founder of The Director's Institute at The Wharton School
of the University of Pennsylvania and serves on its board of directors.

MICHAEL K. LORELLI has served as a director of the Company since May 1996.
From September 1, 1996 to December 31, 1996, Mr. Lorelli was the Chief Executive
Officer and a director of MobileMedia Corporation, the second largest provider
of paging and personal communications services in the United States. MobileMedia
Corporation filed for protection under Chapter 11 of the federal bankruptcy code
in January 1997. From September 1994 through August 1996, Mr. Lorelli served as
President-North/Latin Americas Division for Tambrands, Inc., a leading feminine
protection products company. From 1986 to 1994, Mr. Lorelli held a number of
executive positions with PepsiCo., most recently as President, Pizza Hut
International Division and previously as President, Pepsi-Cola East, and
Executive Vice-President, Pepsi-Cola North America. Mr. Lorelli is a director of
Trident International. He also serves as a trustee of Sarah Lawrence College and
the American Health Foundation. Mr. Lorelli received his M.B.A. from New York
University.

F. WILLIAM SCHMIDT, a co-founder of the Company in 1990, has served as a
director of the Company since February 1996. Mr. Schmidt co-founded Sharpoint,
Inc. with his brother, Rolf D. Schmidt, and completed the design work on
production and manufacturing equipment that led to product development within
that company. In 1986, a significant portion of the business of Sharpoint, Inc.
was sold to its primary distributor, Alcon Laboratories, Inc. In 1991, the
remainder of such business was sold to a management group. Since 1990, Mr
Schmidt has primarily invested in and devoted substantial time and attention to
healthcare-related entities, including the Company. Mr. Schmidt brings 25 years
of management and business experience to the Company.

RANDY H. THURMAN has served as a director of the Company since May 1996.
Mr. Thurman is the Chief Executive Officer of Health Care Strategies 2000, a
health care consulting firm that he founded in 1995, and he also serves as a
Director of Spencer Stuart in their worldwide healthcare search practice. From
1993 to 1995, Mr. Thurman held a number of executive positions with Corning
Incorporated, most recently as Chairman and Chief Executive Officer of Corning
Life Sciences, Inc., a company engaged in providing clinical testing and
pharmaceutical research, laboratory products and disease state management. From
1985 to 1993, he held a number of executive positions with Rhone-Poulenc Rorer,
Inc., most recently as President of Rhone-Poulenc Rorer Pharmaceuticals, Inc.
Mr. Thurman received his M.A. from Webster University and his B.A. from Virginia
Polytechnic Institute. Mr. Thurman is also a director of Enzon, Inc.

The Company's Board of Directors is divided into three classes. Members of
one class are elected each year to serve a three-year term and until their
successors have been elected and qualified or until their earlier resignation or
removal. The terms of Dennis C. Carey and F. William Schmidt will expire at the
1997 annual meeting of stockholders, the terms of Michael K. Lorelli and Rolf D.
Schmidt will expire at the 1998 annual meeting and the terms of Randy H. Thurman
and Robert V. Toni will expire at the 1999 annual meeting.

The Board of Directors has standing Executive, Audit and Compensation
Committees. Mr. Rolf D. Schmidt serves as Chair of the Executive Committee, Mr.
Thurman serves as Chair of the Audit Committee and Mr. Carey serves as Chair of
the Compensation Committee. The Executive Committee, to the extent permitted
under Delaware law, exercises all of the power and authority of the Board of
Directors in the management of the business and affairs of the Company between
meetings of the Board. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of the independent auditors of the
Company, for reviewing with the independent auditors the scope and results of
the audits, and for reviewing the accounting controls, operating, capital and
research and development budgets and other financial matters of the Company. The
Compensation Committee is responsible for reviewing and approving compensation
arrangements for the officers of the Company, for recommending to the Board of
Directors the compensation of the Company's chief executive officer and
non-employee directors, for recommending stock option plans in which officers of
the Company are eligible to participate and for determining grants under and
administering the Company's Equity Compensation Plan.

The executive officers are currently elected annually by the Board of
Directors and hold office until their successors have been chosen and qualified,
or until death, resignation or removal by the Board of Directors. See
" -- Employment Agreements."

DIRECTOR COMPENSATION

Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee directors of the Company receive
annual compensation of $24,000 and $1,500 for each meeting of the Board of
Directors attended in person or participated in telephonically. In addition,
pursuant to the Company's Equity Compensation

<PAGE>
Plan, each non-employee director receives a one-time grant of options to
purchase 25,000 shares of Common Stock upon election to the Board and each
non-employee director in office immediately before and after the annual election
of directors receives options to purchase 5,000 shares of Common Stock. See
" -- Equity Compensation Plan."

EXECUTIVE COMPENSATION

The following table provides information concerning the annual and
long-term compensation of the Company's Chief Executive Officer and the three
most highly compensated executive officers other than the Chief Executive
Officer who were executive officers as of December 31, 1996 (the "Named
Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
NUMBER OF
ANNUAL COMPENSATION SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDED ($)(3)
<S> <C> <C> <C> <C> <C> <C>
Robert V. Toni.................................... 1996 215,000 130,000 -- 66,600 1,987
President and Chief Executive Officer 1995 198,000 50,000 64,473(2) -- 1,273
J. Blount Swain................................... 1996 138,450 85,000 -- 43,050 1,552
Vice President of Finance and Chief 1995 130,000 -- 14,481 -- 805
Financial Officer
Jeffrey G. Clark.................................. 1996 127,200 80,000 -- 40,100 1,341
Vice President of Research and 1995 120,000 -- 14,481 -- 719
Development
Joe B. Barefoot................................... 1996 95,850 60,000 -- 30,458 1,022
Vice President of Regulatory Affairs 1995 90,000 -- 10,861 -- 463
and Quality Assurance
</TABLE>

(1) Includes for 1995 the tax value of interests in the Partnership (the
"Partnership Interests") granted on December 31, 1995 to the Chief Executive
Officer and the Named Officers. The aggregate tax value of the Partnership
Interests on the date of grant to the Chief Executive Officer and the Named
Officers totaled $61,545. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."

(2) Includes payment for relocation expenses and a payment to cover the related
income tax liability in the aggregate amount of $42,751.

(3) Represents Company-paid life insurance premiums and 401(k) retirement plan
matching contributions.

STOCK OPTION INFORMATION

The following table sets forth certain information concerning grants of
stock options made during 1996 to each of the Named Officers. No stock
appreciation rights were granted to any Named Officer during 1996.
OPTION GRANTS IN 1996

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL
SECURITIES OPTIONS/ RATES OF STOCK PRICE APPRECIATION
UNDERLYING SARS MARKET FOR OPTION TERM
OPTIONS/ GRANTED TO EXERCISE PRICE ON
SARS EMPLOYEES OR BASE GRANT 5%($) 0%($) 10%($)
GRANTED IN FISCAL PRICE DATE EXPIRATION EXERCISE MARKET EXERCISE
NAME (#)(1) YEAR(2) ($/SH) ($/SH)(3) DATE PRICE(4) PRICE(4) PRICE(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert V. Toni 66,600 15.2 5.00 8.00 5/29/06 534,875 335,075 1,048,946
J. Blount Swain 43,050 9.8 5.00 8.00 5/29/06 345,741 216,591 678,035
Jeffrey G. Clark 40,100 9.1 5.00 8.00 5/29/06 322,049 201,749 631,573
Joe B. Barefoot 30,458 6.9 5.00 8.00 5/29/06 244,613 153,239 479,712

0%($)
MARKET
NAME PRICE(4)
<S> <C>
Robert V. Toni 849,146
J. Blount Swain 548,885
Jeffrey G. Clark 511,273
Joe B. Barefoot 388,338
</TABLE>

<PAGE>
(1) Options granted in 1996 have a ten-year term and vest 20% on the grant date
of May 30, 1996 and 20% annually on the anniversary of the grant date
thereafter.

(2) Based on 439,602 options granted to employees in 1996.

(3) The options were granted on May 30, 1996, to become effective only upon the
effectiveness of the Company's initial public offering of Common Stock, at
an exercise price equal to the price to the public per share of Common Stock
in the Company's initial public offering less $3.00. The Company's initial
public offering commenced on September 25, 1996 at a price to the public of
$8.00 per share.

(4) The potential realizable value is based on the term of the option at its
time of grant (ten years in the case of the options listed above). It is
calculated by assuming that the stock price on the date of grant appreciates
at the indicated annual rate, compounded annually for the entire term of the
option, and that the option is exercised and sold on the last day of its
term for the appreciated stock price. These amounts represent certain
assumed rates of appreciation only, in accordance with the rules of the
Commission, and do not reflect the Company's estimate or projection of
future stock price performance. Actual gains, if any, are dependent on the
actual future performance of the Company's Common Stock and no gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders.

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

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ACQUIRED VALUE AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Robert V. Toni -- -- 13,320 53,280 129,870 519,480
J. Blount Swain -- -- 8,610 34,440 83,948 335,790
Jeffrey G. Clark -- -- 8,020 32,080 78,195 312,780
Joe B. Barefoot -- -- 6,092 24,366 59,397 237,568
</TABLE>

(1) Calculated on the basis of the closing sale price of $14.75 per share of
Common Stock on December 31, 1996 as quoted on the Nasdaq National Market,
less the exercise price of $5.00 per share.

EMPLOYMENT AGREEMENTS

Messrs. Toni, Swain, Clark and Barefoot each entered into an employment
agreement with the Company in May 1996. The term of each agreement is from May
1, 1996 to May 31, 1999, with automatic one-year extensions unless 60 days'
prior notice is given by either party. The agreements provide for annual base
salaries of not less than $215,000, $138,450, $127,200 and $95,850,
respectively, which salaries may be increased as determined by the Compensation
Committee or the Board of Directors. Each agreement also provides for an annual
bonus ranging from 20% to 60% of base salary to be awarded based on performance
milestones to be established for each calendar year by the Compensation
Committee based on the recommendation of the Chief Executive Officer. In
connection with their employment agreements, in May 1996 the Company granted to
Messrs. Toni, Swain, Clark and Barefoot, respectively, options to purchase
66,600, 43,050, 40,100 and 30,458 shares of Common Stock under the Equity
Compensation Plan at an exercise price of $5.00 per share. The options have a
term of ten years and, provided employment has not been terminated for "cause"
(as defined in the employment agreements), will vest in five equal annual
installments, commencing as of the date of grant. See " -- Equity Compensation
Plan."

If, following a "change in control" (as defined in each agreement), any of
Messrs. Toni, Swain, Clark or Barefoot is terminated other than for "cause" (as
defined in each agreement) or terminates his employment for "good reason" (as
defined in each agreement), he will be entitled to receive all accrued and any
pro rata incentive compensation to the date of termination and a continuation of
his then current annual salary, incentive compensation and benefits for three
years after such termination. In the event of termination for "cause," Messrs.
Toni, Swain, Clark and Barefoot are entitled to a continuation of base salary,
incentive compensation and benefits for a period of eighteen months in the case
of Mr. Toni and one year for the others. The Company has agreed to indemnify
Messrs. Toni, Swain, Clark and Barefoot to the maximum extent permitted by
applicable law against all costs, charges and expenses incurred by each in
connection with any action, suit or proceeding to which he may be a party or in
which he may be a witness by reason of his being an officer, director or
employee of the

<PAGE>
Company or any subsidiary or affiliate of the Company. Messrs. Toni, Swain,
Clark and Barefoot have each agreed not to compete with the Company for two
years after termination of their employment with the Company.

CONSULTING AGREEMENT

In May 1996, the Company entered into a consulting agreement with Steven A.
Kriegsman to provide consulting services to the Company for an annual
compensation of $120,000, payable monthly. Under the agreement, in May 1996 the
Company granted to Mr. Kriegsman nonqualified stock options to purchase 50,000
shares of Common Stock under the Company's Equity Compensation Plan at an
exercise of $5.00 per share. The options have a term of ten years and, provided
that the agreement has not been terminated for "cause" (as defined in the
agreement), will vest in five equal annual installments commencing as of the
date of grant. Mr. Kriegsman has agreed to provide consultation at the times
requested by the Company in relation to new business development, strategic
planning and assistance with strategic alliances. The consulting term shall be
for five years, unless terminated earlier for "cause," or in the event of Mr.
Kriegsman's death or disability. In the event that Mr. Kriegsman dies or becomes
disabled during the term, the Company must continue to pay his compensation to
his executors, legal representatives or administrators or to him, as applicable,
as if the consulting term were not terminated. The Company is permitted to
obtain life insurance on Mr. Kriegsman's life to fund such obligation.

EQUITY COMPENSATION PLAN

The Company maintains the Amended and Restated 1996 Equity Compensation
Plan (the "Plan"), adopted by the Board of Directors on May 28, 1996 (the
"effective date") and amended and restated effective September 24, 1996 and
November 1, 1996. The Plan provides for grants of stock options to selected
officers (including officers who are also directors) of the Company or its
subsidiaries, other employees of the Company or its subsidiaries and independent
contractors and consultants who perform valuable services for the Company or its
subsidiaries. Non-employee directors of the Company are entitled to receive
formula stock option grants under the Plan. In addition, the Plan provides for
grants of restricted stock and stock appreciation rights ("SARs") (herein,
together with grants of stock options, collectively, "Grants") to participants
other than non-employee directors of the Company. By encouraging stock
ownership, the Company seeks to attract, retain and motivate such participants
and to encourage such participants to devote their best efforts to the business
and financial success of the Company.

GENERAL. Subject to adjustment in certain circumstances as discussed below,
the Plan authorizes up to 1,000,000 shares of Common Stock for issuance pursuant
to the terms of the Plan. If and to the extent Grants under the Plan expire or
are terminated for any reason without being exercised, or the shares subject to
a Grant are forfeited, the shares of Common Stock subject to such Grant will
again be available for grant under the Plan.

ADMINISTRATION OF THE PLAN. The Plan is administered and interpreted by a
committee (the "Committee") of the Board of Directors consisting of not fewer
than two persons appointed by the Board of Directors from among its members,
each of whom may be a "non-employee director" as defined in Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and must be an
"outside director" as defined by Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). The Committee has the sole authority to determine
(i) persons to whom Grants may be made under the Plan, (ii) the type, size and
other terms and conditions of each Grant, (iii) the time when the Grants will be
made and the duration of any applicable exercise or restriction period,
including the criteria for vesting and the acceleration of vesting, and (iv) any
other matters arising under the Plan. The Committee has full power and authority
to administer and interpret the Plan, to make factual determinations and to
adopt or amend such rules, regulations, agreements and instruments for
implementing the Plan, and for conduct of its business as it deems necessary or
advisable, in its sole discretion. The Board of Directors has appointed the
Compensation Committee to serve as this Committee.

GRANTS. Grants under the Plan may consist of (i) options intended to
qualify as incentive stock options ("ISOs") within the meaning of section 422 of
the Code or (ii) so-called "nonqualified stock options" that are not intended to
so qualify ("NQSOs"). In addition, Grants under the Plan may also consist of
grants of (i) restricted stock or (ii) SARs.

ELIGIBILITY FOR PARTICIPATION. Grants may be made to any employee
(including officers and directors) of, or independent contractors and
consultants to, the Company or its subsidiaries. Non-employee directors of the
Company are entitled only to formula grants of NQSOs. Independent contractors or
consultants to the Company are not eligible to receive ISOs under the Plan. As
of March 7, 1997, 40 employees were eligible for Grants under the Plan. During
any calendar year, no participant may receive Grants under the Plan for more
than 75,000 shares of Common Stock. As of March 7, 1997, 588,576 options were
outstanding under the Plan and held by all participants as a group, at a
weighted average exercise price of $5.90 per

<PAGE>
share, of which 138,420 were fully vested and exercisable. An additional 406,395
shares were reserved for issuance under the Plan.

OPTIONS. The option price of any ISO granted under the Plan will not be
less than the fair market value of the underlying shares of Common Stock on the
date of grant, except that the option price of an ISO granted to an employee who
owns more than 10% of the total combined voting power of all classes of stock of
the Company or its subsidiaries may not be less than 110% of the fair market
value of the underlying shares of Common Stock on the date of grant. The option
price of a NQSO may be greater than, equal to or less than the fair market value
of the underlying shares of Common Stock on the date of grant. The Committee
will determine the term of each option; provided, however, that the exercise
period may not exceed ten years from the date of grant, and the exercise period
of an ISO granted to an employee who owns more than 10% of the total combined
voting power of all classes of stock of the Company or its subsidiaries may not
exceed five years from the date of grant. A participant may pay the option price
(i) in cash, (ii) with the approval of the Committee, by delivering shares of
Common Stock owned by the participant and having a fair market value on the date
of exercise equal to the option price or (iii) by a combination of the
foregoing. The participant may instruct the Company to deliver the shares of
Common Stock due upon the exercise to a designated broker instead of to the
participant.

FORMULA OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. Non-employee directors are
entitled to receive NQSOs pursuant to the formula grants under the Plan.
According to the formula grants, each non-employee director who first became a
member of the Board of Directors on or after the effective date of the Plan and
before the consummation of the Company's initial public offering of Common Stock
on September 30, 1996 (a "pre-IPO initial grant") received a grant of a NQSO to
purchase 25,000 shares of Common Stock as of the date the non-employee director
first became a member of the Board of Directors (which is the date of grant).
Each non-employee director who first becomes a member of the Board of Directors
after September 30, 1996 will receive a grant of a NQSO to purchase 25,000
shares of Common Stock as of the date the non-employee director first becomes a
member of the Board of Directors. Thereafter, on each date on which the Company
holds its annual meeting of stockholders, each non-employee director in office
immediately before and after the annual election of directors will receive a
grant of a NQSO to purchase 5,000 shares of Common Stock. The option price of a
NQSO granted pursuant to a formula grant under the Plan will be the fair market
value of a share of Common Stock on the date of grant, except that the option
prices of the pre-IPO initial grants were $7.00 per share. The term of each such
option shall be ten years, and each such option shall be exercisable with
respect to 50% of the shares on the date of grant and an additional 25% on each
of the next two anniversaries of the date of the grant.

RESTRICTED STOCK. The Committee may issue shares of Common Stock to
participants other than non-employee directors of the Company pursuant to the
Plan. Shares may be issued for cash consideration or for no cash consideration,
as the Committee determines. The number of shares of Common Stock granted to
each participant shall be determined by the Committee, subject to the maximum
limit described above. Grants of restricted stock will be made subject to such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as the Committee may determine in its sole
discretion.

STOCK APPRECIATION RIGHTS. The Committee may grant SARs to participants
other than non-employee directors of the Company in tandem with any stock option
pursuant to the Plan. Unless the Committee determines otherwise, the exercise
price of a SAR will be the greater of (i) the exercise price of the related
stock option or (ii) the fair market value of a share of Common Stock on the
date of grant of the SAR. When the participant exercises a SAR, the participant
will receive the amount by which the fair market value of the Common Stock on
the date of exercise exceeds the exercise price of the SAR. The participant may
elect to have such amount paid in cash or in shares of Common Stock, subject to
Committee approval. To the extent a participant exercises a SAR, the related
option shall terminate. Similarly, upon exercise of a stock option, the related
SAR, if any, shall terminate.

AMENDMENT AND TERMINATION OF THE PLAN. The Board of Directors may amend or
terminate the Plan at any time; provided, however, that, the Board of Directors
may not amend the Plan, without stockholder approval, to (i) increase (except
for increases due to the adjustments discussed below) the aggregate number of
shares of Common Stock for which Grants may be made thereunder, or the
individual limit of shares of Common Stock for which Grants may be made to any
single individual under the Plan, (ii) modify the requirements as to eligibility
to participate in the Plan or (iii) make any amendment that requires stockholder
approval pursuant to Section 162(m) of the Code. The Plan will terminate on the
day immediately preceding the tenth anniversary of its effective date, unless
terminated earlier by the Board of Directors or extended by the Board of
Directors with approval of the stockholders.

ADJUSTMENT PROVISIONS. Subject to the change of control provisions
described below, in the event of certain transactions identified in the Plan,
the Committee may appropriately adjust (i) the number of shares of Common Stock
(and the option

<PAGE>
price per share) subject to the unexercised portion of any outstanding options
or SARs, (ii) the number of shares of Common Stock covered by outstanding
Grants, (iii) the number of shares of Common Stock for which Grants may be made
under the Plan and (iv) the individual limit of shares for which Grants may be
made to any individual under the Plan, and such adjustments shall be effective
and binding for all purposes of the Plan.

CHANGE OF CONTROL OF THE COMPANY. In the event of a change of control,
unless the Committee determines otherwise, all options, restricted stock and
SARs will become fully vested. Unless the Committee determines otherwise, each
participant will be provided with advance written notice by the Company prior to
the change of control (to the extent possible) and will have the right, within a
designated period after such notice, to exercise the options and SARs in full or
to surrender the options and SARs in exchange for a payment by the Company, in
cash or Common Stock as determined by the Committee, in an amount equal to the
excess of the then fair market value of the shares of Common Stock over the
option exercise price. Any options or SARs not timely exercised or surrendered
will terminate unless exchanged or substituted with options or SARs of the
successor corporation.

A change of control is defined as (i) a tender offer, merger or other
transaction as a result of which any person or group (other than Rolf D.
Schmidt, F. William Schmidt or any entity controlled by either or both of them)
becomes the owner, directly or indirectly, of more than 50.1% of the Common
Stock or the combined voting power of the Company's then outstanding securities,
(ii) a liquidation or a sale of substantially all of the Company's assets, or
(iii) if, during any period of two consecutive years, the individuals who, at
the beginning of such period, constituted the Board of Directors cease to
constitute a majority of the Board of Directors, except as otherwise provided in
the Plan.

SECTION 162(M). Under Section 162(m) of the Code, the Company may be
precluded from claiming a federal income tax deduction for total remuneration in
excess of $1,000,000 paid to the chief executive officer or to any of the other
four most highly compensated officers in any one year. Total remuneration
includes amounts received upon the exercise of stock options granted under the
Plan and the value of shares received when shares of restricted stock become
vested (or such other time when income is recognized). An exception does exist,
however, for "performance-based compensation," including amounts received upon
the exercise of stock options pursuant to a plan approved by stockholders that
meets certain requirements. The Plan has been approved by the stockholder and is
intended to allow grants of options thereunder to meet the requirements of
"performance-based compensation." Grants of restricted stock generally will not
qualify as "performance-based compensation."

<PAGE>
CERTAIN TRANSACTIONS

Immediately prior to the Company's initial public offering on September 25,
1996, in the Exchange, obligations of and interests in the Partnership were
contributed to the Company in exchange for an aggregate of 9,600,000 shares of
Common Stock and the Partnership ceased to exist. See "Prior Partnership
Status."

Rolf D. Schmidt and F. William Schmidt, directors and founders of the
Company, and three partnerships controlled by one or both of them, received, as
successors to Sharpoint's economic interest in the Partnership, 5,453,750 shares
of Common Stock in the Exchange. From the inception of the Partnership until
March 29, 1996, Sharpoint, the general partner of the Partnership, provided the
Company with loans in an aggregate principal amount of $10,502,000, which
accrued interest at rates ranging from 9.5% to 9.75%. On March 29, 1996, in
contemplation of the Exchange, Sharpoint contributed this debt, together with
the accrued interest thereon, in the aggregate amount of $11,483,000, to the
Partnership as partners' capital. The Schmidts are the only stockholders of
Sharpoint.

Under the Partnership agreement, CRX and Caratec, the successor to CRX's
limited partnership interest in the Partnership, were entitled to receive
payments based on net revenues, subject to annual minimum payments of $150,000
in 1992, 1993 and 1994 and $250,000 thereafter. These payments aggregated
approximately $993,000 on the date of the Exchange, at which time the payment
obligations ceased to exist. CRX and Caratec also were entitled as a limited
partner in the Partnership to payment of a percentage of the proceeds of a sale
of all or substantially all of the assets of the Partnership. In connection with
the Exchange, Caratec exchanged its right to receive such payments from the
Partnership and its limited partnership interest for 1,776,250 shares of Common
Stock. This transaction resulted in a non-cash expense of $14,210,000 in 1996
which equaled the difference between the value of the Common Stock issued to
Caratec and its basis in the Partnership. The resulting charge to accumulated
deficit was offset by a credit to additional paid-in capital. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Principal and Selling Stockholders."

PRIOR PARTNERSHIP STATUS

The Company was incorporated in Delaware on February 20, 1996. From May 10,
1990 to February 29, 1996, the business of the Company was conducted by the
Partnership. As of March 1, 1996, substantially all of the assets and
liabilities of the Partnership, except for the indebtedness to Sharpoint, were
transferred to the Company in exchange for one share of Common Stock.
Immediately prior to the Company's initial public offering on September 25,
1996, in the Exchange, obligations of and interests in the Partnership were
contributed to the Company in exchange for an aggregate of 9,600,000 shares of
Common Stock issued to 13 individuals and entities. Upon consummation of the
Exchange, the Partnership ceased to exist. As of March 29, 1996, the long-term
debt, including accrued interest, of the Partnership held by Sharpoint, the
general partner of the Partnership and a corporation controlled by Rolf D.
Schmidt and F. William Schmidt, was contributed to the Partnership as
$11,483,000 of partners' capital. All obligations of and interests in the
Partnership held by Sharpoint and its successors were contributed to the Company
in exchange for shares of Common Stock in connection with the Exchange. Under
the Partnership agreement, CRX and Caratec were entitled to receive payments
based on net revenues, subject to annual minimum payments of $150,000 in 1992,
1993 and 1994 and $250,000 thereafter. These payments aggregated approximately
$993,000 on the date of the Exchange, at which time the payment obligations
ceased to exist. CRX and Caratec also were entitled as a limited partner in the
Partnership to payment of a percentage of the proceeds of a sale of all or
substantially all of the assets of the Partnership. In connection with the
Exchange, Caratec, the successor to CRX's limited partnership interest in the
Partnership, exchanged its right to receive various payments from the
Partnership and its limited partnership interest for 1,776,250 shares of Common
Stock. This transaction resulted in a non-cash expense of $14,210,000 which
equaled the difference between the value of the Common Stock issued to Caratec
and its basis in the Partnership. The resulting charge to accumulated deficit
was offset by a credit to additional paid-in capital. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Certain Transactions" and "Principal and Selling Stockholders."

<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of March 1, 1997 and after giving effect
to the Offering by (i) each person known by the Company to own beneficially more
than 5% of the Company's Common Stock, (ii) the Selling Stockholder, (iii) each
of the Named Officers, (iv) each of the Company's directors and (v) all
directors and executive officers of the Company as a group:

<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) SHARES AFTER OFFERING
NAME OF BENEFICIAL OWNER NUMBER PERCENT TO BE SOLD NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Rolf D. Schmidt (2).................................................. 3,126,831 25.7% -- 3,126,831 24.1%
F. William Schmidt (3)............................................... 3,126,831 25.7% -- 3,126,831 24.1%
Caratec, L.L.C. (4).................................................. 1,326,250 10.9% 700,000 626,250 4.8%
Robert V. Toni (5)................................................... 733,320 6.0% -- 733,320 5.7%
J. Blount Swain (5).................................................. 488,610 4.0% -- 488,610 3.8%
Jeffrey G. Clark (5)................................................. 488,020 4.0% -- 488,020 3.8%
Joe B. Barefoot (5)(6)............................................... 367,247 3.0% -- 367,247 2.8%
Dennis C. Carey (5).................................................. 13,500 * -- 13,500 *
Michael K. Lorelli (5)............................................... 32,500 * -- 32,500 *
Randy H. Thurman (5)................................................. 14,720 * -- 14,720 *
All directors and executive officers as a group
(9 persons) (7).................................................... 7,791,667 63.7% -- 7,791,667 59.8%
</TABLE>

* Less than 1%.

(1) Nature of ownership consists of sole voting and investment power unless
otherwise indicated. Includes shares of Common Stock issuable upon the
exercise of stock options exercisable within 60 days of March 1, 1997.

(2) The address of the stockholder is 205 Sweitzer Road, Sinking Springs, PA
19608. Includes (a) 2,246,945 shares held by Cacoosing Partners, L.P., a
limited partnership of which Rolf D. Schmidt is the sole general partner,
for which shares he is deemed to have sole voting and investing power; (b)
599,912 shares held by OMI Partners, L.P., a limited partnership of which
Rolf D. Schmidt and F. William Schmidt are the sole general partners, for
which shares they are deemed to share voting and investment power; and (c)
100,000 shares owned jointly with Rolf D. Schmidt's spouse, for which shares
he is deemed to share voting and investment power.

(3) The address of the stockholder is 534 Ridge Avenue, Ephrata, PA 17522.
Includes (a) 2,246,945 shares held by Triangle Partners, L.P., a limited
partnership of which F. William Schmidt is the sole general partner, for
which shares he is deemed to have sole voting and investing power; (b)
599,912 shares held by OMI Partners, L.P., a limited partnership of which
Rolf D. Schmidt and F. William Schmidt are the sole general partners, for
which shares they are deemed to share voting and investment power; and (c)
50,000 shares held by F. William Schmidt's spouse, for which shares he
disclaims beneficial ownership.

(4) The address of the stockholder is 206 Erskine Court, Cary, NC 27511.

(5) Includes the following shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of March 1, 1997: Robert V.
Toni -- 13,320; J. Blount Swain -- 8,610; Jeffrey G. Clark -- 8,020; Joe B.
Barefoot -- 6,092; Dennis C. Carey -- 12,500; Michael K. Lorelli -- 12,500;
and Randy H. Thurman -- 12,500.

(6) Includes 1,155 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 1, 1997 by Debra
Genovese-Barefoot. Ms. Genovese-Barefoot is the spouse of Joe B. Barefoot.
Mr. Barefoot disclaims beneficial ownership of such shares.

(7) Includes 74,697 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 1, 1997.

<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 37,000,000 shares,
including 35,000,000 shares of Common Stock, par value $.01 per share, and
2,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"). Immediately after the sale of the 1,500,000 shares of Common Stock
offered hereby, there will be issued and outstanding 12,955,029 shares of Common
Stock and no shares of Preferred Stock.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. The election of directors is determined by a plurality
of the votes cast, with the Board of Directors being divided into three classes,
as nearly equal in number as possible, initially of two directors each, each
class of which, after a transitional period, will serve for a term of three
years and until their successors have been elected and qualified. Accordingly,
holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election and
may exert considerable influence over the management and policies of the
Company. The Company's Certificate of incorporation (the "Certificate") may
generally be amended as permitted by law. However, certain fundamental
transactions, including the amendment of certain anti-takeover provisions in the
Certificate, amendment of the By-Laws by the stockholders, the sale, lease,
exchange or other disposition of all or substantially all of the assets of the
Company, or the merger, consolidation, division, reorganization,
recapitalization, dissolution, liquidation or winding up of the Company, require
either: (i) the affirmative vote of 75% of the directors then in office and the
minimum affirmative vote of the stockholders entitled to vote thereon required
by law and the express terms of any class or series of shares or (ii) the
affirmative vote of the holders of 75% of the voting power of all then
outstanding shares entitled to vote in the election of directors, voting as a
single class, and, in addition, the affirmative vote of the number of shares of
any class or series, if any, as shall at the time of such approval be required
by law or the express terms of any such class or series of shares. Except as
otherwise required by law, all other matters are determined by a majority of the
votes cast. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock (none of which is currently outstanding). Upon the
liquidation, dissolution or winding up of the Company, subject to any
preferential liquidation rights of outstanding Preferred Stock, the holders of
Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities. Holders of the
Common Stock have no preemptive, subscription, redemption or conversion rights.
All shares of Common Stock outstanding are, and the shares offered by the
Company in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future. See "Risk Factors -- Control by Existing Stockholders;
Anti-Takeover Provisions" and " -- Preferred Stock."

PREFERRED STOCK

The Company also has authorized 2,000,000 shares of Preferred Stock which
the Board of Directors has discretion to issue in such series and with such
preferences and rights as it may designate without the approval of the holders
of Common Stock. Such preferences and rights may be superior to those of the
holders of Common Stock. For example, the holders of Preferred Stock may be
given a preference in payment upon liquidation of the Company, or for the
payment or accumulation of dividends before any distributions are made to the
holders of Common Stock. As of the date of this Prospectus, no Preferred Stock
has been designated or issued by the Company, and the Company has no plans,
agreements or understandings for the issuance of any shares of Preferred Stock.
For a description of the possible anti-takeover effects of the Preferred Stock,
see "Risk Factors -- Control by Existing Stockholders; Anti-Takeover Provisions"
and " -- Certain Anti-Takeover Provisions."

LIMITATION OF LIABILITY

The Company's Certificate provides that a director of the Company shall not
be personally liable to the Company or its stockholders for monetary damages for
a breach of fiduciary duty as a director, except for liability (i) for any
breach of such person's duty of loyalty, (ii) for acts or omissions not in good
faith or involving intentional misconduct or a knowing violation of law, (iii)
for the payment of unlawful dividends and certain other actions prohibited by
Delaware corporate law and (iv) for any transaction resulting in receipt by such
person of an improper personal benefit.

The Company maintains directors' and officers' liability insurance to
provide directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, error and other wrongful acts. At
present, there is

<PAGE>
no pending litigation or proceeding, and the Company is not aware of any
threatened litigation or proceeding, involving any director, officer, employee
or agent where indemnification will be required or permitted under the
Certificate or By-Laws.

CERTAIN ANTI-TAKEOVER PROVISIONS

CLASSIFIED BOARD AND OTHER MATTERS

The Company's Board of Directors is divided into three classes, each of
which, after a transitional period, will serve for three years, with one class
being elected each year. Under the Delaware General Corporation Law and the
provisions of the Certificate, stockholders may remove a director only for cause
and, in accordance with the Certificate, only with the approval of 75% of the
voting power of the then outstanding shares entitled to vote in the election of
directors, voting as a single class. Vacancies on the Board of Directors may be
filled only by a vote of the majority of the directors then in office, though
less than a quorum, or by a sole remaining director. The Certificate and the
By-Laws provide that special meetings of stockholders of the Company may be
called only by the Board of Directors or the Chairman of the Board. The
Certificate and By-Laws also provide that no action required or permitted to be
taken by the stockholders at any annual or special meeting of the stockholders
of the Company may be taken without a meeting. The classification of the Board
of Directors, the limitations on the removal of directors and the filling of
vacancies, and the prohibitions against calling of special meetings by
stockholders and stockholder action without a meeting could have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from acquiring, control of the Company.

In addition, the Company's supermajority voting provisions for certain
fundamental corporate transactions, including, among others, amendment of
certain anti-takeover provisions in the Certificate and amendment of the ByLaws
by the stockholders, and the ability of the Board of Directors to establish the
rights of, and to issue, substantial amounts of Preferred Stock without the need
for stockholder approval, which Preferred Stock, among other things, may be used
to create voting impediments with respect to changes in control of the Company
or to dilute the stock ownership of holders of Common Stock seeking to obtain
control of the Company, may have the effect of discouraging, delaying or
preventing a change in control of the Company. See "Risk Factors -- Control by
Existing Stockholders; Anti-Takeover Provisions," " -- Common Stock" and
" -- Preferred Stock."

SECTION 203 OF DELAWARE GENERAL CORPORATION LAW

Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested
stockholder,"which is defined as a person who, together with any affiliates or
associates of such person, beneficially owns, directly or indirectly, 15% or
more of the outstanding voting shares of a Delaware corporation. This provision
prohibits certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
in excess of 10% of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation. The prohibition is for a period of three years commencing on the
date the interested stockholder becomes an interested stockholder, unless (i)
the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder becomes an interested stockholder;
(ii) the interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder; or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder. See
"Risk Factors -- Control by Existing Stockholders; Anti-Takeover Provisions."

REGISTRATION RIGHTS

The Company has granted to the holders of 8,820,000 shares of Common Stock
(the "Registrable Securities") certain rights with respect to the registration
of the Registrable Securities for resale under the Securities Act.

Pursuant to a registration rights agreement, Caratec, the holder of
1,326,250 shares of Common Stock (the "Caratec Registrable Securities"), may
require, on two occasions during the five-year period commencing March 31, 1997,
that the Company register all or a portion of the Caratec Registrable Securities
for public resale under the Securities Act, provided, among other limitations,
that the anticipated aggregate gross proceeds will not be less than $100,000. Of
the 1,326,250 shares subject to such registration rights, 700,000 shares are to
be sold by Caratec in the Offering. See "Principal and Selling Stockholders."

<PAGE>
Pursuant to a registration rights agreement with Rolf D. Schmidt, F.
William Schmidt and three partnerships controlled by one or both of them, who
hold 179,974, 2,246,945, 2,246,945 and 599,912 shares of Common Stock subject to
such registration rights agreement, respectively (the "Schmidt Registrable
Securities"), and four employees of the Company who hold 720,000, 480,000,
480,000 and 360,000 shares of Common Stock, respectively (the "Employee
Registrable Securities"), each of the holders of the Schmidt Registrable
Securities may require, on two occasions during the five-year period commencing
March 31, 1997, that the Company use its best efforts to register all or a
portion of the Schmidt Registrable Securities held by such holder for public
resale under the Securities Act, and each of the holders of the Employee
Registrable Securities, subject to certain exceptions and limitations, may
require, on one occasion after the later of (i) March 31, 1997 or (ii) the
termination of such employee's employment, that the Company use its best efforts
to register all or a portion of such holder's Employee Registrable Securities
for public resale under the Securities Act.

In addition, in the event the Company elects to register any Common Stock
under the Securities Act, either for its own account or for the account of any
other stockholders, the Company, during the five-year period commencing March
31, 1997, is required to notify the holders of the Registrable Securities of the
proposed registration and, subject to certain marketing and other limitations,
is required, upon request, to use its best efforts to include in such
registration any Registrable Securities requested to be included.

All registration expenses under the registration rights agreements are to
be borne by the Company and all selling expenses are to be borne by the holders
of the securities being registered.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
this Offering could adversely affect the market price of the Common Stock and
adversely affect the Company's ability to raise capital at a time and on terms
favorable to the Company.

Of the 12,955,029 shares to be outstanding after this Offering (assuming
that the Underwriters' over-allotment option is not exercised), the 1,500,000
shares of Common Stock offered hereby and an additional 3,005,029 shares of
Common Stock will be freely tradeable without restriction in the public market
unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144(a) under the Securities Act. For purposes of Rule 144, an
"affiliate" of an issuer is a person that, directly or indirectly through one or
more intermediaries, controls, or is controlled by or is under common control
with, such issuer. The remaining 8,450,000 shares of Common Stock to be
outstanding after this Offering are "restricted securities" under the Securities
Act and may be sold in the public market upon the expiration in September 1997
of the one-year holding period under Rule 144 subject to the volume, manner of
sale and other limitations of Rule 144. Of the 8,450,000 shares, 7,493,750
shares of Common Stock will be held by "affiliates" of the Company, as defined
in Rule 144(a).

The Commission recently adopted revisions to Rule 144, the effect of which
substantially shortened the holding periods under Rule 144. In general, under
Rule 144 as will be in effect in April 1997, a person who has beneficially owned
shares for at least one year, including an "affiliate," will be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of Common Stock
(approximately 129,550 shares after giving effect to this Offering), or the
average weekly trading volume during the four calendar weeks preceding filing of
notice of such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. A person who is not an affiliate at any time
during the 90 days preceding a sale, and who has beneficially owned shares for
at least two years, will be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions or public
information requirements.

In addition, as of March 7, 1997, there were outstanding options to
purchase 588,576 shares of Common Stock, of which 138,420 were fully vested and
exercisable. An additional 406,395 shares were reserved for issuance under the
Equity Compensation Plan. All of the shares issued, issuable or reserved for
issuance under the Equity Compensation Plan are covered by an effective
registration statement.

<PAGE>
All directors and executive officers and certain other stockholders of the
Company who will beneficially own an aggregate of 8,343,220 shares of Common
Stock upon completion of this Offering, and the Company, with certain limited
exceptions, have agreed, as described below under "Underwriting," with the
Underwriters not to offer for sale, sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock for a period of 180 days from the date of
this Prospectus without the prior written consent of Lehman Brothers Inc.

Certain holders of 8,820,000 shares of Common Stock, of which 700,000
shares are to be sold by the Selling Stockholder in the Offering, are entitled
to certain registration rights with respect to such shares for resale under the
Securities Act. 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 an adverse effect on the market price for the Common Stock.
Such rights may not be exercised prior to the expiration of 180 days from the
date of this Prospectus. See "Description of Capital Stock -- Registration
Rights."

<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part, the Underwriters named below (the
"Underwriters"), for whom Lehman Brothers Inc., Oppenheimer & Co., Inc. and
Sands Brothers & Co., Ltd. are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Stockholder, and the Company and the Selling Stockholder have agreed to
sell to each Underwriter, the aggregate number of shares of Common Stock set
forth opposite the name of each such Underwriter below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Lehman Brothers Inc.................................................................................. 334,000
Oppenheimer & Co., Inc............................................................................... 333,000
Sands Brothers & Co., Ltd............................................................................ 333,000
Alex. Brown & Sons Incorporated...................................................................... 50,000
Cowen & Company...................................................................................... 50,000
Donaldson, Lufkin & Jenrette Securities Corporation.................................................. 50,000
A.G. Edwards & Sons, Inc............................................................................. 50,000
Hambrecht & Quist LLC................................................................................ 50,000
Montgomery Securities................................................................................ 50,000
Smith Barney Inc..................................................................................... 50,000
Auerbach, Pollak & Richardson, Inc................................................................... 25,000
Legg Mason Wood Walker, Incorporated................................................................. 25,000
Pennsylvania Merchant Group Ltd...................................................................... 25,000
Piper Jaffray Inc.................................................................................... 25,000
Principal Financial Securities, Inc.................................................................. 25,000
Wheat, First Securities, Inc......................................................................... 25,000
Total......................................................................................... 1,500,000
</TABLE>

The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page
hereof, and to certain dealers at such public offering price less a selling
concession not in excess of $0.43 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share to
certain other Underwriters or to certain other brokers or dealers. After the
offering to the public, the offering price and other selling terms may be
changed by the Representatives.

The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, including the condition that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending or threatened by the Commission and
that there has been no material adverse change or any development involving a
prospective material adverse change in the condition of the Company from that
set forth in the Registration Statement otherwise than as set forth or
contemplated in this Prospectus, and that certain certificates, opinions and
letters have been received from the Company and its counsel, the Selling
Stockholder and its counsel and independent auditors. The Underwriters are
obligated to take and pay for all of the above shares of Common Stock if any
such shares are taken.

The Company, the Selling Stockholder and the Underwriters have agreed in
the Underwriting Agreement to indemnify each other against certain liabilities,
including liabilities under the Securities Act.

The Company has granted to the Underwriters an option to purchase up to an
additional 225,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the public offering price, less the underwriting discounts
and commissions shown on the cover page of this Prospectus. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will be
committed to purchase a number of the additional shares of Common Stock
proportionate to each Underwriter's initial commitment as indicated in the
preceding table.

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to these
rules,

<PAGE>
the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described herein.

In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

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

All directors and executive officers and certain other stockholders of the
Company who will beneficially own an aggregate 8,343,220 shares of Common Stock
upon completion of this Offering have agreed not to offer for sale, sell or
otherwise dispose of (or enter into any transaction that is designed to result
in the disposition of), directly or indirectly, other than to the Underwriters
pursuant to the Underwriting Agreement, shares of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock, for a period
of 180 days from the date of this Prospectus without the prior written consent
of Lehman Brothers Inc. Except for the Common Stock to be sold in the Offering,
the Company has agreed, with certain limited exceptions relating to the grant of
options and issuance of Common Stock pursuant to the Equity Compensation Plan,
not to offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or expected to, result in the
disposition at any time in the future of), directly or indirectly, any shares of
Common Stock or other capital stock or any securities convertible into or
exchangeable or exercisable for, or any rights to acquire, Common Stock or other
capital stock, prior to the expiration of 180 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Shearman & Sterling, New York, New York.

EXPERTS

The financial statements as of December 31, 1995 and 1996 and for each of
the three years in the period ended December 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

<PAGE>
AVAILABLE INFORMATION

The Company is subject to the reporting requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the offices of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the following regional offices of the Commission: Seven World Trade Center,
13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such material also may be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov). In addition, such
reports, proxy statements and other information concerning the Company can be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are summaries of the material provisions thereof. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Copies of each contract or document referred to herein are filed
as exhibits to the Registration Statement. Copies of the Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C. or obtained at prescribed
rates from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.

<PAGE>
CLOSURE MEDICAL CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants...................................................................................... F-2
Financial Statements:
Balance Sheet as of December 31, 1995 and 1996....................................................................... F-3
Statement of Operations for the years ended December 31, 1994, 1995 and 1996......................................... F-4
Statement of Cash Flows for the years ended December 31, 1994, 1995 and 1996......................................... F-5
Statement of Partners' Deficit and Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996.................................................................................. F-6
Notes to Financial Statements........................................................................................ F-7
</TABLE>

F-1

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
Closure Medical Corporation

In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and partners' deficit and stockholders' equity
present fairly, in all material respects, the financial position of Closure
Medical Corporation (the "Company") at December 31, 1995 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP
Raleigh, North Carolina
February 14, 1997, except as to
Note 9, which is as of March 7, 1997

F-2

<PAGE>
CLOSURE MEDICAL CORPORATION

BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Cash and cash equivalents.............................................................................. $ 20 $ 13,024
Short-term investments................................................................................. -- 4,627
Accounts receivable.................................................................................... 266 67
Inventories............................................................................................ 119 112
Prepaid expenses....................................................................................... 27 388
Total current assets................................................................................. 432 18,218
Furniture, fixtures and equipment...................................................................... 418 851
Less -- accumulated depreciation and amortization...................................................... (142) (179)
276 672
Long-term investments.................................................................................. -- 409
Intangible assets, net of accumulated amortization..................................................... 200 213
Total assets......................................................................................... $ 908 $ 19,512
LIABILITIES, PARTNERS' DEFICIT AND STOCKHOLDERS' EQUITY
Accounts payable....................................................................................... $ 514 $ 566
Accrued payroll and vacation........................................................................... 28 396
Deferred revenue....................................................................................... 78 2,069
Payable to Caratec, L.L.C.............................................................................. 195 --
Capital lease obligations.............................................................................. 12 12
Total current liabilities............................................................................ 827 3,043
Notes payable to Sharpoint Development Corporation..................................................... 10,062 --
Accrued interest payable to Sharpoint Development Corporation.......................................... 843 --
Capital lease obligations.............................................................................. 26 14
Total liabilities.................................................................................... 11,758 3,057
PARTNERS' DEFICIT AND STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value. Authorized 2,000,000 shares; none issued or outstanding............... -- --
Common Stock, $.01 par value. Authorized 35,000,000 shares; issued and outstanding 12,150,000 shares... -- 122
Additional paid-in capital............................................................................. -- 33,579
Partners' deficit...................................................................................... (10,850) --
Accumulated deficit.................................................................................... -- (16,246)
Deferred compensation on stock options................................................................. -- (1,000)
Total partners' deficit and stockholders' equity..................................................... (10,850) 16,455
Total liabilities, partners' deficit and stockholders' equity........................................ $ 908 $ 19,512
</TABLE>

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

F-3

<PAGE>
CLOSURE MEDICAL CORPORATION

STATEMENT OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Product sales.......................................................................... $ 1,478 $ 1,380 $ 496
License and product development revenues............................................... 25 -- 3,500
Total revenues....................................................................... 1,503 1,380 3,996
Cost of products sold.................................................................. 528 531 460
Gross profit and license and product development revenues............................ 975 849 3,536
Research, development and regulatory affairs expenses.................................. 1,231 1,637 3,167
Selling and administrative expenses.................................................... 1,366 1,589 2,879
Charges related to partnership capital changes......................................... -- 3,500 14,210
Payments to Caratec, L.L.C............................................................. 150 250 293
Total operating expenses............................................................. 2,747 6,976 20,549
Loss from operations................................................................... (1,772) (6,127) (17,013)
Interest expense to Sharpoint Development Corporation.................................. (445) (847) (138)
Investment and interest income......................................................... 2 2 337
Net loss............................................................................... $(2,215) $(6,972) $(16,814)
Shares used in computation of pro forma net loss per common share...................... 10,150 10,545
Pro forma net loss per common share.................................................... $ (0.69) $ (1.59)
</TABLE>

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

F-4

<PAGE>
CLOSURE MEDICAL CORPORATION

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................................... $(2,215) $(6,972) $(16,814)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Amortization expense......................................................................... 67 31 11
Depreciation expense......................................................................... 44 51 85
Charges related to partnership capital changes............................................... -- 3,500 14,210
Amortization of deferred compensation on stock options....................................... -- -- 500
Net loss on disposals of fixed assets........................................................ 4 55 38
Net loss on disposals of intangibles......................................................... -- 14 58
Change in accounts receivable................................................................ 58 (137) 199
Change in inventories........................................................................ (23) -- 7
Change in prepaid expenses................................................................... (14) (4) (361)
Change in accounts payable and accrued payroll and vacation.................................. 127 303 420
Change in deferred revenue................................................................... -- 78 1,991
Change in accrued payable to Caratec, L.L.C.................................................. (24) 125 (195)
Change in accrued interest due to Sharpoint Development Corporation.......................... 443 843 138
Net cash (used) provided by operating activities............................................. (1,533) (2,113) 287
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to furniture, fixtures and equipment............................................... (64) (57) (519)
Additions to intangible assets............................................................... (66) (47) (82)
Purchases of investments..................................................................... -- -- (5,494)
Proceeds from the sale of investments........................................................ -- -- 458
Net cash used by investing activities........................................................ (130) (104) (5,637)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to Sharpoint Development Corporation............................. 1,683 2,216 440
Net proceeds from sale of common stock....................................................... -- -- 17,926
Principal payments under capital lease obligation............................................ (1) (9) (12)
Net cash provided by financing activities.................................................... 1,682 2,207 18,354
Increase (decrease) in cash and cash equivalents............................................. 19 (10) 13,004
Cash and cash equivalents at beginning of period............................................. 11 30 20
Cash and cash equivalents at end of period................................................... $ 30 $ 20 $ 13,024
</TABLE>

NON-CASH TRANSACTIONS:

On December 31, 1994, accrued interest of $931,461 was converted to long-term
debt.

On December 31, 1995, the partnership agreement was amended to admit a new class
of limited partners. The fair value of the partnership interest was reflected as
a contribution of partners' capital.

On March 29, 1996, notes payable of $10,502,301 and related accrued interest of
$980,915 was converted to partners' capital.

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

F-5

<PAGE>
CLOSURE MEDICAL CORPORATION

STATEMENT OF PARTNERS' DEFICIT AND STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
DEFERRED
TOTAL ADDITIONAL COMPENSATION
PARTNERS' COMMON STOCK PAID-IN ACCUMULATED ON STOCK
DEFICIT SHARES AMOUNT CAPITAL DEFICIT OPTIONS
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at December 31, 1993................ $ (5,163 )
Net loss.................................... (2,215 )
Balance at December 31, 1994................ (7,378 )
Capital contribution........................ 3,500
Net loss.................................... (6,972 )
Balance at December 31, 1995................ (10,850 )
Conversion of debt and accrued interest to
partners' capital......................... 11,483
Net loss for January 1, 1996 through
September 25, 1996........................ (568 )
Conversion of partners' capital to common
stock..................................... (65 ) 9,600 $ 96 $ 14,179
Issuance of 2,550,000 shares of common
stock, net of issuance costs of
$1,046,202................................ 2,550 26 17,900
Grant of 550,000 stock options.............. 1,500 $ (1,500)
Amortization of deferred compensation on
stock options............................. 500
Net loss for the period September 26, 1996
through December 31, 1996................. $ (16,246)
Balance at December 31, 1996................ -- 12,150 $122 $ 33,579 $ (16,246) $ (1,000)

<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
<S> <C>
Balance at December 31, 1993................ $ (5,163)
Net loss.................................... (2,215)
Balance at December 31, 1994................ (7,378)
Capital contribution........................ 3,500
Net loss.................................... (6,972)
Balance at December 31, 1995................ (10,850)
Conversion of debt and accrued interest to
partners' capital......................... 11,483
Net loss for January 1, 1996 through
September 25, 1996........................ (568)
Conversion of partners' capital to common
stock..................................... 14,210
Issuance of 2,550,000 shares of common
stock, net of issuance costs of
$1,046,202................................ 17,926
Grant of 550,000 stock options..............
Amortization of deferred compensation on
stock options............................. 500
Net loss for the period September 26, 1996
through December 31, 1996................. (16,246)
Balance at December 31, 1996................ $ 16,455
</TABLE>

F-6

<PAGE>
CLOSURE MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

1. ORGANIZATION AND OPERATIONS

Closure Medical Corporation (the "Company" or "Closure"), formerly named
Tri-Point Medical Corporation, develops, commercializes and manufactures medical
tissue cohesive products based on its proprietary cyanoacrylate technology
utilized primarily for human and veterinary wound closure. The Company was
incorporated in Delaware on February 20, 1996. From May 10, 1990 to February 29,
1996, the business of the Company was conducted by Tri-Point Medical L. P. (the
"Partnership"). Sharpoint Development Corporation ("SDC"), the general partner,
contributed $350,000 in cash for its general partner interest.

The Partnership purchased the assets and product technology of Caratec,
L.L.C. ("Caratec"), formerly CRX Medical, Inc., in 1990 for $700,000 and a
limited partnership interest. The purchase price was allocated as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Inventory...................................................... $ 37
Property and equipment......................................... 249
Patents and trademarks......................................... 282
Noncompete agreements.......................................... 100
Organization costs............................................. 10
Goodwill....................................................... 15
Prepaid expense................................................ 7
$700
</TABLE>

Caratec contributed $1,000 for its limited partnership interest. The
partnership agreement required that a percentage of the proceeds received by the
Partnership or its successors upon the sale of all or substantially all of the
net assets of the Partnership or its successors be paid to Caratec. The
partnership agreement also stipulated that Caratec receive payments based on net
sales volume and gross margin, subject to annual minimum amounts.

On December 31, 1995, the partnership agreement was amended to admit
certain employee limited partners as a new class of limited partners who were
entitled to receive 28.5% of partnership income after payments to Caratec. The
general partner received the remainder of the income and all losses of the
Partnership. For financial statement purposes, compensation expense and
contributed capital in the amount of $3,500,000 were recognized as of December
31, 1995 representing the estimated fair value of the partnership interest
granted to the employee limited partners.

As of March 1, 1996, substantially all of the assets and liabilities of the
Partnership, except for the indebtedness to SDC, were transferred to the Company
in exchange for its sole share of Common Stock. Subsequently, on March 29, 1996,
notes payable and related accrued interest to SDC in the amounts of $10,502,301
and $980,915, respectively, were contributed to partners' capital.

On May 31, 1996, a contribution and exchange agreement was executed whereby
SDC, assignees of SDC's economic interest in the Partnership, Caratec and the
employee limited partners exchanged their Partnership interests for 5,453,750,
1,776,250 and 2,370,000 shares of Common Stock of the Company, respectively,
contemporaneously with the completion of an initial public offering by the
Company. In conjunction with the issuance to Caratec of Common Stock of the
Company, Caratec surrendered its rights to receive a percentage of sales-based
payments and a percentage of capital transaction proceeds. The Company recorded
a non-cash expense related to this issuance of $14,210,000 which was offset by a
credit to additional paid-in-capital.

On September 25, 1996, the Company sold 2,550,000 shares of Common Stock in
an initial public offering (the "IPO"). The net proceeds from the IPO
(approximately $17.9 million) have been and will continue to be used primarily
for capital expenditures related to laboratories, office space and manufacturing
facilities, research and development, including clinical trials, working capital
and general corporate purposes.

During 1996, approximately 87 percent of the Company's revenues were from
domestic sales; the remaining 13 percent was earned from the Western European
market.

F-7

<PAGE>
CLOSURE MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

Cash and cash equivalents represent cash in banks and short-term
investments having an original maturity of less than three months.

INVESTMENTS

Investments at December 31, 1996 consisted of short-term money market
funds, bonds and equity securities having maturities as of the purchase date
greater than three months but less than or equal to one year. Long-term
investments have maturities as of the purchase date greater than one year. Such
investments have been classified as available for sale securities. The fair
market value, based on quoted market prices, of all investments approximates
amortized cost.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market.

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment are stated at cost. Depreciation expense
is computed using the straight-line method over estimated useful lives ranging
between three and ten years. Expenditures for repairs and maintenance are
charged to expense as incurred.

INTANGIBLE ASSETS

Amounts incurred to secure patents and the estimated fair value of
registered patents acquired from Caratec on May 10, 1990 were capitalized and
are amortized over the remaining life of the patent on a straight-line basis.
Costs are capitalized until either the related patent is accepted, in which case
it is amortized, or it is rejected and written off. Other intangible assets
acquired from Caratec were amortized over a five year life on a straight-line
basis.

Costs associated with the organization and formation of the Partnership,
primarily legal costs, were capitalized and amortized over a five year period.

REVENUE RECOGNITION

Revenues from product sales are recognized upon shipment. Advance payments
related to future sales of product or future royalties due on these sales are
deferred and will be recorded as revenue as they are earned over future periods.

INCOME TAXES

No provision for federal or state income taxes was necessary in the
financial statements of the Partnership for the years ended December 31, 1994,
1995 or the two months ending February 29, 1996 because, as a partnership, it
was not subject to federal or state income taxes and the tax effect of its
activities accrued to the partners. For the ten months ended December 31, 1996,
the Company has provided for income taxes using the liability method.

The tax returns of the Partnership are subject to examination by federal
and state tax authorities. If such examinations occur and result in changes with
respect to the Partnership's qualification or to distributable Partnership
income or loss, the tax liability of the respective partners would be changed
accordingly.

Significant differences between the Partnership's financial statement basis
and the tax basis are as follows:

The financial statement basis loss exceeded the tax basis loss by
approximately $3,900,000 for the year ended December 31, 1995, which was
primarily due to the non-deductibility of certain expenses for tax
purposes. Approximately $960,000 of expenses included in December 31,
1996 amounts were recognized on the Partnership's 1996 tax return.

F-8

<PAGE>
CLOSURE MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
The Partnership's net assets on a tax basis exceeded those reported
under the financial statement basis by approximately $200,000 at
December 31, 1995. The difference was attributable to temporary tax
deduction differences.

The partners' capital account in total is the same for both financial
statement and tax reporting.

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.

RELATED PARTIES

The Partnership had notes payable to its general partner, SDC, until March
29, 1996. Details of the debt agreements are summarized in Note 4.

Beginning in 1992 until the Partnership ceased to exist on September 25,
1996, Caratec, a limited partner, received payments of 4% of adjusted net sales
of veterinary products. Caratec also received a minimum of 2% and a maximum of
8% of adjusted net sales of human products depending on the gross margin on
those sales. At the end of 1994, such percentage-based payments to Caratec were
less than $150,000, the stipulated minimum, and the difference was paid at that
time. For 1995 and 1996, such payments to Caratec were not to be less than
$250,000. Upon the effectiveness of the IPO on September 25, 1996, Caratec
surrendered its rights to receive these sales-based payments and a percentage of
capital transaction proceeds pursuant to the contribution and exchange agreement
dated as of May 31, 1996, whereby Caratec agreed to exchange its Partnership
interests for 1,776,250 shares of Common Stock of the Company.

For tax purposes, Caratec was allocated net income up to the amount of
payments received as described above. The general partner and employee limited
partners were allocated the remainder of any net income after allocation to
Caratec. The general partner was allocated 100% of all losses.

During 1994 and 1995, the Partnership paid a consulting fee to an
individual who is also a shareholder of Caratec amounting to $116,390 and
$20,510, respectively. No such fee was paid in 1996.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of current assets and current liabilities
approximates the financial statement carrying value at December 31, 1996 and
1995. The fair value of short-term investments is based on quoted market prices.

The estimated fair value of the notes payable to SDC at December 31, 1995
can not be readily determined since the notes are payable to a related party who
is also the general partner. These notes and related interest were ultimately
exchanged for shares of Common Stock of the Company in 1996. See Note 4 for the
carrying amount, interest rate and maturity dates of the notes payable.

RECENTLY ISSUED ACCOUNTING STANDARDS

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 121"), was issued in March 1995. SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company adopted
SFAS 121 effective January 1, 1996; the adoption of this statement did not have
a material impact on its results of operation or financial position.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), was issued in October 1995. SFAS 123
gives companies the option to adopt the fair value method for expense
recognition of employee stock options and stock-based awards or, as the Company
has elected, to continue to account for such items using

F-9

<PAGE>
CLOSURE MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
the intrinsic value method as outlined under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Consequently, the
adoption of SFAS 123 did not have any impact on the financial position or
results of operations of the Company but pro forma disclosures of net loss and
net loss per share have been provided in Note 8 as if the fair value method had
been applied.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the
current year presentation.

NET LOSS PER SHARE

Net loss per share is computed using the weighted-average number of shares
of common and common equivalent shares outstanding during the periods. Common
equivalent shares consist of stock options using the treasury stock method.
Common equivalent shares from stock options are excluded from the computation if
their effect is antidilutive, except pursuant to the requirements of the
Securities and Exchange Commission. Common and common equivalent shares issued
from January 1, 1995 through the effective date of the Company's IPO on
September 25, 1996 have been included in the computation using the treasury
stock method as if they were outstanding for all periods prior to June 30, 1996.

3. FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment includes the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
(IN
THOUSANDS)
Furniture and equipment............................................................... $134 $279
Machinery and equipment............................................................... 208 387
Leasehold improvements................................................................ 28 43
Machinery and equipment under capital leases (Note 5)................................. 48 48
Construction-in-progress.............................................................. -- 94
418 851
Accumulated depreciation and amortization............................................. (142) (179)
$276 $672
</TABLE>

4. NOTES PAYABLE AND RELATED ACCRUED INTEREST

Notes payable to SDC were $10,062,300 at December 31, 1995. Interest was
payable annually on December 31 at various rates ranging from 9.5% to 9.75%.
These notes were secured by substantially all the Partnership assets and
principal was payable on various dates between January and December 1998.

On March 29, 1996, notes payable of $10,502,301 and accrued interest of
$980,915, respectively, were converted to partners' capital by SDC. On May 31,
1996, a contribution and exchange agreement was executed whereby SDC exchanged
its partners' capital for 5,453,750 shares of Common Stock of the Company upon
the effectiveness of the Company's IPO on September 25, 1996.

5. LEASES

The Company leases office and manufacturing space and equipment under
operating leases which expire at various dates through 1998. Rent expense
related to these leases was approximately $98,000, $93,000 and $136,000 for
1994, 1995 and 1996, respectively.

The Company leases equipment under capital leases. The lease terms are four
years and the Company has the option to purchase the equipment at the end of the
leases.

F-10

<PAGE>
CLOSURE MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

5. LEASES -- Continued
Future minimum lease payments under noncancellable capital leases and
operating leases with initial or remaining terms of one year or more are as
follows at December 31, 1996:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
(IN THOUSANDS)
1997............................................................................. $14 $ 166
1998............................................................................. 12 68
1999............................................................................. 3 --
Total minimum lease payments..................................................... 29 $ 234
Less amount representing interest................................................ 3
Present value of minimum lease payments.......................................... $26
</TABLE>

6. MAJOR CUSTOMERS AND COMMITMENTS

On March 20, 1996, the Company entered into an eight-year exclusive supply
and distribution rights agreement with Ethicon, Inc., a subsidiary of Johnson &
Johnson, whereby Closure will supply Ethicon with a product for human topical
wound closure. In consideration, Ethicon paid Closure $4,500,000 and agreed to
pay additional amounts upon written notification of U.S. regulatory approval for
the product. Of the $4,500,000 total, $3,500,000 was a non-refundable licensing
fee and $1,000,000 will be offset against either future product purchases or
royalties to be paid by Ethicon on product sales and has been classified as
deferred revenue on the accompanying balance sheet. Ethicon also agreed to
advance Closure additional amounts for direct costs incurred in connection with
clinical studies of the product, which amounts will be credited against future
royalties to be paid by Ethicon. As of December 31, 1996, Ethicon had advanced
the Company $1,000,000 for direct costs of these clinical studies which has been
classified as deferred revenue on the accompanying balance sheet of which
$500,000 was advanced during the fourth quarter. Upon U.S. or European Community
approval of the product, Ethicon is obligated to purchase certain minimum
quantities annually at a predetermined price based on average selling prices.

A seven-year marketing agreement with Farnam Companies, Inc. was signed in
December of 1992. This agreement gives Farnam exclusive rights to market, sell
and distribute the Company's veterinary products in North America.

Revenues from Farnam aggregated approximately $400,000 or 27%, $370,000 or
27% and $390,000 or 10% of total revenues for the years ended December 31, 1994,
1995 and 1996, respectively.

The Company has a non-exclusive supply agreement with Procter & Gamble/ALZA
Partnership for Oral Healthcare for a cohesive used in conjunction with a
periodontal drug delivery product. Net revenues under this agreement amounted to
approximately $1,110,000 or 73% of total revenues, $1,010,000 or 73% of total
revenues, and $107,000 or 3% of total revenues during 1994, 1995 and 1996,
respectively. Accounts receivable related to these revenues were approximately
$243,500 and $54,000 at December 31, 1995 and 1996, respectively. In March 1994,
the Company entered into an agreement with On-Site Therapeutics, Inc. (On-Site)
for exclusive services to identify purchasers of Octyldent. Under this
agreement, On-Site receives a 5% royalty on net sales of Octyldent up to a
cumulative maximum royalty amount of $1,500,000. Amounts paid during 1994, 1995
and 1996 were $55,675, $50,686 and $5,046, respectively.

In May 1996, the Company entered into a five-year agreement with a
consultant which provides for annual compensation of $120,000 and included a
grant of options for 50,000 shares of Common Stock under the Equity Compensation
Plan.

The Company has employment agreements with certain key executives that
provide for specified benefits if the executive is terminated other than for
cause, as defined.

F-11

<PAGE>
CLOSURE MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

7. INCOME TAXES

The Company accounts for income taxes using the liability method, which
generally provides that deferred tax assets and liabilities be recognized for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities and expected benefits of utilizing net
operating loss and other carryforwards. At December 31, 1996, the Company had
net operating loss carryforwards for federal income tax reporting purposes of
approximately $140,000 expiring in the year 2011. The Company also has research
and development tax credit carryforwards of approximately $39,000 which will
expire in the year 2011.

The tax effects of significant items comprising the Company's deferred
taxes are as follows (in thousands):

<TABLE>
<CAPTION>
1996
<S> <C>
Net operating losses.......................................................................... $ 44
Research and development carryforwards........................................................ 39
Temporary differences, net.................................................................... 385
468
Valuation allowance........................................................................... (468)
Net deferred tax asset........................................................................ --
</TABLE>

Deferred tax liabilities as of December 31, 1996 were insignificant.

At December 31, 1996, a valuation allowance for deferred tax assets of
$468,000 has been recorded as, due to the Company's history of losses, it is
considered more likely than not that such deferred tax assets will not
ultimately be realized.

8. STOCK PLAN

The Company maintains the Amended and Restated 1996 Equity Compensation
Plan (the "Plan"), adopted by the Board of Directors on May 28, 1996 and amended
effective as of September 24, 1996 and November 1, 1996. The Plan provides a
maximum of 1,000,000 shares of Common Stock may be issued pursuant to stock
options, restricted stock grants and stock appreciation rights (collectively,
"Grants") granted to officers, employees, independent contractors and
consultants, and non-employee directors of the Company. Grants of restricted
stock and stock appreciation rights may only be made to participants other than
non-employee directors of the Company. The Plan is administered and interpreted
by a committee (the "Committee") of the Board of Directors. Grants under the
Plan may consist of (i) options intended to qualify as incentive stock options
("ISOs") within the meaning of section 422 of the Internal Revenue Code of 1986,
as amended, or (ii) so-called "nonqualified stock options" that are not intended
to so qualify ("NQSOs"). Independent contractors or consultants to the Company
are not eligible to receive ISOs under the Plan. The option price of any ISO
granted under the Plan will not be less than the fair market value of the
underlying shares of Common Stock on the date of grant, except that the option
price of an ISO granted to an employee who owns more than 10% of the total
combined voting power of all classes of stock of the Company or its subsidiaries
may not be less than 110% of the fair market value of the underlying shares of
Common Stock on the date of grant. The option price of a NQSO may be greater
than, equal to or less than the fair market value of the underlying shares of
Common Stock on the date of grant. The Committee will determine the term and
vesting period of each option; provided, however, that the exercise period may
not exceed ten years from the date of grant, and the exercise period of an ISO
granted to an employee who owns more than 10% of the total combined voting power
of all classes of stock of the Company or its subsidiaries may not exceed five
years from the date of grant. Options outstanding at December 31, 1996 generally
vest within five years.

F-12

<PAGE>
CLOSURE MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

8. STOCK PLAN -- Continued
The following table summarizes stock option activity for the year ended
December 31, 1996:

<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-AVERAGE
AVERAGE REMAINING CONTRACTUAL EXERCISABLE
SHARES PRICE PER SHARE LIFE AT 12/31/96
<S> <C> <C> <C> <C>
Options outstanding at January 1, 1996........................ -- -- -- --
Granted
With discount exercise price................................ 550,000 $5.27 9.41 132,500
With market exercise price.................................. 29,602 8.00 9.75 5,920
Exercised..................................................... 0 0
Expired or canceled
With discount exercise price................................ (6,997) 5.27
Options outstanding at December 31, 1996...................... 572,605
Weighted-average fair value of options granted................ 8.00
Available for grant at December 31, 1996...................... 427,395
</TABLE>

In October 1995, the Financial Accounting Standards Board issued SFAS 123.
SFAS 123 gives companies the option to adopt the fair value method for expense
recognition of employee stock options and stock-based awards or to continue to
account for such items using the intrinsic value method as outlined under APB
25. Accordingly, compensation expense for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount of the option price. During 1996, the Company recognized
approximately $500,000 of compensation cost related to the plan. The Company has
adopted the disclosure-only provisions of this statement. Had compensation
expense, assuming it was recognized on a straight-line basis over the vesting
period, for 1996 awards been determined based on the fair value at the grant,
consistent with the provisions of SFAS 123, the Company's results of operations
would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1996
<S> <C>
Net loss -- as reported........................................................ $(16,814)
Net loss -- pro forma.......................................................... $(17,414)
Loss per share -- as reported.................................................. $ (1.59)
Loss per share -- pro forma.................................................... $ (1.65)
</TABLE>

The pro forma amounts discussed above were derived using the Black-Scholes
option-pricing model with the assumptions indicated below:

<TABLE>
<CAPTION>
ASSUMPTIONS 1996
<S> <C>
Average expected life (years)...................................................... 6
Average interest rate.............................................................. 6.5%
Volatility......................................................................... 70.0%
Dividend yield..................................................................... 0.0%
</TABLE>

F-13

<PAGE>
CLOSURE MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS -- CONTINUED

9. SUBSEQUENT EVENTS

On January 29, 1997 the Company entered into a five year capital lease
covering laboratory and scientific equipment and computers. Monthly rent
obligation under the lease is equal to 2.19 percent of the total equipment cost
up to a maximum of $1,500,000. At the expiration of the lease term, the Company
is required to purchase all of the equipment for an amount equal to no less than
5% or no more than 10% of the equipment cost.

On February 14, 1997, the Company entered into a ten year operating lease
for approximately 50,000 square feet of office, laboratory and manufacturing
space to, among other things, expand manufacturing capacity. Upon completion,
all of the Company's operations will be maintained at this location and the
Company's current facility leases will be terminated. Rent expense under the
current leases is approximately $170,000 annually. Under the new ten year lease
annual expense will be a minimum of $373,000, with a total minimum expense for
the entire term of $4,100,000.

In March 1997, the Company was served with a complaint filed in the
Superior Court Department of the Trial Court of the Commonwealth of
Massachusetts alleging personal injury as a result of negligence by the Company
in the design, testing and distribution of Avacryl, an n-butyl cyanoacrylate
used in a medical procedure in 1993 as part of a clinical trial conducted by the
Company pursuant to an Investigational Device Exemption. The Company's insurer
has assumed the defense of this lawsuit. The Company has not yet answered the
complaint, and discovery in the case has not yet commenced. Accordingly, the
Company is not yet able to assess its potential exposure in this case. However,
based on the limited information available to it, the Company intends to
vigorously defend the lawsuit and management believes the outcome of this case
will not have a material adverse effect on the Company's financial position or
results of operations.

In March 1997, the Company filed a registration statement with the U.S.
Securities and Exchange Commission for an aggregate of 1,500,000 shares of which
800,000 shares are being offered by the Company and 700,000 shares are being
offered by a stockholder of the Company.

F-14

<PAGE>
NEXACRYLt AND ABSORBABLE TISSUE COHESIVES WILL NOT BE COMMERCIALLY AVAILABLE IN
THE U.S. UNTIL FDA APPROVALS ARE RECEIVED. THERE IS NO ASSURANCE OF SUCH
APPROVALS.

DEVELOPING INNOVATIVE PRODUCTS FOR SURGERY

PRODUCTS TO BENEFIT PERIODONTISTS AND
OPHTHALMOLOGISTS

OCTYLDENT(R) PERIODONTAL COHESIVE IS A TOPICAL
SEALANT USED IN CONJUNCTION WITH A SITE-SPECIFIC
SUSTAINED-RELEASE ANTIBACTERIAL DRUG THERAPY TO
TREAT ADULTS WITH PERIODONTAL DISEASE.

NEXACRYL(R) IS A TOPICAL SEALANT TO BE USED IN THE
REPAIR OF CORNEAL ULCERS AND ABRASIONS.

[PHOTO OF APPLICATION
OF NEXACRYL TO EYE]

ABSORBABLE TISSUE COHESIVES
IN DEVELOPMENT FOR NEW TRENDS
IN MINIMALLY INVASIVE AND
CARDIOTHORACIC SURGERY

TISSUE COHESIVES ARE BEING
DEVELOPED FOR INTERNAL
APPLICATIONS, TO REPLACE OR
BE USED TOGETHER WITH STAPLES
AND SUTURES TO SEAL INCISIONS
AND PREVENT LEAKAGE.

[PHOTO OF
CARDIOTHORACIC SURGERY]

THESE PRODUCTS WILL BE DESIGNED TO ASSIST CARDIAC
SURGEONS IN PERFORMING PROCEDURES SUCH AS CORONARY
ARTERY BYPASS GRAFTS AND VALVE REPLACEMENTS.

MAY ALSO PROVE USEFUL IN BOWEL RESECTION AND LUNG
SURGERY

[PHOTO OF OPERATING ROOM]

VARIOUS MEDICAL SUPPLIES DEPICTED ARE NOT PRODUCTS
OF THE COMPANY.

CLOSURE
MEDICAL CORPORATION
[LOGO]

<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT 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 OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE 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 THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 7
Use of Proceeds...................................... 14
Dividend Policy...................................... 14
Price Range of Common Stock.......................... 14
Capitalization....................................... 15
Dilution............................................. 15
Selected Financial Data.............................. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 17
Business............................................. 20
Management........................................... 33
Certain Transactions................................. 40
Prior Partnership Status............................. 40
Principal and Selling Stockholders................... 41
Description of Capital Stock......................... 42
Shares Eligible for Future Sale...................... 44
Underwriting......................................... 46
Legal Matters........................................ 47
Experts.............................................. 47
Available Information................................ 48
Index to Financial Statements........................ F-1
</TABLE>

1,500,000 SHARES

(CLOSURE MEDICAL CORPORATION(TM) LOGO APPEARS HERE)

COMMON STOCK

PROSPECTUS
March 26, 1997
LEHMAN BROTHERS

OPPENHEIMER & CO., INC.

SANDS BROTHERS & CO., LTD.