ARONEX PHARMACEUTICALS INC, S-1, 1998-11-20

ARONEX PHARMACEUTICALS INC
S-1, 1998-11-20
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1
As filed with the Securities and Exchange Commission on November 20, 1998.

Registration No. 333-
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================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
ARONEX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
Delaware 2834 76-0196535
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

8707 Technology Forest Place
The Woodlands, Texas 77381-1191
(281) 367-1666
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

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

GEOFFREY F. COX
CHIEF EXECUTIVE OFFICER
8707 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381-1191
(281) 367-1666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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

COPY TO:

JEFFREY L. WADE
ANDREWS & KURTH L.L.P.
2170 BUCKTHORNE PLACE, SUITE 150
THE WOODLANDS, TEXAS 77380
(713) 220-4801

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

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

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

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

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

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

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

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

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 4,500,000 shares $3.16 $14,220,000 $3,953
===================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, based on the average of the
high and low sale prices of the Common Stock on the Nasdaq National Market
on November 18, 1998.
---------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to by these securities
in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1998

PROSPECTUS

4,500,000 SHARES

[ARONEX PHARMACEUTICALS, INC. LOGO]

COMMON STOCK

This prospectus relates to a public offering of shares of common stock of
Aronex Pharmaceuticals, Inc. The Company's common stock is traded on the Nasdaq
National Market under the symbol "ARNX." On November 18, 1998, the last reported
sales price of the Company's common stock on the Nasdaq National Market was
$3 1/16 per share.

Aronex Pharmaceuticals is an emerging biopharmaceutical company engaged in
the identification and development of proprietary innovative medicines to treat
cancer and infectious diseases. The Company currently has four medicines in
various stages of clinical development. The Company also has proprietary
technologies in drug formulation and drug delivery.

INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................... $ $
Commissions and Fees............................ $ $
Proceeds to the Company......................... $ $
</TABLE>

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Aronex Pharmaceuticals is offering the common stock, on an all or none
basis, to selected investors purchasing for investment. The Company has retained
Paramount Capital, Inc. to act as its agent to arrange this transaction. The
agent must sell all 4,500,000 shares if any are sold. The agent is required to
use only its best efforts to sell all 4,500,000 shares. The agent will not
accept investor funds until indications of interest have been received for the
full amount of the offering, at which time the Company will request
effectiveness of the registration statement of which this prospectus is a part.
Only after the registration statement has been declared effective will the agent
accept investor funds, which will be placed in an escrow account with State
Street Bank and Trust Co., as escrow agent. The agent will distribute
confirmation and definitive prospectuses to all investors at the time of pricing
and inform investors of the closing date, which will be scheduled three days
after pricing.

The date of this prospectus is , 1998

<PAGE> 3
PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that you
should consider before investing in the common stock. You should read the entire
prospectus carefully.

THE COMPANY

Aronex Pharmaceuticals, Inc. is an emerging biopharmaceutical company
engaged in the identification and development of proprietary innovative
medicines to treat cancer and infectious diseases. The Company's strategy is to
identify and develop medicines based upon either refinements of proven therapies
or novel mechanisms of action against specific disease targets. The Company has
a portfolio of clinical products that it believes provides a balanced
development and commercialization risk profile. The Company believes its focus
on medicines for cancer and infectious diseases for which current therapy is
inadequate will provide synergies in development and product marketing and will
facilitate expedited commercialization of its products.

Aronex Pharmaceuticals currently has four products in various stages of
ongoing clinical development. The Company also has one product in a clinical
trial sponsored by an academic collaborator. In addition, the Company has
proprietary technologies in drug formulation and drug delivery. The following
table lists the Company's clinical products, along with their initial
indications and clinical status:

<TABLE>
<CAPTION>
PRODUCT INDICATIONS CLINICAL STATUS
------- ----------- ---------------
<S> <C> <C>
NYOTRAN(R)....................... Presumed Fungal Infections Phase III
Cryptococcal Meningitis Phase III
Candidemia Phase II completed
Aspergillus Salvage Phase II
ATRAGEN(R)....................... Acute Promyelocytic Leukemia Phase II (pivotal)
Non-Hodgkin's Lymphoma Phase II
Kaposi's Sarcoma Phase II completed
Annamycin........................ Breast Cancer Phase II
Zintevir(R)...................... HIV Infection Phase I/II
Platar........................... Lung Cancer Phase II (institutional IND)
</TABLE>

The Company has established strategic alliances and collaboration
arrangements with leading corporations and academic institutions, including
alliances with Abbott Laboratories and Genzyme Corporation and a collaboration
with The University of Texas M.D. Anderson Cancer Center.

NYOTRAN(R)

Aronex Pharmaceuticals is developing NYOTRAN(R) for the treatment of
systemic fungal infections. Systemic fungal infections threaten patients who
have suppressed immune systems due to the adverse effects of chemotherapy, HIV
infection or anti-rejection therapy for organ transplants. NYOTRAN is a
lipid-based, intravenous formulation of nystatin, an established, widely-used
topical anti-fungal agent. Nystatin has not previously been used in treating
systemic fungal infections because of its toxicity. The Company formulated
NYOTRAN to reduce the toxicity of "free" nystatin, allowing it to be
administered at doses that the Company believes will be effective in treating a
broad spectrum of fungal infections including Aspergillus (mold based) and
Candida (yeast based) fungal infections. NYOTRAN is currently in Phase III
comparative clinical trials for presumed fungal infections, Phase III clinical
trials for Cryptoccocal meningitis and Phase II Aspergillus salvage trials. The
Company expects to complete the clinical trials for presumed fungal infections
in late 1998. If these clinical trials are successful, the Company expects to
file a New Drug Application, or NDA, with the United States Food and Drug
Administration in 1999.

<PAGE> 4

previously granted to Grupo Ferrer Internacional, S.A. in Spain and Portugal and
certain copromotion rights retained by the Company in the United States and
Canada. Abbott has agreed to pay the Company up-front payments of $2.8 million
under the license agreement and has agreed to purchase 837,989 shares of the
Company's common stock for $3.0 million under a related stock purchase
agreement. Abbott has also agreed to provide funding for the continuing clinical
development of NYOTRAN and to make subsequent milestone payments as specified
regulatory goals and sales targets are achieved. Abbott will also pay to the
Company escalating royalties on all product sales of NYOTRAN.

The Company estimates that each year over 300,000 patients worldwide
develop systemic fungal infections. The number of patients developing systemic
fungal infections continues to increase because of the aging population, more
aggressive use of chemotherapy, advances in medical therapies and the
development of resistant fungal strains.

ATRAGEN(R)

Aronex Pharmaceuticals is developing ATRAGEN(R) for the treatment of acute
promyelocytic leukemia and certain other cancers. ATRAGEN is a lipid-based,
intravenous formulation of all-trans retinoic acid, or ATRA, an orally active
derivative of vitamin A that is effective in treating certain leukemias. The
Company believes that the rate at which the oral formulation of ATRA is
metabolized lowers the amount of drug that reaches the cancer target and may
reduce its effectiveness. The oral formulation of ATRA can also cause an adverse
effect called ATRA syndrome, consisting of fever and pulmonary distress. The
Company formulated ATRAGEN to overcome these limitations. ATRAGEN is currently
in a pivotal Phase II clinical evaluation for its potential to induce remission
and prevent relapse of acute promyelocytic leukemia in patients. The Company
completed patient enrollment of the Phase II clinical trials in the third
quarter of 1998 and expects to file an NDA by the end of 1998.

The Company estimates that approximately 2,000 new cases worldwide of acute
promyelocytic leukemia are diagnosed annually. The Company believes that ATRAGEN
may also be useful in treating other types of cancer, and plans to evaluate the
efficacy of ATRAGEN in other hematologic malignancies and solid tumors. In
mid-1998, the Company initiated a Phase II clinical trial in non-Hodgkin's
lymphoma and plans to initiate clinical trials in other indications in the near
future. The Company estimates that each year approximately 1,000,000 patients
worldwide develop the various types of cancer identified as potential
indications for ATRAGEN.

ANNAMYCIN

Aronex Pharmaceuticals is developing Annamycin for the treatment of breast
cancer. Annamycin is a lipid- based formulation of a novel anthracycline, a
class of compounds that includes doxorubicin and many other widely-used
anti-cancer agents. Acquired tumor resistance and severe cardiotoxicity limit
the effectiveness of many anthracyclines. The Company believes that Annamycin
may overcome acquired tumor resistance, commonly referred to as "multi-drug
resistance," by circumventing a mechanism behind multi-drug resistance that
transports most types of anti-cancer drugs out of tumor cells. The Company
believes that Annamycin may also offer reduced cardiotoxicity compared to other
anthracyclines. Annamycin is currently in Phase II clinical trials in breast
cancer patients who have failed treatment with other therapies.

The American Cancer Society estimates that each year there are
approximately 179,000 new cases of breast cancer in the United States. The
Company believes Annamycin may also be useful in treating other varieties of
solid tumors, leukemias and lymphomas.

ZINTEVIR(R)

Aronex Pharmaceuticals is developing Zintevir(R) for the treatment of human
immunodeficiency virus infection. The drugs currently approved in the United
States for treatment of HIV infection consist of reverse transcriptase
inhibitors, such as AZT, ddI, ddC, d4T and 3TC, and protease inhibitors, such as
saquinavir, ritinovir and indinavir. By contrast, Zintevir's primary mechanism
of action is the inhibition of HIV-1 integrase, a key enzyme in catalyzing the
integration of HIV within human cells. Zintevir is in a Phase I/II clinical
trial designed to determine its ability to reduce viral load and to gather data
on its safety and pharmacokinetics at multiple escalating doses in HIV-positive
patients. The Company expects to complete the Phase I/II clinical trial by the
end of 1998.

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<PAGE> 5

PLATAR

Aronex Pharmaceuticals is evaluating the novel platinum analogue Platar
for the treatment of solid tumors. The University of Texas M.D. Anderson Cancer
Center is currently conducting a Phase II clinical trial of Platar for the
treatment of mesothelioma, a type of lung cancer, under an institutional
Investigational New Drug Application.

COMPANY BACKGROUND AND STRATEGY

Aronex Pharmaceuticals was incorporated in 1986 as Argus
Pharmaceuticals, Inc. Argus changed its name to Aronex Pharmaceuticals, Inc.
when it acquired Oncologix, Inc. and Triplex Pharmaceutical Corporation through
a three-way merger in September 1995. Since the merger, Aronex Pharmaceuticals
has established a strategy to build on the following strengths:

o a clear focus in cancer and infectious diseases
o a well-defined and diverse group of products at various
stages of clinical development
o technologies in drug development and delivery
o a diverse group of corporate partners and academic
affiliations
o anexperienced team of biopharmaceutical personnel able to
identify and develop new products, design and implement
complex clinical trials, manage regulatory issues, develop
manufacturing processes and implement the commercialization
of products

The Company's corporate headquarters are located at 8707 Technology
Forest Place, The Woodlands, Texas 77381-1191, and its telephone number is (281)
367-1666.

THE OFFERING

<TABLE>
<S> <C>
Common stock offered by the Company............... 4,500,000 shares
Common stock to be outstanding after
the offering...................................... 20,841,734 shares (1)
Use of proceeds................................... To fund preclinical and clinical testing of the Company's product
candidates, continued research and development and capital
expenditures and for general corporate purposes.
Nasdaq National Market symbol..................... ARNX
</TABLE>

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(1) Reflects completion of the sale of 837,989 shares of common stock to
Abbott Laboratories with a scheduled closing date of November 30, 1998.
Excludes (i) 2,915,573 shares of common stock that may be acquired on
the exercise of outstanding options, (ii) 176,941 shares that may be
acquired on the exercise of outstanding warrants and (iii) 450,000
shares that may be acquired on the exercise of warrants that will be
issued to Paramount Capital, Inc., the placement agent for this
offering, upon completion of the offering. Also excludes shares of
common stock with a value of $5.0 million that may be issued under
contingent stock rights issued to former Triplex stock and option
holders if the Company obtains data from clinical trials of Zintevir on
or before September 11, 2000 that the Company's Board of Directors
determines to be sufficient to file a New Drug Application. See also
"Description on Capital Stock" on p. 46.

-3-

<PAGE> 6
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------- ------------ -------------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
grants and contracts... $ 48 $ 197 $ 1,248 $ 2,670 $ 841 $ 591 $ 329
Interest income........... 217 534 452 1,692 2,059 1,632 1,013
--------- --------- -------- ------- -------- -------- --------
Total revenues.... 265 731 1,700 4,362 2,900 2,223 1,342
Expenses:
Research and development.. 4,491 7,637 8,347(1) 10,357 13,993 9,864 15,399
Purchase of in-process
research and
development............ -- -- 8,383(2) 242(2) 3,000(3) 3,000(3) --
General and administrative 1,876 1,950 2,215 1,620 2,641 1,477 2,448
Interest expense and other 123 196 184 173 257 160 41
--------- --------- -------- ------- -------- -------- --------
Total expenses.... 6,490 9,783 19,129 12,392 19,891 14,501 17,888
--------- --------- -------- ------- -------- -------- --------
Net loss.................. $ (6,225) $ (9,052) $(17,429) $(8,030) $(16,991) $(12,278) $(16,546)
========= ========= ======== ======= ======== ======== ========
Basic and diluted loss per
share(4)............... $ (1.72) $ (1.76) $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
========= ========= ======== ======= ======== ======== =======
Weighted average shares
used in computing basic
and diluted loss per
share(4)............... 3,602 5,153 6,488 13,048 14,896 14,714 15,475
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
PRO FORMA (5) PRO FORMA
ACTUAL (UNAUDITED) AS ADJUSTED (6)
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term and long-term investments...... $ 16,015 $ 19,015 $ 31,421
Total assets......................................................... 18,522 21,522 33,928
Total long-term obligations.......................................... 1,047 1,047 1,047
Deficit accumulated during development stage......................... (85,750) (85,750) (85,750)
Total stockholders' equity........................................... 11,353 14,353 26,759
</TABLE>

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(1) The Company's research and development expenses for the year ended
December 31, 1995 do not include the research and development expenses
incurred by Triplex or Oncologix prior to September 11, 1995, the
effective date of the threeway merger of Argus, Oncologix and Triplex,
and accordingly are not indicative of the research and development
expenses that would have been incurred by the Company for the full year
had such merger been effective at the beginning of the year.
(2) The amount shown as purchase of in-process research and development
reflects a non-cash charge for the excess of the purchase price over
the fair value of the net assets acquired. See Note 4 of Notes to
Financial Statements on page F-14.
(3) Represents the fair market value of common stock issued under the
contingent stock rights issued relating to the three-way merger. See
Note 4 of Notes to Financial Statements on page F-14.
(4) See Note 2 of Notes to Financial Statements on page F-12 for a
description of the computation of loss per share.
(5) Adjusted to reflect the completion of the sale of 837,989 shares of
common stock to Abbott Laboratories for $3.0 million with a scheduled
closing date of November 30, 1998.
(6) Adjusted to reflect (i) the completion of the sale of 837,989 shares of
common stock to Abbott Laboratories for $3.0 million with a scheduled
closing date of November 30, 1998, and (ii) the sale of the 4,500,000
shares of common stock offered hereby at an estimated price of $31/16
per share and the application of the estimated net proceeds therefrom
as described in "Use of Proceeds" on page 12.

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<PAGE> 7
CAUTION AS TO FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's drug
development programs, clinical trials, receipt of regulatory approval, capital
needs, intellectual property, expectations and intentions. Forward-looking
statements necessarily involve risks and uncertainties, and the Company's actual
results could differ materially from those anticipated in the forward-looking
statements, including those listed below under "Risk Factors" and elsewhere in
this prospectus. The factors set forth below under "Risk Factors" and other
cautionary statements made in this prospectus should be read and understood as
being applicable to all related forward-looking statements wherever they appear
in this prospectus.

RISK FACTORS

INVESTING IN THE COMPANY'S COMMON STOCK INVOLVES SUBSTANTIAL RISKS. YOU
SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, TOGETHER WITH ALL OF THE
OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, IN DECIDING WHETHER TO INVEST IN
THE COMMON STOCK.

UNCERTAINTY OF CLINICAL TRIAL RESULTS

Before approving a drug for commercial sale as a treatment for a
disease, the United States Food and Drug Administration and other regulatory
authorities generally require that the safety and efficacy of a drug be
supported by results from adequate and well-controlled pivotal clinical trials
in which the drug is used to treat patients suffering from the disease. The
Company cannot necessarily predict the results of pivotal clinical trials of its
products from the results of preclinical studies and initial clinical trials. As
a result, the Company cannot necessarily predict whether its pivotal clinical
trials will adequately demonstrate the drug's safety and efficacy. Furthermore,
the FDA and other regulatory authorities may differ with the Company as to the
sufficiency of the results of the Company's pivotal clinical trials. In some
cases, the Company may need to conduct additional clinical trials before filing
a New Drug Application. If the Company's pivotal clinical trails do not
demonstrate the safety or efficacy of its products, or if the Company otherwise
fails to obtain regulatory approval for its products, the Company will not be
able to generate revenues from the commercial sale of its products.

Pivotal clinical trials are very costly and time-consuming. The speed
with which the Company is able to enroll patients in clinical trials, which is
affected by the size of the patient population, the proximity of patients to
clinical sites, and the eligibility criteria for the study, affects the cost of
the Company's clinical trials and the Company's ability to complete clinical
trials on schedule. Delays in patient enrollment may result in increased costs,
program delays, or both.

EARLY STAGE OF DEVELOPMENT

The Company's business is at an early stage of development. The
Company has not yet generated any revenues from the commercial sale of its
products, and it does not expect to generate any significant revenues from
product sales for at least several years. The Company can offer no assurance
that it will ever generate revenues from product sales or that it will ever
become profitable because of a variety of risks inherent in its business,
including risks that:

o clinical trials may not demonstrate the safety and efficacy
of the Company's products;
o completion of clinical trials may be delayed, or costs of
clinical trials may exceed anticipated amounts;
o the Company may not be able to obtain regulatory approval of
its products, or may experience delays in obtaining such
approvals;
o the Company may not be able to manufacture its drugs
economically on a commercial scale; o the Company and its
licensees may not be able to successfully market the Company's
products;
o physicians may not prescribe the Company's products, or
patients may not accept such products;
o others may have proprietary rights which prevent the Company
from marketing its products; and
o competitors may sell similar, superior or lower-cost drugs.

-5-

<PAGE> 8

HISTORY OF OPERATING LOSSES AND ANTICIPATED FUTURE LOSSES

Aronex Pharmaceuticals has incurred losses and has had negative cash
flows from operations since it was founded. The Company has funded its
activities primarily from sales of its stock and, to a lesser extent, from
revenues under research and development agreements and grants. As of September
30, 1998, the Company's accumulated deficit was $85.8 million. To date, the
Company has dedicated most of its financial resources to the research and
development of products, general and administrative expenses, and the
prosecution of patents and patent applications.

The Company expects to incur operating losses for at least the next
several years. The Company expects to spend substantial amounts on research and
development of its products, including preclinical studies and clinical trials,
and, if the Company obtains necessary regulatory approvals, on sales and
marketing efforts. The Company can offer no assurance that it will ever become
profitable or that it will remain profitable if and when it becomes profitable.

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING

The Company will continue to require substantial additional funds to
fund its operations. The Company expects that its existing financial resources,
together with the estimated proceeds of this offering, will be sufficient to
fund its capital requirements through 1999, and together with expected payments
from Abbott Laboratories (assuming the achievement of milestones), will be
sufficient to fund its capital requirements through mid-2001. After that time,
the Company will need to raise substantial additional capital to fund
operations. It is possible that changes in the Company's research and
development plans, acquisitions or other events will require the Company to make
unexpected large future expenditures. Excluding the proceeds of this offering
and payments expected from Abbott Laboratories, the Company expects that its
existing financial resources would be sufficient to fund its capital
requirements into late 1999. The Company's independent public accountants have
informed the Company that if the Company's available capital resources at the
time of their audit of the financial statements for the year ending December 31,
1998 are not adequate to fund its anticipated operations through December 31,
1999, their report on those statements will include an explanatory fourth
paragraph expressing substantial doubt about the Company's ability to continue
as a going concern. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

To satisfy its capital requirements, the Company intends to seek
additional funding in the public or private capital markets or through
collaboration agreements with partners. If the results of the Company's clinical
trials are not favorable, it will be much more difficult for the Company to
raise additional funds. The Company does not know if future funding will be
available at all or on acceptable terms. If the Company is not able to obtain
funding from investors, the Company may find it necessary to curtail its
research and development programs or to obtain funds through arrangements that
may require the Company to relinquish rights to some or all of its products or
to declare bankruptcy. If the Company raises funds by selling more stock, your
share ownership in the Company will be diluted. In addition, the Company may
grant future investors rights which are superior to those of the common stock
which you are purchasing.

GOVERNMENT REGULATION AND UNCERTAINTY OF REGULATORY APPROVAL

The FDA and other regulatory agencies in the United States and other
countries regulate nearly all of the Company's activities, including the
Company's research and development activities, preclinical studies and clinical
trials, and the manufacture, marketing and labeling of the Company's products.
The United States Federal Food, Drug and Cosmetic Act, the regulations issued
under that act and other federal and state laws govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of the Company's products. The process of
obtaining the necessary regulatory approvals for a drug takes years, is very
expensive and involves substantial risks, including the risks the Company may:

-6-

<PAGE> 9
o fail to obtain necessary regulatory approvals;
o experience delays in obtaining necessary regulatory approvals;
or
o obtain regulatory approvals which limit the indicated uses for
which the product may be marketed.

Such failures, delays or limitations, if significant, may reduce or eliminate
the Company's ability to successfully commercialize its products and generate
revenues and profits.

The FDA and other regulatory authorities will continue to review the
Company's products and periodically inspect the facilities used to manufacture
those products both before and after the grant of regulatory approvals. The FDA
will require post-marketing reporting to monitor the safety of the Company's
products. In addition, the companies that manufacture the Company's products and
their manufacturing facilities:

o must be inspected and approved by the FDA;
o are subject to biennial inspections by the FDA; and
o must comply with the FDA's Good Manufacturing Practices, or
GMP, requirements.

To supply drug products for use in the United States, foreign manufacturing
establishments also must comply with the FDA's GMP requirements and are subject
to periodic inspection by the FDA or by regulatory authorities in their own
countries under reciprocal agreements with the FDA. If the FDA or other
regulatory authorities identify problems with respect to a product, manufacturer
or facility, they may impose restrictions which may include warning letters,
suspensions of regulatory approvals, operating restrictions, delays in obtaining
new product approvals, withdrawal of the product from the market, product
recalls, fines, injunctions and criminal prosecution.

The Company does not have drug manufacturing capability. Instead, it
relies on its corporate partners or contract manufacturers to manufacture its
products. As a result, its ability to control the manufacture of its products
and compliance with GMP requirements is limited. Because FDA inspection and
approval of manufacturing facilities and quality procedures for a drug are
required for approval of a New Drug Application for that drug, any failure of
the manufacturers of its products to satisfy the Company's need for sufficient
quantities of products made in accordance with specifications or to comply with
GMP requirements could delay or otherwise negatively affect its ability to
obtain regulatory approval of its products.

The Company or its licensees must obtain regulatory approvals in
countries other than the United States before marketing products in those
countries. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country. Some
countries require approval of the sale price of a drug before it can be
marketed. In many countries, the pricing review period begins after product
licensing approval is granted. As a result, the Company or its licensees may
obtain regulatory approval for a product in a particular country, but then be
subject to price regulation which prevents the sale of the product at
satisfactory prices.

The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its procedures for handling and disposing of
these materials comply with state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. If
such an accident occurs, the Company could be held liable for resulting damages,
which could be substantial. The Company is also subject to numerous
environmental, health and workplace safety laws and regulations, including those
governing laboratory procedures, exposure to blood-borne pathogens and the
handling of biohazardous materials. Additional federal, state and local laws and
regulations affecting the Company may be adopted in the future. The Company may
incur substantial costs to comply with and substantial fines or penalties if it
violates any of these laws or regulations.

UNCERTAINTIES RELATING TO PATENTS AND PROPRIETARY RIGHTS

The Company's success will depend in part on its ability to obtain
United States and foreign patent protection for its drug candidates and
processes, preserve its trade secrets, and operate without infringing the
proprietary rights of third parties. Legal standards relating to the validity of
patents covering pharmaceutical and biotechnological inventions

-7-

<PAGE> 10

and the scope of claims made under such patents are still developing. In part as
a result of these still developing standards, the Company's ability to obtain
and enforce patents protecting its products is uncertain and involves complex
legal and factual questions. Some of the United States patents and patent
applications owned by or licensed to the Company are method-of-use patents that
cover the use of certain compounds to treat specified conditions. Composition-
of-matter patents are not available for some of the Company's product
candidates.

The Company cannot be certain that the inventors of subject matter
covered by patents and patent applications that it owns or licenses were the
first to invent or the first to file patent applications for such inventions.
Furthermore, the Company can offer no assurance that any patents will issue from
any pending or future patent applications it owns or has licensed. Existing or
future patents owned by or licensed to the Company may be challenged, infringed
upon, invalidated, found to be unenforceable or circumvented by others. Finally,
the Company can offer no assurance that any rights it has under any issued
patents will provide it with sufficient protection against competitive products
or otherwise cover commercially valuable products or processes.

The Company could incur substantial costs in proceedings before the
United States Patent and Trademark Office and other regulatory authorities,
including interference proceedings. These proceedings could result in adverse
decisions about the patentability of the Company's inventions and products, or
the enforceability, validity or scope of protection offered by the Company's
patents. The Company is currently involved in an interference proceeding before
the United States Patent and Trademark Office regarding Platar.

Litigation in the pharmaceutical and biotechnology industry regarding
patents and other proprietary rights has been significant and widespread. Patent
litigation is costly and time consuming, and the Company may not have sufficient
resources to bring such litigation to a successful conclusion. The manufacture,
use or sale of the Company's products may infringe on the patent rights of
others. If the Company is unable to avoid infringement of the patent rights of
others, it may be required to seek a license, defend an infringement action or
challenge the validity of the patents in court. The Company may not be able to
obtain a license on acceptable terms, or at all. If the Company does not obtain
a license, and fails successfully to defend an infringement action or to have
such patents declared invalid, the Company may incur substantial money damages,
encounter significant delays in bringing products to market or be precluded from
participating in the manufacture, use or sale of products or methods of
treatment requiring such licenses. The Company may not have identified all
United States and foreign patents that pose a risk of infringement.

The Company also relies on trade secrets and other unpatented
proprietary information in its business. The Company seeks to protect trade
secrets and proprietary information through confidentiality agreements with its
employees, consultants, advisors and collaborators. These agreements may not
effectively prevent disclosure of the Company's confidential information and may
not provide the Company with an adequate remedy in the event of unauthorized
disclosure of such information. In addition, the Company's trade secrets and
proprietary information could be independently discovered by others. Costly and
time-consuming litigation could be necessary to enforce and determine the scope
of the Company's proprietary rights. Failure to obtain or maintain patent and
trade secret protection, for any reason, would have a material adverse effect on
the Company.

MANUFACTURING UNCERTAINTIES; RELIANCE ON THIRD-PARTY SUPPLIERS

The Company does not have facilities necessary to manufacture its
products in accordance with FDA Good Manufacturing Practices. The Company
generally uses contract manufacturers to produce larger quantities of its
products for clinical testing, although it expects Abbott Laboratories to supply
the quantities of NYOTRAN necessary to conduct its remaining clinical trials of
that product. The Company and the manufacturers of its products have not entered
into any written agreements other than periodic purchase orders for the supply
of the products they manufacture on its behalf. The Company does not expect to
establish any significant manufacturing capacity in the near future. Instead,
the Company intends to rely on corporate partners and contract manufacturers for
the manufacture and supply of its products. To the extent it relies on contract
manufacturers, the Company may not be able to obtain supplies of its products on
terms or in quantities which it finds acceptable. The Company's dependence on
third parties for the manufacture of its products may also reduce the Company's
profit margins and its ability to develop and deliver products with sufficient
speed. In addition, third-party manufacturers may not provide supplies to the
Company when and as needed. If the Company is unable to obtain adequate
supplies, its business will be materially adversely affected.

-8-

<PAGE> 11

The Company currently can obtain the raw materials needed to produce
its products in quantities that are sufficient to satisfy its clinical
development product needs. Some of the Company's products, such as Annamycin,
are new syntheses and are not yet available in commercial quantities. Raw
materials necessary for the manufacture of the Company's products may not be
available in sufficient quantities or at a reasonable cost in the future.
Complications or delays in obtaining raw materials or in product manufacturing
could delay the submission of products for regulatory approval and the
initiation of new development programs, which could materially impair the
Company's competitive position and potential profitability.

SALES AND MARKETING

The Company has no experience in sales, marketing or distribution. As a
result, the Company must develop a sales and marketing force with supporting
distribution capability or enter into marketing and distribution arrangements
with companies that have established capabilities in those areas. The Company
has entered into agreements with Abbott Laboratories and Grupo Ferrer
Internacional, S.A. for the marketing, sale and distribution of NYOTRAN, while
retaining certain copromotion rights in the United States and Canada. In
addition, the Company has entered into an agreement with Genzyme Corporation
under which Genzyme may acquire the right to market and sell ATRAGEN, subject to
certain conditions and certain rights of the Company. If Genzyme does not
acquire marketing rights with respect to ATRAGEN, or the Company reacquires such
rights, the Company plans to enter into marketing arrangements with one or more
pharmaceutical companies for that product. The Company also plans to enter into
marketing agreements with one or more pharmaceutical companies to market other
products that it may develop. The Company will have to make significant
expenditures to the extent it elects to develop its own sales, marketing or
distribution capabilities.

To the extent that the Company has licensing, marketing or distribution
arrangements under which third parties market its products, its ability to
generate revenues and profits will depend upon the efforts of such third
parties. In addition, the Company's licensing, marketing or distribution
arrangements with such parties may have terms which are not favorable to the
Company. The Company may not be successful in establishing sales, marketing and
distribution capabilities, to the extent it elects to do so. The Company or its
collaborators may not be successful in gaining market acceptance for any
products that the Company may develop. If the Company fails to establish
marketing capabilities or enter into marketing arrangements with third parties,
or if the Company or its marketing partners fail to market a product
successfully, the Company's ability to generate revenues and profits will be
reduced or eliminated.

COLLABORATIVE ARRANGEMENTS

The Company's strategy involves entering into arrangements with
corporate, government and academic collaborators, licensors, licensees and
others. As a consequence, the Company's success may depend on the success of
these other parties in performing their responsibilities. The Company may not be
able to establish additional collaborative arrangements or license agreements
that it needs to develop and commercialize its products. Even if established,
the Company's collaborative or license agreements may not be successful. Some of
the Company's collaborative agreements and license agreements provide for
milestone payments to the Company, and others require the Company to pay
milestone payments to others. The Company may not be able to achieve the
milestones that trigger payments to the Company; in addition, payments by the
Company may not result in the development of marketable products by its
collaborators.

INTENSE COMPETITION

The biotechnology and pharmaceutical industries are intensely
competitive. The Company believes that competition will be intense for all of
its product candidates. The Company's competitors include multinational
pharmaceutical and chemical companies, specialized biotechnology firms, and
universities and other research institutions. Many of these competitors have
greater financial and other resources than the Company. These

-9-

<PAGE> 12
competitors may succeed in developing products, including liposomes and
liposomal products, that are safer, more effective or less costly than the
Company's products. Even if the Company's products prove to be more effective
than those developed by its competitors, its competitors may be more successful
because of greater financial resources, greater experience in conducting
preclinical and clinical trials and obtaining regulatory approval, stronger
sales and marketing efforts, earlier receipt of approval for competing products
and other factors. If the Company commences significant commercial sales of its
products, it or its collaborators will compete in areas in which the Company has
little or no experience, such as manufacturing and marketing.

RAPID TECHNOLOGICAL CHANGE

Biotechnology and related pharmaceutical technology have undergone and
continue to be subject to rapid and significant change. The Company expects that
the technologies associated with biotechnology research and development will
continue to develop rapidly. The Company's future will depend in large part on
its ability to maintain a competitive position with respect to these
technologies. Any compounds, products or processes that the Company develops may
become obsolete before it recovers any expenses incurred in developing those
products.

THIRD-PARTY REIMBURSEMENT

The Company's ability to commercialize its products successfully will
depend in part on the extent to which various third parties are willing to
reimburse patients for the costs of the Company's products and related
treatments. These third parties include government authorities, private health
insurers and other organizations, such as health maintenance organizations.
Third-party payors are increasingly challenging the prices charged for medical
products and services. Accordingly, if less costly drugs are available,
third-party payors may not authorize reimbursement for the Company's products,
even if they are safer or more effective than the alternatives. In addition, the
trend toward managed healthcare and government insurance programs could result
in lower prices and reduced demand for the Company's products. Cost containment
measures instituted by healthcare providers and any general healthcare reform
could affect the Company's ability to sell its products and may have a material
adverse effect on the Company.

Third-party payors in the United States or foreign countries may not
offer reimbursement for the Company's products, or may withdraw approvals for or
limit the amount or availability of such reimbursement such that the demand for
or price of the Company's products falls. The unavailability or inadequacy of
third-party reimbursement for the Company's products could have a material
adverse effect on the Company. The Company cannot predict what additional
legislation or regulation relating to the healthcare industry or third-party
coverage and reimbursement may be enacted in the future, or what effect such
legislation or regulation might have on the Company's business.

POTENTIAL PRODUCT LIABILITY CLAIMS; AVAILABILITY OF INSURANCE

The Company may be subject to product liability claims if the use of
its products is alleged to injure subjects or patients. This risk exists for
products tested in human clinical trials as well as products that are sold
commercially. Product liability claims could result in a recall of the Company's
products or a change in the indications for which they may be used. The Company
presently has product liability insurance coverage for claims arising from the
use of its products in clinical trials. This insurance may not be adequate to
cover claims. Furthermore, product liability insurance is becoming increasingly
expensive. As a result, the Company may not be able to maintain its current
insurance coverage, obtain additional insurance for clinical trials or for
commercial sales or obtain insurance at a reasonable cost or in sufficient
amounts to protect the Company against losses that could have a material adverse
effect on the Company.

-10-

<PAGE> 13

DEPENDENCE ON KEY PERSONNEL

The Company believes that its ability to successfully implement its
business strategy is highly dependent on its management and scientific team. The
loss of services of one or more of the Company's executive officers might hinder
the achievement of its development objectives. The Company is also highly
dependent on its ability to hire and retain qualified scientific and technical
personnel. The competition for these employees is intense. The Company may not
be able to continue to hire and retain the qualified personnel that it needs for
its business. Loss of the services of or failure to recruit key scientific and
technical personnel could substantially hurt the Company and its product
development efforts.

IMMEDIATE AND SUBSTANTIAL DILUTION; CONTINGENT STOCK RIGHTS; ABSENCE OF
DIVIDENDS

Purchasers of common stock in the offering will experience immediate
and substantial dilution in the net tangible book value per share. At an assumed
public offering price of $31/16 per share, the dilution to purchasers of the
common stock in this offering would have been $1.78 per share as of September
30, 1998. These investors will also experience additional dilution upon the
exercise of outstanding options and warrants. In addition, pursuant to the terms
of its 1995 merger with Triplex Pharmaceutical Corporation, the Company is
obligated to issue shares of common stock to certain former security holders of
Triplex if the Company obtains data from clinical trials of Zintevir on or
before September 11, 2000 that the Company's Board of Directors determines to be
sufficient to file a New Drug Application. If that event occurs, these rights
will result in the issuance of up to an aggregate of $5.0 million of common
stock, valued for such purpose at the current market value of the common stock
at the time the event requiring issuance of such shares occurs. The Company does
not anticipate paying cash dividends in the foreseeable future.

LIMITED TRADING VOLUME; POSSIBLE STOCK PRICE VOLATILITY

The historical trading volume of the Company's common stock has been
limited. An active public market for the common stock may not develop or be
sustained. The trading price of the common stock and the price at which the
Company may sell securities in the future could be subject to large fluctuations
in response to a number of factors. These factors could include announcements of
research activities, technological innovations or new products by the Company or
its competitors, changes in government regulations, developments concerning
proprietary rights, quarterly variations in operating results, litigation,
clinical trials of products, approval or denial of New Drug Applications,
general market conditions, the liquidity of the Company, the Company's ability
to raise additional funds and other events. The market price of the common
stock, and the market prices for securities of emerging biotechnology companies
generally, has fluctuated dramatically in recent years. These fluctuations have
sometimes been unrelated to the operating performance of the affected companies.
General fluctuations in the stock markets may also affect the price of the
common stock.

ANTI-TAKEOVER PROVISIONS

The Company's certificate of incorporation:

o provides for staggered terms of office for directors;
o requires certain procedures to be followed and time periods to
be met for any stockholder to propose matters to be considered
at annual meetings of stockholders, including nominating
directors for election at those meetings;
o prohibits stockholders from calling special meetings of
stockholders; and
o authorizes the Board of Directors of the company to issue up
to 10,000,000 shares of preferred stock without stockholder
approval and to set the rights, preferences and other
designations, including voting rights, of those shares as the
Board of Directors may determine.

-11-

<PAGE> 14

These provisions, alone or in combination with each other, may
discourage transactions involving actual or potential changes of control of the
Company, including transactions that otherwise could involve payment of a
premium over prevailing market prices to holders of common stock. The Company
also is subject to provisions of the Delaware General Corporation Law that may
make some business combinations more difficult.

YEAR 2000 ISSUES

The Company is evaluating Year 2000 issues and their potential impact
on its information systems and computer technologies. All evaluation costs will
be expensed as incurred. Year 2000 issues are not expected to have a significant
impact on the Company's ongoing results of operations.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 4,500,000 shares
of the Company's common stock offered hereby at an assumed public offering price
of $3 1/16 per share (the last sale price of the common stock on November 18,
1998) are estimated to be approximately $12.4 million.

The Company anticipates that the net proceeds of this offering will be
used to fund the continued clinical and preclinical development of the Company's
existing products, the continued research and development of medicines for the
treatment of cancer and infectious diseases, capital expenditures and other
general corporate purposes. Exact allocation of the proceeds for such purposes
and timing of the expenditures will vary depending on numerous factors,
including the hiring of additional personnel, the progress of the Company's
research and development programs, the results of clinical and preclinical
trials of its products, the cost and timing of regulatory approvals,
technological advances, the commercial potential of its products, the terms of
any collaborative arrangements entered into by the Company and the status of
competitive products. The Company's Board of Directors has significant
discretion in the application of such funds.

Pending application of the proceeds described above, the Company
intends to invest the net proceeds in cash equivalents and short-term
investments, including United States government securities and high-grade
corporate investments, commercial paper and bankers acceptances. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company intends to invest
and use the net proceeds so as not to be considered an investment company under
the Investment Company Act of 1940.

DIVIDEND POLICY

The Company has never paid cash dividends on the common stock. The
Company currently intends to retain earnings, if any, to support the development
of the Company's business and does not anticipate paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's board of directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion.

-12-

<PAGE> 15

PRICE RANGE OF COMMON STOCK

The Company's common stock is traded on the Nasdaq National Market
under the symbol "ARNX." The following table sets forth the range of high and
low sales prices per share of common stock, as reported on the Nasdaq National
Market, during the periods presented. The information provided in the table
gives effect to a one-for-two reverse split of the Company's common stock
effected in July 1996.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996: HIGH LOW
------------ -----------
<S> <C> <C>
1st Quarter............................................................. $ 13 1/2 $ 6 1/2
2nd Quarter............................................................. 15 7 7/8
3rd Quarter............................................................. 12 3/4 6 1/2
4th Quarter............................................................. 10 1/4 7 1/8

YEAR ENDED DECEMBER 31, 1997:
1st Quarter............................................................. $ 10 1/8 $ 5 1/8
2nd Quarter............................................................. 6 7/8 3
3rd Quarter............................................................. 7 5/8 3 5/8
4th Quarter............................................................. 7 1/4 3 11/16

YEAR ENDED DECEMBER 31, 1998:
1st Quarter............................................................. $ 4 3/4 3
2nd Quarter............................................................. 4 7/8 2 1/4
3rd Quarter............................................................. 4 2 1/32
4th Quarter (through November 18, 1998)................................. 4 5/16 2 1/16
</TABLE>

The last sale price of the common stock as reported on the Nasdaq
National Market on November 18, 1998 was $3 1/16 per share. At November 18,
1998, there were approximately 200 holders of record and approximately 4,400
beneficial owners of the Company's common stock.

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<PAGE> 16
DILUTION

The pro forma net tangible book value of the Company's common stock as
of September 30, 1998, adjusted to reflect the completion of the sale of 837,989
shares of common stock to Abbott Laboratories for $3.0 million with a scheduled
closing date of November 30, 1998, would have been $14,353,000, or $0.88 per
share. Net tangible book value per share represents the total tangible assets of
the Company reduced by its total liabilities and divided by the number of shares
of common stock outstanding as of September 30, 1998. After giving effect to the
sale of the common stock offered hereby at an assumed public offering price of
$31/16 per share and the deduction of the commissions and estimated offering
expenses payable by the Company in connection therewith, the pro forma net
tangible book value of the Company as of September 30, 1998, as adjusted, would
have been $26,759,000, or $1.28 per share. This represents an immediate increase
in the net tangible book value of $0.40 per share to existing stockholders and
an immediate dilution of $1.78 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates the per share
dilution to new investors purchasing common stock in this offering:

<TABLE>
<S> <C> <C>
Assumed public offering price per share(1)........................................... $ 3.06
Pro forma net tangible book value per share as of September 30, 1998 (2)....... 0.88
Increase per share attributable to new investors............................... 0.40
-------
Pro forma net tangible book value as adjusted for this offering (2)(3)............... $ 1.28
------
Dilution per share to new investors (2)(3)........................................... $ 1.78
======
</TABLE>

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

(1) Before deducting commissions and estimated offering expenses payable by
the Company.
(2) Assumes no exercise of any outstanding options or warrants to purchase
common stock or issuance of common stock under outstanding contingent
stock rights. As of September 30, 1998, there were outstanding options
to purchase an aggregate of 2,624,776 shares of common stock at a
weighted average exercise price of $5.25 per share, outstanding
warrants to purchase an aggregate of 176,941 shares of common stock at
a weighted average exercise price of $11.53 per share and outstanding
contingent stock rights issued to former Triplex stock and option
holders pursuant to which the Company may be required to issue shares
of common stock with a fair market value on the date of issuance of up
to approximately $5.0 million if the Company obtains data from clinical
trials of Zintevir on or before September 11, 2000 that the Company's
Board of Directors determines to be sufficient to file a New Drug
Application. See "Description of Capital Stock -Warrants" and
"Description of Capital Stock -- Contingent Stock Rights."
(3) Assumes no exercise of the warrants to purchase an aggregate of 450,000
shares of common stock to be issued to Paramount Capital, Inc. or its
designees in connection with this offering. See "Plan of Distribution."

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<PAGE> 17
CAPITALIZATION

The following table sets forth (i) the actual capitalization of the
Company as of September 30, 1998, (ii) the pro forma capitalization of the
Company as of September 30, 1998 giving effect to the sale of 837,989 shares of
common stock to Abbott Laboratories for $3.0 million with a scheduled closing
date of November 30, 1998, and (iii) the pro forma as adjusted capitalization of
the Company as of September 30, 1998 giving effect to the sale of 837,989 shares
of common stock to Abbott Laboratories for $3.0 million with a scheduled closing
date of November 30, 1998 and the sale by the Company of the shares of common
stock offered hereby and the application of the net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction with
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Long-term obligations (1).............................................. $ 1,047 $ 1,047 $ 1,047
--------- --------- ---------
Stockholders' equity (2) ............................................
Preferred stock $.001 par value, 5,000,000 shares authorized,
none issued and outstanding ....................................... -- -- --
Common stock $.001 par value, 30,000,000 shares authorized,
15,503,745 shares issued and outstanding, actual; 16,341,734
shares, pro forma; 20,841,734 shares, pro forma as adjusted (3) ..... 15 16 21
Additional paid-in capital .......................................... 97,660 100,659 113,060
Common stock warrants ............................................... 50 50 50
Treasury stock ...................................................... (11) (11) (11)
Deferred compensation ............................................... (545) (545) (545)
Unrealized loss on securities available-for-sale .................... (66) (66) (66)
Deficit accumulated during development stage ........................ (85,750) (85,750) (85,750)
--------- --------- ---------
Total stockholders' equity .......................................... 11,353 14,353 26,759
--------- --------- ---------
Total capitalization............................................. 12,400 $ 15,400 $ 27,806
========= ========= =========
</TABLE>

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

(1) See Note 5 of Notes to Financial Statements.
(2) See Notes 6 and 7 of Notes to Financial Statements.
(3) Excludes (i) 2,624,776 shares of common stock issuable as of September
30, 1998 upon the exercise of outstanding options at a weighted average
exercise price of $5.25 per share, (ii) 176,941 shares of common stock
issuable as of September 30, 1998 upon the exercise of outstanding
warrants at a weighted average exercise price of $11.53 per share and
(iii) shares of common stock with a fair market value on the date of
issuance of up to approximately $5.0 million which may be issued
pursuant to outstanding contingent stock rights issued to former
Triplex stock and option holders if the Company obtains data from
clinical trials of Zintevir on or before September 11, 2000 that the
Company's Board of Directors determines to be sufficient to file a New
Drug Application. See "Description of Capital Stock -- Warrants" and
"Description of Capital Stock -- Contingent Stock Rights." Also
excludes 450,000 shares of common stock issuable upon the exercise of
warrants to be issued to Paramount Capital, Inc. or its designees in
connection with this offering. See "Plan of Distribution."

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<PAGE> 18
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)

The selected financial data set forth below are derived from the
Company's financial statements as of and for each of the years in the five-year
period ended December 31, 1997, and as of and for the nine month periods ending
September 30, 1997 and 1998. The Company's financial statements as of and for
each of the years in the five year period ended December 31, 1997 have been
audited by Arthur Andersen LLP, independent public accountants. Although the
following unaudited financial statements for the nine months ended September 30,
1998 have not been audited by Arthur Andersen LLP, they have informed the
Company that if the conditions described in Note 1 of the Notes to Financial
Statements continue to exist at the time of their audit of the financial
statements for the year ended December 31, 1998, their report on those
statements will include an explanatory fourth paragraph expressing substantial
doubt about the Company's ability to continue as a going concern. On September
11, 1995, Aronex Pharmaceuticals, Triplex and Oncologix effected a three-way
merger, which was accounted for under the purchase method of accounting. The
selected financial data prior to September 11, 1995 represent the operations and
balance sheet data of Aronex Pharmaceuticals, while the selected financial data
from and after September 11, 1995 represent the combined operations and balance
sheet data of the merged companies. The selected financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements and notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------- ------------ -------------- ------------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
grants and contracts... $ 48 $ 197 $ 1,248 $ 2,670 $ 841 $ 591 $ 329
Interest income........... 217 534 452 1,692 2,059 1,632 1,013
--------- --------- -------- -------- -------- -------- ----------
Total revenues... 265 731 1,700 4,362 2,900 2,223 1,342
Expenses:
Research and development.. 4,491 7,637 8,347(1) 10,357 13,993 9,864 15,399
Purchase of in-process
research and development -- -- 8,383(2) 242 (2) 3,000(3) 3,000 (3) --
General and administrative 1,876 1,950 2,215 1,620 2,641 1,477 2,448
Interest expense and other 123 196 184 173 257 160 41
--------- --------- -------- -------- -------- -------- ----------
Total expenses... 6,490 9,783 19,129 12,392 19,891 14,501 17,888
--------- --------- -------- -------- -------- -------- ----------
Net loss.................. $ (6,225) $ (9,052) $(17,429) $ (8,030) $(16,991) $(12,278) $ (16,546)
--------- ========= ======== ======== -------- ======== ==========
Basic and diluted loss per
share(4)............... $ (1.72) $ (1.76) $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
-------- ========= ======== ======== ======== -------- ==========
Weighted average shares
used in computing basic
and diluted loss per
share(4) 3,602 5,153 6,488 13,048 14,896 14,714 15,475
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------- ------------ -------------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term and long-term
investments............ $ 19,642 $ 10,019 $ 12,015 $ 41,388 $ 29,954 $ 32,738 $ 16,015
Total assets.............. 21,187 12,958 15,530 44,281 32,125 $ 35,588 18,522
Total long-term obligations 913 1,218 1,574 146 6 13 1,047
Deficit accumulated during
development stage...... (17,702) (26,754) (44,183) (52,213) (69,204) (64,491) (85,750)
Total stockholders' equity 19,471 10,660 11,994 40,477 27,379 31,810 11,353
</TABLE>

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

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<PAGE> 19

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

OVERVIEW

Since its inception in 1986, Aronex Pharmaceuticals, Inc. has primarily
devoted its resources to fund research, drug discovery and development. The
Company has been unprofitable to date and expects to incur substantial operating
losses for the next several years as it expends its resources for product
research and development, preclinical and clinical testing and regulatory
compliance. The Company has sustained losses of approximately $85.8 million
through September 30, 1998. The Company has financed its research and
development activities and operations primarily through public and private
offerings of securities. The Company's operating results have fluctuated
significantly during each quarter, and the Company anticipates that such
fluctuations, largely attributable to varying commitments and expenditures for
clinical trials and research and development, will continue for the next several
years.

RESULTS OF OPERATIONS

Nine Month Periods Ended September 30, 1997 and 1998

Revenues from research and development grants and contracts decreased
44% to $329,000 for the nine months ended September 30, 1998 from $591,000 for
the nine months ended September 30, 1997. For the nine months ended September
30, 1997, research and development revenue was composed of (i) $150,000 in
revenue from the initiation of a license agreement with F. Hoffman-LaRoche Ltd.
(formerly Boehringer Mannheim GmbH), (ii) $166,000 in development revenue from
Targeted Genetics, Incorporated and (iii) $250,000 in the third quarter of 1997
from a gene therapy licensing agreement with Genzyme Corporation. The Company
has not received any revenues in 1998 under the agreement with Hoffman-LaRoche,
which was terminated in September 1998. The three-year agreement with Targeted
Genetics ended in the second quarter of 1997. The majority of research and
development revenue for the nine months ended September 30, 1998 represents
Small Business Innovative Research (SBIR) grant revenue relating to Zintevir(R).

Interest income decreased 38% to $1.0 million for the nine months ended
September 30, 1998 from $1.6 million for the nine months ended September 30,
1997. The decrease in interest income resulted from a decrease of funds
available for investment.

Research and development expenses increased 56% to $15.4 million for
the nine months ended September 30, 1998 from $9.9 million for the nine months
ended September 30, 1997. The increase in research and development expenses
resulted primarily from an increase of $4.4 million in clinical investigation
costs for the nine months ended September 30, 1998. The majority of these costs
relate to clinical trials of the Company's lead products, NYOTRAN(R) and
ATRAGEN(R). The increase in research and development expenses also reflects an
increase of $1.3 million in medical affairs and regulatory salaries and payroll
costs for the nine months ended September 30, 1998, as the number of personnel
in these departments increased significantly from the same period in 1997.

The costs of $3.0 million incurred for the purchase of in-process
research and development in the third quarter of 1997 related to a non-cash
research and development charge incurred in connection with the issuance of
common stock under the contingent rights issued in the merger with Triplex
Pharmaceutical Corporation. The Company issued an aggregate of 686,472 shares of
common stock with an aggregate value of $3.0 million under these contingent
rights because equity milestone payments of $5.0 million were not received from
Genzyme relating to ATRAGEN on or before September 11, 1997.

General and administrative expenses increased 60% to $2.4 million for
the nine months ended September 30, 1998 from $1.5 million for the nine months
ended September 30, 1997. The increase in general and administrative expenses
resulted primarily from (i) an increase of $601,000 in salaries and payroll
costs; (ii) an increase of $119,000 relating to business development activities;
(iii) an increase of $64,000 in investor and public relations expenses and (iv)
the addition of $159,000 in marketing expenses, relating primarily to ATRAGEN,
for the nine month period ended

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September 30, 1998. Several new positions have been added since the first
quarter of 1997 and a Chief Executive Officer was added in the fourth quarter of
1997. Additionally, the Company's former President, who resigned in January
1998, is entitled to certain severance payments in accordance with a termination
and severance agreement with the Company. These severance payments, which
continue through January 1999, were recorded as compensation expense in the
first quarter of 1998. See Note 11 of Notes to Financial Statements.

Interest expense and other decreased 74% to $41,000 for the nine months
ended September 30, 1998 from $160,000 for the nine months ended September 30,
1997. The decrease in interest expense and other resulted primarily from a loss
of $107,000 in the quarter ended September 30, 1997 from the disposition of
equipment and leasehold improvements that had been used in research activities
eliminated in early 1997 and a decrease in interest expense for the first half
of 1998 resulting from a reduction in the average amount of capital lease
obligations and indebtedness used to fund the acquisition of laboratory
equipment.

Net loss increased 35% to $16.6 million for the nine months ended
September 30, 1998 from $12.3 million for the nine months ended September 30,
1997. The increase in net loss resulted primarily from the increase in research
and development expenses.

Years Ended December 31, 1996 and 1997

Research and development grants and revenues decreased 70% to $0.8
million in 1997 from $2.7 million in 1996. The decrease in 1997 research and
development grants and revenues was due primarily to the following factors: (i)
the Company received no revenues from Hoechst Marion Roussel, Inc. in 1997
compared with $1.3 million in revenues from Hoechst in 1996, as a result of the
expiration of the Company's research and development agreement with Hoechst at
the end of 1996; (ii) the Company received no revenues under its collaborative
agreement with Genzyme during 1997 as compared with $576,000 in revenues under
the Genzyme agreement in 1996, as a result of the termination of Genzyme's
funding obligations under the agreement; and (iii) the Company received $166,000
in revenues under a research and development agreement with Targeted Genetics in
1997 as compared with $597,000 in revenues from Targeted Genetics in 1996, as a
result of the expiration of the agreement with Targeted Genetics in the second
quarter of 1997. The decrease in research and development grants and revenues in
1997 was partially offset by the Company's receipt in 1997 of $250,000 under the
Company's license agreement with Roche and an additional $250,000 under a new
license agreement with Genzyme relating to gene therapy.

Interest income increased 24% to $2.1 million in 1997 from $1.7 million
in 1996, due primarily to an increase of funds available for investment during
the first half of 1997 resulting from cash received from a public offering of
common stock completed in May 1996.

Research and development expenses increased 35% to $14.0 million in
1997 from $10.4 million in 1996. This increase in research and development
expenses was due primarily to: (i) an increase of $1.2 million in clinical
investigation costs relating mostly to NYOTRAN; (ii) an increase of $1.6 million
in salaries and payroll costs, including costs relating to the hiring of senior
pharmaceutical development and medical affairs executives; (iii) an increase of
$687,000 in drug materials and manufacturing costs, relating mainly to NYOTRAN
and Zintevir; and (iv) an increase of $678,000 in outside pharmacology studies,
relating mainly to ATRAGEN. These increases were partially offset by a decrease
of $1.2 million in research expenses resulting from the elimination of the
majority of the Company's internal research efforts in the second quarter of
1997, relating in part to the termination of research funding from Hoechst.

The costs of $3.0 million incurred for the purchase of in-process
research and development in 1997 related to a non-cash research and development
charge incurred in connection with the issuance of 686,472 shares of common
stock, with an aggregate fair market value at the time of issuance of $3.0
million, under the contingent rights issued in the Triplex merger. The issuance
of such shares under the contingent rights was required because equity milestone
payments of $5.0 million were not received from Genzyme relating to ATRAGEN on
or before September 11, 1997. (See Note 4 of Notes to Financial Statements).
In-process research and development costs of $242,000 in 1996 represent charges
incurred relating to the Company's 1995 mergers with Triplex and Oncologix, Inc.
including the non-cash settlement of a lawsuit filed by certain stockholders of
Oncologix in connection with the mergers in September 1995.

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General and administrative expenses increased 63% to $2.6 million in
1997 from $1.6 million in 1996. The increase in general and administrative
expenses was primarily due to the following: (i) an increase of $721,000 in
salaries and payroll costs, including costs relating to the hiring of a new
Chief Executive Officer and a Vice President of Marketing and Business
Development; and (ii) an increase of $195,000 in stock and stock option
compensation expense.

The Company's net loss increased 111% to $16.9 million in 1997 from
$8.0 million in 1996. The increase was primarily a result of the following: (i)
an increase of $3.6 million in research and development expenses due to
increased salaries and payroll costs and other expenses relating to advancing
the Company's products; (ii) a $3.0 million charge relating to the issuance of
shares of common stock under the contingent stock agreement (see Note 4 of Notes
to the Financial Statements); (iii) an increase of $1.0 million in general and
administrative expenses relating mainly to increased salaries and payroll costs,
including salary and hiring costs for several new positions; and (iv) a decrease
of $1.9 million in research and development grants and revenues, attributable
primarily to the loss of revenues from the Hoechst agreement.

Years Ended December 31, 1995 and 1996

Research and development grants and revenues increased 125% to $2.7
million in 1996 from $1.2 million in 1995. The increase in research and
development grants and revenues was due primarily to: (i) the Company's
recognition of $576,000 in revenues during the third and fourth quarters of 1996
relating to pharmaceutical development work performed in connection with the
Company's collaborative agreement with Genzyme; and (ii) the Company's
recognition of revenues of $1.3 million from Hoechst. The Company did not
recognize any revenue relating to the Genzyme agreement in 1995, as all such
amounts were being deferred in accordance with the agreement, and recognized
revenues of $350,000 in 1995 under the Hoechst agreement, representing amounts
received after its assumption of Triplex's rights under that agreement in the
Company's 1995 merger with Triplex.

Interest income increased 276% to $1.7 million in 1996 from $452,000 in
1995, due primarily to an increase of funds available for investment resulting
from cash received from the exercise of warrants and a public offering of common
stock completed in May 1996.

Research and development expenses increased 25% to $10.4 million in
1996 from $8.3 million in 1995, due primarily to the addition of Triplex's
research department following the Triplex merger and increased clinical
investigation costs relating to the Company's NYOTRAN and Zintevir products.

In-process research and development costs of $242,000 in 1996 and $8.4
million in 1995 represent charges incurred in connection with the Triplex and
Oncologix mergers in September 1995 representing the excess of the purchase
price and other costs of the mergers over the fair value of the assets acquired
in the mergers. The charges in 1996 include the non-cash settlement of a lawsuit
filed by certain stockholders of Oncologix.

General and administrative expenses decreased 27% to $1.6 million in
1996 from $2.2 million in 1995, primarily due to: (i) non-recurring operating
expenses incurred on behalf of Oncologix and paid in 1995 by the Company
pursuant to the terms of the Oncologix merger agreement; and (ii) a decrease in
salary and personnel costs from 1995 due to severance payments made to the
Company's former President in 1995.

The Company's net loss decreased 54% to $8.0 million in 1996 from $17.4
million in 1995, due primarily to the $8.4 million charge in 1995 for in-process
research and development costs in connection with the Triplex and Oncologix
mergers.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company's primary source of cash has been from
financing activities, which have consisted primarily of sales of equity
securities. The Company has raised an aggregate of approximately $75 million
from the sale of equity securities from its inception through September 30,
1998. In July 1992, the Company raised net

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proceeds of approximately $10.7 million in the initial public offering of its
common stock. In September 1993, the Company entered into a collaborative
agreement with Genzyme Corporation relating to the development and
commercialization of ATRAGEN, in connection with which the Company received net
proceeds of approximately $4.5 million from the sale of common stock to Genzyme.
In November 1993 and May 1996, the Company raised net proceeds of approximately
$11.5 and $32.1 million, respectively, in public offerings of common stock. From
October 1995 through September 30, 1998, the Company received aggregate net
proceeds of approximately $6.5 million from the exercise of certain warrants
issued in its 1995 merger with Oncologix. In November 1998, the Company entered
into a license agreement with Abbott Laboratories relating to NYOTRAN, in
connection with which Abbott has agreed to purchase 837,989 shares of the
Company's common stock for $3.0 million with a scheduled closing date of
November 30, 1998. From its inception until September 30, 1998, the Company also
received an aggregate of $5.1 million cash from collaborative arrangements and
SBIR grants.

In September 1996, Genzyme advanced Aronex Pharmaceuticals $2.0 million
relating to a $5.0 million equity milestone under the Company's collaborative
agreement with Genzyme. Early in 1997, Genzyme and the Company entered into an
amendment to the agreement pursuant to which (i) Genzyme was released from any
further obligation to perform development work for ATRAGEN and (ii) the license
granted to Genzyme under the agreement was converted to an option to acquire the
right to market and sell ATRAGEN worldwide (with the Company retaining co-
promotion rights in the United States). If Genzyme exercises its option, Genzyme
will be required to pay the Company $3.0 million and product royalties and the
Company will be entitled to retain the $2.0 million advance. The Company has the
right to reacquire such marketing rights at any time within six months following
Genzyme's exercise of the option, by returning to Genzyme the $3.0 million
received in connection with Genzyme's exercise of the option and repaying
Genzyme the $2.0 million advance. If the Company reacquires such marketing
rights, it will also required to pay Genzyme product royalties, including
$500,000 in minimum royalties in the first year following its reacquisition of
such rights. If Genzyme does not exercise its option prior to its expiration,
the Company will be required to repay Genzyme the $2.0 million advance and to
pay product royalties, including $500,000 in minimum royalties in the first year
following the expiration of the option. Genzyme's option to acquire such rights
expires six months after the filing of a New Drug Application for ATRAGEN. The
Company presently expects to file an NDA for ATRAGEN by the end of 1998.

The Company's primary use of cash to date has been in operating
activities to fund research and development, including preclinical studies and
clinical trials, and general and administrative expenses. Cash of $14.0 million
and $8.1 million was used in operating activities during the first nine months
of 1998 and 1997, respectively. The Company had cash, cash-equivalents and
short-term and long-term investments of $16.0 million as of September 30, 1998,
consisting primarily of cash and money market accounts, and United States
government securities and investment grade commercial paper.

The Company has experienced negative cash flows from operations since
its inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require, substantial
funds to continue research and development, including preclinical studies and
clinical trials of its products, and to commence sales and marketing efforts if
Food and Drug Administration and other regulatory approvals are obtained. The
Company expects that its existing financial resources, together with the
estimated proceeds of this offering, will be sufficient to fund its capital
requirements through 1999, and together with expected payments from Abbott
(assuming the achievement of milestones), will be sufficient to fund its capital
requirements through mid-2001. Thereafter, the Company will need to raise
substantial additional capital to fund its operations. Excluding the proceeds of
this offering and payments expected from Abbott Laboratories, the Company
expects that its existing financial resources would be sufficient to fund its
capital requirements into late 1999. The Company's independent public
accountants have informed the Company that if the Company's available capital
resources at the time of their audit of the financial statements for the year
ending December 31, 1998 are not adequate to fund its anticipated operations
through December 31, 1999, their report on those statements will include an
explanatory fourth paragraph expressing substantial doubt about the Company's
ability to continue as a going concern. The Company's capital requirements will
depend on many factors, including the problems, delays, expenses and
complications frequently encountered by development stage companies; the
progress of the Company's research, development and clinical trial programs; the
extent and terms of any future collaborative research, manufacturing, marketing
or other funding arrangements; the costs and timing of seeking regulatory
approvals of the Company's products; the Company's ability to obtain regulatory
approvals; the success of the Company's sales and marketing programs; costs of
filing, prosecuting and defending and

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enforcing any patent claims and other intellectual property rights; and changes
in economic, regulatory or competitive conditions of the Company's planned
business. Estimates about the adequacy of funding for the Company's activities
are based on certain assumptions, including the assumption that testing and
regulatory procedures relating to the Company's products can be conducted at
projected costs. There can be no assurance that changes in the Company's
research and development plans, acquisitions, or other events will not result in
accelerated or unexpected expenditures. To satisfy its capital requirements, the
Company may seek to raise additional funds in the public or private capital
markets. The Company's ability to raise additional funds in the public or
private markets will be adversely affected if the results of its current or
future clinical trials are not favorable. The Company may seek additional
funding through corporate collaborations and other financing vehicles. There can
be no assurance that any such funding will be available to the Company on
favorable terms or at all. If adequate funds are not available, the Company may
be required to curtail significantly one or more of its research or development
programs, or it may be required to obtain funds through arrangements with future
collaborative partners or others that may require the Company to relinquish
rights to some or all of its technologies or products. If the Company is
successful in obtaining additional financing, the terms of such financing may
have the effect of diluting or adversely affecting the holdings or the rights of
the holders of the Company's common stock.

YEAR 2000

Year 2000 issues result from the inability of certain computer programs
or computerized equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. The erroneous date can be interpreted in a
number of different ways; typically the year 2000 is represented as the year
1900. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business.

The Company is in the process of assessing all financial and
operational systems and equipment to ensure year 2000 compliance. The Company
has completed its initial review of its financial and operational systems and
equipment, including those associated with embedded systems with the exception
of certain personal computer and network hardware which it is continuing to
assess. Except for the personal computer and network hardware that remains under
assessment, the Company has either obtained certifications as to year 2000
compliance from vendors or has tested the year 2000 compliance of substantially
all its systems and equipment, and has taken the steps it believes will be
necessary to remediate year 2000 problems associated with the systems and
equipment that it determined not to be year 2000 compliant. The Company is in
the process of assessing its remediated systems and equipment, and plans to
complete that assessment, as well as its continuing assessment of certain
personal computer and network hardware, by January 31, 1999. The Company
believes that the potential impact, if any, of its systems not being year 2000
compliant will not materially affect the Company's ability to continue its
research and development activities.

The Company is in the process of contacting its consultants and other
suppliers of goods and services, as well as its corporate partners, to assess
the possible impact of year 2000 compliance of their systems and equipment on
the Company. The Company plans to complete its assessment of such matters by
July 31, 1999. The Company believes that the potential impact, if any, of the
systems of its consultants, suppliers and corporate partners not being year 2000
compliant will not materially affect the Company's ability to continue its
research and development activities.

Based on its assessments and remediation efforts to date, the Company
does not anticipate that it will incur any significant costs relating to the
assessment and remediation of year 2000 issues. However, there can be no
assurance that the Company or its consultants, suppliers and corporate partners
will successfully be able to identify and remedy all potential year 2000
problems or that a system failure resulting from a failure to identify any such
problems would not have a material adverse effect on the Company.

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<PAGE> 24

BUSINESS

GENERAL

Aronex Pharmaceuticals currently has four products in various stages of
ongoing clinical development:

o NYOTRAN(R) for the treatment of systemic fungal infections,
o ATRAGEN(R) for the treatment of cancer,
o Annamycin for the treatment of cancers with multi-drug resistance,
and
o Zintevir(R) for the treatment of human immunodeficiency virus ("HIV")
infection.

The Company has one product, Platar, in a clinical trial sponsored by
an academic collaborator. In addition, the Company has proprietary technologies
in drug formulation and drug delivery.

The Company has strategic alliances and collaboration arrangements with
leading corporations and academic institutions, including alliances with Abbott
Laboratories and Genzyme Corporation and a collaboration with The University of
Texas M.D. Anderson Cancer Center.

BUSINESS STRATEGY

Aronex Pharmaceuticals has implemented a comprehensive strategy to
become a commercial biopharmaceutical company involved in the identification,
development and commercialization of novel medicines for treating cancer and
infectious diseases. The Company's strategy encompasses five key elements.

Therapeutic Focus. The Company has adopted a clear therapeutic focus
aimed at identifying and developing novel medicines to satisfy clearly defined,
unsatisfied needs in the treatment of cancer and infectious diseases. The
Company believes that this focus provides synergies in the development of its
products as a result of common patient populations, and will provide synergies
in the marketing and commercialization of its products as a result of the common
hospital-based sales and distribution channels and concentrated customer base
associated with such products. In addition, the Company believes its focus on
medicines for cancer and infectious diseases for which current therapy is
inadequate may facilitate expedited commercialization of its products.

Balanced Product Portfolio. The Company has a portfolio of clinical
products that it believes provides a balanced development and commercialization
risk profile. Two of the Company's products are liposomal formulations of drugs
that are currently on the market, designed to improve effectiveness and reduce
adverse side effects. The Company believes that this should contribute to a
reduction in the development risks associated with such products. Two of the
Company's products are new compounds with novel mechanisms of action against a
specific disease target. While these products are associated with a greater
degree of development risk, the Company believes that these products may have a
substantial impact against the diseases they are intended to treat. The Company
believes that this balanced development and commercialization risk profile
limits its dependence on a single product.

Expedited Drug Development Programs. The Company believes that it has
created an effective pharmaceutical development infrastructure. With expertise
in preclinical development, drug formulation and delivery, quality assurance,
quality control and analytical chemistry, drug manufacturing, regulatory and
clinical affairs, the Company believes that it has the ability to effectively
advance preclinical and clinical products through the development pipeline.

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Leveraged Research and Technological Resources. The Company relies on
several sources to provide potential opportunities to expand its pipeline of
products for commercialization. Using its academic and corporate collaborations,
the Company seeks late-stage preclinical products for advancement into the
Company's clinical pipeline as well as early- stage clinical products with
prospects for rapid clinical development. Additional opportunities are available
through the Company's existing capabilities in drug formulation and delivery.

Marketing and Commercialization Strategy. The Company's marketing and
commercialization effort is designed to create a revenue stream utilizing two
diverse methods. The Company intends to market products in the United States
through its own sales and marketing efforts and to market products overseas and
those requiring broader marketing and distribution efforts through licensing
arrangements with corporate partners.

CLINICAL AND SCIENTIFIC BACKGROUND

Aronex Pharmaceuticals' development programs are aimed at the
identification and development of innovative medicines to treat cancer and
infectious diseases for which current therapy is inadequate. The effectiveness
of the current generation of anti-cancer and anti-infective drugs is limited
because of two significant factors. First, cancer cells frequently become
resistant to commonly used anti-cancer drugs, and organisms responsible for
infectious diseases may also acquire resistance to anti-infective drugs. This
resistance results in the ultimate progression of many cancers and some
infections, such as HIV. Second, these drugs, particularly cancer drugs, are
generally toxic because their lack of selectivity results in significant side
effects on normal cells. The Company is targeting the development of drugs for
cancer and infectious diseases that are selective in their actions, with
specific mechanisms of action and more favorable safety profiles.

Infectious Diseases

The immune system, the major line of defense against infection, may be
weakened by diseases, such as HIV and diabetes, or by drugs or agents used for
the treatment of other medical conditions, such as chemotherapy in cancer
patients or immunosuppressive (anti-rejection) therapy in patients receiving
organ transplants. A weak immune system predisposes patients to opportunistic
infections caused by otherwise harmless microbes. These microbes may be fungi
such as Aspergillus and Candida, viruses or bacteria. Some of these
"opportunist" microbes can be or become resistant to existing therapies. Drugs
with new mechanisms of action and/or improved safety profiles are needed to
treat fungal, viral and bacterial diseases and to overcome the toxicity
limitations associated with certain existing drugs.

Cancer

The American Cancer Society estimates that more than 1.2 million new
cases of cancer will be diagnosed and more than 500,000 people will die of
cancer in 1998 in the United States. Major classes of cancer include (i) solid
tumors, the most common of which are breast cancer (approximately 179,000 new
cases in the United States annually) and cancers of the lung (approximately
171,000 new cases in the United States annually), (ii) cancers of the lymphoid
system (approximately 62,000 new cases of lymphoma in the United States
annually) and (iii) cancers of the blood (approximately 29,000 new cases of
leukemia in the United States annually). Chemotherapy, surgery and radiation are
the major components in the treatment of cancer. Chemotherapy is usually the
primary treatment for cancers, such as hematologic malignancies, which cannot be
excised by surgery. In addition, chemotherapy is increasingly being used as an
adjunct to radiation and surgery to improve efficacy and reduce the incidence of
metastasis (the spread of cancer), and as primary therapy for some solid tumors.
The standard strategy for chemotherapy is to destroy the malignant cells by
exposing them to as much drug as the patient can tolerate. Clinicians attempt to
design a combination of drugs, dosing schedule and method of administration that
increases the probability that malignant cells will be destroyed, while
minimizing the harm to healthy cells.

Most current anti-cancer drugs have significant limitations. Certain
cancers, such as colon, lung, kidney and pancreatic cancers, are inherently
unresponsive to chemotherapeutic agents. Certain other cancers may initially
respond to a chemotherapeutic agent, but cease to respond as the cancer cells
acquire resistance to the drug during the course of therapy. As such cancer
cells develop resistance to a specific chemotherapeutic agent, they often
simultaneously

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become resistant to a wide variety of structurally unrelated agents through a
phenomenon known as "multi-drug resistance." Finally, current anti-cancer drugs
are generally highly toxic, with effects including bone marrow suppression and
irreversible cardiotoxicity, which can prevent their administration in
therapeutic doses.

Aronex Pharmaceuticals' Approach to the Treatment of Cancer and
Infectious Diseases

The Company has a focused effort aimed at identifying highly-specific,
novel medicines for the treatment of cancer and infectious diseases. The
Company's research and development strategy is to augment its pipeline by
partnering with academic centers such as The University of Texas M.D. Anderson
Cancer Center and the National Institutes of Health (the "NIH"). These
relationships are intended to permit the Company to identify opportunities which
have already been validated in preclinical and, in some instances, clinical
studies before the Company allocates resources for further evaluation and
development. The Company also anticipates expansion of its product pipeline
through acquisitions, licenses and joint ventures with corporate partners. This
strategy is further intended to allow the Company to bypass the lengthy and
uncertain drug discovery and screening process and to proceed quickly to product
development and clinical evaluation. The Company believes that utilizing this
strategy will allow it to maintain a full pipeline of innovative products for
the treatment of cancer and infectious diseases. See "-- Collaborative
Agreements."

PRODUCTS IN CLINICAL AND PRECLINICAL DEVELOPMENT

The following table lists the Company's clinical products, along with
their initial indications and clinical status:

<TABLE>
<CAPTION>
PRODUCT INDICATIONS CLINICAL STATUS(1)
INFECTIOUS DISEASES
<S> <C> <C>
NYOTRAN(R)........................ Presumed Fungal Infections Phase III
Cryptococcal Meningitis Phase III
Candidemia Phase II completed(2)
Aspergillus Salvage Phase II
Zintevir(R)....................... HIV Infection Phase I/II

CANCER
ATRAGEN(R)........................ Acute Promyelocytic Leukemia Phase II (pivotal)
Non-Hodgkin's Lymphoma Phase II
Kaposi's Sarcoma Phase II completed
Annamycin........................ Breast Cancer Phase II
Platar........................... Lung Cancer Phase II(3)
</TABLE>
- ---------------------------

(1) "Phase I" indicates that the first phase of human clinical studies is
being conducted with a small number of subjects in order to gain
evidence of safety, establish the maximum dose of the drug which may be
safely administered to patients and to characterize the
pharmacokinetics profile of a drug. "Phase I/II" indicates that a
product is being tested in humans primarily for safety and drug
distribution, while preliminary measures of efficacy are also observed.
"Phase II" indicates that a product is being tested in humans for
safety and preliminary evidence of efficacy. "Phase III" indicates that
a product is being tested in multi-center studies generally designed to
provide evidence of efficacy and further safety of the product in a
large number of patients.

(2) This Phase II clinical trial has been completed. However, the Company
is continuing to enroll patients for whom other therapies have not
proven effective on a compassionate basis.

(3) This Phase II clinical trial is being conducted under an institutiona l
Investigational New Drug application at M.D. Anderson.

There can be no assurance that the results of any of the Company's
clinical trials will be favorable or that its products will obtain regulatory
approval for commercialization. See "Risk Factors -- Uncertainty of Clinical
Trial Results."

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INFECTIOUS DISEASES

Aronex Pharmaceuticals' infectious disease program centers on the
development of new agents for the treatment of infectious diseases, including
those that occur in patients with weakened immune systems. The clinical program
presently focuses on the development of NYOTRAN for life-threatening systemic
fungal infections and Zintevir for the treatment of HIV infection.

NYOTRAN(R) for Presumed Fungal Infections (Phase III), Candidemia
(Phase II completed), Aspergillus Salvage (Phase II) and Cryptococcal
Meningitis (Phase III)

Systemic fungal infections are generally serious and may result in
death. Most systemic fungal infections are caused by Candida (yeasts) and
Aspergillus (molds) species. These life-threatening infections occur most often
in patients with impaired immune defense mechanisms as a result of an underlying
disease, such as HIV or diabetes, or the effects of treatments for other medical
conditions, such as chemotherapy in cancer patients or immunosuppressive
(anti-rejection) therapy in patients receiving organ transplants. The population
of patients who become candidates for anti-fungal treatment is increasing
because of a number of factors, including more aggressive use of chemotherapy in
cancer patients, increases in organ and bone marrow transplants, increased use
of in-dwelling catheters for prolonged periods and the spread of HIV.

The Company believes that the drugs that are currently used to treat
systemic fungal infections, including fluconazole, itraconazole, amphotericin B
and liposomal formulations of amphotericin B, have limitations that present a
need for new therapies. Data from recent in vitro studies as well as the
Company's clinical trial data indicate that a number of fungal strains are
becoming increasingly resistant to known therapies. Fluconazole and itraconazole
are relatively safe and are effective in inhibiting fungal growth in Candida,
but are not effective in inhibiting fungal growth in Aspergillus and are
generally not effective in treating fungal infections in patients who are
seriously ill and immunocompromised. Amphotericin B is very active against both
Candida and Aspergillus but is highly toxic, although several companies have
developed liposomal versions of amphotericin B that are designed to reduce the
potential toxicity of amphotericin B.

NYOTRAN is a lipid-based, intravenous formulation of nystatin, an
established, widely-used topical antifungal agent. Although nystatin has proven
to be a potent anti-fungal against a broad spectrum of fungi, including Candida,
Cryptococcus, Histoplasma, Blastomyces and Aspergillus, its poor solubility and
toxicity have previously precluded its systemic administration as a therapy for
such fungal infections. Aronex Pharmaceuticals has developed a proprietary
formulation to deliver NYOTRAN to reduce the toxicity of "free" nystatin. The
Company believes NYOTRAN offers potential advantages over current systemic
anti-fungal therapies. The Company's in vitro studies indicate that it is active
against a range of fungal strains, including Candida, Aspergillus, Cryptococcus
and Fusarium species, some of which are resistant to currently available
anti-fungal therapies. While final clinical efficacy trials have not been
completed, the Company believes that its Phase I and Phase II clinical trials
suggest that NYOTRAN can be administered at doses that are effective in treating
Aspergillus, Candida and Cryptococcus infections.

The strategy for the development of NYOTRAN has involved several
stages. The Company has conducted three Phase I clinical studies which
demonstrated a favorable safety profile. The Company completed a Phase II open
label study in patients with Candidemia evaluating NYOTRAN at multiple doses.
Although this Phase II study has been completed, it remains open on a
compassionate basis to enroll patients for whom other therapies have not been
effective. Results from this study indicate that a dose of one-third the
tolerated dose established in Phase I appears to be efficacious. Based upon data
from this study, the Company initiated Phase III comparative multicenter trials
of NYOTRAN against amphotericin B in patients with presumed fungal infections in
the United States and in Europe. The Company expects to complete the clinical
trials for presumed fungal infections in late 1998. In 1998, to expand the
potential indications for NYOTRAN, the Company also initiated Phase II/III
trials for patients with cryptococcal meningitis and Phase II Aspergillus
salvage trials. The Company plans to file a New Drug Application (an "NDA") for
NYOTRAN with the United States Food and Drug Administration (the "FDA") in 1999.
Following the United States submission, Abbott Laboratories, the exclusive
licensee for NYOTRAN, will begin to file additional international regulatory
submissions. See "-- Government Regulation," "-- Collaborative Agreements --
Collaborative Agreement with Abbott Laboratories" and "Risk Factors --
Uncertainty of Clinical Trial Results."

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The active ingredient of NYOTRAN, nystatin, is available commercially.
The Company has contracted for the manufacture of its clinical requirements of
NYOTRAN by a contract manufacturer capable of satisfying the quantities required
for clinical trials and anticipated quantities for initial commercial sales. The
Company expects Abbott to manufacture the quantities of NYOTRAN necessary to
conduct its remaining clinical trials and, following regulatory approval, to
manufacture NYOTRAN for commercial sale.

The Company estimates that each year over 300,000 patients worldwide
develop systemic fungal infections. The current systemic anti-fungal market is
estimated at more than $1.5 billion on an annual basis. The number of patients
developing systemic fungal infections continues to increase because of the aging
population, more aggressive use of chemotherapy, advances in medical therapies
and the development of resistant fungal strains.

Current treatment for systemic fungal infection is largely limited to
amphotericin B, several liposomal formulations of amphotericin B and
fluconazole. Amphotericin B has been a common choice for the treatment of
systemic fungal infections. The clinical usefulness of amphotericin B is
limited, however, because serious toxicity can occur at doses that are only
marginally effective. Liposomal formulations of amphotericin B have been
developed by several companies, including The Liposome Company, Inc., NeXstar
Pharmaceuticals, Inc. and SEQUUS Pharmaceuticals, Inc. Each of these companies'
products have regulatory approval in the United States and other countries. Each
of these liposomal formulations shows a reduction in toxicity as compared to
amphotericin B. Pfizer Inc.'s fluconazole, the world's largest selling
anti-fungal product, is an oral formulation used for a wide range of less
serious Candida indications. The Company is aware of other anti-fungal agents
currently in clinical development.

In November 1998, the Company entered into a license agreement with
Abbott Laboratories for NYOTRAN. The license agreement provides Abbott with
exclusive worldwide rights to market and sell NYOTRAN, subject to rights
previously granted to Grupo Ferrer Internacional, S.A. in Spain and Portugal and
certain copromotion rights retained by the Company in the United States and
Canada. Abbott has agreed to pay the Company up-front payments of $2.8 million
under the license agreement and has agreed to purchase 837,989 shares of the
Company's common stock for $3.0 million under a related stock purchase
agreement. Abbott has also agreed to provide funding for the continuing clinical
development of NYOTRAN and to make subsequent milestone payments as specified
regulatory goals and sales targets are achieved. Abbott has agreed to pay to the
Company escalating royalties on all product sales of NYOTRAN. See "--
Collaborative Agreements -- Collaborative Agreement with Abbott Laboratories."

M.D. Anderson has granted Aronex Pharmaceuticals the worldwide
exclusive license to an issued patent directed to the use of a liposomal
formulation of nystatin in the treatment of systemic fungal infections. A
process which is of substantial pharmaceutical utility for making NYOTRAN is
protected by another issued patent. A continuation of this process patent is
currently being prosecuted seeking additional claims in this area. See "--
Patents and Proprietary Rights."

Zintevir(R) for HIV Infection (Phase I/II)

Two Phase I trials on Zintevir have been completed. A Phase I single
dose study of Zintevir was initiated at San Francisco General Hospital in
October 1995. The primary objectives of this Phase I study were to determine the
safety and pharmacokinetics profile of escalating single doses of Zintevir in
patients with HIV infection. Single doses as high as 6 mg/kg were given. A Phase
I multiple dose study was initiated at Harris Laboratories, Inc., a clinical

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<PAGE> 29
research organization, in May 1996. The primary objectives of the multiple dose
study were to determine the safety and pharmacokinetics profile of multiple
intravenous doses of Zintevir and to evaluate the anti-HIV activity in HIV
infected patients. Multiple doses as high as 3 mg/kg were administered every
other day for a total of seven doses with minimal adverse events. Multiple doses
as high as 6 mg/kg given every day for 14 days are being administered in a Phase
I/II clinical trial begun in November 1997. This Phase I/II clinical trial is
designed to determine Zintevir's ability to reduce viral load as well as to
gather additional data on the product's safety and pharmacokinetics. The Company
expects to complete the Phase I/II clinical trial by the end of 1998. See "Risk
Factors -- Uncertainty of Clinical Trial Results."

Although treatment with a combination of reverse transcriptase and
protease inhibitors has been shown to reduce the level of HIV ribonucleic acid
("RNA") in the plasma to undetectable levels in many patients, HIV
deoxyribonucleic acid ("DNA") continues to persist in the tissues of these
patients. In addition, 25% of patients who have received combination therapy
with reverse transcriptase and protease inhibitors do not respond to the
treatment, either because of the patient's inability to withstand the
combination therapy due to side effects or the failure of the combination
therapy to produce an anti-viral effect.

Certain of the currently-approved drugs for treating HIV cause toxicity
in some patients. AZT may cause anemia as a result of bone marrow toxicity, and
ddI, ddC and d4T may cause painful neuropathy. Although these toxicities are
sometimes reversible, they are considered serious and dose-limiting and may
prevent prolonged use. 3TC and saquinavir have been reported to have few serious
side effects. Some of the new protease inhibitors are known to cause kidney
stones and severe diarrhea. There is a continuing need for improved drugs for
the treatment of HIV infection, particularly for drugs that have novel
mechanisms of action and activity against AZT-resistant HIV strains.

According to UNAIDS, a program sponsored by the United Nations, nearly
900,000 people in the United States and over 30 million people worldwide are
infected with HIV. Since the early 1980's, more than 40 million individuals have
contracted HIV and almost 12 million have died as a result. In the United States
alone, over 600,000 AIDS cases had been reported by June 1997. The Company
believes that substantial market potential exists for HIV agents with novel
mechanisms of action, for use in combination with existing therapies.

The use and composition of a group of compounds including Zintevir are
the subject of one issued patent and four United States patent applications and
eight foreign patent applications. These applications are either assigned wholly
to Aronex Pharmaceuticals, or jointly to the Company and Baylor College of
Medicine, in which latter case the Company has exclusively licensed Baylor's
rights. The issued patent covers the inhibition of HIV production in cultured
cells by a group of compounds including Zintevir. See "-- Patents and
Proprietary Rights."

CANCER

Aronex Pharmaceuticals' programs in cancer focus on developing
medicines based upon either refinements of proven therapies or novel mechanisms
of action against specific disease targets. The clinical program currently
focuses on development of ATRAGEN(R) for hematological malignancies and solid
tumors and Annamycin for breast cancer.

ATRAGEN(R) for Acute Promyelocytic Leukemia (pivotal Phase II),
Non-Hodgkin's Lymphoma (Phase II) and Kaposi's Sarcoma (Phase II
completed)

ATRAGEN, the Company's most advanced anti-cancer agent, is presently in
clinical trials for the treatment of acute promyelocytic leukemia ("APL"). This
indication represents a therapeutic area where new therapies are needed.
Established chemotherapeutic agents have been effective in treating some cases
of APL, but have been associated with serious side effects and frequent relapse.
The oral formulation of the retinoid all-trans retinoic acid ("ATRA") has been
approved by the FDA as a treatment for APL. ATRA and other retinoids (a family
of molecules comprising both natural and synthetic derivatives of retinol,
otherwise known as vitamin A) cause cell differentiation in contrast to most
conventional chemotherapeutic agents. However, the Company believes the
effectiveness of the oral formulation of ATRA may be reduced by the rate at
which it is metabolized, which lowers the amount of drug that reaches the cancer
target. The oral formulation of ATRA can also cause an adverse effect called
ATRA syndrome, consisting of fever and pulmonary distress.

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<PAGE> 30

ATRAGEN is a lipid-based, intravenous formulation of all-trans retinoic
acid which has been studied in patients with APL and Kaposi's sarcoma. The
Company's lipid formulation has been developed to change certain aspects of the
drug's behavior in the body to overcome the known deficiencies of oral
retinoids, such as the oral formulation of ATRA. ATRAGEN has a different
pharmacokinetics and distribution profile, so that there may be a decrease in
the proportion of the drug metabolized and an increase in the proportion that
reaches the cancer target. Following ATRAGEN treatment, higher plasma
concentrations of the drug are achieved than after oral ATRA therapy. Unlike
oral administration, these drug levels are maintained throughout the course of
therapy. These characteristics may provide more effective delivery of the drug
to the bone marrow, liver and spleen, where most leukemic cells are found, and a
better safety profile.

Aronex Pharmaceuticals completed a Phase I clinical trial of ATRAGEN in
1995 in patients with cancers of the blood. Phase I data presented in the
journal Blood during 1996 indicated that ATRAGEN sustains levels in the blood
after prolonged dosing, is well tolerated, and shows evidence of activity
against certain leukemias and lymphomas. The Company recently completed patient
enrollment for the pivotal Phase II clinical evaluation of ATRAGEN for its
potential to induce remission and prevent relapse of APL in patients that have
experienced a recurrence of the cancer. Interim results from one of these
trials, presented at the American Society for Hematology meeting in December
1997, demonstrated that ATRAGEN has activity against APL. The Company completed
patient enrollment of the Phase II clinical trials in the third quarter of 1998
and expects to file an NDA by the end of 1998.

ATRAGEN has also been assessed in Phase II clinical trials in
collaboration with Genzyme Corporation for the treatment of Kaposi's sarcoma.
Results from this trial indicated that ATRAGEN was generally well tolerated,
with headaches and dry skin being the primary reported adverse events. The
Company is not presently pursuing this indication, although it may do so in the
future.

The Company believes that ATRAGEN may also be useful in treating other
types of cancer, and plans to evaluate the efficacy of ATRAGEN in other
hematologic malignancies and solid tumors. In mid-1998, the Company initiated a
Phase II clinical trial in non-Hodgkin's lymphoma and plans to initiate clinical
trials in other indications in the near future. ATRAGEN has been designated an
orphan drug for the treatment of acute and chronic leukemia by the FDA. See "--
Government Regulation" and "Risk Factors -- Uncertainty of Clinical Trial
Results."

The Company estimates that approximately 2,000 new cases worldwide of
APL are diagnosed annually. The Company estimates that each year approximately
1,000,000 patients worldwide develop the various types of cancer identified as
potential indications for ATRAGEN.

In 1993, Aronex Pharmaceuticals entered into a collaborative agreement
with Genzyme Corporation to develop and commercialize ATRAGEN for the treatment
of cancer. This agreement has subsequently been modified, with the result that:
(i) the Company retains responsibility for the further clinical development of
ATRAGEN and (ii) Genzyme has an option to acquire marketing rights to ATRAGEN,
subject to the right of the Company to retain or reacquire such marketing rights
and subject to certain other rights retained by the Company. See "--
Collaborative Agreements -Collaborative Agreement with Genzyme Corporation."

The composition and method of use of ATRAGEN (liposomal Tretinoin) is
the subject of a patent application, assigned to The University of Texas M.D.
Anderson Cancer Center, as to which the rights of M.D. Anderson are exclusively
licensed to the Company. These rights are subject to certain options held by
Genzyme related to development of ATRAGEN. Claims to the ATRAGEN formulation
have been allowed in the European Patent Office.
See "-- Patents and Proprietary Rights."

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<PAGE> 31
Annamycin for Breast Cancer (Phase II)

Annamycin is a new chemical entity belonging to the class of widely
prescribed anti-cancer agents known as anthracyclines. This class of drug, which
includes doxorubicin, daunorubicin and idarubicin, has been shown to be
effective, either alone or in combination, against proliferating cancer cells.
Anthracyclines currently on the market, however, suffer from two primary
limitations. Cancer cells often develop a resistance to taxol, doxorubicin and
related anthracyclines, rendering the treatment ineffective. This resistance,
once developed by cancer cells, generally extends to include resistance to a
variety of other chemotherapeutic agents, a phenomenon commonly referred to as
multi-drug resistance. The best understood mechanism behind multi-drug
resistance involves an increase in the production of P-glycoprotein, a
trans-cell membrane pump. This pump transports drugs, including most types of
anti-cancer drugs, out of tumor cells. Currently available anthracyclines also
frequently result in severe toxic effects, including irreversible
cardiotoxicity.

Annamycin was designed to overcome these two major limitations. In
contrast to conventional chemotherapeutic agents, Annamycin is structured so
that it avoids the mechanism of operation of the trans-cell membrane pump
believed to be one of the mechanisms responsible for multi-drug resistance. The
Company's preclinical studies have shown that Annamycin, which is a lipid-based
formulation of a novel anthracycline, may be active against multi-drug resistant
tumor cells that over-express at least two of the pumps that are believed to be,
at least in part, responsible for tumor cells becoming resistant to treatment.
The Company's preclinical studies of Annamycin in animals bearing human tumors
also indicate that Annamycin may be less cardiotoxic than doxorubicin. A Phase I
dose-escalating clinical trial of Annamycin was completed in August 1997. Data
from this trial were presented at the American Society of Clinical Oncology
meeting in May 1997. Annamycin is currently being evaluated in Phase II
multi-center clinical trials in breast cancer patients whose tumors are
resistant to conventional therapies. The Company expects to complete Phase II
clinical trials in 1998. Clinical trials to assess the efficacy of Annamycin in
patients with other solid tumors and with various hematological malignancies are
being planned. See "Risk Factors -- Uncertainty of Clinical Trial Results."

The Company believes that there would be a substantial market for an
agent which is active against multi-drug resistance and exhibits an improved
safety profile over doxorubicin. The American Cancer Society estimates that each
year there are approximately 179,000 new cases of breast cancer in the United
States. Annamycin also may be useful in treating other varieties of solid
tumors, leukemias and lymphomas. The Company plans to initiate Phase II clinical
trials to evaluate the activity of Annamycin in acute myelocytic leukemia.

While there are a range of chemotherapeutic agents used alone and in
combination to treat breast cancer and other solid tumors, including
doxorubicin, daunorubicin, liposomal formulations of doxorubicin and
daunorubicin, taxol, platinum and cyclophosphamide, the Company does not believe
that there are any medicines available that are active against multi-drug
resistant tumors. Aronex Pharmaceuticals is aware of some agents currently in
Phase II clinical trials that are designed to modulate multi-drug resistance,
but for which no efficacy data are yet available. These agents would potentially
be used in combination with chemotherapeutic agents.

The Company's liposomal formulation of Annamycin is the subject of an
issued patent, licensed exclusively to the Company by The University of Texas
M.D. Anderson Cancer Center, that claims liposomal Annamycin and a method using
liposomal Annamycin in treating cancer. In addition, a patent application has
been filed with respect to an improved process for preparing Annamycin. Patent
protection is also being sought for a specific formulation of liposomal
Annamycin with improved processing characteristics. Annamycin itself is the
subject of a patent that has been non-exclusively sublicensed to Aronex
Pharmaceuticals by M.D. Anderson, which M.D. Anderson licensed from Ohio State
University. See "-- Patents and Proprietary Rights."

Platar for Lung Cancer (Institutional Phase II)

The Company, in conjunction with The University of Texas M.D. Anderson
Cancer Center, is developing the novel platinum analogue Platar for the
treatment of solid tumors. Platar has been designed to overcome the toxicity and
resistance that currently limits the usefulness of platinum, a chemotherapeutic
agent widely used in the treatment of solid tumors. Platar was selected as the
Company's lead candidate from a series of platinum anti-cancer compounds.

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Platar is currently being evaluated in a Phase II clinical trial, under
an institutional Investigational New Drug application ("IND") at M.D. Anderson,
for the treatment of mesothelioma, a type of lung cancer. This trial is
sponsored by the Office of Orphan Drug Products at the FDA. A Phase I clinical
trial was previously conducted under a physician's IND at M.D. Anderson.

Platar is covered by a series of patents and a patent application,
licensed exclusively to the Company by M.D. Anderson, relating to hydrophobic
cis-platinum complexes and to stable liposomal formulations of the lipophilic
platinum compounds. The claims of these patents are drawn to novel cis-platinum
complexes having hydrophobic properties and possessing branched or
unbranched-chain hydrocarbon substituents. Formulations containing the novel
platinum complexes entrapped in liposomes and exhibiting improved drug stability
are included. Anti-tumor compositions containing these stable cis-platinum
containing liposomes and methods of using them to treat tumors are also covered.
Claims to the product have been allowed by the European Patent Office. A patent
application filed in the United States that may overlap claims included in the
United States patents licensed to the Company is the subject of an ongoing
interference proceeding in the United States Patent and Trademark Office. The
Company cannot currently predict the outcome of this matter. See "-- Patents and
Proprietary Rights."

AR209: erbB-2 Targeted Therapy for Solid Tumors (Preclinical)

AR209 is an innovative cancer therapy which Aronex Pharmaceuticals
believes has potential for additional solid tumor indications, including lung,
ovarian and stomach cancers. The Company believes the design of this product
improves upon conventional cancer therapy by targeting specific cancer cells
that contain the oncoprotein erbB-2. The erbB-2 protein occurs at high levels
only in tumors and not in normal tissues. AR209 is an antibody-toxin complex
composed of a targeting ligand and a fragment of the Pseudomonas exotoxin. This
novel product is designed to bind to cancer cells that contain the erbB-2
oncoprotein and to be transported inside (internalized) where it kills the
cancer cell. Preclinical studies indicate that AR209 causes regression of solid
human tumors and is well tolerated.

Aronex Pharmaceuticals has a worldwide license from the NIH to the
Pseudomonas exotoxin used in the design of AR209. The Company also has an
exclusive license to a United States government patent application covering
antibodies targeting the erbB-2 oncoprotein. Patent applications covering the
sequences of the e23 antibody used in the formulation of AR209 have also been
filed. See "-- Patents and Proprietary Rights."

RESEARCH PIPELINE

The Company's goal is to establish an effective and efficient
pharmaceutical development infrastructure and capability to provide a continuing
pipeline of products for commercialization. The Company's research and
development strategy is to augment its pipeline by partnering with academic
centers such as The University of Texas M.D. Anderson Cancer Center and the NIH,
as well as with private research foundations. Such partnering will allow the
Company to identify opportunities which have already been validated in
preclinical and, in some instances, clinical studies before allocating resources
for further evaluation and development. This approach will allow the Company to
bypass the lengthy and uncertain drug discovery and screening process and to
proceed quickly to product development and clinical evaluation. The Company
believes that utilizing this strategy will allow it to maintain a full pipeline
of innovative products for the treatment of cancer and infectious diseases. See
"-- Collaborative Agreements."

COLLABORATIVE AGREEMENTS

The Company's development strategy involves entering into selected
development and licensing agreements with corporate partners to provide working
capital to the Company as well as assist in the efficient development and
marketing of certain of its products. See "Risk Factors -- Collaborative
Arrangements."

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Collaborative Agreement with Abbott Laboratories

In November 1998, the Company entered into a license agreement with
Abbott Laboratories for NYOTRAN. The license agreement provides Abbott with
exclusive worldwide rights to market and sell NYOTRAN, subject to rights
previously granted to Grupo Ferrer Internacional, S.A. in Spain and Portugal and
certain copromotion rights retained by the Company in the United States and
Canada. Abbott has agreed to pay the Company up-front payments of $2.8 million
under the license agreement and has agreed to purchase 837,989 shares of the
Company's common stock for $3.0 million under a related stock purchase
agreement. Abbott has also agreed to provide funding for the continuing clinical
development of NYOTRAN and to make subsequent milestone payments as specified
regulatory goals and sales targets are achieved. Abbott will also pay to the
Company escalating royalties on all product sales of NYOTRAN.

The licenses granted under the NYOTRAN agreement terminate on a
country-by-country basis on the expiration of the last patent relating to such
product in such country. The agreements are terminable by Abbott in the event
certain regulatory milestone goals are not met or other specified events occur
and are terminable by either party on the occurrence of a breach that is not
cured by the breaching party within a certain time period after notice has been
given to such breaching party.

Relationship with Grupo Ferrer Internacional, S.A.

In 1997, the Company entered into a supply and distribution agreement
with Grupo Ferrer International, S.A. to commercialize and market NYOTRAN, under
which Ferrer received the exclusive right to distribute and sell NYOTRAN in
Spain and Portugal. In December 1997, the Company, in cooperation with Ferrer,
filed a Marketing Authorization Application in Spain and Portugal seeking
approval for NYOTRAN for the treatment of systemic fungal infections.

Collaborative Agreement with Genzyme Corporation

In 1993, the Company entered into a license and development agreement
with Genzyme Corporation to develop and commercialize ATRAGEN. The initial focus
of the collaboration was the development of ATRAGEN for the treatment of
myelogenous leukemias and certain non-hematologic cancers. The Company and
Genzyme shared clinical development responsibilities and research program
funding through the end of 1996. Under the agreement, Genzyme was required to
make up to $1.5 million in milestone payments to the Company upon the occurrence
of certain events and to pay the Company royalties on sales of the product.
Genzyme had the right to terminate the agreement in the event of a third party
claim of infringement by products subject to the agreement. The Company had the
right to terminate the agreement if Genzyme failed to satisfy certain
milestones. In connection with the collaborative agreement, Genzyme made a net
$4.5 million equity investment in the Company and agreed to make an additional
$5.0 million equity investment in the Company if certain developmental goals
were achieved.

In September 1996, Genzyme advanced Aronex Pharmaceuticals $2.0 million
relating to the $5.0 million equity milestone. Early in 1997, Genzyme and the
Company entered into an amendment to the agreement pursuant to which (i) Genzyme
was released from any further obligation to perform development work for ATRAGEN
and (ii) the license granted to Genzyme under the agreement was converted to an
option to acquire the right to market and sell ATRAGEN worldwide (with the
Company retaining co-promotion rights in the United States). If Genzyme
exercises its option, Genzyme will be required to pay the Company $3.0 million
and product royalties and the Company will be entitled to retain the $2.0
million advance. The Company has the right to reacquire such marketing rights at
any time within six months following Genzyme's exercise of the option, by
returning to Genzyme the $3.0 million received in connection with Genzyme's
exercise of the option and repaying Genzyme the $2.0 million advance. If the
Company reacquires such marketing rights, it will also required to pay Genzyme
product royalties, including $500,000 in minimum royalties in the first year
following its reacquisition of such rights. If Genzyme does not exercise its
option prior to its expiration, the Company will be required to repay Genzyme
the $2.0 million advance and to pay product royalties, including $500,000 in
minimum royalties in the first year following the expiration of the option.
Genzyme's option to acquire such rights expires six months after the filing of a
New Drug Application for ATRAGEN. The Company presently expects to file an NDA
for ATRAGEN by the end of 1998.

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Relationship with The University of Texas M.D. Anderson Cancer Center

Aronex Pharmaceuticals has two license agreements with The University
of Texas M.D. Anderson Cancer Center which grant the Company exclusive rights to
manufacture, use, market and sell products based upon certain technology
developed at M.D. Anderson relating to the development of human monocyte or
murine macrophage-derived cytotoxins which inhibit or destroy the proliferation
of tumor cells, liposomal-encapsulated polyene antibiotics (except amphotericin
B), liposomal-encapsulated anthracyclines, liposomal-encapsulated platinum
derivatives and liposomal- encapsulated retinoids. NYOTRAN(R), ATRAGEN(R),
Annamycin and Platar are products derived from the Company's relationship with
M.D. Anderson.

The license agreements with M.D. Anderson require Aronex
Pharmaceuticals to pay royalties for licensed technology based on specified
percentages of cumulative net sales and royalties from sublicensees. The Company
is also obligated to pay a milestone payment of $200,000 upon the filing of an
NDA for each licensed product. Because it has not sold any products or processes
to date, the Company has not paid any royalties under the license agreements.
M.D. Anderson is responsible for the preparation, filing and prosecution of all
patent applications, foreign and domestic, relating to technology developed at
M.D. Anderson, and the Company reimburses M.D. Anderson for expenses incurred in
connection with such activities.

The license agreements generally remain in force until the expiration
of the last patent subject to such agreements. Either party may terminate the
license agreements after 60 days notice to the other party in the event of a
material breach of the terms of such agreement. M.D. Anderson has the right to
terminate either license agreement with 90 days notice for failure to convert
the licensed subject matter to a commercial form; however, the Company believes
its ongoing and active research and development efforts directed at commercial
marketing of the licensed products currently satisfies this obligation.

Aronex Pharmaceuticals and M.D. Anderson have entered into research and
development contracts in conjunction with the license agreements which obligate
the Company to fund research and development expenses incurred by the M.D.
Anderson scientists that relate to the technology licensed by the Company. Such
contracts grant the Company an exclusive worldwide license to technology related
to the technology licensed under the license agreements and developed as a
result of research funded by the Company. Such contracts also grant the Company
a right of first refusal to acquire an exclusive worldwide license to certain
technology developed at M.D. Anderson which is not the result of projects funded
by the Company. Aronex Pharmaceuticals and M.D. Anderson agreed to the funding
commitments for research projects under such contracts through September 30,
1999. If the Company defaults in the payment of research and development funding
commitments due M.D. Anderson under such contracts, M.D. Anderson may suspend
the related research and development projects or, if the Company's default
continues for a period of 60 days, M.D. Anderson may terminate the related
contract upon 60 days notice to Aronex Pharmaceuticals.

Relationship with Baylor College of Medicine

Aronex Pharmaceuticals had collaborative arrangements with Baylor
College of Medicine, under licensing, consulting and research and development
arrangements entered into by Triplex beginning in 1989. The Company has an
exclusive, worldwide, royalty-free license from Baylor to certain technology
developed by Baylor. The collaboration arrangements terminated in 1996. The
license agreement terminates on the expiration of the last patent to expire that
is licensed thereunder.

MANUFACTURING

The Company does not have facilities necessary to manufacture its
products in accordance with FDA Good Manufacturing Practices ("GMP"), but it
does have the capability to develop formulations, analytical methods, process
controls and manufacturing technology for its products. The Company generally
uses contract manufacturers to produce larger quantities of its products for
clinical testing, although it expects Abbott Laboratories to supply the
quantities of NYOTRAN necessary to conduct its remaining clinical trials of that
product. The Company and the manufacturers of its products have not entered into
any written agreements other than periodic purchase orders for the supply of the

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products they manufacture on its behalf. Contract manufacturers are closely
supervised to ensure adherence to established production methods and compliance
with the Company's rigorous quality control and quality assurance standards. The
Company does not expect to establish any significant manufacturing capacity in
the near future. The Company does not operate and does not currently plan to
operate manufacturing facilities for the production of its products in
commercial quantities, and it intends to contract with third parties for the
manufacture and supply of its products. There can be no assurance that the
Company will be able to obtain supplies of its products from third-party
suppliers on terms or in quantities acceptable to the Company. Also, the
Company's dependence on third parties for the manufacture of its products may
adversely affect the Company's product margins and its ability to develop and
deliver products on a timely basis. Any such third-party suppliers or any
manufacturing facility the Company establishes will be required to meet FDA GMP
requirements. FDA inspection and approval of manufacturing facilities and
quality procedures for a drug are a prerequisite to approval of an NDA for that
drug. The Company may encounter significant delays in obtaining supplies from
third-party manufacturers or experience interruptions in its supplies. If the
Company is unable to obtain adequate supplies, its business would be materially
adversely affected.

The raw materials required for the majority of the Company's products
are currently available in quantities sufficient to conduct the Company's
research, development, preclinical safety and clinical development activities.
Certain of the Company's products, such as Annamycin, are new syntheses and,
therefore, are not yet available in commercial quantities. No assurance can be
given that the raw materials necessary for the manufacture of the Company's
products will be available in sufficient quantities or at a reasonable cost.
Complications or delays in obtaining raw materials or in product manufacturing
could delay the submission of products for regulatory approval and the
initiation of new development programs, which could materially impair the
Company's competitive position and potential profitability.

SALES AND MARKETING

The Company presently intends to market its products and will build its
sales and marketing infrastructure in accordance with regulatory submissions.
The Company currently plans to market selected products directly to oncologists,
hematologists and infectious disease specialists through a niche sales and
marketing force in the United States. Where large market opportunities require
large sales forces, the Company may enter into co-marketing arrangements with,
or license marketing rights to, third parties. The Company's international
strategy is to negotiate marketing agreements with pharmaceutical manufacturers
and distributors which will entitle the Company to receive a percentage of net
product sales.

The Company does not have any experience in sales, marketing or
distribution. To market any of its products, the Company must develop a sales
and marketing force with supporting distribution capability or enter into
marketing and distribution arrangements with a company that has an established
capability. Significant additional expenditures will be required for the Company
to develop such capabilities. The Company has entered into agreements with
Abbott Laboratories and Grupo Ferrer Internacional, S.A. with respect to the
marketing and sale of NYOTRAN. In addition, the Company has entered into an
agreement with Genzyme Corporation under which Genzyme may acquire the right to
market and sell ATRAGEN, subject to certain conditions and certain rights of the
Company. To the extent that Genzyme does not acquire or the Company reacquires
such marketing rights, the Company plans to enter into marketing agreements with
one or more other pharmaceutical companies to market ATRAGEN. In addition, the
Company plans to enter into marketing agreements with one or more pharmaceutical
companies to market other products that it may develop. To the extent the
Company relies upon licensing, marketing or distribution arrangements with
others, any revenues the Company receives will depend upon the efforts of third
parties. There can be no assurance that any third party will market the
Company's products successfully or that any third-party collaboration will be on
terms favorable to the Company. If any marketing partner does not market a
product successfully, the Company's business would be materially adversely
affected. There can be no assurance that the Company will be able to establish
sales, marketing and distribution capabilities or that it or its collaborators
will be successful in gaining market acceptance for any products that the
Company may develop. The Company's failure to establish marketing capabilities
or to enter into marketing arrangements with third parties would have a material
adverse effect on the Company.

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<PAGE> 36
PATENTS AND PROPRIETARY RIGHTS

The Company's ability to commercialize any products will depend, in
part, upon its or its licensors' ability to obtain patents, enforce those
patents, preserve trade secrets, and operate without infringing upon the
proprietary rights of third parties. The patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions. Some of the United States patents and patent applications
owned by or licensed to the Company are method-of-use patents that cover the use
of certain compounds to treat specified conditions, and composition-of-matter
patents are not available for some of the Company's product candidates. There
can be no assurance that the patent applications licensed to or owned by the
Company will result in issued patents, that patent protection will be secured
for any particular technology, that any patents that have been or may be issued
to the Company or its licensors will be valid or enforceable, that any patents
will provide meaningful protection to the Company, that others will not be able
to design around the patents, or that the Company's patents will provide a
competitive advantage or have commercial application.

There can be no assurance that patents owned by or licensed to the
Company will not be challenged by others. The Company could incur substantial
costs in proceedings before the United States Patent and Trademark Office and
other regulatory authorities, including interference proceedings. These
proceedings could result in adverse decisions about the patentability of the
Company's inventions and products as well as about the enforceability, validity
or scope of protection afforded by the patents. The Company is currently
involved in an interference proceeding before the United States Patent and
Trademark Office regarding Platar. See "-- Cancer -- Platar for Lung Cancer
(Institutional Phase II)."

There can be no assurance that the manufacture, use or sale of the
Company's product candidates will not infringe patent rights of others. The
Company may be unable to avoid infringement of those patents and may be required
to seek a license, defend an infringement action, or challenge the validity of
the patents in court. There can be no assurance that a license will be available
to the Company, if at all, upon terms and conditions acceptable to the Company
or that the Company will prevail in any patent litigation. Patent litigation is
costly and time consuming, and there can be no assurance that the Company will
have sufficient resources to bring such litigation to a successful conclusion.
If the Company does not obtain a license under such patents, is found liable for
infringement, or is not able to have such patents declared invalid, the Company
may be liable for significant money damages, may encounter significant delays in
bringing products to market, or may be precluded from participating in the
manufacture, use or sale of products or methods of treatment requiring such
licenses. The Company does not believe that the commercialization of its
products will infringe upon the patent rights of others. However, there can be
no assurance that the Company has identified United States and foreign patents
that pose a risk of infringement.

The Company also relies upon trade secrets and other unpatented
proprietary information in its product development activities. To the extent the
Company relies on trade secrets and unpatented know-how to maintain its
competitive technological position, there can be no assurance that others may
not independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge, in part through confidentiality
agreements with its employees, consultants, advisors and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information. If
the Company's employees, scientific consultants or collaborators develop
inventions or processes independently that may be applicable to the Company's
products, disputes may arise about ownership of proprietary rights to those
inventions and processes. Such inventions and processes will not necessarily
become the Company's property, but may remain the property of those persons or
their employers. Protracted and costly litigation could be necessary to enforce
and determine the scope of the Company's proprietary rights. Failure to obtain
or maintain patent and trade secret protection, for any reason, would have a
material adverse effect on the Company.

The Company engages in collaborations, sponsored research agreements,
licensing and other arrangements with academic researchers and institutions that
have received and may receive funding from United States government agencies. As
a result of these arrangements, the United States government or certain third
parties have rights in certain inventions developed during the course of the
performance of such collaborations and agreements as required by law or such
agreements.

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<PAGE> 37
Several bills affecting patent rights have been introduced in the
United States Congress. These bills address various aspects of patent law,
including publication, patent term, reexamination, subject matter and
enforceability. It is not certain whether any of these bills will be enacted
into law or what form new laws may take. Accordingly, the effect of legislative
change on the Company's intellectual property estate is uncertain.

GOVERNMENT REGULATION

The Company's research and development activities, preclinical studies
and clinical trials, and ultimately the manufacturing, marketing and labeling of
its products, are subject to extensive regulation by the FDA and other
regulatory authorities in the United States and other countries. The United
States Federal Food, Drug and Cosmetic Act and the regulations promulgated
thereunder and other federal and state statutes and regulations govern, among
other things, the testing, manufacture, safety, efficacy, labeling, storage,
record keeping, approval, advertising and promotion of the Company's products.
Preclinical study and clinical trial requirements and the regulatory approval
process take years and require the expenditure of substantial resources.
Additional government regulation may be established that could prevent or delay
regulatory approval of the Company's products. Delays or rejections in obtaining
regulatory approvals would adversely affect the Company's ability to
commercialize any product the Company develops and the Company's ability to
receive product revenues or royalties. If regulatory approval of a product is
granted, the approval may include significant limitations on the indicated uses
for which the product may be marketed.

The FDA and other regulatory authorities require that the safety and
efficacy of the Company's therapeutic products must be supported through
adequate and well-controlled clinical trials. If the results of these clinical
trials do not establish the safety and efficacy of the Company's products to the
satisfaction of the FDA and other regulatory authorities, the Company will not
receive the approvals necessary to market its products, which would have a
material adverse effect on the Company.

The standard process required by the FDA before a pharmaceutical agent
may be marketed in the United States includes: (i) preclinical tests; (ii)
submission to the FDA of an IND which must become effective before human
clinical trials may commence; (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug in its intended
application; (iv) submission of an NDA to the FDA; and (v) FDA approval of the
NDA prior to any commercial sale or shipment of the drug. In addition to
obtaining FDA approval for each product, each drug manufacturing establishment
must be inspected and approved by the FDA. All manufacturing establishments are
subject to inspections by the FDA and by other federal, state and local agencies
and must comply with current GMP requirements.

Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA before the commencement of human clinical
trials. Unless the FDA objects to an IND, the IND will become effective 30 days
following its receipt by the FDA. There can be no assurance that submission of
an IND will result in the FDA authorization to commence clinical trials or that
the lack of an objection means that the FDA will ultimately approve an NDA.

Clinical trials involve the administration of the investigational new
drug to humans under the supervision of a qualified principal investigator.
Clinical trials must be conducted in accordance with Good Clinical Practices
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety, and efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. Also, each clinical trial must
be approved and conducted under the auspices of an Institutional Review Board
("IRB"). The IRB will consider, among other things, ethical factors, the safety
of human subjects, and the possible liability of the institution conducting the
clinical trials.

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<PAGE> 38

Clinical trials are typically conducted in three sequential phases
which may overlap. In Phase I, the initial introduction of the drug to humans,
the drug is tested for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II
involves studies of a limited patient population to gather evidence about the
efficacy of the drug for specific targeted indications, dosage tolerance and
optimal dosage, and to identify possible adverse effects and safety risks. When
a product has shown evidence of efficacy and has an acceptable safety profile in
a Phase II evaluation, Phase III clinical trials are undertaken to evaluate
clinical efficacy and to test for safety in an expanded patient population at
geographically dispersed clinical trial sites. There can be no assurance that
any of the Company's clinical trials will be completed successfully or within
any specified time period. The Company or the FDA may suspend clinical trials at
any time.

The Company has designed the protocols for its pivotal clinical trials
based on its analysis of its research, including various parts of its Phase I
and Phase II clinical trials. Although copies of its pivotal clinical trial
protocols have been submitted to the FDA, there can be no assurance that the
FDA, after the results of the pivotal clinical trials have been announced, will
not disagree with the design of the pivotal clinical trial protocols. In
addition, the FDA inspects and reviews clinical trial sites, informed consent
forms, data from the clinical trial sites, including case report forms and
record keeping procedures, and the performance of the protocols by clinical
trial personnel to determine compliance with Good Clinical Practices. The FDA
also looks to determine that there was no bias in the conduct of clinical
trials. The conduct of clinical trials in general and the performance of the
pivotal clinical trial protocols is complex and difficult. There can be no
assurance that the design or the performance of the pivotal clinical trial
protocols will be successful.

The results of preclinical studies and clinical trials, if successful,
are submitted in an NDA to seek FDA approval to market and commercialize the
drug product for a specified use. The testing and approval process will require
substantial time and effort, and there can be no assurance that any approval
will be granted for any product or that approval will be granted according to
any schedule. The FDA may deny an NDA if it believes that applicable regulatory
criteria are not satisfied. The FDA may also require additional testing for
safety and efficacy of the drug. Moreover, if regulatory approval of a drug
product is granted, the approval will be limited to specific indications. There
can be no assurance that any of the Company's product candidates will receive
regulatory approvals for commercialization.

The FDA has implemented an accelerated review process for
pharmaceutical agents that treat serious or life- threatening diseases and
conditions, subject to payment of user fees. When appropriate, the Company
intends to pursue opportunities for accelerated review of its products. The
Company cannot predict the ultimate effect of this review process on the timing
or likelihood of FDA review of any of its products.

Even if regulatory approvals for the Company's products are obtained,
the Company, its products, and the facilities manufacturing the Company's
products are subject to continual review and periodic inspection. The FDA will
require post-marketing reporting to monitor the safety of the Company's
products. Each drug manufacturing establishment must be inspected and approved
by the FDA. All manufacturing establishments are subject to biennial inspections
by the FDA and must comply with the FDA's GMP requirements. To supply drug
products for use in the United States, foreign manufacturing establishments must
comply with the FDA's GMP requirements and are subject to periodic inspection by
the FDA or by regulatory authorities in those countries under reciprocal
agreements with the FDA. In complying with GMP requirements, manufacturers must
expend funds, time and effort in the area of production and quality control to
ensure full technical compliance. The Company does not have any drug
manufacturing capability and must rely on outside firms for this capability. See
"-- Manufacturing." The FDA stringently applies regulatory standards for
manufacturing. Identification of previously unknown problems with respect to a
product, manufacturer or facility may result in restrictions on the product,
manufacturer or facility, including warning letters, suspensions of regulatory
approvals, operating restrictions, delays in obtaining new product approvals,
withdrawal of the product from the market, product recalls, fines, injunctions
and criminal prosecution.

Before the Company's products can be marketed outside of the United
States, they are subject to regulatory approval similar to FDA requirements in
the United States, although the requirements governing the conduct of clinical
trials, product licensing, pricing, and reimbursement vary widely from country
to country. No action can be taken to

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<PAGE> 39
market any drug product in a country until an appropriate application has been
approved by the regulatory authorities in that country. FDA approval does not
assure approval by other regulatory authorities. The current approval process
varies from country to country, and the time spent in gaining approval varies
from that required for FDA approval. In some countries, the sale price of a drug
product must also be approved. The pricing review period often begins after
market approval is granted. Even if a foreign regulatory authority approves any
of the Company's products, no assurance can be given that it will approve
satisfactory prices for the products.

The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses, and various radioactive compounds.
Although the Company believes that its procedures for handling and disposing of
those materials comply with state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. If
such an accident occurs, the Company could be held liable for resulting damages,
which could be material to the Company's financial condition and business. The
Company is also subject to numerous environmental, health and workplace safety
laws and regulations, including those governing laboratory procedures, exposure
to blood-borne pathogens, and the handling of biohazardous materials. Additional
federal, state and local laws and regulations affecting the Company may be
adopted in the future. Any violation of, and the cost of compliance with, these
laws and regulations could materially and adversely affect the Company.

Under the Orphan Drug Act, the FDA may grant "orphan drug" status to
therapeutic agents intended to treat a "rare disease or condition," defined as a
disease or condition that affects less than 200,000 persons in the United
States. Orphan drug status grants the sponsor tax credits for the amounts
expended on clinical trials, provided that certain conditions are met, as well
as potential marketing exclusivity for four to seven years following approval of
the pertinent NDA. The Company received orphan drug status for ATRAGEN(R) in
1993 for the treatment of acute and chronic leukemia and may request this status
for more of its products as part of its overall regulatory strategy. There is no
assurance, however, that any of its other products will receive orphan drug
status or that the benefits of protection currently afforded by orphan drug
status will remain in effect. In addition, any party may obtain orphan drug
status with respect to products for which patent protection has expired or is
otherwise unavailable. The first party granted marketing approval could prevent
other persons from commercializing that product during the period for which
exclusivity was granted to such party (i.e., four to seven years).

COMPETITION

The Company believes that its products, because of their unique
pharmacologic profiles and novel mechanisms of action, will become useful new
treatments for cancers and infectious diseases, either as alternatives to or in
combination with other pharmaceuticals. The Company is engaged in pharmaceutical
product development characterized by rapid technological progress. Many
established biotechnology and pharmaceutical companies, universities and other
research institutions with resources significantly greater than those of the
Company may develop products that directly compete with the Company's products.
Those entities may succeed in developing products, including liposomes and
liposomal products, that are safer, more effective or less costly than the
Company's products. Even if the Company's products should prove to be more
effective than those developed by other companies, other companies may be more
successful than the Company because of greater financial resources, greater
experience in conducting preclinical and clinical trials and obtaining
regulatory approval, stronger sales and marketing efforts, earlier receipt of
approval for competing products and other factors. If the Company commences
significant commercial sales of its products, it or its collaborators will
compete in areas in which the Company has little or no experience such as
manufacturing and marketing. There can be no assurance that the Company's
products, if commercialized, will be accepted and prescribed by healthcare
professionals.

Some of the Company's competitors are active in the development of
liposome and liposomal research and product development to treat cancer and
certain fungal infections. Those competitors include The Liposome Company, Inc.,
NeXstar Pharmaceuticals, Inc., and SEQUUS Pharmaceuticals, Inc. Each of these
companies' products have regulatory approval in the United States and other
countries. Any marketing of these and other products that treat disease
indications targeted by the Company could adversely affect the market acceptance
of the Company's products as a result of the established market recognition and
physician familiarity with the competing product. The presence of directly
competitive products could also result in more intense price competition than
might otherwise exist, which could have a material adverse effect on the
Company's financial condition and results of operations. The Company believes
that competition will be intense for all of its product candidates.

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<PAGE> 40

EMPLOYEES

As of September 30, 1998, the Company had 92 full time employees, 74 of
whom were engaged in research, development, clinical and regulatory affairs and
18 of whom were engaged in marketing, business development and administration.
The Company's employees include two M.D.s, sixteen Ph.D.s, one Pharm.D and two
R.N.s. The Company has not experienced any work stoppages and considers
relations with its employees to be good.

LEGAL PROCEEDINGS

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

PROPERTIES

The Company's corporate offices and laboratories are located in a
30,000 square foot leased building located at 8707 Technology Forest Place in
The Woodlands, a suburb of Houston, Texas. The lease for this facility expires
in 2008, and the Company has renewal options to extend the lease to 2018.

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<PAGE> 41
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
NAME AGE POSITION

<S> <C> <C>
Geoffrey F. Cox, Ph.D.(3)............... 54 Chairman of the Board of Directors (Class II)
and Chief Executive Officer
David S. Gordon, M.D.................... 56 Senior Vice President of Medical Affairs and
Chief Medical Officer
Paul A. Cossum, Ph.D.................... 45 Vice President, Preclinical Development
Praveen Tyle, Ph.D...................... 38 Vice President, Pharmaceutical Development
and Operations
Janet M. Walter......................... 35 Vice President, Marketing and Business
Development
Terance A. Murnane...................... 48 Controller and Secretary
Gabriel Lopez-Berestein, M.D.(1)........ 50 Director (Class II) and Chief Scientific
Advisor
Ronald J. Brenner, Ph.D................. 65 Director (Class I)
James R. Butler(1)(3)................... 57 Director (Class III)
Phyllis I. Gardner, M.D................. 48 Director (Class II)
Martin P. Sutter(2)(3).................. 43 Director (Class I)
Gregory F. Zaic(2)...................... 50 Director (Class III)
</TABLE>

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

(1) Member of the Audit Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
(3) Member of the Nominating Committee of the Board of Directors

Geoffrey F. Cox, Ph.D. joined the Company as Chairman of the Board and
Chief Executive Officer in November 1997 and has served as a member of the Board
of Directors since January 1994. Dr. Cox joined Genzyme Corporation in 1984, was
appointed Managing Director of Genzyme, Ltd. (U.K.) in 1986, Senior Vice
President of worldwide manufacturing operations in May 1988 and Executive Vice
President in 1996, with responsibility for manufacturing operations and the
Pharmaceuticals, Diagnostic Products and Genetic Diagnostic Products units of
Genzyme.

David S. Gordon, M.D. joined the Company in April 1997 as its Senior
Vice President of Medical Affairs and Chief Medical Officer. Dr. Gordon has over
20 years experience in internal medicine, oncology and hematology, clinical
research and the pharmaceutical industry. He has held clinical and
administrative positions with The Liposome Company and the RW Johnson
Pharmaceutical Research Institute of Johnson & Johnson. Prior to positions in
the pharmaceutical industry, Dr. Gordon held a number of academic positions,
including Professor of Medicine (Hematology & Oncology) at Emory University
School of Medicine and Director, Division of Immunology at the Centers for
Disease Control, both in Atlanta, Georgia. Dr. Gordon currently serves as a
director of Hycor Biomedical, Inc. Dr. Gordon is board certified in internal
medicine and medical oncology. He has published over 100 articles and abstracts
in the fields of cancer, infectious disease and immunology.

Paul A. Cossum, Ph.D. joined Triplex Pharmaceuticals Corporation
("Triplex") as Vice President of Preclinical Development in 1993 and assumed the
position of Vice President of Preclinical Development of the Company in
September 1995 upon consummation of the Company's mergers with Triplex and
Oncologix. From 1992 to 1993, he was the Director of Preclinical Development at
Isis Pharmaceuticals. While at Isis, he implemented preclinical programs

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<PAGE> 42

to support the development INDs for two anti-viral oligonucleotide compounds.
Prior to his employment at Isis, Dr. Cossum worked in the Department of
Pharmacological Sciences at Genentech, Inc., where he participated in the filing
of several INDs and NDAs for certain endocrine, cardiovascular and neurologic
therapeutic proteins. He has published widely in the fields of metabolism and
toxicology of oligonucleotides, recombinant proteins and conventional drugs.

Praveen Tyle, Ph.D. joined the company in February 1997 as its Vice
President of Pharmaceutical Development and Operations. Dr. Tyle has more than
14 years of worldwide pharmaceutical industry experience, serving most recently
as Senior Director, Pharmaceutical Development at Agouron Pharmaceuticals, Inc.,
where he was responsible for the development of preclinical and clinical
products and their preparation toward commercialization. From 1984 to 1991, Dr.
Tyle held product development positions at American Cyanamid Company and
Novartis (formerly Sandoz Pharmaceuticals Corporation). Dr. Tyle serves as a
member of the Scientific Advisory Board of a French biotechnology company,
Biovector Therapeutics, S.A., and is a scientific advisor to Warner Chilcott
Laboratories in New Jersey. Dr. Tyle also serves as an adjunct Professor of
Pharmaceutical Sciences at the University of Houston. He holds several U.S.
patents in the areas of drug development and delivery systems.

Janet M. Walter joined the Company in August 1997 as Vice President of
Marketing and Business Development. Ms. Walter, who has more than ten years of
oncology marketing experience, served most recently as Director, Global
Marketing at Schering-Plough Pharmaceuticals, Inc. where she was responsible for
the worldwide development of INTRON(R)A. She also served as Senior Product
Manager for Bristol-Myers Squibb Oncology Division, where she was responsible
for the launch of TAXOL(R) in several different markets, and Product manager at
U.S. Bioscience. In addition, Ms. Walter has several years of prior experience
in oncology clinical research and field sales.

Terance A. Murnane joined the Company in May 1990 as its Controller and
was appointed Secretary in January 1992. Mr. Murnane was a self-employed
accountant from February 1988 until April 1990. From October 1987 to February
1988, he served as the Controller for a privately-held wholesale company. Prior
to that time, he spent ten years in the Private Business/Audit Department at
KPMG Peat Marwick, an international accounting firm, serving most recently as
Senior Manager. Mr. Murnane is a Certified Public Accountant.

Gabriel Lopez-Berestein, M.D., a co-founder of the Company, has served
as a member of the Board of Directors and the Company's Chief Scientific Advisor
since January 1988. Dr. Lopez-Berestein is Professor of Medicine and Chief of
the Immunobiology and Drug Carriers Section at The University of Texas M.D.
Anderson Cancer Center, with which he has been affiliated since 1979. Dr.
Lopez-Berestein is the author of over 125 publications in the areas of
macrophage research and drug carrier technology. Dr. Lopez-Berestein is also the
recipient of a number of grants and awards, including a Scholar Award of the
Leukemia Society of America and various NIH awards.

Ronald J. Brenner, Ph.D. has served as a member of the Board of
Directors since September 1995. Since 1988, Dr. Brenner has been a Vice
President of Hillman Medical Ventures, Inc., a venture capital firm, and a
general partner of several Hillman investment partnerships. From 1984 to 1988,
Dr. Brenner was President and Chief Executive Officer of Cytogen Corporation, a
biotechnology company. Prior to 1984, he was Vice President, Corporate External
Research, at Johnson & Johnson, a major pharmaceutical company, and also served
as a Chairman of McNeil Pharmaceutical, Ortho Pharmaceutical Corp. and the Cilag
Companies, all subsidiaries of Johnson & Johnson. Dr. Brenner is a director of
Cytogen Corporation.

James R. Butler has served as a member of the Board of Directors since
June 1997. Mr. Butler is Senior Vice President, Sales and Marketing for ALZA
Corporation, a California-based pharmaceutical company developing therapeutics
using its proprietary drug delivery systems. Mr. Butler has overseen ALZA
Pharmaceuticals since August 1993. ALZA Pharmaceuticals has responsibility for
domestic sales and marketing, government affairs, ex-U.S. commercialization of
ALZA products, new product planning, and ALZA scientific. ALZA scientific is
responsible for all aspects of the ALZET(R) product line. Prior to joining ALZA
in 1993, Mr. Butler was Vice President and General Manager of Glaxo Inc.'s
Corporate Division. Mr. Butler held numerous sales and marketing positions
during his 23- year tenure at Glaxo.

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<PAGE> 43
Phyllis I. Gardner, M.D. has served as a member of the Board of
Directors since September 1998. Dr. Gardner is the Senior Associate Dean for
Education and Student Affairs at Stanford University School of medicine, and has
been a tenured associate professor in the departments of molecular pharmacology
and medicine at Stanford since 1984. Since 1994, Dr. Gardner has worked closely
with ALZA Corporation in the areas of drug formulation and drug delivery. From
1996 to 1998, she was Vice President of Research and Head of the ALZA Technology
Institute. Dr. Gardner is also a consultant or advisor to a number of companies
and serves as a member of the board of directors of Health Hero Network and Elim
Biopharmaceuticals, Inc.

Martin P. Sutter, a co-founder of the Company, has served as a Director
of the Company since June 1986 and served as Chairman of the Board of Directors
of the Company from 1986 to 1997. Since July 1988, Mr. Sutter has been the
managing General Partner of The Woodlands Venture Partners, L.P., a venture
capital firm based in The Woodlands, Texas, and the General Partner of The
Woodlands Venture Fund, L.P., one of the Company's principal stockholders. In
addition, Mr. Sutter has been a General Partner of Essex Woodlands Health
Ventures, L.P. since September 1994. From January 1985 to July 1988, he served
as President of The Woodlands Venture Capital Company. Mr. Sutter is the
Chairman of the Board of Directors of Zonagen, Inc., a biotechnology company
based in The Woodlands, Texas, and a director of Targeted Genetics and several
privately held healthcare and biotechnology companies.

Gregory F. Zaic has served as a member of the Board of Directors since
September 1995. Mr. Zaic has been an investor primarily focused on medical and
life science investment opportunities since 1983. He currently is a General
Partner of Prince Ventures and has served as acting president and director of
many private and public companies, including GenVec, Inc., Thiktillos, Inc. and
Xylos Corporation. Before his investment career, Mr. Zaic served in several
financial, technical, and operational capacities, including heading the Special
Products Division of Baxter, a manufacturer of custom medical devices for the
cardiopulmonary and intravenous solution administration markets.

COMPENSATION OF EXECUTIVE OFFICERS

Summary Compensation Table

The following table provides certain summary information concerning
compensation paid or accrued during the last three years to the Company's Chief
Executive Officer, to its former President and to each of the other executive
officers of the Company, determined as of the end of the last fiscal year, whose
annual compensation exceeded $100,000 (the "Named Executive Officers"):

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- -----------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS (#) COMPENSATION
- -------------------------------------- -------- --------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey F. Cox, Ph.D .................. 1997 $ 50,000(1) $ 110,000(2) $ 93,992(3) 500,000 $ 134(4)
Chief Executive Officer
David S. Gordon, M.D ................... 1997 $ 146,208(5) $ 28,400 -- 125,000 $ 21,360(6)
Senior Vice President of Medical
Affairs and Chief Medical Officer
Paul A. Cossum, Ph.D ................... 1997 $ 168,000 $ 33,600 -- 41,000 $ 1,302(8)
Vice President, Preclinical ......... 1996 $ 163,000 $ 2,000 -- 44,800 $ 1,292(8)
Development ......................... 1995 $ 46,667(7) -- -- 20,000 $ 17,000(9)
Praveen Tyle, Ph.D ..................... 1997 $ 147,377(10) $ 30,100 $ 36,250(11) 125,000 $ 77,956(12)
Vice President, Pharmaceutical
Development and Operations
Janet M. Walter ........................ 1997 $ 60,000(13) $ 12,000 -- 100,000 $ 8,974(14)
Vice President, Marketing and
Business Development
James M. Chubb, Ph.D ................... 1997 $ 235,000 $ 58,750 -- $ 8,339(15)
Former President .................... 1996 $ 221,583 $ 10,000 -- 208,000 $ 32,389(16)
1995 $ 61,833(17) -- $ 106,250(18) 125,000 $ 42,075(19)
</TABLE>

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<PAGE> 44
- ---------------------------

(1) Dr. Cox joined the Company as Chief Executive Officer and Chairman of
the Board in November 1997 at an annual base salary of $300,000.
(2) Represents a cash bonus paid upon commencement of employment.
(3) Represents a stock bonus of 17,278 shares of common stock issued upon
commencement of employment and recorded at fair market value at the
time of issuance.
(4) Represents taxable life insurance.
(5) Dr. Gordon joined the Company as Senior Vice President of Medical
Affairs and Chief Medical Officer in April 1997 at an annual base
salary of $213,000.
(6) Represents (i) $6,952 in relocation costs, (ii) $12,250 in housing
allowance, (iii) $1,158 in taxable life insurance and (iv) $1,000 in
matching contributions to the Company's 401(k) savings plan.
(7) Dr. Cossum joined the Company as Vice President of Preclinical
Development in September 1995 at an annual base salary of $160,000. Dr.
Cossum's current annual base salary is $168,000.
(8) Represents (i) $1,000 in matching contributions to the Company's 401(k)
savings plan in 1996 and 1997, respectively, and (ii) taxable life
insurance of $292 and $302 in 1996 and 1997, respectively.
(9) Represents the forgiveness of a portion of the balance of a loan to Dr.
Cossum.
(10) Dr. Tyle joined the Company as Vice President of Pharmaceutical
Development and Operations in February 1997 at an annual base salary of
$168,000. Dr. Tyle's current annual base salary is $176,400.
(11) Represents a stock bonus of 5,000 shares of Common stock issued upon
commencement of employment and recorded at fair market value at the
time of issuance.
(12) Represents (i) $46,386 in relocation costs, (ii) $30,397 in estimated
federal income taxes relating to such relocation costs, which are
reimbursable by the Company in 1998, (iii) $173 in taxable life
insurance and (iv) $1,000 in matching contributions to the Company's
401(k) savings plan.
(13) Janet M. Walter joined the Company as Vice President, Marketing and
Business Development in August 1997 at an annual base salary of
$160,000.
(14) Represents (i) $7,924 in relocation costs, (ii) $50 in taxable life
insurance and (iii) $1,000 in matching contributions to the Company's
401(k) savings plan.
(15) Represents (i) $7,339 in taxable life and long-term disability
insurance and (ii) $1,000 in matching contributions to the Company's
401(k) savings plan.
(16) Represents (i) $25,695 in federal income taxes incurred by Dr. Chubb in
connection with the 1996 grant of 25,000 shares of common stock that
the Company reimbursed in 1997, (ii) $5,694 in taxable life and
long-term disability insurance and (iii) $1,000 in matching
contributions to the Company's 401(k) savings plan.
(17) Dr. Chubb joined the Company as President in September 1995 at an
annual base salary of $212,000. (18) Represents a stock bonus of 25,000
shares of common stock issued upon commencement of employment and
recorded at fair market value at the time of issuance.
(19) Represents the estimated amount of federal income taxes incurred by Dr.
Chubb in connection with the grant of 25,000 shares of common stock
that the Company reimbursed in 1996.

Option Grants in 1997

The following table provides certain information with respect to
options granted to the Chief Executive Officer and to each of the Named
Executive Officers during the fiscal year ended December 31, 1997 under the
Company's Employee Option Plan:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------- --------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS MARKET ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE PRICE ON STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES IN PRICE PER DATE OF EXPIRATION FOR OPTION TERM(1)
NAME GRANTED (#) FISCAL YEAR SHARE GRANT DATE 5% 10%
- --------------- ------- ------------- --------- -------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Cox 500,000 41.3% $ 4.25 $ 4.25 09/03/04 $ 865,088 $ 1,986,602
David S. Gordon 125,000 10.3% $ 5.13 $ 5.13 04/28/04 $ 261,053 $ 599,486
Paul A. Cossum 31,000 2.6% $ 4.75 $ 4.75 05/14/04 $ 59,946 $ 137,660
10,000 0.8% $ 4.75 $ 4.75 12/09/04 $ 19,337 $ 44,406
Praveen Tyle 100,000 8.3% $ 7.25 $ 7.25 02/21/04 $ 295,148 $ 677,782
25,000 2.1% $ 4.75 $ 4.75 12/09/04 $ 48,343 $ 111,016
Janet M. Walter 100,000 8.3% $ 4.50 $ 4.50 08/18/04 $ 183,195 $ 420,692
James M. Chubb -- -- -- -- -- -- --
</TABLE>

-42-
<PAGE> 45
- ---------------------------

(1) The Securities and Exchange Commission requires disclosure of the
potential realizable value or present value of each grant. The
disclosure assumes the options will be held for the full seven-year
term prior to exercise. Such options may be exercised prior to the end
of such seven-year term. The actual value, if any, an executive officer
may realize will depend upon the excess of the stock price over the
exercise price on the date the option is exercised. There can be no
assurance that the stock price will appreciate at the rates shown in
the table.

Year-End Option Values

The following table sets forth certain information regarding (i) the
number of shares of common stock underlying unexercised options held by the
Chief Executive Officer and each Named Executive Officer as of December 31, 1997
and (ii) the value, at December 31, 1997, of exercisable and unexercisable
"in-the-money" stock options held by the Chief Executive Officer and each Named
Executive Officer. Neither the Chief Executive Officer nor any other Named
Executive Officer exercised any stock options during the year ended December 31,
1997.

1997 OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR END ($)(1)
------------------------------ -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------ ---------------- -------------- --------------
<S> <C> <C> <C> <C>
GEOFFREY F. COX, PH.D............ 149,155 383,345 $ -- $ --
DAVID S. GORDON, M.D............. 42,000 83,000 $ -- $ --
PAUL A. COSSUM, PH.D............. 45,306 72,489 $ 42,922 $ 100
PRAVEEN TYLE, PH.D............... 49,500 75,500 $ -- $ --
JANET M. WALTER.................. 35,932 64,068 $ -- $ --
JAMES. M. CHUBB, PH.D............ 158,460 199,224 $ 99,514 $ 548
</TABLE>

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

(1) A STOCK OPTION IS "IN-THE-MONEY" IF THE CLOSING MARKET PRICE OF THE
COMPANY'S COMMON STOCK EXCEEDS THE EXERCISE PRICE OF SUCH STOCK OPTION.
THE VALUE OF "IN-THE-MONEY" UNEXERCISED STOCK OPTIONS SET FORTH IN THE
FOREGOING TABLE REPRESENTS THE DIFFERENCE BETWEEN THE EXERCISE PRICE OF
SUCH OPTIONS AND THE CLOSING SALES PRICE OF THE COMPANY'S COMMON STOCK
ON DECEMBER 31, 1997, AS REPORTED BY THE NASDAQ STOCK MARKET, $4.25 PER
SHARE.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Dr. Cox, Dr.
Gordon, Dr. Cossum, Dr. Tyle, Ms. Walter and Mr. Murnane which establish their
annual salaries and provide for the payment of such bonus compensation as may be
awarded by the Board of Directors and for their participation in all employee
benefit plans sponsored by the Company. The employment agreement for Dr. Cox has
a primary term ending in 2000, with automatic monthly renewals starting in May
1999 for an on-going eighteen months unless terminated by either party. All
other employment agreements are for a one year period and renew automatically
for one year periods unless terminated by either party. All agreements provide
that if the employee is terminated for any reason other than cause, the Company
is obligated to pay for the employee an amount equal to one year's annual base
salary and continue the provision of employment benefits for one year following
termination.

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<PAGE> 46
PRINCIPAL STOCKHOLDERS

The following table presents certain information regarding the
beneficial ownership of the Company's equity securities at October 31, 1998, and
as adjusted to reflect the sale of the shares offered hereby, by (i) each person
who is known by the Company to own beneficially more than five percent of the
outstanding shares of common stock, (ii) each director of the Company, (iii) the
Company's chief executive officer and each of the other executive officers of
the Company with annual compensation in excess of $100,000 and (iv) all
directors and officers as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------
NUMBER OF SHARES OF
COMMON STOCK PRIOR TO AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
---- ------------------ -------- --------
<S> <C> <C> <C>
Paragon Associates and Paragon Associates II 1,351,000 8.7% 6.8%
Joint Venture and the Bradbury Dyer Foundation(1)
500 Crescent Court, Suite 260
Dallas, Texas 75201.........................................
Hillman Medical Venture Partnerships(2) 1,187,925 7.7% 5.9%
824 Market Street, Suite 900
Wilmington, Delaware 19801..................................
Healthcare Ventures Partnerships(3) 977,825 6.3% 4.9%
Twin Towers at Metro Bank
379 Thornall Street
Edison, New Jersey 08837....................................
The Allstate Corporation(4) 810,962 5.2% 4.1%
2775 Sanders Road
Northbrook, Illinois 60062..................................
Geoffrey F. Cox(5).......................................... 308,095 2.0% 1.5%
Martin P. Sutter(6)......................................... 553,883 3.6% 2.8%
Gabriel Lopez-Berestein(7).................................. 152,065 1.0% *
Ronald J. Brenner(8)........................................ 1,238,013 8.0% 6.2%
Gregory F. Zaic(9).......................................... 445,239 2.9% 2.2%
James R. Butler(10)......................................... 30,500 * *
Paul A. Cossum(11).......................................... 77,141 * *
Praveen Tyle(12)............................................ 91,311 * *
David S. Gordon(13)......................................... 74,736 * *
Janet M. Walter(14)......................................... 53,735 * *
All directors and officers as a group (11 persons)(5)-(15).. 3,069,327 19.7% 15.3%
</TABLE>

- ---------------------------
*Less than one percent.

(1) Consists of 1,331,000 shares beneficially owned by Paragon Associates
II Joint Venture ("Paragon JV"), which includes ownership of Paragon
Associates and Paragon Associates II, and 20,000 shares owned by the
Bradbury Dyer Foundation ("Foundation"). The sole general partner of
Paragon Associates and Paragon JV, Bradbury Dyer III, may be deemed to
be the beneficial ownership of 1,351,000 shares.
(2) Consists of 141,232 shares owned by Hillman Medical Ventures 1989 L.P.,
441,383 shares owned by Hillman Medical Ventures 1990 L.P. and 605,310
shares owned by Hillman Medical Ventures 1991 L.P. (collectively, the
"Hillman Medical Venture Partnership"). The general partners of the
Hillman Medical Venture Partnerships are Cashon Biomedical Associates,
L.P. and Hillman/Dover Limited Partnership. The general partner of
Hillman/Dover Limited Partnership is a wholly-owned subsidiary of The
Hillman Company, a firm engaged in diversified investments and
operations. The Hillman Company is controlled by Henry L. Hillman,
Elsie Hilliard Hillman and C.G. Grefenstette, Trustees of the Henry L.
Hillman Trust, which Trustees may be deemed the beneficial owners of
the 1,187,925 shares owned by the Hillman Medical Venture Partnerships.
Dr. Brenner, a director of the Company, is the managing partner of
Cashon Biomedical Associates, L.P., of which the other general partners
are Hal S. Broderson, M.D. and Charles G. Hadley. Dr. Brenner, Dr.
Broderson and Mr. Hadley may be deemed to beneficially own such shares.

-44-

<PAGE> 47
(3) Consists of 255,132 shares owned by HealthCare Ventures III, L.P.,
199,391 shares owned by HealthCare Ventures II, L.P., 404,651 shares
owned by HealthCare Ventures III, L.P. and 118,651 shares owned by
HealthCare Ventures IV, L.P. (Collectively, the "HealthCare Venture
Partnerships"). James H. Cavanaugh, Ph.D., Harold R. Werner, John W.
Littlechild and William W. Crouse are general partners of each of the
HealthCare Venture Partnerships and may be deemed to beneficially own
such shares.
(4) Consists of 810,962 shares owned by Allstate Insurance Company, a
wholly owned subsidiary of The Allstate Corporation, based on Schedule
13G, Amendment No. 5, dated February 10, 1998, of The Allstate
Corporation.
(5) Includes 266,435 shares that may be acquired on the exercise of stock
options. Also includes 17,278 shares owned by Dr. Cox's spouse which
may be considered to be beneficially owned.
(6) Includes 463,883 shares owned by The Woodlands Venture Fund, L.P. Mr.
Sutter is a general partner of The Woodlands Venture Partners, L.P.,
which is the general partner of The Woodlands Venture Fund, L.P. Mr.
Sutter disclaims beneficial ownership of the 463,883 shares owned by
The Woodlands Venture Fund, L.P. Also includes 88,750 shares which may
be acquired on the exercise of the currently vested portion of stock
options.
(7) Includes 65,000 shares that may be acquired on the exercise of stock
options. Excludes 19,697 shares held by a relative of Dr.
Lopez-Berestein, to which he disclaims beneficial ownership.
(8) Includes 1,187,925 shares owned by the Hillman Medical Venture
Partnerships, of which Dr. Brenner is the managing general partner of
one of the general partners. Also includes 40,000 shares which may be
acquired on the exercise of the currently vested portion of stock
options.
(9) Includes 403,539 shares owned by Prince Venture Partners III, L.P. Mr.
Zaic is the general partner of Prince Ventures, L.P., which is a
general partner of Prince Venture Partners III, L.P. Mr. Zaic disclaims
beneficial ownership of the shares held by Prince Venture Partners III,
L.P. Also includes 40,000 shares which may be acquired on the exercise
of the currently vested portion of stock options.
(10) Includes 25,000 shares that may be acquired on the exercise of
currently vested stock options. Also includes 3,000 shares owned
through The Butler Living Trust and 2,500 shares owned by the spouse of
Mr. Butler which may be considered to be beneficially owned.
(11) Includes 71,266 shares that may be acquired on the exercise of the
currently vested portion of stock options. Also includes 1,000 shares
owned by two daughters of Dr. Cossum which may be considered to be
beneficially owned.
(12) Includes 76,900 shares that may be acquired on the exercise of the
currently vested portion of stock options.
(13) Includes 67,500 shares that may be acquired on the exercise of the
currently vested portion of stock options. Also includes 3,000 shares
owned by Gordon Strategic, Inc. which is wholly owned by Dr. Gordon and
500 shares owned by Dr. Gordon's spouse which may be considered to be
beneficially owned.
(14) Represents shares that may be acquired on the exercise of currently
vested stock options.
(15) Includes 857,775 shares that may be acquired on the exercise of the
currently vested portion of stock options.

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<PAGE> 48
DESCRIPTION OF CAPITAL STOCK

The Company's Certificate of Incorporation provides for authorized
capital stock of 35,000,000 shares, consisting of 30,000,000 shares of common
stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par
value $0.001 per share. The following summary description of the capital stock
of the Company is qualified in its entirety by reference to the Certificate of
Incorporation, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

COMMON STOCK

Holders of common stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of common stock are not entitled to
cumulative voting rights. Therefore, holders of a majority of the shares voting
for the election of directors can elect all the directors. Subject to the terms
of any outstanding series of preferred stock, the holders of common stock are
entitled to dividends in such amounts and at such times as may be declared by
the Company's Board of Directors out of funds legally available therefor. See
"Dividend Policy." Upon liquidation or dissolution, holders of common stock are
entitled to share ratably in all net assets available for distribution to
stockholders after payment of any liquidation preferences to holders of
preferred stock. Holders of common stock have no redemption, conversion or
preemptive rights.

PREFERRED STOCK

The Board of Directors has the authority to cause the Company to issue
up to the authorized number of shares of preferred stock in one or more series,
to designate the number of shares constituting any series, and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, voting rights, redemption and conversion rights and liquidation
preferences of such series, without further action by the stockholders. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of the common stock. The Company has no
present plan to issue any shares of preferred stock.

WARRANTS

The Company currently has outstanding warrants issued in connection
with financing transactions to purchase an aggregate of 17,951 shares of common
stock and outstanding warrants issued in connection with the September 1995
merger with Oncologix (the "Oncologix Warrants") to purchase an aggregate of
158,990 shares of common stock. The Oncologix Warrants have an exercise price of
$12.00 per share and expire on December 11, 1999.

CONTINGENT STOCK RIGHTS

In connection with the Triplex merger, the Company issued contingent
rights (the "Triplex Contingent Stock Rights") to the former holders of Triplex
stock and options entitling them to receive additional shares of common stock
upon the occurrence of certain events. The Triplex Contingent Stock Rights
entitle the former Triplex stock and option holders to receive shares of common
stock with an aggregate fair market value at the time of issuance of $5.0
million (subject to certain adjustments) if the Company obtains data from
clinical trials of Zintevir on or before September 11, 2000 that the Company's
Board of Directors determines to be sufficient to file an NDA.

CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS AND DELAWARE LAW

Certain provisions of the Certificate of Incorporation and Bylaws are
intended to enhance the likelihood of continuity and stability in the Board of
Directors of the company and in its policies, but might have the effect of
delaying or preventing a change in control of the Company and may make more
difficult the removal of incumbent management even if such transactions could be
beneficial to the interests of stockholders. Set forth below is a summary
description of such provisions:

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<PAGE> 49
Authority to Issue Preferred Stock. The Company's Certificate of
Incorporation authorizes the Board of Directors, without stockholder approval,
to establish and to issue shares of one or more series of preferred stock, each
such series having such voting rights, divided rates, liquidation, redemption,
conversion and other rights as may be fixed by the Board.

Stockholder Actions and Meetings. The Company's Bylaws direct that
special meetings of the stockholders may only be called by a majority of the
members of the Board of Directors, the Chairman of the Board of Directors, the
President of the Company or the holders of not less than 30 percent of the total
voting power of all shares of the Company's capital stock entitled to vote in
the election of directors. The Bylaws further provide that stockholders'
nominations to the Board of Directors and other stockholder business proposed to
be transacted at stockholder meetings must be timely received by the Company in
a proper written form which meets the prescribed content requirements. The
Certificate of Incorporation and Bylaws of the company prohibit stockholders
from taking any action by written consent.

Classification of Directors. The Company's Certificate of Incorporation
and bylaws provide that the directors of the Company shall be divided into three
classes as equal in number as possible serving three-year terms.

Limitation of Director Liability. Section 102(b)(7) of the Delaware
General Corporation Law ("Section 102(b)") authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. Although Section 102(b) does not change directors' duty of care it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Company's Certificate of Incorporation limits the liability
of directors to the Company or its stockholders (in their capacity as directors
but not in their capacity as officers) to the fullest extent permitted by
Section 102(b). Specifically, directors of the Company will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) for any transaction from which the director derived an improper personal
benefit.

Indemnification. To the maximum extent permitted by law, the Company's
Certificate of Incorporation and Bylaws provide for mandatory indemnification of
directors and permit indemnification of officers, employees and agents of the
Company against all expense, liability and loss to which they may become subject
or which they may incur as a result of being or having been a director, officer,
employee or agent of the Company. In addition, the Company must advance or
reimburse directors, and may advance or reimburse officers, employees and agents
for expenses incurred by them in connection with indemnifiable claims.

Section 203 of the Delaware General Corporation Law ("Section 203")
generally provides that a stockholder acquiring more than 15 percent of the
outstanding voting stock of a corporation subject to the statute (an "Interested
Stockholder") but less than 85 percent of such stock may not engage in certain
"Business Combinations" with the corporation for a period of three years after
the date on which the stockholder became an Interested Stockholder unless (i)
prior to such date, the corporation's board of directors approved either the
Business Combination or the transaction in which the stockholder became an
Interested Stockholder or (ii) the Business Combination is approved by the
corporation's board of directors and authorized at a stockholders' meeting by a
vote of at least two-thirds of the corporation's outstanding voting stock not
owned by the Interested Stockholder. Under Section 203, these restrictions will
not apply to certain Business Combinations proposed by an Interested Stockholder
following the earlier of the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who was not an
Interested Stockholder during the previous three years or who became an
Interested Stockholder with the approval of the corporation's board of
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
Interested Stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.

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<PAGE> 50
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, such as mergers,
certain asset sales, certain issuances of additional shares to the Interested
Stockholder, transactions with the corporation which increase the proportionate
interest in the corporation directly or indirectly owned by the Interested
Stockholder or transactions in which the Interested Stockholder receives certain
other benefits.

The provisions of Section 203, together with the ability of the
Company's Board of Directors to issue Preferred Stock without further
stockholder action, could delay or frustrate the removal of incumbent directors
or a change in control of the Company. The provisions also could discourage,
impede or prevent a merger, tender offer or proxy contest, even if such event
would be favorable to the interests of stockholders. The Company's stockholders,
by adopting an amendment to the Company's Certificate of Incorporation or Bylaws
may elect not to be governed by Section 203 effective 12 months after such
adoption. Neither the Company's Certificate of Incorporation nor Bylaws
currently exclude the Company from the restrictions imposed by Section 203.

REGISTRATION RIGHTS

The Company entered into registration rights agreements dated September
1, 1986 with Dr. Jim Klostergaard and Dr. Gabriel Lopez-Berestein. Pursuant to
such Agreements, Drs. Klostergaard and Lopez-Berestein have unlimited
"piggyback" registration rights with respect to the shares of common stock owned
by them. These registration rights are subject to certain conditions and
limitations, including the right of the underwriters to restrict the number of
shares offered in a registration.

Pursuant to a registration rights agreement dated August 2, 1989,
holders of approximately 1,011,790 shares of common stock and of warrants to
purchase 17,951 shares of common stock have the right to demand up to three
registrations of the Registrable Securities (as defined in the agreement) under
the Securities Act of 1933, as amended (the "Securities Act"), and unlimited
piggyback registration rights. These demand registration rights are subject to
certain conditions and limitations, including the right of the underwriters to
limit the number of shares offered in such registration and to require a lock-up
of shares not included in such registration and the right of the Company to
refuse a registration under certain conditions, such as the six-month period
immediately following effectiveness of a registration statement and the
ninety-day period preceding an expected filing of a registration statement. If
the Company proposes an offering of Registrable Securities, either for its own
account of for other stockholders exercising such registration rights, the other
holders of these rights are entitled to notice of the contemplated registration
and an opportunity to include their securities in such registration. The Company
must use its best efforts to effect such registration, with certain limitations.
Furthermore, the Company is required to pay the associated registration
expenses, excluding the underwriting discounts and sales commissions, for the
holders exercising such registration rights. In addition, Genzyme Corporation
has one demand registration right, which requires the Company to register all
shares of common stock that Genzyme currently holds or may acquire in the
future.

In connection with the Triplex merger, the Company granted the former
stockholders of Triplex unlimited piggyback registration rights which provide
that, if the Company proposes an offering of common stock, either for its own
account or for other stockholders exercising registration rights, the holders of
the rights are entitled to notice of the contemplated registration and an
opportunity to include their common stock in such registration, subject to
certain limitations. The Company will request that these registration rights be
waived in connection with this offering by substantially all of the holders of
such rights.

TRANSFER AGENT

The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.

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<PAGE> 51
PLAN OF DISTRIBUTION

The Company is offering the shares of common stock offered hereby on a
best efforts, all or nothing basis, principally to selected investors purchasing
for investment. Paramount Capital, Inc. (the "Placement Agent") has been
retained to act as the exclusive agent for the Company in connection with the
arrangement of such offers and sales on a best efforts basis. The Placement
Agent is not obligated to and does not intend to itself take (or purchase) any
of the shares offered hereby. The Placement Agent will obtain indications of
interest from potential investors for the amount of the offering. The Company
will not request effectiveness of the Registration Statement and no investor
funds will be accepted until indications of interest have been received for the
full amount of the offering. The Placement Agent will distribute confirmation
and definitive prospectuses to all investors at the time of pricing, informing
investors of the closing date, which will be scheduled for three business days
after pricing.

Neither the Company nor the Placement Agent will accept investor funds
prior to effectiveness of the Registration Statement. Prior to the closing date,
the Placement Agent will promptly place all investor funds in escrow with State
Street Bank and Trust, as escrow agent (the "Escrow Agent"), in an escrow
account established for the benefit of the investors. The escrow agent will
invest such funds in accordance with Rule 15c2-4 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Prior to the
closing date, the Escrow Agent will advise the Company that payment for the
purchase of the shares of common stock offered hereby has been affirmed by the
investors and that the investors have deposited the requisite funds in the
escrow account at the Escrow Agent. Upon receipt of such notice, the Company
will deposit the shares with The Depositary Trust Company to be credited to the
respective accounts of the investors. The Company will collect investor funds,
together with interest thereon, if any, through the facilities of the Escrow
Agent on the scheduled closing date. The offering will not continue after the
closing date. In the event that investor funds are not received in the full
amount necessary to satisfy the requirements of the offering, all funds
deposited in the Escrow Agent escrow account will promptly be returned.

The following table sets out the nature of the compensation and the
amounts of commissions and fees to be paid to the Placement Agent for each share
and in total.

<TABLE>
<CAPTION>
PRICE TO COMMISSION PROCEEDS TO
PUBLIC AND FEES (1) COMPANY (2)
------ ------------ -----------
<S> <C> <C> <C>
Per Share................ $ $ $
Total.................... $ $ $
</TABLE>

(1) The Company has agreed, among other things, (i) to pay the Placement Agent
a fee in connection with the arrangement of this financing of 8% of the
Price to Public for shares sold to purchasers who are not affiliates of the
Company and 5% for shares sold to purchasers who are affiliates of the
Company, (ii) to indemnify the Placement Agent against certain liabilities
including liabilities under the Securities Act and (iii) to reimburse the
Placement Agent for out-of-pocket expenses. Further, the Company has agreed
to issue to the Placement Agent, upon the closing of the offering, warrants
to purchase 450,000 shares of Common Stock.
(2) Before deducting expenses payable by the Company estimated at $ .

Certain officers and directors of the Company have agreed that they
will not, directly or indirectly, offer, sell or otherwise dispose of any shares
of common stock or any securities convertible into or exercisable for, or any
rights to purchase or acquire, common stock for a period of 180 days after the
date of this Prospectus, without the prior written consent of the Placement
Agent (which consent may be given without notice to the Company's Stockholders
or other public announcement).

LEGAL MATTERS

The validity of the shares to be offered hereby will be passed upon for
the Company by Andrews & Kurth L.L.P., Houston, Texas.

-49-

<PAGE> 52
EXPERTS

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

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Exchange Act, and, accordingly, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information filed with the SEC are available
for inspection and copying at the public reference facilities maintained by the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The public
may obtain information on the operation of the public reference room by calling
the SEC at 1-800-SEC-0330. The SEC maintains a site on the World Wide Web at
"http://www.sec.gov" that contains reports, proxy statements and other
information regarding registrants that file electronically with the SEC. In
addition, such materials and other information concerning the Company can be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, DC 20006.

The Company has filed with the SEC a registration statement under the
Securities Act, on Form S-1 to register with the SEC the securities offered by
the Company using this prospectus. This prospectus is a part of that
registration statement. As allowed by SEC rules, this prospectus does not
contain all of the information contained in the registration statement or the
exhibits to the registration statement.

-50-
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants......................................................... F-2

Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited)............... F-3

Statements of Operations for the Years ended December 31, 1995, 1996 and 1997, and
for the Nine Months Ended September 30, 1997 and 1998 (unaudited) and the
Period from Inception (June 13, 1986) through September 30, 1998 (unaudited)................ F-4

Statements of Stockholders' Equity for the Period from Inception (June 13, 1986) through
September 30, 1998 (unaudited).............................................................. F-5

Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997, and for the
Nine Months Ended September 30, 1997 and 1998 (unaudited) and the Period from
Inception (June 13, 1986) through September 30, 1998 (unaudited)............................ F-11

Notes to Financial Statements.................................................................... F-12
</TABLE>

F-1

<PAGE> 54

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Aronex Pharmaceuticals, Inc.:

We have audited the accompanying balance sheets of Aronex Pharmaceuticals,
Inc. (a Delaware corporation in the development stage), as of December 31, 1996
and 1997, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997 and
for the period from inception (June 13, 1986) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aronex Pharmaceuticals, Inc.
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 and for
the period from inception (June 13, 1986) through December 31, 1997, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

The Woodlands, Texas
February 17, 1998

F-2

<PAGE> 55

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
ASSETS

DECEMBER 31
---------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ........................................ $ 4,179 $ 2,029 $ 3,791
Short-term investments ........................................... 30,414 17,783 10,936
Accounts receivable .............................................. 78 100 --
Prepaid expenses and other assets ................................ 663 474 384
-------- -------- --------
Total current assets ......................................... 35,334 20,386 15,111

Long-term investments ................................................ 6,795 10,142 1,288
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $2,869, $3,660, and $2,781, respectively ......... 2,152 1,107 2,123
Deposits ............................................................. -- 490 --
-------- -------- --------
Total assets ................................................. $ 44,281 $ 32,125 $ 18,522
======== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses ............................ $ 1,191 $ 1,977 $ 2,959
Accrued payroll .................................................. 126 554 933
Advance from Genzyme ............................................. 2,000 2,000 2,000
Current portion of notes payable ................................. 325 191 217
Current portion of obligations under capital leases .............. 16 18 13
-------- -------- --------
Total current liabilities .................................... 3,658 4,740 6,122

Long-term liabilities:
Notes payable, net of current portion ............................ 121 -- 1,047
Obligations under capital leases, net of current portion ......... 25 6 --
-------- -------- --------
Total long-term obligations .................................. 146 6 1,047

Commitments and Contingencies

Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
none issued and outstanding .................................. -- -- --
Common stock $.001 par value, 30,000,000 shares authorized,
14,597,247, 15,459,166 and 15,503,745 shares issued
and outstanding, respectively ................................ 15 15 15
Additional paid-in capital ....................................... 93,742 96,606 97,660
Common stock warrants ............................................ 968 967 50
Treasury stock ................................................... (11) (11) (11)
Deferred compensation ............................................ (1,949) (907) (545)
Unrealized loss on securities available-for-sale ................. (75) (87) (66)
Deficit accumulated during development stage ..................... (52,213) (69,204) (85,750)
-------- -------- --------
Total stockholders' equity ................................... 40,477 27,379 11,353
-------- -------- --------

Total liabilities and stockholders' equity ....................... $ 44,281 $ 32,125 $ 18,522
======== ======== ========
</TABLE>

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

F-3

<PAGE> 56

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)

<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED INCEPTION
YEARS ENDED DECEMBER 31, SEPTEMBER 30, (JUNE 13,1986)
------------------------------------ ---------------------- THROUGH
SEPTEMBER 30,
1995 1996 1997 1997 1998 1998
-------- -------- -------- -------- -------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Interest income .................... $ 452 $ 1,692 $ 2,059 $ 1,632 $ 1,013 $ 6,594
Research and development
grants and contracts ............... 1,248 2,670 841 591 329 5,379
-------- -------- -------- -------- -------- --------
Total revenues ............ 1,700 4,362 2,900 2,223 1,342 11,973
-------- -------- -------- -------- -------- --------
Expenses:
Research and development ........... 8,347 10,357 13,993 9,864 15,399 68,534
Purchase of in-process research
and development ............... 8,383 242 3,000 3,000 -- 11,625
General and administrative ......... 2,215 1,620 2,641 1,477 2,448 16,252
Interest expense and other ......... 184 173 257 160 41 1,312
-------- -------- -------- -------- -------- --------
Total expenses ............ 19,129 12,392 19,891 14,501 17,888 97,723
-------- -------- -------- -------- -------- --------
Net loss ............................... $(17,429) $ (8,030) $(16,991) $(12,278) $(16,546) $(85,750)
======== ======== ======== ======== ======== ========

Basic and diluted loss per share ....... $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
======== ======== ======== ======== ========

Weighted average shares used in
computing basic and diluted
loss per share ..................... 6,488 13,048 14,896 14,714 15,475
======== ======== ======== ======== ========
</TABLE>

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

F-4

<PAGE> 57

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
ADDITIONAL COMMON SECURITIES
COMMON STOCK PAID-IN STOCK DEFERRED AVAILABLE
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION FOR SALE
--------- --------- ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sale of Common Stock for cash, August
through December 1986
($1.6396 per share)............................ 183,334 $ -- $ 301 $ -- $ -- $ --
Issuance of Common Stock for license
agreement rights, October 1986 ($.006
per share)..................................... 60,606 -- 1 -- -- --
Net loss.......................................... -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1986...................... 243,940 -- 302 -- -- --
Issuance of Common Stock in exchange for
8% convertible notes, May 1987 ($3.30
per share)..................................... 90,909 1 299 -- -- --
Net loss.......................................... -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1987...................... 334,849 1 601 -- -- --
Warrants issued to purchase 11,364 shares
of Common Stock............................... -- -- -- -- -- --
Issuance of Common Stock for cash, September
and December 1988 ($.066 per share)............ 130,303 -- 8 -- -- --
Net loss.......................................... -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1988...................... 465,152 1 609 -- -- --
Issuance of Common Stock for cash, July
and August 1989 ($.066 per share).............. 158,182 -- 10 -- -- --
Issuance of Common Stock for cash, August
1989 ($3.63 per share)........................ 1,220,386 1 4,429 -- -- --
Issuance of Common Stock for key man life
insurance policies, December 1989 ($3.63)...... 3,862 -- 14 -- -- --
Net loss.......................................... -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1989...................... 1,847,582 $ 2 $ 5,062 $ -- $ -- $ --

<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT TREASURY STOCKHOLDERS'
STAGE STOCK EQUITY
------------ -------- -------------
<S> <C> <C> <C>
Sale of Common Stock for cash, August
through December 1986
($1.6396 per share)............................ $ -- $ -- $ 301
Issuance of Common Stock for license
agreement rights, October 1986 ($.006
per share)..................................... -- -- 1
Net loss.......................................... (40) -- (40)
------------ -------- -------------
Balance at December 31, 1986...................... (40) -- 262
Issuance of Common Stock in exchange for
8% convertible notes, May 1987 ($3.30
per share)..................................... -- -- 300
Net loss.......................................... (216) -- (216)
------------ -------- -------------
Balance at December 31, 1987...................... (256) -- 346
Warrants issued to purchase 11,364 shares
of Common Stock............................... -- -- --
Issuance of Common Stock for cash, September
and December 1988 ($.066 per share)............ -- -- 8
Net loss.......................................... (832) -- (832)
------------ -------- -------------
Balance at December 31, 1988...................... (1,088) -- (478)
Issuance of Common Stock for cash, July
and August 1989 ($.066 per share).............. -- -- 10
Issuance of Common Stock for cash, August
1989 ($3.63 per share)........................ -- -- 4,430
Issuance of Common Stock for key man life
insurance policies, December 1989 ($3.63)...... -- -- 14
Net loss.......................................... (942) -- (942)
------------ -------- -------------
Balance at December 31, 1989...................... $ (2,030) $ -- $ 3,034
</TABLE>

(continued on next page)

F-5

<PAGE> 58

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
ADDITIONAL COMMON SECURITIES
COMMON STOCK PAID-IN STOCK DEFERRED AVAILABLE
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION FOR SALE
--------- --------- ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1989.................... 1,847,582 $ 2 $ 5,062 $ -- $ -- $ --
Stock options exercised January 1990 ($.66
per share).................................. 30 -- -- -- -- --
Warrants issued to purchase 9,914 shares
of Common Stock.............................. -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1990.................... 1,847,612 2 5,062 -- -- --
Stock options exercised, May 1991 ($.66
per share)................................... 75 -- -- -- -- --
Issuance of Common Stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share)...... 596,095 -- 4,328 -- -- --
Deferred compensation relating to certain
stock options................................ -- -- 326 -- (326) --
Compensation expense related to stock options... -- -- -- -- 138 --
Net loss........................................ -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1991.................... 2,443,782 2 9,716 -- (188) --
Stock options exercised, January, April, May,
October and December 1992 ($.66 per
share)....................................... 37,198 -- 24 -- -- --
Stock warrants exercised April, May and
August 1992 ($3.63 per share)................ 11,364 -- 41 -- -- --
Issuance of Common Stock for cash in initial
public offering, July 1992 ($14.00 per
share) ...................................... 850,000 1 10,659 -- -- --
Deferred compensation relating to certain
stock options................................ -- -- 1,644 -- (1,644) --
Compensation expense related to stock options .. -- -- -- -- 460 --
Net loss........................................ -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1992.................... 3,342,344 $ 3 $ 22,084 $ -- $ (1,372) $ --

<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT TREASURY STOCKHOLDERS'
STAGE STOCK EQUITY
------------ -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1989.................... $ (2,030) $ -- $ 3,034
Stock options exercised January 1990 ($.66
per share).................................. -- -- --
Warrants issued to purchase 9,914 shares
of Common Stock.............................. -- -- --
Net loss........................................ (1,825) -- (1,825)
------------ -------- -------------
Balance at December 31, 1990.................... (3,855) -- 1,209
Stock options exercised, May 1991 ($.66
per share)................................... -- -- --
Issuance of Common Stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share)...... -- -- 4,328
Deferred compensation relating to certain
stock options................................ -- -- --
Compensation expense related to stock options... -- -- 138
Net loss........................................ (2,914) -- (2,914)
------------ -------- -------------
Balance at December 31, 1991.................... (6,769) -- 2,761
Stock options exercised, January, April, May,
October and December 1992 ($.66 per
share)....................................... -- -- 24
Stock warrants exercised April, May and
August 1992 ($3.63 per share)................ -- -- 41
Issuance of Common Stock for cash in initial
public offering, July 1992 ($14.00 per
share) ...................................... -- -- 10,660
Deferred compensation relating to certain
stock options................................ -- -- --
Compensation expense related to stock options .. -- -- 460
Net loss........................................ (4,708) -- (4,708)
------------ -------- -------------
Balance at December 31, 1992.................... $ (11,477) $ -- $ 9,238

</TABLE>

(continued on next page)

F-6

<PAGE> 59

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

Balance at December 31, 1992.................... 3,342,344 $ 3 $ 22,084 $ -- $ (1,372) $ --
Issuance of Common Stock for compensation....... 5,000 -- 51 -- -- --
Warrants issued to purchase 50,172 shares
of Common Stock............................. -- -- -- -- -- --
Stock options exercised, February and
November 1993 ($.66) per share............... 14,465 -- 9 -- -- --
Issuance of Common Stock for cash,
September 1993 ($14.00 per share) ........... 357,143 -- 4,538 -- -- --
Issuance of Common Stock for cash in
secondary public offering November &
December 1993 ($9.00 per share).............. 1,402,250 2 11,462 -- -- --
Compensation expense related to stock options... -- -- -- -- 396 --
Net loss........................................ -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1993.................... 5,121,202 5 38,144 -- (976) --
Deferred compensation relating to certain
stock options ............................... -- -- 66 -- (66) --
Stock options exercised, January through October
($.66 per share) ............................... 199415,111 -- 10 -- -- --
Warrants issued to purchase 537 shares of
Common Stock................................. -- -- -- -- -- --
Issuance of additional shares of Common
Stock pursuant to collaborative
agreement (see Note 6)....................... 66,163 -- -- -- -- --
Compensation expense related to stock options... -- -- -- -- 546 --
Unrealized loss on available-for-sale securities -- -- -- -- -- (315)
Net loss........................................ -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1994.................... 5,202,476 $ 5 $ 38,220 $ -- $ (496) $ (315)

<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT TREASURY STOCKHOLDERS'
STAGE STOCK EQUITY
------------ -------- -------------
<S> <C> <C> <C>

Balance at December 31, 1992.................... $ (11,477) $ -- $ 9,238
Issuance of Common Stock for compensation....... -- -- 51
Warrants issued to purchase 50,172 shares
of Common Stock............................. -- -- --
Stock options exercised, February and
November 1993 ($.66) per share............... -- -- 9
Issuance of Common Stock for cash,
September 1993 ($14.00 per share) ........... -- -- 4,538
Issuance of Common Stock for cash in
secondary public offering November &
December 1993 ($9.00 per share).............. -- -- 11,464
Compensation expense related to stock options... -- -- 396
Net loss........................................ (6,225) -- (6,225)
------------ -------- -------------
Balance at December 31, 1993.................... (17,702) -- 19,471
Deferred compensation relating to certain
stock options ............................... -- -- --
Stock options exercised, January through October
($.66 per share) ............................... -- -- 10
Warrants issued to purchase 537 shares of
Common Stock................................. -- -- --
Issuance of additional shares of Common
Stock pursuant to collaborative
agreement (see Note 6)....................... -- -- --
Compensation expense related to stock options... -- -- 546
Unrealized loss on available-for-sale securities -- -- (315)
Net loss........................................ (9,052) -- (9,052)
------------ -------- -------------
Balance at December 31, 1994.................... $ (26,754) $ -- $ 10,660
</TABLE>

(continued on next page)

F-7
<PAGE> 60
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

UNREALIZED
LOSS ON
ADDITIONAL COMMON SECURITIES
COMMON STOCK PAID-IN STOCK DEFERRED AVAILABLE
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION FOR SALE
--------- --------- ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............. 5,202,476 $ 5 $ 38,220 $ -- $ (496) $ (315)
Deferred compensation relating to certain
stock options ....................... -- -- 1,380 -- (1,380) --
Stock options exercised, January through
December 1995 ($.66 per share) ...... 36,958 -- 24 -- -- --
Issuance of Common Stock and warrants
pursuant to merger agreements
(see Note 4) ........................ 3,868,436 4 11,111 2,844 -- --
Warrants exercised ($4.50 per share) ..... 705,614 1 3,402 (226) -- --
Issuance of Common Stock pursuant to
settlement agreement (see Note 6) ... 531,552 -- 2,046 (1,130) -- --
Issuance of Common Stock for services
rendered ............................ 37,500 -- 159 -- -- --
Treasury stock purchased ($4.42 per share) (2,480) -- -- -- -- --
Compensation expense related to stock
options ............................. -- -- -- -- 340 --
Unrealized gain on available-for-sale
securities ............................. -- -- -- -- -- 199
Net loss ................................. -- -- -- -- -- --
--------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1995 ............. 10,380,056 $ 10 $ 56,342 $ 1,488 $ (1,536) $ (116)

<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT TREASURY STOCKHOLDERS'
STAGE STOCK EQUITY
------------ -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1994 ............. $ (26,754) $ -- $ 10,660
Deferred compensation relating to certain
stock options ....................... -- -- --
Stock options exercised, January through
December 1995 ($.66 per share) ...... -- -- 24
Issuance of Common Stock and warrants
pursuant to merger agreements
(see Note 4) ........................ -- -- 13,959
Warrants exercised ($4.50 per share) ..... -- -- 3,177
Issuance of Common Stock pursuant to
settlement agreement (see Note 6) ... -- -- 916
Issuance of Common Stock for services
rendered ............................ -- -- 159
Treasury stock purchased ($4.42 per share) -- (11) (11)
Compensation expense related to stock
options ............................. -- -- 340
Unrealized gain on available-for-sale
securities ............................. -- -- 199
Net loss ................................. (17,429) -- (17,429)
------------ -------- -------------
Balance at December 31, 1995 ............. $ (44,183) $ (11) $ 11,994

</TABLE>

(continued on next page)

F-8

<PAGE> 61
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

UNREALIZED
LOSS ON
ADDITIONAL COMMON SECURITIES
COMMON STOCK PAID-IN STOCK DEFERRED AVAILABLE
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION FOR SALE
---------- --------- ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (1,536) $ (116)
---------- --------- ---------- -------- ------------ ----------
Warrants redeemed January 1996.................. -- -- 269 (269) -- --
Deferred compensation relating to certain
stock options.............................. -- -- 966 -- (966) --
Issuance of Common Stock for cash in
secondary public offering, March &
April 1996 ($10.00 per share).............. 3,450,000 4 32,073 -- -- --
Stock options exercised, January through
December 1996 ($.04-$9.50 per share)....... 106,041 -- 343 -- -- --
Warrants exercised January through December
1996 ($4.50-$12.00 per share).............. 622,574 1 3,528 (194) -- --
Issuance of Common Stock pursuant to
settlement agreements...................... 38,722 -- 221 (57) -- --
Compensation expense related to stock options... -- -- -- -- 553 --
Unrealized gain on available-for-sale securities -- -- -- -- -- 41
Net loss........................................ -- -- -- -- -- --
---------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1996.................... 14,597,247 15 93,742 968 (1,949) (75)

Warrants exercised February and March 1997
($8.00 per share).......................... 3,499 -- 28 (1) -- --
Reversal of deferred compensation relating to
forfeited stock options.................... -- -- (578) -- 578 --
Issuance of Common Stock for services........... 22,278 -- 130 -- -- --
Stock options exercised, January through
December 1997 ($.04-$5.50 per share)....... 128,278 -- 215 -- -- --
Issuance of shares through the employee stock
purchase plan, June and December 1997 ($3.31
and $3.19 per share)....................... 21,392 -- 69 -- -- --
Issuance of Common Stock pursuant to
contingent stock agreement................. 686,472 -- 3,000 -- -- --
Compensation expense related to stock options... -- -- -- -- 464 --
Unrealized loss on securities available-for-sale -- -- -- -- -- (12)
Net loss........................................ -- -- -- -- -- --
---------- --------- ---------- -------- ------------ ----------
Balance at December 31, 1997 15,459,166 $ 15 $ 96,606 $ 967 $ (907) $ (87)
<CAPTION>

DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT TREASURY STOCKHOLDERS'
STAGE STOCK EQUITY
-------------- -------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995 ..................... $ (44,183) $ (11) $ 11,994
-------------- -------------- --------------
Warrants redeemed January 1996 ................... -- -- --
Deferred compensation relating to certain
stock options ............................... -- -- --
Issuance of Common Stock for cash in
secondary public offering, March &
April 1996 ($10.00 per share) ............... -- -- 32,077
Stock options exercised, January through
December 1996 ($.04-$9.50 per share) ........ -- -- 343
Warrants exercised January through December
1996 ($4.50-$12.00 per share) ............... -- -- 3,335
Issuance of Common Stock pursuant to
settlement agreements ....................... -- -- 164
Compensation expense related to stock options .... -- -- 553
Unrealized gain on available-for-sale securities . -- -- 41
Net loss ......................................... (8,030) -- (8,030)
-------------- -------------- --------------
Balance at December 31, 1996 ..................... (52,213) (11) 40,477

Warrants exercised February and March 1997
($8.00 per share) ........................... -- -- 27
Reversal of deferred compensation relating to
forfeited stock options ..................... -- -- --
Issuance of Common Stock for services ............ -- -- 130
Stock options exercised, January through
December 1997 ($.04-$5.50 per share) ........ -- -- 215
Issuance of shares through the employee stock
purchase plan, June and December 1997 ($3.31
and $3.19 per share) ........................ -- -- 69
Issuance of Common Stock pursuant to
contingent stock agreement .................. -- -- 3,000
Compensation expense related to stock options .... -- -- 464
Unrealized loss on securities available-for-sale . -- -- (12)
Net loss ......................................... (16,991) -- (16,991)
-------------- -------------- --------------
Balance at December 31, 1997 ..................... $ (69,204) $ (11) $ 27,379
</TABLE>

(continued on next page)

F-9

<PAGE> 62

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ........................... 15,459,166 $ 15 $ 96,606 $ 967 $ (907)
Stock Options exercised January through June
1998 (unaudited) .................................. 8,115 -- 3 -- --
Issuance of Common Stock for services .................. 17,192 -- 70 -- --
Warrants expired June 1998 (unaudited) ................. -- -- 917 (917) --
Issuance of shares through the employee stock purchase
plan, June 1998 ($3.35) (unaudited) ............ 19,272 -- 64 -- --
Compensation expense related to stock
options (unaudited) ............................... -- -- -- -- 362
Unrealized gain on securities available for sale ....... -- -- -- -- --
Net loss (unaudited) ................................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance at September 30, 1998 (unaudited) .............. 15,503,745 $ 15 $ 97,660 $ 50 $ (545)
============= ============= ============= ============= =============
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ........................... $ (87) $ (69,204) $ (11) $ 27,379
Stock Options exercised January through June
1998 (unaudited) .................................. -- -- -- 3
Issuance of Common Stock for services .................. -- -- -- 70
Warrants expired June 1998 (unaudited) ................. -- -- -- --
Issuance of shares through the employee stock purchase
plan, June 1998 ($3.35) (unaudited) ............ -- -- -- 64
Compensation expense related to stock
options (unaudited) ............................... -- -- -- 362
Unrealized gain on securities available for sale ....... 21 -- -- 21
Net loss (unaudited) ................................... (16,546) -- -- (16,546)
------------- ------------- ------------- -------------
Balance at September 30, 1998 (unaudited) .............. $ (66) $ (85,750) $ (11) $ 11,353
============= ============= ============= =============

</TABLE>

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

F-10
<PAGE> 63

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 13,
NINE MONTHS ENDED 1986)
YEARS ENDED DECEMBER 31, SEPTEMBER 30, THROUGH
-------------------------------- -------------------- SEPTEMBER 30,
1995 1996 1997 1997 1998 1998
-------- -------- -------- -------- -------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ......................................... $(17,429) $ (8,030) $(16,991) $(12,278) $(16,546) $(85,750)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities --
Depreciation and amortization .................... 749 936 1,139 652 521 4,547
Loss (gain) on disposal of assets ................ -- -- 200 107 (2) 198
Compensation expense related to stock and
stock options .................................. 499 553 594 400 432 3,668
Charge for purchase of in-process research and
development .................................... 8,383 164 3,000 3,000 -- 11,547
Unrealized gain (loss) on investment ............. 199 41 (12) (31) 21 (66)
Acquisition costs, net of cash received .......... (270) -- -- -- -- (270)
Loss in affiliate ................................ 300 50 -- -- -- 500
Accrued interest payable converted to stock ...... -- -- -- -- -- 97
Changes in assets and liabilities:
(Decrease) increase in prepaid expenses and
other assets ..................................... (1) (375) 189 (45) 90 (199)
Decrease (increase) in accounts receivable ....... (32) 267 (22) (88) 100 --
Increase (decrease) in accounts payable and
accrued expenses ............................... 796 (322) 1,214 211 1,361 3,819
Increase (decrease) in deferred revenue ......... 272 (876) -- -- -- (353)
-------- -------- -------- -------- -------- --------
Net cash used in operating activities ............ (6,534) (7,592) (10,689) (8,072) (14,023) (62,262)

Cash flows from investing activities:
Net sales (purchases) of investments ............. 10,094 (32,975) 9,284 6,392 15,701 (6,489)
Purchase of furniture, equipment and leasehold
improvements ................................... (137) (256) (352) (280) (1,545) (5,666)
Proceeds from sale of assets ..................... -- -- 54 34 9 63
Decrease (increase) in deposits .................. -- -- (490) (336) 490 --
Investment in affiliate .......................... -- -- -- -- -- (500)
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities ..................................... 9,957 (33,231) 8,496 5,810 14,655 (12,592)
Cash flows from financing activities:
Proceeds from notes payable and capital leases ... 64 2,000 -- -- 1,369 6,041
Repayment of notes payable and principal
payments under capital lease obligations ....... (534) (272) (237) (307) (321) (2,765)
Purchase of treasury stock ....................... (11) -- -- -- -- (11)
Proceeds from issuance of stock .................. 3,200 35,755 315 241 68 75,380
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ..................................... 2,932 37,221 43 4 1,130 78,645
-------- -------- -------- -------- -------- --------
Net increase in cash and cash equivalents ........ 6,355 (3,602) (2,150) (2,258) 1,762 3,791
Cash and cash equivalents at beginning
of period ...................................... 1,426 7,781 4,179 4,179 2,029 --
-------- -------- -------- -------- -------- --------

Cash and cash equivalents at end of period .......... $ 7,781 $ 4,179 $ 2,029 $ 1,921 $ 3,791 $ 3,791
======== ======== ======== ======== ======== ========

Supplemental disclosures of cash flow information:
Cash paid during the period for interest ......... $ 184 $ 120 $ 57 $ 52 $ 14 $ 826
Supplemental schedule of noncash financing
activities: Conversion of notes payable and
accrued interest to Common Stock ............... $ -- $ -- $ -- $ -- $ -- $ 3,043
</TABLE>

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

F-11

<PAGE> 64

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION

Aronex Pharmaceuticals, Inc. ("Aronex Pharmaceuticals" or the "Company")
was incorporated in Delaware on June 13, 1986 and merged with Triplex
Pharmaceutical Corporation ("Triplex") and Oncologix, Inc. ("Oncologix")
effective September 11, 1995 (see Note 4). Aronex Pharmaceuticals is a
development stage company which has devoted substantially all of its efforts to
research and product development and has not yet generated any significant
revenues, nor is there any assurance of future revenues. In addition, the
Company expects to continue to incur losses for the foreseeable future, and
there can be no assurance that the Company will successfully complete the
transition from a development stage company to successful operations. See "Risk
Factors" elsewhere herein. The research and development activities engaged in by
the Company involve a high degree of risk and uncertainty. The ability of the
Company to successfully develop, manufacture and market its proprietary products
is dependent upon many factors. These factors include, but are not limited to,
the need for additional financing, attracting and retaining key personnel and
consultants, and successfully developing manufacturing, sales and marketing
operations. The Company's ability to develop these operations may be immensely
impacted by uncertainties related to patents and proprietary technologies,
technological change and obsolescence, product development, competition,
government regulations and approvals, health care reform, third-party
reimbursement and product liability exposure. Additionally, the Company is
reliant upon collaborative arrangements for research, contractual agreements
with corporate partners, and its exclusive license agreements with The
University of Texas M.D. Anderson Cancer Center ("M.D. Anderson"). Further,
during the period required to develop these products, the Company will require
additional funds which may not be available to it. Accordingly, there can be no
assurance of the Company's future success. The Company expects that its existing
financial resources will be sufficient to fund its capital requirements into
late 1999. As a result, the Company's independent public accountants have
informed the Company that if the conditions regarding its financial resources
continue to exist at the time of their audit of the financial statements for the
year ending December 31, 1998, their report on those financial statements will
include an explanatory fourth paragraph expressing substantial doubt about the
Company's ability to continue as a going concern.

2. ACCOUNTING POLICIES

Interim Financial Statements

The interim financial statements as of September 30, 1998, and for the nine
months ended September 30, 1997 and September 30, 1998, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.

Cash, Cash Equivalents and Short- and Long-Term Investments

The Company has adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities". Debt and equity securities that the Company has the intent and
ability to hold to maturity are classified as "held to maturity" and reported at
amortized cost. Debt and equity securities that are held for current resale are
classified as "trading securities" and reported at fair value with unrealized
gains and losses included in earnings. Debt and equity securities not classified
as either "securities-held-to-maturity" or "trading securities" are classified
as "securities-available-for-sale" and reported at fair value, with unrealized
gains and losses

F-12

<PAGE> 65

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

excluded from earnings and reported as a separate component of stockholders'
equity. The adoption of SFAS 115 did not have a material effect on the Company's
financial position or results of operations.

Cash and cash equivalents include money market accounts and investments
with an original maturity of less than three months. At September 30, 1998, all
short-term investments are held to maturity securities consisting of high-grade
commercial paper and United States Government backed securities with a carrying
value of $10,936,000 (unaudited), which approximates fair market value and cost.
Long-term investments at September 30, 1998 are available for sale securities
which are United States mortgage backed securities with various maturity dates
over the next several years that have an amortized cost of $1,354,000
(unaudited), a fair market value of $1,288,000 (unaudited) and a gross
unrealized loss of $66,000 (unaudited) at September 30, 1998. The Company
currently has no trading securities.

Furniture, Equipment and Leasehold Improvements

Furniture and equipment are carried at cost and depreciation is calculated
on the straight-line method using a five-year estimated useful life. Leasehold
improvements are amortized on the straight-line method over the shorter of the
life of the lease or a five-year estimated useful life. Maintenance and repairs
that do not improve or extend the life of assets are expensed as incurred.
Expenditures which improve or extend the life of assets are capitalized.

A summary of furniture, equipment and leasehold improvements is as follows
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
------------- ---------
<S> <C> <C>
Office furniture and equipment................................... $ 571 $ 611
Laboratory equipment............................................. 2,986 2,802
Leasehold improvements........................................... 1,464 1,354
--------- ---------
5,021 4,767
Less accumulated depreciation and amortization.................... (2,869) (3,660)
--------- ---------
Furniture, equipment and leasehold improvements, net.............. $ 2,152 $ 1,107
========= =========
</TABLE>

At December 31, 1996 and 1997, the cost of laboratory equipment held under
capital leases aggregated $64,000. All furniture, equipment and leasehold
improvements have been pledged as collateral on notes payable.

Revenue Recognition

Research and development grant and contract revenues are recognized as
expenses for development activities as they are incurred and the related work is
performed under the terms of the contracts. Any revenue contingent upon future
performance by the Company is deferred and recognized as the performance is
completed. Any revenues resulting from the achievement of milestones are
recognized when the milestones are achieved.

Research and Development

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

F-13

<PAGE> 66

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Loss Per Share

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per
Share", which establishes standards for computing and presenting earnings per
share. The new standard replaces the presentation of primary earnings per share
prescribed by Accounting Principles Board Opinion No. 15 ("APB 15"), "Earnings
per Share", with a presentation of basic earnings per share and also requires
dual presentation of basic and diluted earnings per share on the face of the
statement of operations for all entities with complex capital structures. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is computed similarly to
fully-diluted earnings per share pursuant to APB 15. The Company adopted SFAS
No. 128 in the fourth quarter of fiscal 1997. Because of the loss for the year,
no shares resulting from the assumed exercise of the options or warrants using
the treasury stock method are added to the denominator because the inclusion of
such shares would be antidilutive due to the losses for all periods included in
the statements of operations. Therefore, the Company's basic and diluted
earnings per share are the same.

Presentation

In April 1992, the stockholders approved a 1 for 3.3 reverse stock split
and in July 1996 approved a 1 for 2 reverse stock split. Retroactive effect has
been given to the reverse stock splits in stockholders' equity and in all per
share data in the accompanying financial statements.

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.

3. INVESTMENT IN AFFILIATE

In April 1994, the Company invested in and entered into a drug development
agreement with RGene Therapeutics, Inc. ("RGene"). RGene was involved in the
development of gene therapy. Aronex Pharmaceuticals purchased $500,000 of
RGene's preferred stock. This $500,000 investment was written off during 1994,
1995 and 1996. In June 1996, RGene was acquired by Targeted Genetics Corporation
("Targeted Genetics"), a publicly traded company. The Company received 440,520
shares of Targeted Genetics common stock in the merger. These shares are subject
to certain contractual resale restrictions. Under the drug development agreement
with RGene, Aronex Pharmaceuticals performed certain research and development
with respect to certain RGene projects for three years. This agreement expired
in April 1997. During 1995, 1996 and 1997, Aronex Pharmaceuticals recorded
$668,000, $597,000 and $166,000, respectively, in revenue relating to this
agreement.

4. MERGER AGREEMENTS WITH TRIPLEX PHARMACEUTICAL CORPORATION AND ONCOLOGIX,
INC.

On September 11, 1995, Aronex Pharmaceuticals merged with Triplex and
Oncologix through two newly-formed, wholly-owned subsidiaries pursuant to
Agreements and Plans of Merger (the "Triplex Agreement" and the "Oncologix
Agreement"). The results of operations and the cash flow for Triplex and
Oncologix have been included in the financial statements from the date of
acquisition.

F-14

<PAGE> 67

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

In connection with the Triplex Agreement, the Company issued the following
to existing Triplex stockholders and option holders: (i) 3,441,436 shares of
Common Stock; (ii) options to purchase 88,912 shares of Common Stock; and (iii)
contingent stock issue rights to receive shares of Common Stock with a fair
market value of up to $8.0 million, the conversion of which is contingent upon
the satisfaction of conditions which relate to the licensing or development of
certain products (the "Triplex Contingent Stock Rights").

The Triplex Contingent Stock Rights entitle the former Triplex stockholders
and option holders to receive shares of Common Stock with an aggregate fair
market value at the time of issuance of $5.0 million (subject to certain
adjustments) if the Company either: (i) entered into an agreement on or before
September 11, 1997 with respect to the licensing of a certain product whereby
the Company received at least $5.0 million in cash or an unconditional binding
commitment for at least $5.0 million (events which did not occur) or (ii)
obtains data from such clinical trials for such product on or before September
11, 2000 that the Company's Board of Directors determines to be sufficient to
file a New Drug Application. In addition, the Triplex Contingent Stock Rights
entitled the former Triplex stock and option holders to receive shares of Common
Stock with an aggregate fair market value at the time of issuance of $3.0
million if the Company did not receive a minimum of $5.0 million in equity
milestone payments from Genzyme on or before September 11, 1997 with respect to
the development of its ATRAGEN product. As a result of its failure to receive
such payments from Genzyme, the Company issued 686,472 shares of Common Stock
under the Triplex Contingent Stock Rights with an aggregate fair market value at
the time of issuance of $3.0 million and recorded a corresponding non-cash
research and development expense of $3.0 million in 1997.

In connection with the Oncologix Agreement, the Company issued the
following: (i) 427,000 shares of Common Stock to certain Oncologix debt holders;
(ii) warrants (the "Warrants") to purchase approximately 9.0 million shares of
Common Stock to Oncologix preferred stockholders, certain former employees and
debt holders; and (iii) contingent stock issue rights to receive shares of
Common Stock with a fair market value of approximately $2.1 million, the
conversion of which was contingent upon the satisfaction of conditions which
relate to the licensing or development of certain products (the "Oncologix
Contingent Stock Rights").

The Oncologix Contingent Stock Rights entitled such former Oncologix
investors to receive shares of Common Stock if the Company received at least
$5.0 million in cash or an unconditional binding commitment for at least $5.0
million on or before September 11, 1997 relating to certain products. Neither
such event occurred and, accordingly, the Oncologix Contingent Stock Rights
expired in 1997.

The Warrants issued in connection with the Oncologix merger consisted of
three series of warrant rights to purchase approximately 2.4 million, 2.8
million and 3.7 million shares of Common Stock, respectively designated as
Series A, Series B and Series C. Upon the failure to exercise a series of
warrant rights prior to their expiration, the warrant holder forfeits all
remaining rights under the terms of the Warrant. The Series A component of the
Warrants expired in 1995. At December 31, 1997 the Series B and Series C
components to purchase approximately 1.4 million and 1.2 million shares of
Common Stock, respectively, had exercise prices of $8.00 and $12.00 per share,
respectively, and expiration dates of June 1998 and December 1999, respectively.
In June 1998 the Series B component of the Warrants expired. At September 30,
1998 Series C Warrants to purchase approximately 160,000 (unaudited) shares of
Common Stock were outstanding.

5. NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES

In June 1993, the Company entered into a master loan agreement for the
financing of $1.0 million in furniture, office equipment and laboratory
equipment acquisitions. Each loan is collateralized by the furniture and
equipment and is payable in 48 monthly installments with a final installment at
the end of the loan term not to exceed 20% of the purchase price at inception.
During 1993 and 1994, the Company borrowed $607,000 and $392,000,

F-15

<PAGE> 68

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

respectively, through this agreement. In 1993 and 1994, in connection with the
financing, the Company issued to the lender warrants to purchase 5,093 and 2,944
shares of the Common Stock at an exercise price of $12.00 per share that expire
in March 2000 and March 2001, respectively. No value was assigned to the
warrants as the value of the warrants at the dates of issuance was de minimis.
This loan was paid in full in 1998.

In July 1990 and October 1992, the Company borrowed $108,000 and $388,000,
respectively, from a real estate company related to one of its stockholders to
finance the construction of the Company's laboratory and office space. The
Company executed promissory notes bearing interest at 10.5 and 12.5% per annum,
respectively. The July 1990 note was payable in monthly installments of
principal and interest over a five-year period ending July 1995. The October
1992 note, as amended, provided for payment of interest only through October
1994 and monthly payment of principal and interest from November 1994 through
January 1999. This note was paid in full in 1996.

At December 31, 1996, the Company had a promissory note payable to Genzyme
bearing interest at nine percent per annum. This note was converted to an
advance in 1997 (see Note 9).

In May 1998, the Company entered into a master loan agreement for the
financing of $1.5 million in furniture, office equipment and laboratory
equipment acquisitions. Each loan is collateralized by the furniture and
equipment and is payable in 60 monthly installments. In June 1998, the Company
borrowed $1,369,000 (unaudited) through this agreement bearing interest at 12%.
Future principal payments under the master loan agreement at September 30, 1998
are as follows:

<TABLE>
<CAPTION>
NOTE PAYABLE
MASTER LOAN
YEAR ENDING AGREEMENT
DECEMBER 31, (UNAUDITED)
------------ --------------
<S> <C> <C>
1998 $ 50,000
1999 221,000
2000 250,000
2001 281,000
2002 318,000
2003 144,000
-------------
Total $ 1,264,000
=============
</TABLE>

The Company leases certain laboratory equipment under capital leases. The
leases have effective interest rates ranging from approximately 15 to 18% and
mature at various dates through March 1999. Future payments under capital lease
obligations at December 31, 1997 are as follows:

YEAR ENDING
DECEMBER 31, CAPITAL LEASES
------------ --------------
<S> <C> <C>
1998 $ 21,000
1999 6,000
--------------
27,000
Less Interest (3,000)
--------------
Lease Obligations $ 24,000
==============
</TABLE>

F-16

<PAGE> 69

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY

Common Stock

In July 1992, the Company, in an initial public offering, issued 850,000
shares of Common Stock for $14 a share, with the Company receiving net proceeds
of approximately $10.7 million. In connection with a collaborative agreement
entered into in September 1993 (described in Note 9), Genzyme Corporation
("Genzyme") made a $5 million equity investment in the Company which resulted in
Genzyme's ownership of approximately 9 percent of the Company's outstanding
Common Stock at the time the investment was made. In September 1994, the Company
issued to Genzyme 66,162 additional shares which were contingent on certain
stock performance criteria. In November 1993, the Company sold 1,250,000 shares
of its Common Stock in a secondary public offering for $9.00 per share which,
together with the over-allotment exercise for 152,250 shares of its Common
Stock, raised net proceeds of approximately $11.5 million. In May 1996, the
Company sold 3,000,000 shares of its Common Stock in a secondary public offering
for $10.00 per share which, together with the over-allotment exercise for
450,000 shares of its Common Stock, raised net proceeds of approximately $32.1
million.

Common Stock Warrants

At September 30, 1998, the Company had warrants outstanding, relating to
certain financing and leasing transactions, to purchase 17,951 (unaudited)
shares of Common Stock at exercise prices ranging from $3.63 per share to $12.00
per share. The warrants expire at various dates through March 2001.

The Company issued Warrants to purchase approximately 9.0 million shares of
Common Stock in connection with the Oncologix merger in 1995 (see Note 4). At
September 30, 1998, warrants to purchase approximately 160,000 (unaudited)
shares of Common Stock remained outstanding at an exercise price of $12.00 per
share. The Warrants expire in December 1999.

Contingent Stock Rights

In connection with the Triplex and Oncologix mergers, the Company issued
$10.1 million contingent stock rights. At December 31, 1997, $5.0 million
contingent stock rights remain outstanding, contingent upon the development and
licensing of a certain product (see Note 4).

7. STOCK OPTION PLANS

During 1989, the Company's stockholders approved the 1989 Stock Option Plan
(the "Plan"). The Plan, as amended in 1992 and in May 1997, authorizes the
issuance of options covering the greater of (i) 2,490,000 shares of Common Stock
or (ii) 17% of the shares of Common Stock outstanding on the last day of the
preceding fiscal quarter. The term of each option ranges from five to seven
years from the date of grant. At December 31, 1997, 301,907 shares were
available for future grant under the Plan.

F-17

<PAGE> 70

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

A summary of stock option activity for the Plan follows:

<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
--------- ------------------
<S> <C> <C>
Balance at December 31, 1994 ................... 364,607 $ .66 to $14.88
Granted, including options repriced ...... 578,968 $ .04 to $7.00
Options repriced ......................... (10,500) $ 7.00 to $14.88
Exercised ................................ (49,459) $ .22 to $.68
Forfeited ................................ (95,079) $ .66 to $14.88
--------- ------------------
Balance at December 31, 1995 ................... 788,537 $ .04 to $14.88
Granted .................................. 533,200 $ 5.50 to $12.00
Exercised ................................ (93,541) $ .04 to $9.50
Forfeited ................................ (109,047) $ 4.24 to $11.00
--------- ------------------
Balance at December 31, 1996 ................... 1,119,149 $ .04 to $14.88
Granted .................................. 1,232,578 $ 4.06 to $8.88
Exercised ................................ (150,556) $ .04 to $5.50
Forfeited ................................ (240,454) $ .66 to $10.50
--------- ------------------
Balance at December 31, 1997 ................... 1,960,717 $ .04 to $14.88
Granted (unaudited) ...................... 290,320 $ 2.19 to $4.63
Exercised (unaudited) .................... (8,115) $ 0.12 to $3.88
Forfeited (unaudited) .................... (110,646) $ 3.88 to $14.88
--------- ------------------
Balance at September 30, 1998 (unaudited) ...... 2,132,276 $ .04 to $14.88
========= ==================
Exercisable at September 30, 1998 (unaudited) .. 954,652 $ .04 to $14.88
========= ==================
</TABLE>

During June 1998, the Company's stockholders approved the 1998 Stock Option
Plan. This plan authorizes the issuance of options to purchase up to 750,000
(unaudited) shares of Common Stock. Shares issued under this plan expire 10
years from the date of issuance. In 1998, options to purchase 320,000 shares
(unaudited) of Common Stock at an exercise price of $3.88 were issued to
employees under this plan. These shares will vest at various dates based on the
achievement of corporate and personal goals as determined by the Board of
Directors' compensation committee and the achievement of specific Common Stock
price targets. None of the options issued under this plan were exercisable at
September 30, 1998.

During 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "Director Plan"). The Director Plan, as amended effective in
May 1997, authorizes the issuance of options to purchase up to 600,000 shares of
Common Stock. Shares issued under the Director Plan expire 10 years from the
date of issuance. The Director Plan allows for the issuance of two types of
grants: Formula Grants and Discretionary Grants. Formula Grants are fully vested
when issued and are issued at a price equal to the fair market value of the
Company's stock at the date of issuance. Each Non-Employee Director was issued
12,500 Formula Grants on November 14, 1995. In addition, the following Formula
Grants are issued under the Director Plan: (1) options to purchase 25,000 shares
of common stock to each Non-Employee Director upon first being elected to the
Board of Directors and (2) options to purchase 7,500 shares of Common Stock
annually, beginning on December 31, 1997, to each Non-Employee Director who has
served as a director for at least six months. Additionally, under the Director
Plan, as amended in 1997, on March 17, 1997, each Non-Employee Director received
an option to purchase 16,250 shares of Common Stock. These options were fully
vested when issued and were issued at a price equal to the fair market value of
the Company's stock at the date of issuance. Discretionary Grants may be issued
by the Compensation Committee of the Board of Directors and may be issued at
less than the fair market value of the Company's stock. In 1997, grants to
purchase a total of 15,000 shares of Common Stock were issued to one
Non-Employee Director. These options were fully vested when issued and were
issued at a price equal to the fair market value of the Company's stock at the
date of issuance. In 1996, Discretionary Grants to purchase a total of 87,500
shares of Common Stock were issued to two Non-Employee Directors. These
options vest over four years and were issued at less than the fair market value
of the Company's Common Stock at the date of grant.

F-18

<PAGE> 71

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

A summary of stock option activity for the Director Plan follows:

<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
-------------- -----------------
<S> <C> <C>
Balance at December 31, 1994........................... 30,000 $ 11.00
Granted................................................ 87,500 $ 5.50
Forfeited.............................................. (15,000) $ 11.00
-------------- -----------------
Balance at December 31, 1995........................... 102,500 $ 5.50 to $11.00
Granted................................................ 110,000 $ 5.50 to $9.38
Exercised.............................................. (12,500) $ 5.50
-------------- -----------------
Balance at December 31, 1996........................... 200,000 $ 5.50 to $9.38
Granted................................................ 167,500 $ 4.25 to $11.00
Exercised.............................................. -- $ --
-------------- -----------------
Balance at December 31, 1997........................... 367,500 $ 4.25 to $11.00
-------------- -----------------
Granted (unaudited).................................... 25,000 $ 2.53
Exercised (unaudited).................................. -- $ --
-------------- -----------------
Balance at September 30, 1998 (unaudited).............. 392,500 $ 2.53 to $11.00
============== =================
Exercisable at September 30, 1998 (unaudited).......... 348,750 $ 2.53 to $11.00
============== =================
</TABLE>

The Company records deferred compensation for the difference between the
grant price and the deemed fair value for financial statement presentation
purposes related to options. Such amount totals $907,000 at December 31, 1997.
In 1995, 1996 and 1997, $340,000, $553,000, and $594,000, respectively, in
related expense was recorded. The balance will be amortized to expense over the
remaining vesting periods of the options.

The Company accounts for these plans under APB Opinion No. 25, under which
compensation expense was recorded. Had compensation cost for these plans been
determined consistent with FASB Statement No. 123 ("SFAS 123"), the Company's
net loss per share would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------------------
1995 1996 1997
--------------- ---------------- --------------
<S> <C> <C> <C>
Net Loss:
As reported .................. $ (17,429,000) $ (8,030,000) $ (16,991,000)
================ ================ ==============
Pro forma .................... $ (18,240,000) $ (9,062,000) $ (19,129,000)
================ ================ ==============

Loss Per Share (basic and diluted):
As reported .................. $ (2.69) $ (0.62) $ (1.14)
================ ================ ==============
Pro forma .................... $ (2.81) $ (0.69) $ (1.29)
================ ================ ==============
</TABLE>

Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation may not
be representative of that to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black Scholes options
pricing model with the following weighted-average assumptions used for grants in
1995, 1996 and 1997, respectively: risk-free interest rates of 5.5% to 7.7%,
5.4% to 6.4% and 5.7% to 6.9%, with no expected dividends; expected lives of 5
years and expected volatility of 116% in 1995 and 1996 and 114% in 1997.

F-19

<PAGE> 72

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

A summary of the status of the Company's two fixed stock option plans as of
December 31, 1995, 1996 and 1997 and charges during the years ending on those
dates is presented below:

<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ----------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------ -------- -------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year........ 394,607 $ 5.37 891,037 $ 4.29 1,319,149 $ 5.27
Granted............................. 666,468 $ 3.61 643,200 $ 6.89 1,400,078 $ 4.99
Options repriced.................... (10,500) $ 11.48 -- $ -- -- $ --
Exercised........................... (49,459) $ 0.49 (106,041) $ 3.24 (150,556) $ 1.43
Forfeited........................... (110,079) $ 7.30 (109,047) $ 6.75 (240,454) $ 5.91
-------- ---------- -----------
Balance at end of year.............. 891,037 $ 4.10 1,319,149 $ 5.27 2,328,217 $ 5.37
======== ========== ===========
Options exercisable at year end..... 360,657 $ 3.24 437,391 $ 4.10 915,103 $ 5.56
======== ========== ===========
Weighted-average fair value of
options granted during the year..... $ 6.49 $ 7.99 $ 4.02
</TABLE>

The following table summarizes information about fixed stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -----------------------------------
AMOUNT WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
- ---------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 - $ 3.00 56,894 4.2 $ 0.40 56,894 $ 0.40
$3.01 - $ 7.00 1,863,110 6.3 $ 4.90 612,880 $ 4.92
$7.01 - $14.88 408,213 6.9 $ 8.22 245,329 $ 8.37
--------- -------
2,328,217 915,103
========= =======
</TABLE>

8. FEDERAL INCOME TAXES

The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation allowance should be
provided.

A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the periods ended December 31, 1995, 1996 and 1997
is as follows:

<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Statutory rate (34.0)% (34.0)% (34.0)%
Purchase of in-process research and development 16.4% 1.1% 6.6%
Stock option compensation not deductible (deductible) 0.7% (0.3)% (0.2)%
Other nondeductible expenses -- -- (0.7)%
Adjustment to deferred tax valuation allowance 16.9% 33.2% 28.3%
----- ----- =====
0.0% 0.0% 0.0%
===== ===== =====
</TABLE>

F-20
<PAGE> 73

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Significant components of the Company's net deferred tax asset at December 31,
1996 and 1997 are as follows:

<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Deferred tax assets relating to:
Federal net operating loss carryforwards .............. $ 22,777,400 $ 27,640,500
Financial statement depreciation and amortization in
excess of (less than) amount deductible for income
tax purposes ..................................... 130,400 132,000
Accrued liabilities not currently deductible
for income tax purposes .......................... 42,900 725,100
Equity in loss of affiliate not currently
deductible for income tax purposes ............... 170,000 170,000
Other items, net ...................................... (24,300) (19,400)
------------ ------------
Total deferred items, net ................................ 23,096,400 28,648,200
Deferred tax valuation allowance ......................... (23,096,400) (28,648,200)
------------ ------------
Net deferred tax asset ................................... $ -- $ --
============ ============
</TABLE>

At December 31, 1997, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $79.0 million.
The Tax Reform Act of 1986 provided a limitation on the use of NOL and tax
credit carryforwards following certain ownership changes that could limit the
Company's ability to utilize these NOLs and tax credits. Accordingly, the
Company's ability to utilize the above NOL and tax credit carryforwards to
reduce future taxable income and tax liabilities may be limited. As a result of
the merger (see Note 4) with Triplex and Oncologix, a change in control as
defined by federal income tax law occurred, causing the use of these
carryforwards to be limited and possibly eliminated. Additionally, because
United States tax laws limit the time during which NOLs and the tax credit
carryforwards may be applied against future taxable income and tax liabilities,
the Company may not be able to take full advantage of its NOLs and tax credit
carryforwards for federal income tax purposes. The carryforwards will begin to
expire in 2001 if not otherwise used. Due to the possibility of not reaching a
level of profitability that will allow for the utilization of the Company's
deferred tax assets, a valuation allowance has been established to offset these
tax assets. The valuation allowance increased $10,957,000, $3,504,000, and
$5,551,800 for the years ended December 31, 1995, 1996 and 1997, respectively.
These increases were primarily due to the Company's losses from operations for
such periods and the valuation allowance for the net operating loss
carryforwards acquired in the 1995 mergers with Triplex and Oncologix (See Note
4). The Company has not made any federal income tax payments since inception.

9. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS

The Company has two exclusive license agreements with M.D. Anderson
which may be terminated in the event of a material breach of the terms of the
agreement or for failure to convert the licensed subject matter to a commercial
form. However, the Company believes its ongoing research and development efforts
currently satisfy this obligation to commercialize.

The license agreements require the Company to pay royalties for
licensed patent products or processes based on cumulative net sales percentages.
The Company must also pay M.D. Anderson $200,000 for each FDA-approved product
resulting from certain licensed research tasks. No royalties have been paid to
date since the Company has had no sales.

F-21

<PAGE> 74

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

For the years ended December 31, 1995, 1996 and 1997, the Company paid
M.D. Anderson $392,000, $144,000, and $108,000, respectively, for research
performed on behalf of the Company.

The Company entered into a non-exclusive license agreement to use a
patented process in the manufacture, use and sale of certain of Aronex
Pharmaceuticals' products in 1993 with an initial fee of $30,000. Annual royalty
payments by the Company are to be computed as a percentage of sales, as defined
in the agreement. The royalty payments shall not exceed $1 million in a calendar
year and expire upon expiration of the licensed patents.

In 1993, the Company entered into a license and development agreement
with Genzyme to develop and commercialize ATRAGEN(R). The initial focus of the
collaboration was the development of ATRAGEN for the treatment of myelogenous
leukemias and certain non-hematologic cancers. The Company and Genzyme shared
clinical development responsibilities and research program funding through the
end of 1996. Under the agreement, Genzyme was required to make up to $1.5
million in milestone payments to the Company upon the occurrence of certain
events and to pay the Company royalties on sales of the product. Genzyme had the
right to terminate the agreement in the event of a third party claim of
infringement by products subject to the agreement. The Company had the right to
terminate the agreement if Genzyme failed to satisfy certain milestones. In
connection with the collaborative agreement, Genzyme made a net $4.5 million
equity investment in the Company and agreed to make an additional $5.0 million
equity investment in the Company if certain developmental goals were achieved.

In September 1996, Genzyme advanced the Company $2.0 million relating
to the $5.0 million equity milestone. In early 1997, the license and development
agreement was amended and Genzyme was released from any further obligation to
perform development work for ATRAGEN. Under the amendment, the license granted
to Genzyme was converted to an option to acquire the right to market and sell
ATRAGEN worldwide (with the Company retaining co-promotion rights in the United
States). Genzyme is required to pay the Company $3.0 million no more than six
months after the filing of an NDA for ATRAGEN to exercise the option, and would
thereafter be required to pay royalties on sales of ATRAGEN. The Company has the
right to re-acquire the marketing rights at any time within the six months
following Genzyme's exercise of the option by returning Genzyme's $3.0 million
option exercise payment, repaying Genzyme's $2.0 million advance and paying
royalties on sales of ATRAGEN, including $500,000 in minimum royalties in the
first year. If Genzyme does not exercise its option, the Company is required to
repay Genzyme the $2.0 million advance and to pay royalties on sales of ATRAGEN,
including $500,000 in minimum royalties in the first year following the
expiration of the option.

In 1996, the Company entered into a license agreement with Boehringer
Mannheim GmbH (subsequently acquired by F. Hoffman-LaRoche Ltd. ("Roche")) to
develop and commercialize one of the Company's products, AR209. Under the
agreement, Roche was responsible for funding the costs of all remaining
preclinical and clinical development of AR209 and for manufacturing the product.
Roche paid the Company $150,000 in license fees in connection with this
agreement in 1997 and agreed to pay minimum annual license fees of $100,000
during the term of the agreement. In addition, Roche was required to pay the
Company up to $2.65 million in milestone payments upon the occurrence of certain
events and to pay the Company royalties on sales of the product. The Company had
the option to co-promote the product under terms to be negotiated by the parties
or to co-market the product if the parties are unable to reach an agreement as
to the terms of a co-promotion arrangement. Roche had the right to terminate the
agreement if the costs of developing AR209 were materially greater than
anticipated and Roche determined, in its reasonable discretion, not to proceed
with the development of the product in light of such increased costs. The
Company had the right to terminate the agreement if Roche failed to achieve
certain milestones. Both parties had the right to terminate the agreement
without cause, with all rights to AR209 reverting to the non-terminating party.
The agreement was terminated without cause by Roche in September 1998, as a
result of which all rights to AR209 have reverted to the Company.

F-22

<PAGE> 75

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES

The Company leases laboratory and office space under operating leases
and certain office equipment on a short-term basis. In 1997, the Company entered
into a lease for a building from its current landlord who was a related party
until late in 1997. Under this lease, the Company has committed to lease 30,000
square feet for ten years beginning in January 1998. Rental expense was
approximately $208,000, $268,000, and $236,000 for the years ended December 31,
1995, 1996 and 1997, respectively.

Future minimum noncancellable payments under operating leases at
December 31, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -------------
<S> <C> <C>
1998 $ 698,000
1999 714,000
2000 714,000
2001 714,000
2002 712,000
Thereafter 3,570,000
-------------
Total $ 7,122,000
=============
</TABLE>

The Company is subject to numerous risks and uncertainties because of
the nature of and status of its operations. The Company maintains insurance
coverage for events and in amounts that it deems appropriate. Management
believes that uninsured losses, if any, will not be materially adverse to the
Company's financial position or results of operations.

11. RELATED PARTY TRANSACTIONS AND EMPLOYMENT AGREEMENTS

In September 1995, the Company entered into an employment agreement
with an officer of the Company, for an initial term of one year. This officer
terminated his employment on January 15, 1998 and the Company is obligated to
pay his monthly salary of $19,583 and certain benefits for a period of twelve
months after termination.

During 1995, 1996 and 1997, the Company entered into employment
agreements with its chief executive officer and other officers which have
initial termination dates ranging from 1998 to 2000. The agreements are
thereafter automatically renewed for successive periods of twelve to eighteen
months unless terminated by either party. Such agreements provide that in the
case of termination without cause, the officers are entitled to payments ranging
from one hundred to one hundred and fifty percent of their annual salaries.
Under these agreements the Company is committed to pay certain relocation costs
and an amount equal to the federal income tax liability relating to a portion of
the taxable relocation costs. Additionally, one of these officers has an
outstanding loan with the Company with a balance of approximately $18,000 at
December 31, 1997. This loan will be repaid over the next three years. Current
annual salaries relating to these agreements total $1,017,000 at December 31,
1997.

In February 1998, the Company amended a consulting agreement with the
Company's chief scientific advisor for a three-year period ending December 31,
2000, whereby the Company is committed to pay consulting fees of $156,000 per
year through December 31, 2000. One-half of the amount to be paid over the next
three years will be paid in cash and one-half will be paid in Company Common
Stock. The Company paid cash of $132,000, $144,000, and $156,000 for the years
ended December 31, 1995, 1996 and 1997, respectively, pursuant to this
agreement.

During 1995 and 1996, the Company paid $28,500 and $2,500,
respectively, in consulting fees to a consulting firm which is wholly-owned by a
former member of the Board of Directors.

F-23

<PAGE> 76

ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. 401(k) PLAN

The Company maintains a retirement savings plan, effective as amended
on January 1, 1991, in which any employee of the Company who has completed one
month of employment may elect to participate. The plan is an individual account
plan providing for deferred compensation as described in Section 401(k) of the
Code and is subject to, and intended to comply with, the Employee Retirement
Income Security Act of 1974, as amended. Each eligible employee is permitted to
contribute up to 20% of his annual salary up to the applicable statutory maximum
prescribed in the Code. The Company may, in its discretion, contribute an amount
equal to the employee's contribution, but such Company contribution may not
exceed an amount equal to six percent of the employee's compensation. A
participant is 50% vested in the accrued benefits derived from the Company's
contributions after completion of one year of employment following his election
to participate in the plan, and 100% vested in such contributions after
completion of two years of employment following such election. Participants may
receive hardship loans under the terms of the plan. The plan provides for
distributions in the event a participant dies, reaches the age of 65, becomes
disabled or terminates his employment prior to the age of 65. The Company made
contributions of approximately $25,800, $40,000 and $45,700 under the 401(k)
plan for the years ended December 31, 1995, 1996 and 1997, respectively.

13. EMPLOYEE STOCK PURCHASE PLAN

In December 1996, the Board of Directors adopted the 1997 Employee
Stock Purchase Plan and reserved 250,000 shares of Common Stock for issuance
thereunder. The plan permits employees to purchase Common Stock through
payroll deductions of up to 15% of their compensation subject to limitations as
defined by the Internal Revenue Service. Purchases of Common Stock are made at
the lower of 85% of fair market value at the beginning or end of each six-month
offering period. In 1997, 21,292 shares were purchased by employees at $3.31
and $3.19 per share.

14. SUBSEQUENT EVENT

On November 12, 1998, the Company entered into a license agreement with
Abbott Laboratories ("Abbott") for NYOTRAN. The license agreement provides
Abbott with exclusive worldwide rights to market and sell NYOTRAN, subject to
rights previously granted to Grupo Ferrer Internacional, S.A. in Spain and
Portugal and certain copromotion rights retained by the Company in the United
States and Canada. Abbott has agreed to pay the Company up-front payments of
$2.8 million under the license agreement within 10 business days of November 12,
1998. Abbott has agreed to purchase 837,989 shares of the Company's common stock
for $3.0 million under a related stock purchase agreement with a scheduled
closing date of November 30, 1998. Abbott has also agreed to provide funding for
the continuing clinical development of NYOTRAN and to make subsequent milestone
payments as specified regulatory goals and sales targets are achieved. Abbott
will also pay to the Company escalating royalties on all product sales of
NYOTRAN.

F-24

<PAGE> 77

================================================================================

WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION (OTHER THAN THIS PROSPECTUS) OR TO MAKE ANY
REPRESENTATIONS AS TO MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY
ON UNAUTHORIZED INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES OR A SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER AFTER THE DATE OF THIS
PROSPECTUS SHALL CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
OR THE AFFAIRS OF THE COMPANY HAVE NOT CHANGED SINCE THE DATE THEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE

<S> <C>
Prospectus Summary.................................................. 1
Caution as to Forward-Looking
Statements....................................................... 5
Risk Factors........................................................ 5
Use of Proceeds..................................................... 12
Dividend Policy..................................................... 12
Price Range of Common Stock......................................... 13
Dilution............................................................ 14
Capitalization...................................................... 15
Selected Financial Data............................................. 16
Management's Discussion and Analysis
of Financial Condition and Results of
Operations....................................................... 17
Business............................................................ 22
Management.......................................................... 39
Principal Stockholders.............................................. 44
Description of Capital Stock........................................ 46
Plan of Distribution................................................ 49
Legal Matters....................................................... 49
Experts............................................................. 50
Available Information............................................... 50
Index to Financial Statements....................................... F-1
</TABLE>

================================================================================

4,500,000 SHARES

[ARONEX PHARMACEUTICALS, INC. LOGO]

COMMON STOCK

--------------
PROSPECTUS
--------------

, 1998

================================================================================

<PAGE> 78

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

An itemized statement of the estimated amount of all expenses in
connection with the distribution of the securities registered hereby, all of
which will be paid by the Company, is as follows:

<TABLE>
<S> <C>
Registration fee............................................. $ 3,953
NASD filing fee.............................................. *
Nasdaq listing fee........................................... *
Blue Sky fees and expenses................................... *
Printing and engraving expenses.............................. *
Legal fees and expenses...................................... *
Accounting fees and expenses................................. *
Miscellaneous fees and expenses.............................. *
-
Total .............................................. $ *
====
</TABLE>

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

*To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("DGCL"), inter
alia, empowers a Delaware corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or in the right
of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Similar indemnity is authorized for such persons against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of any such threatened, pending or
completed action or suit if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent
jurisdiction otherwise provides) such person shall not have been adjudged
liable to the corporation. Any such indemnification may be made only as
authorized in each specific case upon a determination by the stockholders or
disinterested directors or by independent legal counsel in a written opinion
that indemnification is proper because the indemnitee has met the applicable
standard of conduct.

Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
The Company maintains policies insuring its and its subsidiaries' officers and
directors against certain liabilities for actions taken in such capacities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").

Article VIII of the Amended and Restated Certificate of Incorporation
of the Company and Article VII of the Bylaws of the Company provides for
indemnification of the directors of the Company to the full extent permitted
by law, as now in effect or later amended. Article VII of the Bylaws also
permits the indemnification to the same extent of officers, employees or
agents of the Company if, and to the extent, authorized by the Board of
Directors. In

II-1

<PAGE> 79

addition, the Bylaws provide for indemnification against expenses incurred by
a director to be paid by the Company at reasonable intervals in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it shall be ultimately determined that he is not entitled to be indemnified by
the Company. The Bylaws further provide for a contractual cause of action on
the part of directors of the Company for indemnification claims that have not
been paid by the Company.

The Company also has provided liability insurance for each director and
officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the Company.

Article VII of the Company's Amended and Restated Certificate of
Incorporation, as amended, limits under certain circumstances the liability of
the Company's directors for a breach of their fiduciary duty as directors.
These provisions do not eliminate the liability of a director (i) for a breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL (relating to
the declaration of dividends and purchase or redemption of shares in violation
of the DGCL) or (iv) for any transaction from which the director derived an
improper personal benefit.

ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES

On November 12, 1998, the Company entered into a license agreement and a
related stock purchase agreement with Abbott Laboratories ("Abbott") for
NYOTRAN. In connection with the license agreement, Abbott has agreed to
purchase 837,989 shares of the Company's common stock pursuant to the stock
purchase agreement. Closing of the transaction is scheduled for November 30,
1998 and is subject to customary closing conditions, none of which are under
the control of Abbott. The sale of shares of the Company's common stock to
Abbott is conducted as a private placement pursuant to Regulation D
promulgated under the Securities Act.

ITEM 16. EXHIBITS

<TABLE>
<S> <C>
*1.1 Placement Agent Agreement.

3.1 Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ending June 30, 1997 (the "June 1997
Form 10-Q")).

3.2 Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (No. 33-47418) (the
"1992 Registration Statement"), as declared effective by the
Commission on July 10, 1992).

4.1 Specimen certificate for shares of Common Stock, par value $0.001
per share (incorporated by reference to Exhibit 4.1 to the
Company's Annual Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996).

*5.1 Opinion of Andrews & Kurth L.L.P.

10.1 Registration Rights Agreement dated August 2, 1989, by and among
the Company and certain of its stockholders (incorporated by
reference to Exhibit 10.2 to the 1992 Registration Statement).

10.2 First Amendment to Registration Rights Agreement dated April 18,
1990, by and among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.3 to the 1992 Registration
Statement).

10.3 Second Amendment to Registration Rights Agreement dated October 31,
1991, by and among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.4 to the 1992 Registration
Statement).
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<PAGE> 80

<TABLE>
<S> <C>
10.4 Third Amendment to Registration Rights Agreement dated September
10, 1993, among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (No. 33-71166) (the "1993
Registration Statement"), as declared effective by the Commission
on November 15, 1993).

10.5 Fourth Amendment to Registration Rights Agreement dated January 20,
1994, among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993 (the "1993
Form 10-K")).

10.6 Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the June 1997 Form 10-Q).

10.7 Amended and Restated 1993 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the June 1997 Form
10-Q).

10.8 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 (the "June 1998 Form 10-Q")).

10.9 Exclusive License Agreement dated October 15, 1986, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center (incorporated by
reference to Exhibit 10.8 to the 1992 Registration Statement).

10.10 Research and Development Contract dated October 1, 1986, between
the Company, The University of Texas System Board of Regents and
The University of Texas M. D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to
Exhibit 10.9 to the 1992 Registration Statement).

10.11 Exclusive License Agreement dated July 1, 1988, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to
Exhibit 10.10 to the 1992 Registration Statement).

10.12 Research and Development Contract dated July 1, 1988, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to
Exhibit 10.11 to the 1992 Registration Statement).

10.13 Amendment No. 2 to Exclusive License Agreement dated July 9, 1993,
among the Company, The University of Texas System Board of Regents
and The University of Texas M. D. Anderson Cancer Center
(incorporated by reference to Exhibit 10.20 to the 1993
Registration Statement).

10.14 Sponsored Laboratory Study Agreement dated July 9, 1993, between
the Company and The University of Texas M. D. Anderson Cancer
Center (incorporated by reference to Exhibit 10.21 to the 1993
Registration Statement).

10.15 Technology Transfer Agreement dated July 18, 1989, among Triplex
Pharmaceutical Corporation and Baylor College of Medicine, BCM
Technologies, Inc., Michael Edward Hogan and Donald Joseph Kessler
(incorporated by reference to Exhibit 10.61 to the Company's
Registration Statement on Form S-4 (No. 33-91584) dated July 24,
1995 (the "Merger Registration Statement")).

10.16 Form of Key Management Proprietary Information and Inventions and
Noncompetition Agreement (incorporated by reference to Exhibit
10.23 to the 1992 Registration Statement).
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<PAGE> 81

<TABLE>
<S> <C>
10.17 Form of Proprietary Information and Inventions Agreement
(incorporated by reference to Exhibit 10.24 to the 1992
Registration Statement).

10.18 Stock Purchase Warrant dated March 29, 1990, from the Company in
favor of Pacific Venture Finance, Inc (incorporated by reference to
Exhibit 10.28 to the 1992 Registration Statement).

10.19 Master Loan and Security Agreement dated March 1, 1993, between the
Company and MMC/GATX Partnership No. 1 (incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the fiscal year Ended December 31, 1993 (the "1993 Form 10-K")).

10.20 Common Stock Purchase Warrant dated June 28, 1993 from the Company
in favor of MMC/GATX Partnership No. 1 (incorporated by reference
to Exhibit 10.22 to the 1993 Form 10-K).

10.21 Common Stock Purchase Warrant dated March 21, 1994 from the Company
in favor of MMC/GATX Partnership No. 1 (incorporated by reference
to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 (the "March 1994 Form 10-Q")).

10.22 Common Stock Purchase Warrant dated January 27, 1994 from the
Company in favor of Vector Securities International, Inc
(incorporated by reference to Exhibit 10.29 to the 1993 Form 10-K).

10.23 License and Development Agreement dated September 10, 1993, between
the Company and Genzyme Corporation (incorporated by reference to
Exhibit 10.22 to the 1993 Registration Statement).

10.24 Common Stock Purchase Agreement dated September 10, 1993, between
the Company and Genzyme Corporation (incorporated by reference to
Exhibit 10.23 to the 1993 Registration Statement).

10.25 Amendment No. 2 to License and Development Agreement dated
September 10, 1996, between the Company and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 (the "September 1996 Form 10-Q")).

10.26 Amendment No. 2 to Stock Purchase Agreement dated September 10,
1996, between the Company and Genzyme Corporation (incorporated by
reference to Exhibit 10.2 to the September 1996 Form 10-Q).

10.27 Amendment No. 3 to License and Development Agreement dated March
25, 1997, between the Company and Genzyme Corporation (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 30, 1997 (the "March
1997 Form 10-Q")).

10.28 Amendment No. 3 to Common Stock Purchase Agreement dated March 25,
1997, between the Company and Genzyme Corporation (incorporated by
reference to Exhibit 10.2 to the March 1997 Form 10-Q).

10.29 Licensing Agreement dated December 7, 1996, between the Company and
Boehringer Mannheim GmbH (incorporated by reference to Exhibit
10.51 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996).

10.30 Plan and Agreement of Merger dated February 22, 1995, among Triplex
Pharmaceutical Corporation, Argus Pharmaceuticals, Inc. and API
Acquisition Company No. 1 (incorporated by reference to Exhibit 1.1
to the Company's Current Report on Form 8-K dated February 22, 1995
(the "February 1995 Form 8-K")).

10.31 Form of Certificate of Contingent Interest (incorporated by
reference to Exhibit 1.2 to the February 1995 Form 8-K).
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<PAGE> 82

<TABLE>
<S> <C>
10.32 Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc., the Company and API Acquisition Company No. 2
(incorporated by reference to Exhibit 1.7 to the February 1995 Form
8-K).

10.33 Form of Warrant (incorporated by reference to Exhibit 1.8 to the
February 1995 Form 8-K).

10.34 Agreement between Oncologix and HCV Group (incorporated by
reference to Exhibit 1.9 to the February 1995 Form 8-K).

10.35 Exchange Agreement dated December 12, 1995, among the Company,
Health Care Ventures I, L.P., Health Care Ventures II, L.P., Health
Care Ventures III, L.P. and Health Care Ventures IV, L.P
(incorporated by reference to Exhibit 1.2 to the Company's Current
Report on Form 8-K dated December 12, 1995).

10.36 Employment Agreement dated March 12, 1997, between the Company and
David S. Gordon, M.D (incorporated by reference to Exhibit 10.4 to
the March 1997 Form 10-Q).

10.37 Employment Agreement dated July 28, 1997, between the Company and
Janet Walter (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for fiscal quarter ended
September 30, 1997).

10.38 Employment Agreement dated November 3, 1997 between the Company and
Geoffrey Cox, Ph.D (incorporated by reference to Exhibit 10.39 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "1997 Form 10-K")).

10.39 Employment Termination and Severance Agreement dated January 1,
1998, between the Company and James M. Chubb, Ph.D (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998 (the "March 1998
Form 10-Q")).

10.40 Consulting Agreement dated January 1, 1998, between the Company and
Gabriel Lopez-Berestein (incorporated by reference to Exhibit 10.2
to the March 1998 Form 10-Q).

10.41 Consulting Agreement dated April 1, 1998, between the Company and
Roman Perez-Solar (incorporated by reference to Exhibit 10.3 to the
March 1998 Form 10-Q).

10.42 Employment Agreement dated June 12, 1998, between the Company and
Praveen Tyle, Ph.D. (incorporated by reference to Exhibit 10.2 to
the June 1998 Form 10-Q).

10.43 Employment Agreement dated June 12, 1998, between the Company and
Paul A. Cossum, Ph.D. (incorporated by reference to Exhibit 10.3 to
the June 1998 Form 10-Q).

10.44 Employment Agreement dated June 12, 1998, between the Company and
Terance A. Murnane, Ph.D. (incorporated by reference to Exhibit
10.4 to the June 1998 Form 10-Q).

10.45 Lease Agreement dated April 4, 1997, between the Company and The
Woodlands Corporation (incorporated by reference to Exhibit 10.3 to
the June 1997 Form 10-Q).

*10.46 License Agreement dated November 12, 1998, between the Company and
Abbott Laboratories.

11.1 Statement regarding computation of loss per share (incorporated by
reference to Exhibit 11.1 to the 1997 Form 10-K).

23.1 Consent of Arthur Andersen LLP
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<PAGE> 83

<TABLE>
<S> <C>
*23.2 Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).

24.1 Power of attorney (included on the signature page of this
Registration Statement).
</TABLE>

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

* To be filed by amendment.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes that:

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

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

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions in Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

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<PAGE> 84

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL THE REQUIREMENTS FOR FILING ON FORM S-1 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED IN THE CITY OF THE WOODLANDS, STATE OF TEXAS, ON
NOVEMBER 18, 1998.

ARONEX PHARMACEUTICALS, INC.

By:/s/ Geoffrey F. Cox
---------------------------------
Geoffrey F. Cox
Chairman of the Board and
Chief Executive Officer

POWER OF ATTORNEY

We the undersigned, directors and officers of Aronex Pharmaceuticals,
Inc. (the "Company"), do hereby severally constitute and appoint Geoffrey F.
Cox and Terance A. Murnane and each or any of them, our true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments or post-effective amendments to
this Registration Statement, and to file the same with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys and agents, and each or any
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, and each of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

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

<S> <C> <C>
/s/ Geoffrey F. Cox Chairman of the Board and Chief November 18, 1998
----------------------------------- Executive Officer (Principal executive
Geoffrey F. Cox officer)

/s/ Terance A. Murnane Controller (Principal financial and November 18, 1998
----------------------------------- accounting officer)
Terance A. Murnane

/s/ Gabriel Lopez-Berestein Director November 18, 1998
-----------------------------------
Gabriel Lopez-Berestein

/s/ Ronald J. Brenner, Ph.D. Director November 18, 1998
-----------------------------------
Ronald J. Brenner, Ph.D.

Director November , 1998
-----------------------------------
James R. Butler

/s/ Martin P. Sutter Director November 18, 1998
-----------------------------------
Martin P. Sutter

/s/ Phyllis I. Gardner, M.D. Director November 18, 1998
-----------------------------------
Phyllis I. Gardner, M.D.

/s/ Gregory F. Zaic Director November 18, 1998
-----------------------------------
Gregory F. Zaic
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<PAGE> 85
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
*1.1 Placement Agent Agreement.

*5.1 Opinion of Andrews & Kurth L.L.P.

10.1 Registration Rights Agreement dated August 2, 1989, by and among
the Company and certain of its stockholders (incorporated by
reference to Exhibit 10.2 to the 1992 Registration Statement).

<PAGE> 86

10.6 Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the June 1997 Form 10-Q).

10.7 Amended and Restated 1993 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the June 1997 Form
10-Q).

10.8 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 (the "June 1998 Form 10-Q")).

10.16 Form of Key Management Proprietary Information and Inventions and
Noncompetition Agreement (incorporated by reference to Exhibit
10.23 to the 1992 Registration Statement).
</TABLE>

<PAGE> 87