MAGAININ PHARMACEUTICALS INC, S-3, 1997-10-20

MAGAININ PHARMACEUTICALS INC
S-3, 1997-10-20
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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MAGAININ PHARMACEUTICALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 2834 13-3445668
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION NO.) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)

5110 CAMPUS DRIVE
PLYMOUTH MEETING, PA 19462
(610) 941-4020
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

---------------
JAY MOORIN
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAGAININ PHARMACEUTICALS INC.
5110 CAMPUS DRIVE
PLYMOUTH MEETING, PA 19462
(610) 941-4020
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES OF ALL COMMUNICATIONS TO:
DAVID R. KING JAMES R. TANENBAUM
MORGAN, LEWIS & BOCKIUS LLP STROOCK & STROOCK & LAVAN LLP
2000 ONE LOGAN SQUARE 180 MAIDEN LANE, 35TH FLOOR
PHILADELPHIA, PA 19103-6993 NEW YORK, NY 10038
(215) 963-5000 (212) 806-5400

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

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]

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, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

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

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

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

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.002 par 2,875,000
value................. shares(1) $10.94(2) $31,452,500(2) $9,531.06(3)
</TABLE>
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(1) Includes 375,000 shares, which may be purchased by the Underwriters to
cover over-allotments, if any.
(2) Based on the average of the reported high and low sales of the Common
Stock reported on the Nasdaq National Market on October 16, 1997,
estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(3) The registration fee represents one-thirty-third of one percent of the
proposed maximum aggregate offering price.

---------------
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.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 20, 1997

PROSPECTUS

2,500,000 SHARES

MAGAININ PHARMACEUTICALS INC.

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by Magainin
Pharmaceuticals Inc. ("Magainin" or the "Company"). The Company's Common Stock
is quoted on the Nasdaq National Market tier of The Nasdaq Stock Market under
the symbol "MAGN." On October 16, 1997, the last reported sale price of the
Common Stock was $10.75 per share.

-----------

THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.

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

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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................... $ $ $
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Total(3)..................................... $ $ $
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters

(2) Before deducting expenses payable by the Company estimated at $275,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively, See "Underwriting."

-----------

The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997 at the office of the agent of Hambrecht &
Quist LLC in New York, New York.

HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY

, 1997
<PAGE>

AVAILABLE INFORMATION

This Prospectus, which constitutes a part of a Registration Statement on
Form S-3 (the "Registration Statement") filed by the Company with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act") omits certain of the information
set forth in the Registration Statement. Reference is hereby made to the
Registration Statement and to the exhibits thereto for further information
with respect to the Company and the securities offered hereby. Copies of the
Registration Statement and the exhibits thereto are on file at the offices of
the Commission and may be obtained upon payment of the prescribed fee or may
be examined without charge at the public reference facilities of the
Commission described below.

Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in
its entirety by references to the copy of the applicable document filed with
the Commission.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facility maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at Seven World Trade Center, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained in person from the
Public Reference Section of the Commission at its principal office located at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Additionally, such material may be obtained at the web site the Commission
maintains at "http://www.sec.gov", which contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Reports and proxy statements concerning
the Company also may be inspected at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

INFORMATION INCORPORATED BY REFERENCE

The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference: (1) Annual
Report on Form 10-K for the year ended December 31, 1996, (2) Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997, and (3) the description of the Company's Common Stock
which is contained in the Company's Registration Statement on Form 8-A filed
under the Exchange Act on November 7, 1991 and as amended on January 15, 1993,
including any amendment or reports filed for the purpose of updating such
description.

All documents filed by the Company pursuant to section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Common Stock hereunder shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. The Company will provide without
charge to each person to whom this Prospectus is delivered, a copy of any and
all such documents (exclusive of exhibits unless such exhibits are
specifically incorporated by reference herein), upon written or oral request
to Michael R. Dougherty, Executive Vice President and Chief Financial Officer,
Magainin Pharmaceuticals Inc., 5110 Campus Drive. Plymouth Meeting, PA 19462,
(610)941-5228.

Any statement contained in a document, all or a portion of which is
incorporated by reference herein, shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained or
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

2
<PAGE>

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."

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Cytolex(TM) is a registered trademark of the Company. All other brand names
or trademarks appearing in this Prospectus are the property of their
respective holders.

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere or incorporated by reference
in this Prospectus. Investment in the securities offered hereby involves a high
degree of risk. See "Risk Factors." Except as otherwise noted, all information
in this Prospectus assumes no exercise of the Underwriters' over-allotment
option. This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors," as well as those discussed elsewhere in this Prospectus.

THE COMPANY

Magainin Pharmaceuticals Inc. ("Magainin" or the "Company") is a
biopharmaceutical company engaged in the development of medicines for serious
diseases. The Company's development efforts are focused on anti-infectives,
oncology, and pulmonary and allergic disorders.

Magainin's research and drug development efforts are focused on two
technology platforms:

. Host Defense Drug Discovery--the Company isolates and develops
therapeutically active compounds from the host defense systems of
animals. Magainin peptides represent a new class of antibiotics being
developed for the treatment of infection. The Company's second host
defense class, aminosterols, is a new class of pharmaceuticals which the
Company believes may have multiple applications, including the control
of cell proliferation.

. Asthma Genomics--the Company employs a broad range of genomics
techniques to identify genes associated with the pathogenesis of asthma,
with the objective of utilizing the optimal biologic gene targets in the
development of novel therapeutics for asthma and allergy.

MAGAININ PEPTIDES--CYTOLEX(TM)

The Company's most advanced class of compounds under development are magainin
peptides. Discovered in the skin of the African clawed frog, magainins have
demonstrated broad activity against a variety of pathogens in preclinical
studies. These molecules act by puncturing the membrane of the pathogen cell,
resulting in the death of the pathogen.

The Company's lead product development candidate is Cytolex(TM) (formerly
called MSI-78), a topical cream antibiotic. The Company has completed two
pivotal Phase III clinical trials of Cytolex for the treatment of infection in
diabetic foot ulcers. These studies were designed as equivalence trials, with
the goal of demonstrating that topically applied Cytolex is as effective as
orally administered ofloxacin, a quinolone antibiotic indicated for the
treatment of infection, including skin and soft tissue infections. Company
analyses of the data from the studies showed statistical equivalence between
Cytolex and ofloxacin, with respect to the primary end point of clinical
response of infection at day 10 of treatment, and at subsequent time points
through day 28, and at follow-up. Clinical response rates for both Cytolex and
ofloxacin were between 84% and 89% and between 87% and 93%, at day 10 of
treatment, and at follow-up, respectively. As a secondary endpoint in the
trials, Cytolex and ofloxacin were comparable with respect to overall
assessments of microbiological improvements. The two studies enrolled 926
patients.

Data was also collected on wound healing as part of the studies. At the last
patient visit date, approximately six weeks after treatment was initiated, 18%
to 30% of wounds were resolved. The Company plans to evaluate additional
studies relating to the effect of Cytolex on wound healing.

Analyses of adverse events in the studies suggest a favorable profile for
Cytolex. Both drugs were well tolerated; however, treatment with ofloxacin was
associated with a significant excess of adverse events related to insomnia.

4
<PAGE>

In February 1997, Magainin and SmithKline Beecham ("SB") entered into a
development, supply and distribution agreement pursuant to which SB will market
and sell Cytolex in North America. Under this agreement, SB has paid $10.0
million to the Company, and may make additional payments of up to $22.5 million
upon the occurrence of certain product milestones. SB will also fund a majority
of development expenses for any additional indications for Cytolex.

AMINOSTEROLS--SQUALAMINE

Squalamine is the lead product development candidate in the Company's
aminosterol program. Squalamine was discovered in the body tissues of the
dogfish shark. The shark was initially examined because of its known resistance
to infection and cancer. Since the discovery of squalamine, the Company has
discovered several other aminosterol compounds in the shark. In preclinical
testing conducted to date, certain of these compounds have demonstrated an
ability to control cell growth, along with other pharmacological properties.
These properties may have application in the treatment of disease indications
characterized by cell proliferation, such as cancer.

The Company's initial disease focus for squalamine is solid tumors. The
formation of new blood vessels, or angiogenesis, is believed to be a critical
factor in tumor growth. Squalamine may be of benefit in the treatment of a
number of solid tumors by inhibiting new blood vessel growth required for tumor
nourishment.

In August 1997, the Company submitted an Investigational New Drug Application
("IND"), which is now effective, to begin Phase I clinical testing of
squalamine in patients with advanced malignancy.

ASTHMA GENOMICS

In 1996, Magainin initiated a research program in the genomics of asthma.
These efforts led to the identification of Asthma Associated Factor 1 ("AAF1"),
a gene which varies in DNA structure and function in asthmatic and allergic
humans and animals. The Company maintains a comprehensive research program to
identify additional genes in the AAF1 biologic pathway, which genes are
believed to be important in mediating the allergic responses controlled by
AAF1. Asthma Associated Factor 2 ("AAF2") has been discovered in humans as a
key second gene candidate in the AAF1 pathway, and other genes have also been
identified by the Company. The Company continues to investigate the role of
such genes in the allergic inflammatory response, with the objective of
utilizing the optimal biologic gene targets in the development of novel
therapeutics for asthma and allergy.

Magainin was incorporated in Delaware in June 1987. The Company's offices and
research facility are located at 5110 Campus Drive, Plymouth Meeting, PA 19462,
and its telephone number is (610) 941-4020.

5
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the 2,500,000 shares
Company..........................
Common Stock to be outstanding
after the offering............... 21,879,607 shares (1)
Use of proceeds................... The Company will use the net proceeds to
fund both ongoing and planned research and
development activities, including continued
manufacturing and development efforts for
Cytolex, activities associated with the
Company's aminosterol and asthma genomics
programs, and working capital to be used
for general corporate purposes.
Nasdaq National Market symbol..... MAGN
</TABLE>
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(1) Based upon the number of shares outstanding as of September 30, 1997.
Excludes 4,492,707 shares issuable upon exercise of options and warrants
outstanding as of September 30, 1997. Of the options to purchase 2,951,072
shares of Common Stock that were outstanding as of September 30, 1997,
options to purchase 1,557,921 shares of Common Stock at a weighted average
exercise price of $3.90 per share were exercisable, and options to purchase
1,393,151 shares of Common Stock at a weighted average exercise price of
$8.72 per share were not exercisable. As of September 30, 1997, warrants to
purchase 1,541,635 shares of Common Stock at a weighted average exercise
price of $8.22 per share were outstanding and exercisable. See
"Capitalization" and "Description of Capital Stock."

6
<PAGE>

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1996 1995 1994 1993 1992 1997 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Contract and
government grant..... $ 150 $ 2,056 $ 85 $ 273 $ 140 $10,088 $ 112
Related party
contract............. -- 280 326 319 260 -- --
-------- -------- -------- -------- ------- ------- --------
150 2,336 411 592 400 10,088 112
-------- -------- -------- -------- ------- ------- --------
Costs and expenses:
Research and
development.......... 22,326 18,160 11,258 11,455 6,626 16,864 17,870
General and
administrative....... 3,488 3,137 3,468 2,630 2,640 2,475 2,378
Charge for stock
issuance relating to
royalty buyout....... 7,080 -- -- -- -- -- 7,080
-------- -------- -------- -------- ------- ------- --------
32,894 21,297 14,726 14,085 9,266 19,339 27,328
-------- -------- -------- -------- ------- ------- --------
Loss from operations.. (32,744) (18,961) (14,315) (13,493) (8,866) (9,251) (27,216)
Interest income....... 2,172 1,778 1,207 846 494 1,301 1,648
Interest expense...... (48) (32) (48) (64) (87) (73) (18)
-------- -------- -------- -------- ------- ------- --------
Net loss.............. $(30,620) $(17,215) $(13,156) $(12,711) $(8,459) $(8,023) $(25,586)
======== ======== ======== ======== ======= ======= ========
Net loss per share.... $ (1.71) $ (1.17) $ (0.99) $ (1.14) $ (1.20) $ (0.41) $ (1.47)
======== ======== ======== ======== ======= ======= ========
Weighted average
shares outstanding... 17,938 14,696 13,301 11,108 7,076 19,366 17,459
======== ======== ======== ======== ======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, ------------------------
1996 ACTUAL AS ADJUSTED(1)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments.................... $ 33,340 $ 25,129 $ 50,184
Working capital......................... 28,276 20,029 45,084
Total assets............................ 36,376 28,640 53,695
Long-term liabilities................... 915 1,104 1,104
Total liabilities....................... 6,433 6,641 6,641
Accumulated deficit..................... (95,243) (103,266) (103,266)
Stockholders' equity.................... 29,943 21,999 47,054
</TABLE>
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(1) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $10.75 per
share and the receipt of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization".

7
<PAGE>

RISK FACTORS

This Prospectus contains, in addition to historical information, statements
by the Company with regard to its expectations as to financial results and
other aspects of its business that involve risks and uncertainties and may
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements reflect management's
current views and are based on certain assumptions. Actual results could
differ materially from those currently anticipated as a result of a number of
factors, including, but not limited to, the risks and uncertainties discussed
below, as well as those discussed elsewhere in this Prospectus. In addition to
the other information in this Prospectus, prospective investors should
carefully consider the following factors in evaluating the Company and its
business before purchasing any shares of Common Stock offered hereby.

Risks Associated with Clinical Testing and FDA Approval of Cytolex. The
Company has completed two pivotal Phase III clinical trials of Cytolex for the
treatment of infection in diabetic foot ulcers and intends to submit a New
Drug Application ("NDA") to the U.S. Food and Drug Administration (the "FDA")
based on the results of these trials. Although the Company believes the two
pivotal trials conducted for Cytolex yielded successful results, there can be
no assurance that the FDA will concur with the Company's analysis in this
regard. There can be no assurance that the FDA will not, after completing its
own analysis of the two pivotal trials conducted for Cytolex, determine that
such trials should have been conducted or analyzed differently, and thus reach
a different conclusion from that reached by the Company or request that
further studies be conducted. Requiring the Company to conduct additional
studies would have a material adverse effect on the Company, as any such
additional studies would likely be time consuming and expensive.

The clinical trials conducted for Cytolex yielded substantial data. Such
data includes information relating to the primary endpoint for the studies
(clinical cure or improvement of infection), as well as additional data
relating to microbiological results, patient subgroup analysis, wound healing
and side effects. Analyses were also done on various aspects of the data, some
of which yielded results that favored ofloxacin. Additionally, the Company is
continuing its analysis of data from the studies. There can be no assurance
that such continued analysis will yield positive results.

There can be no assurance that Cytolex will receive FDA approval on a timely
basis, if at all. The failure of the Company to obtain FDA approval for
Cytolex, any significant delay in obtaining such approval, or the imposition
of highly restrictive conditions on such approval, would have a material
adverse effect on the Company.

Accumulated Deficit; Continuing Losses. The Company has been engaged to date
primarily in research and development activities and, through September 30,
1997, has generated no revenue from product sales. The Company has incurred
losses in each year since its inception, and at September 30, 1997, had an
accumulated deficit of approximately $103.3 million. There can be no assurance
that the Company will realize product revenues on a timely basis, if at all.
The Company's operations are subject to numerous risks associated with
research and development companies, including a competitive and regulatory
environment in an industry characterized by numerous well-established and
well-capitalized companies and exhaustive and expensive regulatory scrutiny.
The Company will be required to continue to conduct significant research,
development and testing activities which, together with projected general and
administrative expenses, are expected to result in continued substantial
losses for the foreseeable future.

Need for Substantial Additional Funds. The Company will require substantial
additional funds to continue its research and development programs and to
commercialize potential products. The Company may not have sufficient funds to
complete development activities for any of its proposed products, including
Cytolex.

The Company intends to seek additional funding through a combination of
future offerings of securities and collaborative arrangements with third
parties, and regularly explores alternatives in this regard. The

8
<PAGE>

Company does not have any commitments to obtain any additional funds and has
no established banking arrangements through which it can obtain additional
debt financing. There can be no assurance that future funding will be
available to the Company, or, if available, will be obtainable on terms
favorable to the Company. The receipt of funding, if any, from any corporate
partners, including SB, will depend largely on the progress of research and
development programs. Under collaborative arrangements, the Company may convey
marketing, distribution, manufacturing, development or other rights to its
proposed products to pharmaceutical companies in order to receive financial or
other assistance. This will result in lower consideration to the Company upon
commercialization of such products than if no arrangements were entered into
or if such arrangements were entered into at later stages in the product
development process. There can be no assurance that the Company will be able
to enter into such arrangements on favorable terms, if at all.

If the Company does not enter into appropriate collaborations, receive
additional funds from SB under its current agreement, or raise sufficient
funds from the periodic sale of securities, the Company will be required to
delay or eliminate expenditures for potential products, including Cytolex, or
to enter into collaborations with third parties to commercialize potential
products or technologies that the Company would otherwise seek to develop
itself, or seek other arrangements.

Manufacturing Uncertainties; Dependence on Third Parties. The Company does
not have the resources, facilities or capabilities to manufacture any of its
proposed products. The Company has no current plans to establish a
manufacturing facility. The Company expects that it will be dependent to a
significant extent on contract manufacturers for commercial scale
manufacturing of its proposed products in accordance with regulatory
standards. The Company's dependence on third parties for manufacturing may
adversely affect operating results as well as the Company's ability to develop
and deliver products on a timely and competitive basis. Production of peptides
(such as Cytolex and other magainins) is expensive relative to production of
traditional antibiotics. Additionally, there are a limited number of companies
which are currently able to produce bulk peptides on the scale which the
Company expects to require to commercialize Cytolex. There can be no assurance
that qualified outside contractors will be available to manufacture materials
for the Company, or do so at costs which are affordable by the Company.

Contract manufacturers may utilize their own technology, technology
developed by the Company, or technology acquired or licensed from third
parties. When contract manufacturers develop proprietary process technology
and have ownership of the Drug Master File, the Company's reliance on such
contract manufacturer is increased, and the Company may have to obtain a
license from such contract manufacturer to have its products manufactured by
another party. Technology transfer from the original contract manufacturer may
also be required. There can be no assurance that any such license will be
available on terms acceptable to the Company, or, if available, that such
technology will be successfully transferred to the Company. Any such
technology transfer may also require transfer of requisite data for regulatory
purposes, including information contained in a proprietary Drug Master File
held by a contract manufacturer. There can be no assurance that any such
transfer can be completed.

The Company is working with Abbott Laboratories ("Abbott") with regard to
the manufacture of bulk drug substance for Cytolex. The Company's current
arrangement with Abbott provides for cash payments by the Company to Abbott
through early 1998 aggregating approximately $17,180,000, as well as the
issuance by the Company to Abbott of up to 500,000 shares of its Common Stock
and the obligation to pay a royalty on future sales of Cytolex. Through
September 30, 1997, the Company has paid Abbott approximately $14,130,000
under this arrangement. Stock issuances by the Company to Abbott will result
in a charge to earnings, representing the fair value of the shares when
issued. The Company issued 125,000 shares of Common Stock to Abbott in October
1995, resulting in a charge to earnings of $1,250,000 in 1995. Future stock
issuances are related to the achievement by Abbott of contractual performance
milestones which could begin to occur in 1997.

The Company and Abbott have agreed that upon completion of Abbott's
development activities, they will negotiate in good faith a supply agreement
for the Company's worldwide supply needs of bulk drug substance

9
<PAGE>

for Cytolex. Early stage discussions as to supply cost have occurred with
Abbott, and, based on these discussions, the Company believes that further
progress in scale-up and manufacturing development efforts will be required to
enable the Company to manufacture and sell Cytolex on a profitable basis. This
may require substantial additional funds. No assurance can be given that a
cost-effective manufacturing process can ultimately be developed, or that any
such process would be approved by the FDA, or that the Company, Abbott, or
others will be able to manufacture Cytolex on a commercially viable basis. See
"Government Regulation."

The Company is currently dependent upon Abbott for the production of bulk
Cytolex. In the event that bulk Cytolex is not manufactured at Abbott, the
Company will need to secure other manufacturing arrangements. The process
developed by Abbott is proprietary, and in the event the Company desires to
utilize, or have another party utilize, such technology, the Company would be
required to make license payments to Abbott. The Company has certain efforts
under way with respect to alternative manufacturing sources, including
recombinant manufacturing; however, these programs are at an early stage, and
significant expenditures over an extended period of time will be required to
develop a commercially viable process, and there can be no assurance that such
efforts will be successful.

The Company also expects to conduct significant manufacturing development
activities for its other products under development. The Company is currently
working with outside contractors for the chemical production of squalamine. The
Company expects to expend significant resources in the production of squalamine
and any other compounds under development, and there can be no assurance that
these efforts will be successful.

Dependence on Sales and Marketing Partners; Marketing Uncertainties. In order
to successfully develop and market its products, it will be necessary for the
Company to enter into marketing, distribution, development or other
arrangements with third parties, granting marketing rights, which may be
exclusive, to potential products. The Company has entered into such an
arrangement with SB with respect to Cytolex in North America, and intends to
seek a sales and marketing collaboration for Cytolex in other territories. Such
sales and marketing arrangements may also involve delegating to the Company's
partner in such collaborations the responsibility for all or a significant
portion of the development and regulatory approval process. In the event that
such collaborators do not develop an approvable or marketable product or do not
market a product successfully, the Company's business will be adversely
affected. There can be no assurance that the Company will be able to enter into
any such arrangements in the future, or that such collaborations will be
successful.

The amount and timing of resources to be devoted to the Company's products by
any of its collaborative partners is not within the control of the Company.
There can be no assurance that the interests of the Company will continue to
coincide with the interests of its collaborators. Collaborators could develop
products independently or through third parties which could compete with the
Company's proposed products. With respect to Cytolex, SB maintains a
significant presence in the antibiotic area, and currently sells a topical
antibiotic product indicated for the treatment of certain skin infections.
Furthermore, SB may unilaterally terminate its agreement with the Company.
There can be no assurance that any of the Company's collaborative agreements
will not be terminated by the Company's collaborators.

For certain products under development, the Company may conduct its own
marketing activities through its own sales force. The Company has no marketing
and sales staff and, although certain members of management have experience in
the marketing of pharmaceutical products, the Company has no experience with
respect to marketing its proposed products. Significant additional
expenditures, management resources and time will be required to develop a sales
force, and there can be no assurance that the Company will be successful either
in developing a sales force or penetrating the markets for any proposed
products it may develop.

Technological Uncertainty and Early Stage of Product Development. There can
be no assurance that the Company's research and development activities will be
successful, that any products under development

10
<PAGE>

will be approved or will be commercially viable and successfully marketed, or
that the Company will ever achieve significant levels of revenue or profits.
In addition, the Company may encounter unanticipated problems, including
development, regulatory, manufacturing and marketing difficulties, some of
which may be beyond the Company's ability to resolve.

There has been only limited research in the area of the use of naturally
occurring host defense compounds for the treatment of infectious and other
diseases. The Company has submitted an IND application to the FDA, to obtain
authorization for human testing, for only two compounds, Cytolex and
Squalamine. The Company's research activities in asthma have only recently
been initiated, and there can be no assurance that any product candidates will
result from these efforts. Additionally, there can be no assurance that
results obtained in preclinical studies will be indicative of results that
will be obtained in human clinical testing.

The Company's proposed products are in the developmental stage, require
significant further research, development, testing and regulatory approvals
and are subject to the risks of failure inherent in the development of all
pharmaceutical products. These risks include the possibilities that any or all
of the proposed products are found to be ineffective or toxic, or otherwise
fail to receive necessary regulatory approvals, that the proposed products,
although effective, are uneconomical to manufacture or to market, that third
parties hold proprietary rights that preclude the Company from marketing any
products, or that third parties market superior or equivalent products.

No Assurance of Market Acceptance of Cytolex. Even if the requisite
regulatory approvals for Cytolex are obtained, there is no assurance that such
product would be accepted in the United States or foreign markets. A number of
factors may affect the rate and overall market acceptance of Cytolex,
including the perception by physicians and other members of the health care
community of the safety and efficacy of Cytolex on an absolute basis or in
comparison to other drugs, the price of Cytolex relative to other drugs or
competing treatment modalities, the availability of third-party reimbursement,
and the effectiveness of the sales and marketing efforts by SB and the Company
relative to the sales and marketing efforts of competitors. In addition, side
effects or unfavorable publicity concerning Cytolex or comparable drugs on the
market could have an adverse effect on the Company's ability to obtain
physician, patient or third-party payor acceptance.

Government Regulation. The production and marketing of the Company's
products and its research and development activities are subject to regulation
by numerous governmental authorities in the United States and other countries.
In the United States, drug products are subject to rigorous review by the FDA.
The Federal Food, Drug, and Cosmetic Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety, efficacy,
labeling, storage, recordkeeping, approval, advertising, promotion and
distribution of such products. Noncompliance with applicable requirements can
result in Warning Letters, fines, recall or seizure of products, refusal of
the government to approve marketing applications or to allow the Company to
enter into government supply contracts, the withdrawal of previously approved
new drug applications and criminal prosecution.

In order to obtain FDA approval to market a new drug product, the Company
must submit proof of safety, efficacy and quality. Such proof entails
extensive and time consuming preclinical and clinical testing. The results of
preclinical studies are submitted to the FDA as part of an IND. Once the IND
is effective, human clinical trials may be conducted. The results of the
clinical trials are submitted to the FDA as part of an NDA.

Any contract manufacturers that the Company may use must adhere to the Good
Manufacturing Practices prescribed by the FDA. Drug manufacturing facilities
must pass a plant inspection before the FDA will issue approval to market a
new drug product. Detailed manufacturing information is also required to be
submitted for review and approval by the FDA. Among other things, the Company
must submit data indicating that the drug product can be consistently
manufactured at the same quality standard, that the drug product is stable
over time, and that the level of chemical impurities in the drug product is
under specified levels.

11
<PAGE>

Peptides are an especially difficult compound to manufacture at these
standards, particularly in the quantities at which Cytolex will be required to
be manufactured. There can be no assurance that the manufacturing information
submitted for Cytolex, or other products under development, will be sufficient
for approval by the FDA.

Following extensive review of the NDA, the FDA may grant marketing approval,
require additional testing or information, or deny the application. Sales of a
new drug may commence following FDA approval of an NDA and satisfactory
completion of a pre-approval inspection of the manufacturing facility,
including a review of pertinent production records. If there are any
modifications to the drug, including any changes in indication, manufacturing
process, labeling or manufacturing facility, an NDA supplement may be required
to be submitted to the FDA. The FDA may also require post-marketing testing
and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of
such products. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems concerning safety,
efficacy or quality of the product occur following approval.

Continued compliance with all FDA requirements and the conditions in an
approved application, including those concerning product specifications,
manufacturing process, validation, labeling, promotional material,
recordkeeping and reporting, is necessary for all approved drug products.
Failure to comply could result in Warning Letters, product recall or other
FDA-initiated actions, which could delay further marketing until the products
are brought into compliance.

In October 1992, the Prescription Drug User Fee Act of 1992 ("PDUFA") was
enacted, imposing substantial fees on a one-time basis for applications for
approval, and on an annual basis for manufacturing and marketing, of
prescription drugs. Legislation reauthorizing PDUFA is currently pending in
Congress and it is anticipated that such fees will continue and may increase
in the future.

The Company is also subject to regulation by other regulatory authorities,
including the Occupational Safety and Health Administration, the Environmental
Protection Agency, the Nuclear Regulatory Commission, the Drug Enforcement
Agency and the United States Department of Agriculture, and to regulation
under the Toxic Substances Control Act, the Resource Conservation and Recovery
Act and other regulatory statutes, and may in the future be subject to
additional federal, state or local regulations. These agencies may promulgate
regulations that affect the Company's research and development programs.

Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities of foreign countries must be obtained prior
to the commencement of marketing the product in those countries. The time
required to obtain such approvals may be longer or shorter than that required
for FDA approval.

There can be no assurance that any required FDA or other governmental
approval will be granted, or if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Company's
proposed products, cause the Company to undertake costly procedures, and
furnish a competitive advantage to the more substantially capitalized
companies with which the Company competes. In addition, the extent of
potentially adverse government regulations which might arise from future
administrative action or legislation cannot be predicted. Efforts are
currently underway in the U.S. Congress to reform federal regulation of drug
and biological products. The reform provisions, when and if implemented, could
modify a number of existing legal requirements and standards and create new
legal requirements and standards. Although certain of these provisions, if
implemented, could streamline and otherwise benefit development, marketing and
related requirements for drugs and biologics, others could increase regulatory
requirements or otherwise materially adversely affect the Company.

Competition. The pharmaceutical industry is characterized by intense
competition. Many companies, research institutions and universities are
working in a number of areas similar to the Company's field of interest. The
Company is aware that research is being conducted by others in connection with
compounds

12
<PAGE>

derived from the host defense systems of various animals. Additionally, many
companies are involved in research and development activities focused on the
pathogenesis of disease, and competition among companies attempting to find
genes responsible for disease is intense. Furthermore, many companies are
engaged in the development and sale of products, such as traditional
antibiotics, which may be, or are, competitive with the Company's proposed
products. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources than the
Company. The Company's proposed products will also be subject to competition
from products using techniques other than those developed by the Company or
based on advances that may render the Company's products obsolete.

The Company expects technological developments in the biopharmaceutical field
to occur at a rapid rate and expects competition to intensify as advances in
this field are made. Accordingly, the Company will be required to continue to
devote substantial resources and efforts to research and development activities
in order to maintain a competitive position in this field. Compounds, products
or processes developed by the Company may become obsolete before the Company is
able to recover a significant portion of its research and development expenses.
The Company will be competing with respect to its proposed products with
companies that have significantly more experience in undertaking preclinical
testing and human clinical trials of new or improved therapeutic products and
obtaining regulatory approvals of such products. Some of these companies may be
in advanced phases of clinical testing of various drugs that may be competitive
with the Company's proposed products.

Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that they
have developed, some of which may be directly competitive with that of the
Company. In addition, these institutions, along with pharmaceutical and
specialized biotechnology companies, can be expected to compete with the
Company in recruiting highly qualified scientific personnel.

As to the disease areas being targeted by the Company, there can be no
assurance that Cytolex will be successfully marketed against oral antibiotics
for the treatment of infection in diabetic foot ulcers. These infections have
historically been treated with systemically administered antibiotics, such as
ofloxacin, which may be perceived by some medical professionals as having
certain advantages over Cytolex. There also can be no assurance that Cytolex
can be manufactured at a cost which will allow it to be sold at a competitive
price relative to oral antibiotics, or other topical antibiotics that may be
used for this indication. Significant efforts are underway by many companies in
the development and marketing of products intended for the additional disease
areas being targeted by the Company, including cancer and asthma. A number of
major pharmaceutical companies have significant franchises in these disease
areas, and can be expected to invest heavily to protect these interests. In the
cancer field, anti-angiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.

Uncertainties Relating to Patents and Proprietary Rights. The Company's
success will depend in part upon its ability to obtain patent protection for
compounds, uses of compounds, and processes. Patent matters involve complex
legal and factual issues, and can be highly uncertain. Host defense compounds
can be isolated from a wide variety of sources, and it is not possible for the
Company or any other entity to have proprietary rights to all such compounds or
their uses. Additionally, chemical entities that are similar to, but not
identical with, the Company's compounds, may not be protected by issued patents
of the Company. In the genomics area, a number of companies are attempting to
identify rapidly and patent genes whose functions have not been characterized.
Additional companies are seeking to patent fully characterized genes. The
criteria for obtaining patent protection for genes is unclear and the impact of
this uncertainty on the Company's business cannot be determined.

13
<PAGE>

now pending or filed in the future will result in patents being issued or that
any patents now held by or licensed to the Company, or issued or licensed to
the Company in the future, will afford any competitive advantages for the
Company, or will not be challenged by third parties. The cost of litigation to
uphold the validity and prevent infringement of patents and to enforce
licensing rights can be substantial. Furthermore, there can be no assurance
that others will not independently develop similar technologies or duplicate
the technology owned by or licensed to the Company, or design around the
patented aspects of such technology. In addition, there can be no assurance
that the products and technologies the Company will seek to market will not
infringe patents or other rights owned by others, licenses to which may not be
available to the Company.

The Company also relies upon unpatented proprietary technology, and may
determine in appropriate circumstances that its interest would be better served
by reliance on trade secrets or confidentiality agreements rather than patents.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to such proprietary technology or that the Company can meaningfully
protect its rights in such unpatented proprietary technology. Additionally, if
the Company is unable to obtain strong proprietary rights protection of its
products after obtaining regulatory clearance, competitors may be able to
market competing products by obtaining regulatory clearance, through showing
equivalency to the Company's product, without being required to conduct the
lengthy, clinical tests required to be conducted by the Company.

Virtually all of the Company's key scientists worked at other biotech or
pharmaceutical companies or at universities and research institutions before
joining the Company. Disputes may arise as to whether technology developed by
such scientists while employed by or associated with the Company was first
discovered when they were employed by or associated with others in a manner
that would give third parties rights to such technology superior to the rights,
if any, of the Company. Disputes of this nature have occurred in the past, and
are expected to continue to arise in the future, and there can be no assurance
that the Company will prevail in any such disputes.

To the extent that consultants, vendors or other third parties apply
technological information independently developed by them or by others to the
Company's proposed products, disputes may arise as to the proprietary rights to
such information, which may not be resolved in favor of the Company. Members of
the Company's Scientific Advisory Board and other consultants are employed by
or have consulting agreements with third parties, and any inventions discovered
by such individuals are not likely to become the property of the Company.

The Company has rights under license agreements to certain patents and patent
applications under which the Company expects to owe royalties on sales of any
products which are covered by issued patent claims. Additionally, certain of
these agreements also provide that if the Company elects not to pursue the
commercial development of any licensed technology, or does not adhere to an
acceptable schedule of commercialization, then the Company's exclusive rights
to such technology would terminate.

Dependence on Key Personnel. The Company depends to a considerable degree on
a limited number of key personnel. Due to the Company's limited number of
employees, many key responsibilities within the Company have been assigned to a
relatively small number of individuals. The Company does not maintain "key man"
insurance on any of its employees. The loss of certain senior management could
adversely affect the business of the Company. The success of the Company will
depend, among other factors, upon the successful recruitment and retention of
qualified personnel.

Product Liability and Insurance Risks. Before obtaining required regulatory
approvals for the commercial sale of products, the Company must demonstrate
through human clinical testing that such products are safe and efficacious for
use in each target indication. The administration of any product being
developed by the Company could produce undesirable side effects in humans. The
Company carries limited clinical trial insurance, and there can be no assurance
that such coverage is adequate.

14
<PAGE>

In addition, in the event the Company successfully develops any products,
the marketing of such products could expose the Company to product liability
claims. Certain agreements require the Company to maintain insurance coverage
naming third parties as additional insureds at such time as any related
products may be marketed. There can be no assurance that the Company will be
able to obtain such insurance or that such insurance can be maintained in
sufficient amounts to protect the Company against such liabilities or at a
reasonable cost. Certain arrangements also require the Company to indemnify
third parties with whom the Company has entered into contractual arrangements
against any liabilities that may arise in connection with such third party's
activities on behalf of the Company.

In the event of an uninsured or inadequately insured claim, the Company's
business and financial condition could be materially adversely affected.

Uncertainty Related to Reimbursement Policies; Health Care
Reform. Successful commercialization of Cytolex and the Company's other
potential products will be dependent in part on the coverage and reimbursement
of such products from third-party payors, such as government authorities,
private health insurers and other organizations, such as managed care
organizations. There can be no assurance that such coverage and reimbursement
will be available or, if available, will be in adequate amounts.

The revenues and profitability of pharmaceutical companies can be
significantly affected by the efforts of governmental and third-party payors
to contain or reduce the cost of health care through various means. For
example, in the United States, pricing of prescription pharmaceutical products
has been impacted by the efforts of managed care organizations and other
third-party payors, and, in certain foreign markets, pricing of prescription
pharmaceutical products is subject to government control. Government and
third-party payors have also taken more aggressive steps to limit the
availability of new and often more costly therapeutics especially where they
believe that the incremental therapeutic benefit is not justified by the
additional cost. All of these trends are expected to continue in the future.

Various proposals have been put forth to reform the current health care
system in the United States. Additionally, several states have enacted
modifications to the current health care system to both improve access and
control costs. Such reform measures could adversely affect the amount of
reimbursement available from governmental agencies or third party insurers, or
could affect the ability to set prices for newly approved therapeutic
products. Similar proposals are being considered by governmental officials in
other significant pharmaceutical markets, including Europe.

The Company cannot predict if such reforms will be implemented or the effect
any such reforms might have on the Company's business, and no assurance can be
given that any such reforms will not have an adverse effect on the Company's
business. In particular, it is possible that any such reform could impact the
manner in which drugs or therapies are marketed and could include restrictions
on the ability of pharmaceutical and biotechnology companies to price drugs or
therapies, which in turn could impact the ability of biotechnology companies
such as the Company to obtain financing for the continued development of
potential products. Furthermore, any such reform could also impose limits on
the overall growth of health care spending, as well as limits on the growth of
Medicare and Medicaid spending, all of which could have an adverse effect on
the Company.

Possible Volatility of Stock Price. The market prices for securities of
emerging and biotechnology companies, including the Company, have historically
been highly volatile. Future events concerning the Company or its competitors,
including product testing results, technological innovations, new commercial
products, government regulations, proprietary rights, regulatory actions,
litigation and other matters, may have a significant impact on the market
price of the Common Stock.

Effect of Exercise of Options and Warrants, and Other Issuance of Shares. As
of September 30, 1997, the Company had outstanding options to purchase an
aggregate of 2,951,072 shares at prices ranging from $.002 per share to $16.75
per share, of which approximately 1,557,921 were exercisable as of such date.
Also

15
<PAGE>

outstanding at September 30, 1997 were warrants to purchase 229,739 shares of
the Company's Common Stock exercisable at $8 per share, a warrant to purchase
300,000 shares of the Company's Common Stock, exercisable at $7.50 per share,
and warrants to purchase an aggregate of 1,011,896 shares of the Company's
Common Stock, exercisable at $8.48 per share, subject to adjustment. Exercise
of options and warrants at prices below the market price of the Company's
Common Stock could adversely affect the price of the Company's Common Stock.
Additional dilution may result from the issuance of shares in connection with
collaborations or manufacturing arrangements, or in connection with other
financings. See "Risk Factors--Need for Substantial Additional Funds."

Dilution. Upon completion of this offering, purchasers of Common Stock in
this offering will incur immediate dilution of $8.60 in the per share net
tangible book value of their Common Stock from the assumed public offering
price of $10.75 per share.

16
<PAGE>

USE OF PROCEEDS

Assuming an offering price of $10.75 per share, the net proceeds to the
Company from the sale of 2,500,000 shares of Common Stock offered hereby will
be approximately $25,055,000 (or $28,854,000 if the Underwriters'
overallotment option is exercised in full). The Company intends to use the net
proceeds to fund both ongoing and planned research and development activities,
including continued manufacturing and development efforts for Cytolex,
activities associated with the Company's aminosterol and asthma genomics
programs, and working capital to be used for general corporate purposes.

Proceeds may also be used to acquire businesses, technologies or other
products that complement the business of the Company. The Company has no
current commitments or agreements for material transactions of this nature.

Pending the application of funds to such uses, the Company intends to invest
the net proceeds of this offering in U.S. government and other investment
grade securities. The Company intends to invest and use the net proceeds of
the offering so as not to be considered an investment company under the
Investment Company Act of 1940.
PRICE RANGE OF COMMON STOCK

The Common Stock of the Company is traded publicly on the Nasdaq National
Market under the symbol MAGN. The following table sets forth for the periods
indicated the high and low daily closing prices for the Common Stock:

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
1st Quarter................................................ $ 5.25 $ 2.50
2nd Quarter................................................ 6.88 3.38
3rd Quarter................................................ 11.25 6.50
4th Quarter................................................ 13.13 7.75
YEAR ENDED DECEMBER 31, 1996
1st Quarter................................................ 15.13 10.25
2nd Quarter................................................ 12.88 8.38
3rd Quarter................................................ 12.88 7.50
4th Quarter................................................ 12.13 7.38
YEAR ENDING DECEMBER 31, 1997
1st Quarter................................................ 10.50 7.88
2nd Quarter................................................ 8.44 6.63
3rd Quarter................................................ 11.81 7.25
4th Quarter (through October 16, 1997)..................... 12.13 10.63
</TABLE>

On October 16, 1997, the reported last sale price for the Common Stock as
reported on the Nasdaq National Market was $10.75 per share. As of October 16,
1997 there were 341 holders of record of the Common Stock.

DIVIDEND POLICY

The Company has not declared or paid any dividends on its capital stock. The
Company currently anticipates that it will retain all future earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.

17
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis and (ii) as adjusted to give effect
to the sale by the Company of the 2,500,000 shares of Common Stock offered
hereby at an assumed offering price offered hereby of $10.75 per share and the
application of the estimated proceeds therefrom. This table should be read in
conjunction with the Financial Statements of the Company and the Notes thereto
included in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Note payable--long-term.................................. $ 1,000 $ 1,000
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value; 9,211,000 shares
authorized;
no shares issued or outstanding....................... -- --
Common Stock, $.002 par value; 45,000,000 shares
authorized;
19,379,607 shares outstanding, actual; and 21,879,607
shares
outstanding, as adjusted(1)........................... 39 44
Additional paid-in capital............................. 125,209 150,259
Accumulated deficit.................................... (103,266) (103,266)
Unrealized gain on investments......................... 17 17
-------- --------
Total stockholders' equity........................... 21,999 47,054
-------- --------
Total capitalization................................ $ 22,999 $ 48,054
======== ========
</TABLE>
- ---------------------
(1) Excludes 4,492,707 shares issuable upon exercise of options and warrants
outstanding as of September 30, 1997. Of the options to purchase 2,951,072
shares of Common Stock that were outstanding as of September 30, 1997,
options to purchase 1,557,921 shares of Common Stock at a weighted average
exercise price of $3.90 per share were exercisable, and options to purchase
1,393,151 shares of Common Stock at a weighted average exercise price of
$8.72 per share were not exercisable. As of September 30, 1997, warrants to
purchase 1,541,635 shares of Common Stock at a weighted average exercise
price of $8.22 per share were outstanding and exercisable. The number of
shares issuable upon the exercise of certain of these warrants and the
exercise price for such shares are subject to adjustment under certain
circumstances. See "Description of Capital Stock."

DILUTION

The net tangible book value of the Company at September 30, 1997 was
approximately $21,999,000 or $1.14 per share. "Net tangible book value" per
share of Common Stock represents the total tangible assets of the Company
reduced by the total liabilities of the Company and divided by the number of
shares of Common Stock outstanding. Assuming completion of this offering at an
offering price of $10.75 per share, the adjusted net tangible book value of the
Company as of September 30, 1997 would have been approximately $47,054,000 or
$2.15 per share. The increase in net tangible book value of $1.01 per share
would be due solely to the purchase of the shares in this offering. Purchasers
in this offering will immediately incur dilution of $8.60 per share assuming an
offering price of $10.75 per share. "Dilution" is determined by subtracting net
tangible book value per share after the offering from the offering price.

18
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 are derived
from the Company's financial statements which have been audited by Richard A.
Eisner & Company, LLP, independent auditors, which are included and
incorporated by reference in this Prospectus. The selected financial data set
forth as of December 31, 1994, 1993 and 1992, and for the years ended 1993 and
1992 are derived from audited financial statements not included or
incorporated by reference in this Prospectus. The unaudited financial data as
of September 30, 1997 and for the nine months ended September 30, 1997 and
1996 have been prepared on a basis consistent with the audited financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial condition and results of operations for the periods presented.
The results for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Prospectus, and the financial statements and related notes
included in the Company's Reports on Form 10-K and Form 10-Q which are
incorporated by reference in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1996 1995 1994 1993 1992 1997 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Contract and
government grant... $ 150 $ 2,056 $ 85 $ 273 $ 140 $10,088 $ 112
Related party
contract........... -- 280 326 319 260 -- --
-------- -------- -------- -------- -------- -------- --------
150 2,336 411 592 400 10,088 112
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Research and
development........ 22,326 18,160 11,258 11,455 6,626 16,864 17,870
General and
administrative..... 3,488 3,137 3,468 2,630 2,640 2,475 2,378
Charge for stock
issuance relating
to royalty buyout.. 7,080 -- -- -- -- -- 7,080
-------- -------- -------- -------- -------- -------- --------
32,894 21,297 14,726 14,085 9,266 19,339 27,328
-------- -------- -------- -------- -------- -------- --------
Loss from operations.. (32,744) (18,961) (14,315) (13,493) (8,866) (9,251) (27,216)
Interest income....... 2,172 1,778 1,207 846 494 1,301 1,648
Interest expense...... (48) (32) (48) (64) (87) (73) (18)
-------- -------- -------- -------- -------- -------- --------
Net loss.............. $(30,620) $(17,215) $(13,156) $(12,711) $ (8,459) $ (8,023) $(25,586)
======== ======== ======== ======== ======== ======== ========
Net loss per share.... $ (1.71) $ (1.17) $ (0.99) $ (1.14) $ (1.20) $ (0.41) $ (1.47)
======== ======== ======== ======== ======== ======== ========
Weighted average
shares outstanding... 17,938 14,696 13,301 11,108 7,076 19,366 17,459
<CAPTION>
DECEMBER 31,
------------------------------------------------ SEPTEMBER 30,
1996 1995 1994 1993 1992 1997
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments.. $ 33,340 $ 43,666 $ 25,921 $ 38,303 $ 8,915 $ 25,129
Working capital....... 28,276 30,429 21,750 30,621 8,536 20,029
Total assets.......... 36,376 45,727 28,050 40,460 11,162 28,640
Long-term liabili-
ties................. 915 304 460 299 471 1,104
Total liabilities..... 6,433 4,534 4,137 3,451 982 6,641
Accumulated deficit... (95,243) (64,623) (47,408) (34,252) (21,541) (103,266)
Stockholders' equity.. 29,943 41,193 23,913 37,009 10,180 21,999
</TABLE>

19
<PAGE>

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

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains
certain forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," as well as those
discussed elsewhere herein.

GENERAL

The Company is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company has completed two pivotal Phase III
clinical trials for its lead product development candidate, Cytolex, a topical
cream antibiotic intended for the treatment of infection in diabetic foot
ulcers. The Company is also conducting preclinical research on an aminosterol
class of compounds. One such compound, squalamine, is being evaluated in
cancer. The Company's newest research efforts are in the genomics of asthma.

Since commencing operations in 1988, the Company has not generated any sales
revenue. The Company has funded operations primarily from the proceeds of
public and private placements of securities. The Company has incurred net
losses in each year since its inception, and expects to incur substantial
additional losses for the next several years. The Company expects that losses
will fluctuate from quarter to quarter, and that such fluctuations may be
substantial. At September 30, 1997, the Company's accumulated deficit was
approximately $103,266,000.

REVENUES

The Company has received no revenue from product sales. Revenues recorded to
date have consisted principally of revenues recognized under collaborations
with corporate partners, and pursuant to Small Business Innovation Research
("SBIR") grants. Contract revenues of $150,000 in 1996 consist of payments
under a collaborative arrangement with Abbott in the nutritional field. The
Company recorded revenues of $1,900,000 in 1995 relating to the execution of an
Agreement in Principle with Fisons plc in September 1995, and the termination
of this arrangement in November 1995. Related party contract revenue consisted
of funding received from Colgate-Palmolive Company pursuant to an oral health
care collaboration which concluded in January 1996. Government grant revenues
resulted from a $500,000 SBIR grant to develop a treatment for certain
gastrointestinal ailments, which ended during 1994.

For the nine month period ended September 30, 1997, the Company recorded
revenues of $10,000,000 reflecting the receipt of payments under the
development, supply and distribution agreement entered into in February, 1997
with SB for Cytolex. The Company also recorded revenues of $88,000 and $112,000
in the nine month periods ended September 30, 1997 and 1996, respectively, in
connection with the collaborative arrangement with Abbott in the nutritional
field.

The Company does not expect to realize additional milestone revenues from its
arrangement with SB until FDA approval of Cytolex. However, there can be no
assurance that Cytolex will be approved by the FDA. The Company has no other
currently existing collaborations which will result in the realization of
research and development revenues.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased on an annual basis from 1994
through 1996 principally as a result of increases in clinical and preclinical
testing, manufacturing development expenses, personnel costs,

20
<PAGE>

and laboratory supplies. In particular, these increases have been related to
increasing costs associated with the Company's lead product candidate, Cytolex.
Expenses have also increased due to preclinical activities associated with the
Company's other research and development programs, including its aminosterol
and asthma genomics programs.

Research and development expenses decreased in the nine month period ended
September 30, 1997 as compared to the same period a year ago, due principally
to the completion of clinical testing of Cytolex in early 1997, partially
offset by an increase in preclinical development activities.

Significant development work is necessary to scale-up the manufacturing
process for the Company's products to those levels necessary for a profitable
commercial product. The Company contracts with third parties for these
manufacturing development activities, and for the procurement of material for
clinical and preclinical testing, and such expenses, including those for
Cytolex, amounted to $9,557,000, $7,652,000 and $3,620,000 in 1996, 1995 and
1994, respectively, and $6,720,000 and $6,470,000 for the nine month periods
ended September 30, 1997 and 1996, respectively.

The Company is working with Abbott with regard to the manufacture of bulk
drug substance for Cytolex. The Company's current arrangement with Abbott
provides for the development by Abbott of a solution phase chemical process to
manufacture bulk drug substance for Cytolex on a commercial scale, for the
production of bulk drug substance for Cytolex for development purposes, and for
Abbott to perform those activities necessary to submit a Drug Master File to
the FDA in support of any filing for marketing approval of Cytolex. This
arrangement provides for cash payments by the Company to Abbott through early
1998 aggregating approximately $17,180,000, as well as the issuance by the
Company to Abbott of up to 500,000 shares of its Common Stock and the
obligation to pay a royalty on future sales of Cytolex. Through September 30,
1997, the Company has paid Abbott approximately $14,130,000 under this
arrangement. Stock issuances by the Company to Abbott will result in a charge
to earnings, representing the fair value of the shares when issued. The Company
issued 125,000 shares of Common Stock to Abbott in October 1995, resulting in a
charge to earnings of $1,250,000 in 1995. Future stock issuances are related to
the achievement by Abbott of contractual performance milestones, which could
begin to occur in 1997. See "Risk Factors--Manufacturing Uncertainties;
Dependence on Third Parties."

The Company contracts with third parties to conduct its clinical trial
programs. In 1994, the Company initiated a pivotal clinical trial of Cytolex
for the treatment of infection in diabetic foot ulcers, and a second such trial
was initiated in August 1995. Such clinical trial costs amounted to $4,005,000,
$5,172,000 and $1,570,000 in 1996, 1995 and 1994, respectively, and $651,000
and $4,005,000 in the nine month periods ended September 30, 1997 and 1996,
respectively.

In September 1996, the Company announced results of its initial pivotal trial
of Cytolex for the treatment of infection in diabetic foot ulcers, and in March
1997 the Company reported results from a second such pivotal trial. The
clinical trials conducted for Cytolex yielded substantial data. Such data
includes information relating to the primary endpoint for the studies (clinical
cure or improvement of infection), as well as additional data relating to
microbiological results, patient subgroup analysis, wound healing and side
effects. Although the Company believes the two pivotal trials of Cytolex
yielded successful results, there can be no assurance that the FDA will concur
with the Company's analysis in this regard.

There can be no assurance that Cytolex will receive FDA approval on a timely
basis, if at all. The failure of the Company to obtain FDA approval for
Cytolex, any significant delay in obtaining such approval, or the imposition of
highly restrictive conditions on such approval, would have a material adverse
effect on the Company.

The level of research and development expenses in future periods will depend
upon the success of the Cytolex development program, and the progress of other
research programs at the Company. Expenses relating to the development of
Cytolex are expected to continue to be significant in future periods
principally

21
<PAGE>

as a result of the Company's ongoing manufacturing development program,
partially offset by a decline in clinical trial costs related to Cytolex. The
Company also expects, in future periods, increased development expenses
relating to its aminosterol and asthma genomics programs.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses have consisted principally of personnel
costs and professional fees, and have fluctuated year to year from 1994 through
1996 due largely to changes in professional fees expense. General and
administrative expenses increased in the nine month period ended September 30,
1997 due to increases in professional fees expense. The Company expects general
and administrative expenses to increase in future periods as the Company's
level of activities increases.

OTHER EXPENSES/INCOME

The Company recorded in 1996 a non-cash charge to earnings of $7,080,000
representing the fair value of 550,000 shares of Common Stock issued by the
Company in a buyout of royalties which the Company would otherwise have owed on
any sales of Cytolex.

The increases in interest income from 1994 through 1996 are due principally
to increasing investment balances and higher prevailing interest rates. The
decrease in interest income in the nine month period ended September 30, 1997
as compared to the same period a year ago is principally due to decreased
investment balances.

Interest expense consists primarily of interest under the Company's credit
facilities, and the interest component of capital equipment leases. In late
1996 and early 1997, the Company borrowed $1,500,000 under its credit
facilities, resulting in increased interest expense in the nine month period
ended September 30, 1997 as compared to the same period a year ago.

NET LOSS

The Company expects to conduct, over the next several years, significant
research, preclinical development, clinical testing and manufacturing
development activities which, together with projected general and
administrative expenses, are expected to result in continued losses,
particularly due to the extended time period before the Company expects to
commercialize any products.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and investments were approximately $25,129,000 at September 30, 1997 as
compared to $33,340,000 at December 31, 1996. The primary use of cash was to
finance the Company's operations. Cash used in operating activities was
$7,487,000 and $15,115,000 for the nine months ended September 30, 1997 and
1996, respectively, and $21,831,000, $14,953,000 and $11,741,000 in 1996, 1995
and 1994, respectively.

Since inception, the Company has funded its operations primarily from the
proceeds of public and private placements of securities, including $17,080,000
raised from its initial public offering in December 1991, $21,469,000 raised
from a public offering completed in February 1993, $18,023,000 raised from a
private placement completed in October 1993, $32,627,000 raised from a public
offering completed in August 1995, and $11,932,000 raised from a private
placement completed in August 1996, as well as contract and grant revenues,
interest income and lease and debt financing.

Capital expenditures were $1,206,000 in the nine months ended September 30,
1997, principally reflecting equipment purchases. Capital expenditures
increased to $1,655,000 in 1996, principally reflecting an expansion of the
Company's leased facility.

Accounts payable and accrued expenses decreased to $4,973,000 at September
30, 1997 as compared to $5,145,000 at December 31, 1996, due principally to
payments made under certain manufacturing

22
<PAGE>

development arrangements, partially offset by increases in accrued regulatory
costs and compensation costs. The Company expects a decrease in accounts
payable and accrued expenses in future periods as certain of these liabilities
are satisfied.

In February 1997, the Company entered into a development, supply and
distribution agreement (the "Agreement") in North America with SB for Cytolex.
SB has paid the Company $10.0 million under this Agreement, and may make
additional payments to Magainin of up to $22.5 million upon the occurrence of
certain product milestones. SB will also fund a percentage of any development
expenses for any additional indications for Cytolex. Upon the commencement of
commercial sales by SB, Magainin will be responsible for the supply of Cytolex
and SB will be responsible for the marketing and sales of Cytolex. Magainin
will receive certain percentages of SB sales revenues under agreed upon terms.
The Agreement also gives SB the right to negotiate for rights to another
Magainin product development candidate, under certain terms and conditions.

The Company anticipates the net proceeds of this offering, together with its
available cash, should be sufficient to finance its operations through 1999.
However, the Company's capital requirements may change due to numerous factors,
including the progress of the Company's research and development programs,
regulatory approvals, competitive and technological advances, the commercial
viability of the Company's products, the terms of collaborative arrangements,
if any, entered into by the Company, and other factors, many of which are
beyond the Company's control. The Company will require substantial additional
funds to continue its research and development programs and to commercialize
potential products. The Company intends to seek such funds through a
combination of future offerings of securities and collaborative arrangements
with third parties, and regularly explores alternatives in this regard. There
can be no assurance that future funding will be available to the Company or, if
available, will be obtainable on terms favorable to the Company. The receipt of
funding, if any, from any corporate partners, including SB, will depend largely
on the progress of research and development programs. If the Company does not
enter into appropriate collaborations, receive additional funds from SB under
its current agreement or raise sufficient funds from the periodic sale of
securities, the Company will be required to delay or eliminate expenditures for
potential products, including Cytolex, or to enter into collaborations with
third parties to commercialize potential products or technologies that the
Company would otherwise seek to develop itself, or seek other arrangements. See
"Risk Factors--Need for Substantial Additional Funds."

The Company's capital expenditure requirements will depend upon numerous
factors, including the success of Cytolex and the progress of the Company's
other research and development programs, the time and cost required to obtain
regulatory approvals, the ability of the Company to enter into additional
collaborative arrangements, the demand for products based on the Company's
technology, if and when such products are approved, and possible acquisitions
of products, technologies and companies. The Company had no significant capital
commitments as of September 30, 1997.

The Company does not have the resources, facilities or capabilities to
manufacture any of its proposed products. The Company has no current plans to
establish a manufacturing facility. The Company expects that it will be
dependent to a significant extent on contract manufacturers for commercial
scale manufacturing of its proposed products in accordance with regulatory
standards. The Company's dependence on third parties for manufacturing may
adversely affect operating results as well as the Company's ability to develop
and deliver products on a timely and competitive basis. Production of peptides
(such as Cytolex and other magainins) is expensive relative to production of
traditional antibiotics. Additionally, there are a limited number of companies
which are currently able to produce bulk peptides on the scale which the
Company expects to require to commercialize Cytolex. There can be no assurance
that qualified outside contractors will be available to manufacture materials
for the Company, or do so at costs which are affordable by the Company.

23
<PAGE>

for Cytolex. Early stage discussions as to supply cost have occurred with
Abbott, and, based on these discussions, the Company believes that further
progress in scale-up and manufacturing development efforts, as well as
increases in projected volumes, will be required to enable the Company to
manufacture and sell Cytolex on a profitable basis. This may require
substantial additional funds. No assurance can be given that a cost-effective
manufacturing process can be developed, or that any such process would be
approved by the FDA, or that the Company, Abbott, or others will be able to
manufacture Cytolex on a commercially viable basis.

The Company's business is subject to a number of substantial risks and
uncertainties. In addition to the information set forth above, see the
information set forth under "Risk Factors."

24
<PAGE>

BUSINESS

THE COMPANY

Magainin is a biopharmaceutical company engaged in the development of
medicines for serious diseases. The Company's development efforts are focused
on anti-infectives, oncology, and pulmonary and allergic disorders.

Magainin's research and drug development efforts are focused on two
technology platforms:

Magainin Peptides--Cytolex(TM)

The Company's most advanced class of compounds under development are
magainin peptides. Discovered in the skin of the African clawed frog,
magainins have demonstrated broad activity against a variety of pathogens in
preclinical studies. These molecules act by puncturing the membrane of the
pathogen cell, resulting in the death of the pathogen.

In February 1997, the Company and SB entered into a development, supply and
distribution agreement pursuant to which SB will market and sell Cytolex in
North America. Under this agreement, SB has paid $10 million to the Company,
and may make additional payments of up to $22.5 million upon the occurrence of
certain product milestones. SB will also fund a majority of development
expenses for any additional indications for Cytolex.

Aminosterols--Squalamine

Squalamine is the lead product development candidate in the Company's
aminosterol program. Squalamine was discovered in the body tissues of the
dogfish shark. The shark was initially examined because

25
<PAGE>

of its known resistance to infection and cancer. Since the discovery of
squalamine, the Company has discovered several other aminosterol compounds in
the shark. In preclinical testing conducted to date, certain of these
compounds have demonstrated an ability to control cell growth, along with
other pharmacological properties. These properties may have application in the
treatment of disease indications characterized by cell proliferation, such as
cancer.

The Company's initial disease focus for squalamine is solid tumors. The
formation of new blood vessels, or angiogenesis, is believed to be a critical
factor in tumor growth. Squalamine may be of benefit in the treatment of a
number of solid tumors by inhibition of new blood vessel growth required for
tumor nourishment.

In August 1997, the Company submitted an IND, which is now effective, to
begin Phase I clinical testing of squalamine in patients with advanced
malignancy.

Asthma Genomics

In 1996, the Company initiated a research program in the genomics of asthma.
These efforts led to the identification of AAF1, a gene which varies in DNA
structure and function in asthmatic and allergic humans and animals. The
Company maintains a comprehensive research and development program to identify
additional genes in the AAF1 biologic pathway, which genes are believed to be
important in mediating the allergic responses controlled by AAF1. AAF2 has
been discovered in humans as a key second gene candidate in the AAF1 pathway,
and other genes have also been identified by the Company. The Company
continues to investigate the role of such genes in the allergic inflammatory
response.

BACKGROUND

Overview

Magainin's biopharmaceutical research and development efforts are focused on
two technology platforms. In host defense drug discovery, the Company seeks to
isolate and develop therapeutically active compounds from various organisms
for the treatment of human diseases. The Company's second platform technology
is a gene-based target and drug discovery program in asthma. The Company
employs a broad range of genomics techniques to identify genes associated with
the pathogenesis of asthma, with the objective of utilizing the optimal
biologic gene targets in the development of novel therapeutics for asthma and
allergy.

Host Defense System

The Company was formed to engage in the research, development and
commercialization of compounds derived from the host defense systems of
animals. The host defense system is the complex of natural processes and
mechanisms used by the body to protect itself against infection and certain
cancers. This system comprises physical barriers to infection, such as skin
and mucosal membranes and fluids, as well as more complex chemical and
biological components, such as the immune system. The Company believes that
certain classes of naturally occurring peptides, such as magainins, and
certain small molecules, such as aminosterols, both described below, are used
by the host defense system to provide a first line of defense against
infection and may have activity against certain cancers.

The Company's approach to identifying pharmaceutically active compounds in
the host defense systems of animals involves the extraction of compounds from
animal tissues. The extracts are assayed for activity against selected
pathogens, such as bacteria, fungi, viruses and certain cancers. The Company
then purifies the active compounds and determines the precise chemical
structure of the purified molecule. Once naturally occurring molecules have
been isolated, the Company analyzes the relationship between the molecular
structure of the compound and its biological activity. In general, this
requires identification of the structures

26
<PAGE>

in the compound which are believed to have therapeutic effects and an analysis
of how the compounds could be modified to improve the desired therapeutic
effects. The Company then utilizes its combinatorial chemistry capabilities to
modify the molecules to alter biological activity or increase stability.

Magainins

The Company's lead product development candidate, Cytolex, is a synthetic
magainin peptide. The first magainins were isolated from the African frog
Xenopus laevis by Dr. Michael A. Zasloff (presently Vice Chairman and
Executive Vice President of the Company, and President of the Magainin
Research Institute, a division of the Company) while conducting genetic and
molecular biological research at the National Institutes of Health ("NIH") in
1987. In connection with his research, Dr. Zasloff was performing surgery on
African clawed frogs in his laboratory. After suturing the frogs and returning
them to their aquarium tank, he noticed that the incisions healed without
infection, inflammation or notable scarring, despite being exposed to the
bacteria-filled aquarium water. Dr. Zasloff deduced that the frogs produced a
substance that protected them against infection. Eventually, he isolated, from
the skin, two related peptides, which he called magainins and which were later
shown to kill a variety of pathogens, including bacteria, amoeba, fungi and
parasites.

Magainins are peptides. A peptide is a chain of molecules, known as amino
acids, that are considered to be one of the basic building blocks of the human
body. Chains of two to 50 amino acids are generally referred to as peptides,
while longer chains are referred to as proteins. Magainins are shorter-chain
peptides, which can be synthesized chemically as well as by recombinant
technology. Chemical synthesis permits greater flexibility in manipulating the
sequence of amino acids, enabling the Company to create and test derivative
compounds more rapidly and efficiently than using recombinant technology. The
Company has modified natural peptides by rearranging the order and combination
of amino acids and by substituting and deleting additional amino acids to
produce magainins having a broader spectrum of therapeutic activity and
improved potency.

An increasing problem in the antibiotic field is resistance, the process by
which antibiotics lose their effectiveness over time as bacteria, through
mutation, develop the means to produce enzymes capable of diminishing the
antibiotic utility. To date, the Company has not noted the development of
resistance to magainins. The Company believes this is due to the means by
which magainins break down pathogen cells and kill pathogens, which mechanism
of action differs from traditional antibiotics. In the presence of a cell
membrane rich in acidic phospholipids and poor in cholesterol, such as
bacterial membranes, magainins twist into two-sided, spiral shaped molecules
(helices), with one side soluble in the fat-like substance that comprises cell
membranes and the other side soluble in water. Individual magainin peptides
then aggregate and line up to form a channel in the membrane of a pathogen.
Once formed, this aggregate punctures the cell membrane, breaks down the
integrity of the cell and kills the pathogen.

Aminosterols and Angiogenesis

Squalamine is the lead product development candidate in the Company's
aminosterol program. Squalamine was discovered in the body tissues of the
dogfish shark. The shark was initially examined because of its known
resistance to infection and cancer. The chemical structure of squalamine
uniquely combines a steroid and a polyamine, two classes of systemic agents
that are generally well-tolerated in humans. Since 1992, the Company has
discovered several other aminosterol compounds in the shark. In preclinical
testing, certain of these compounds have demonstrated an ability to control
cell growth, along with other pharmacological properties. These properties may
have application in the treatment of a number of disease indications
characterized by cell proliferation, including cancer.

Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The
basic network of the vasculature is developed through angiogenesis, a
fundamental process by which new blood vessels are formed. The primary
angiogenic period in humans takes place during the first three months of
embryonic development. During this period, cytokines

27
<PAGE>

and growth factors are activated to stimulate the growth of new blood vessels.
Once the general network of the blood vessels is complete, these angiogenic
stimulators are balanced and stabilized by the production of inhibitory
factors. Although angiogenesis occurs in human embryonic development, wound
healing and in certain reproductive processes in women, angiogenesis is also
associated with several diseases, including cancer, as well as diabetic
retinopathy and macular degeneration, both of which are major causes of
blindness.

The term cancer includes many different types of uncontrolled cellular
growth. Clusters of cancer cells, referred to as tumors, may invade and
destroy surrounding organs, impair physiological function and lead to death.
In order to survive, cancer cells require oxygen and nutrients which they
receive from the body's blood supply. In order to access this blood supply,
cancer cells initiate a biochemical mechanism that stimulates angiogenesis,
which provides the blood supply that nourishes the tumor. As cancer cells grow
and metastasize (spread from primary sites to secondary sites) they require
continuous angiogenesis. Antiangiogenic substances are intended to inhibit the
growth of new blood vessels and may therefore be effective in treating certain
cancers, with potentially less serious and fewer adverse side effects than
traditional therapies.

The aminosterol compounds are believed by the Company to have a unique
mechanism of action whereby they inhibit cell proliferation at an early stage
in cell activation by blocking the function of certain ion transporters in the
cell membrane. These transporters act as pumps on the surface of cells, and
control cell function through regulation of intracellular pH, cell metabolism
and cell volume. In the case of squalamine, there is a blockade of function
for a specific sodium proton exchanger in the cell membrane of certain
endothelial cells which leads to a cessation of endothelial cell
proliferation, and as a consequence, capillary formation. Thus, squalamine is
believed by the Company to limit growth promoting signals from several
different growth stimulatory factors.

Genomics and Drug Discovery

Advances in genetics and molecular biology have significantly enhanced the
ability of scientists to clone and sequence genes and identify the causes of
disease at the molecular level. The examination of the genetic influences on
human disease is called genomics, or the study of the genome. Functional
genomics refers to the determination of the manner in which disease genes
specifically impact the disease process. In contrast to traditional drug
discovery and development, a genetics approach commences by identifying those
genes that are responsible for the initiation or progression of disease.
Analysis of DNA (deoxyribonucleic acid) helps characterize the specific role
of genes in the disease process. The information stored in the DNA of a gene
is a set of instructions to living cells of the organism. These instructions
direct the cells to synthesize specific proteins such as hormones or enzymes
that perform the basic biochemical and physiological functions of the cells.
Disease may occur when a defect (mutation) occurs in a gene or genes,
resulting in incorrect instructions being sent to cells, and disrupting the
normal balance or function of these essential proteins. The ability to detect
such a mutation and to understand how the disruption of normal protein
function contributes to the initiation and progression of the resultant
disease are potentially valuable aids to pharmaceutical discovery and
development. To identify an appropriate molecular target for therapeutic
intervention, it may also be necessary to characterize fully the biochemical
pathway in which the disease gene functions.

The Company employs a comprehensive functional genomics approach to
understand the genetic basis of disease and to develop potential drug leads.
The key elements of the Company's asthma genomics program include:

Gene Identification--To link a disease with specific genes, DNA and
relevant clinical information is collected from families and isolated
individuals afflicted with the disease. The DNA from each individual of the
families is tested with DNA mapping markers, which when analyzed give a
chromosomal location for a disease gene. The process is then extended to
more detailed DNA mapping studies of the chromosomal area, and the
identification of genes located in the area that may be associated with the
disease. These genes are screened for mutations (defects) using DNA
sequencing and other techniques and then correlated based on inherited
disease patterns in families and isolated discrete populations.

28
<PAGE>

Parallel studies of gene mapping and mutation analyses of animal models of
a disease process are often possible, and provide complimentary
information. Genetic defects related to disease susceptibility and
progression are thus identified.

Target Validation--Genes identified as potential targets for
pharmaceutical intervention undergo an integrated analysis using advanced
in vitro and in vivo bench techniques to elucidate mechanisms of disease
initiation and progression. This process, known as target validation,
provides further evidence of the relevance of the identified genes to
particular portions of the disease process, and guides the selection of
strategies for pharmaceutical intervention. The Company uses an integrated
approach of biochemistry, genetics, cellular and molecular biology, and
animal models of the disease in the target validation process.

Pathway Elucidation--To identify an appropriate target for therapeutic
intervention, it is highly desirable to know how the disease genes are
turned on or off (gene regulation pathways) and how the gene functions
within the biochemical processes of cells (signal transduction pathways).
The discovery process for novel regulatory and signaling proteins involves
a combination of biochemical, molecular, biological and genetic approaches.

Target Specific Assay Development--Targets identified as appropriate for
therapeutic intervention are placed in biochemical and cell based assay
systems that closely mimic their native environment. In a biochemical
assay, the components and mechanism of action of the target proteins are
known. Since biochemical assays are usually amenable to high-throughput
screening, results can be obtained rapidly and reproduced consistently. As
a complimentary approach, cell based assays extend the biochemical
screening capabilities by allowing analysis of sample activity in a
physiologically relevant environment while similarly permitting the
assessment of cytotoxicity and cell permeability. Cell based screens
provide multiple sites of therapeutic intervention to be assessed at one
time, such as the receptors, regulatory proteins, and signaling proteins
involved in a pathway.

Through these processes, the Company seeks to identify appropriate targets
for pharmaceutical intervention that aim to control the root cause of human
disease. The Company believes that pharmaceuticals developed for use against
these specific targets have the potential for greater effectiveness and fewer
side-effects than pharmaceuticals developed through more traditional
processes.

PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS

Cytolex--Infected Diabetic Foot Ulcers

The Company's most advanced development compound is Cytolex, a topical cream
antibiotic. Cytolex is a 22 amino acid magainin peptide, formulated as a 1%
topical cream. In vitro studies of Cytolex have shown that it is a broad
spectrum anti-infective, effective against gram negative, gram positive and
fungal organisms. The Company's initial intended use for Cytolex is for the
treatment of infection in diabetic foot ulcers.

Infected foot ulcers in diabetic patients are a serious complication. The
often compromised vasculature and nervous systems in the diabetic patient can
create conditions conducive to foot ulceration and consequent infection. These
infections can lead to osteomyelitis (bone infection) and limb amputation.
Patients with infected ulcers are typically treated with oral antibiotics and
no topical antibiotics are currently approved specifically for the treatment
of infection in diabetic foot ulcers.

The Company believes that topical antibiotics may offer advantages over oral
antibiotics in the treatment of infection in diabetic foot ulcers. Increasing
utilization of oral antibiotics has exacerbated the development of antibiotic
resistance, and resistant organisms are expected to continue to develop.
Additionally, there can be side effects associated with oral antibiotics,
including gastrointestinal distress, headaches and insomnia. The Company
believes that a topical treatment for diabetic foot ulcers may also improve
patient compliance with their medication and associated wound care.

In September 1996, the Company announced results of its initial, pivotal
Phase III clinical trial of Cytolex, and in March 1997, the Company reported
results from a second such pivotal trial. These trials were

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designed as equivalence studies with the goal of demonstrating that Cytolex
topical cream is as effective as orally administered ofloxacin, a quinolone
antibiotic, indicated for the treatment of infection, including skin and soft
tissue infections. The Company's analysis of the data from the studies showed
statistical equivalence between Cytolex and ofloxacin, with respect to the
primary endpoint of clinical response of infection at day 10 of treatment, and
at subsequent time points through day 28, and at follow-up. Clinical response
rates for both Cytolex and ofloxacin were between 84% and 89% and between 87%
and 93%, at day 10 of treatment, and at follow-up, respectively. As a secondary
endpoint in the trials, Cytolex and ofloxacin were comparable with respect to
overall assessments of microbiological improvement. The two studies together
enrolled 926 patients. The Company intends to submit an NDA with the FDA based
on the results of these clinical trials; however, there can be no assurance
that Cytolex will be approved by the FDA. See "Risk Factors -- Risks Associated
with Clinical Testing and FDA Approval of Cytolex."

Additional analyses were done on the eradication rate for each individual
species of pathogen. Results varied from species to species, and generally
favored ofloxacin. Although eradication rates for individual organisms
differed, positive clinical responses were commonly observed even when total
eradication did not occur.

Data was also collected on wound healing as part of the studies. At the last
patient visit date, approximately six weeks after treatment was initiated, 18%
to 30% of wounds were resolved. The results indicated the rate and extent of
wound resolution was not statistically different in the two treatment groups.
The Company plans to evaluate additional studies relating to the effect of
Cytolex on wound healing.

Squalamine--Solid Tumors

Squalamine is the Company's lead product development candidate in its
aminosterol program. The Company's initial disease focus for squalamine is
solid tumors. In August 1997, the Company filed an IND with the FDA to begin
Phase I clinical testing of squalamine in patients with advanced malignancy.

Cancer is the second most common cause of death in the Western world,
exceeded only by coronary heart disease. The three most prevalent methods of
treating patients with cancer are surgery, radiation therapy and chemotherapy.
A cancer patient often receives a combination of these treatment methods.
Surgery and radiation therapy are particularly effective in patients in which
the disease has not yet metastasized to other tissue or organs. Chemotherapy is
the principal treatment for tumors that have metastasized. Chemotherapy
involves the administration of drugs designed to kill cancer cells ("cytotoxic
drugs") or the administration of hormone analogues to either reduce the
production of, or block the action of, certain hormones, such as estrogens and
androgens, which affect the growth of tumors. Because chemotherapeutic agents
generally attack rapidly dividing cells indiscriminately, damaging normal as
well as cancerous cells, use of such agents often has serious adverse effects.
Additionally, resistance to chemotherapy inevitably occurs over time.

Advances in the understanding of the genesis and development of cancer have
begun to yield new approaches to cancer treatment. One such approach is the
control of angiogenesis, or new blood vessel growth. Angiogenesis is a key
stage in the development of tumor malignancy, and its inhibition should
contribute to the tumor becoming or remaining dormant.

Squalamine may be of benefit in the treatment of solid tumors by inhibiting
new blood vessel growth required for tumor nourishment. Squalamine has
exhibited antiangiogenic properties in a number of in vitro and in vivo assays,
and in animal models. Squalamine is believed to inhibit the growth of primitive
or embryonic capillaries associated with tumor growth. Squalamine has the
potential to be used in combination

30
<PAGE>

with a number of cytotoxic drugs in the treatment of solid tumors, and the
Company has observed synergies with certain such cytotoxic therapies in animal
testing.

Asthma Genomics Program

Asthma is characterized clinically by wheezing and shortness of breath due to
reversible bronchospasm. It is a chronic, disabling disorder that appears to be
increasing in prevalence and severity. The complex pathophysiology of asthma is
under intensive scrutiny; however, its precise causes are not well understood.
A number of studies suggest a genetic component to asthma, but family studies
have been difficult to interpret due to other influences, including allergens
and pollutants. Allergic diseases, including allergic rhinitis, are often
present in individuals with asthma, but are also important disease entities by
themselves. The Company believes the genetic susceptibility factors for asthma
and allergy will be, at least in part, related to one another. Current
treatments for asthma and allergy are limited to controlling inflammation or
treating airway constriction through use of bronchodilators.

In 1996, Magainin initiated a research program in the genomics of asthma.
These efforts led to the identification of AAF1, a gene which varies in DNA
structure and function in asthmatic and allergic humans and animals. The
Company maintains a comprehensive research and development program to identify
additional genes in the AAF1 biologic pathway, which other genes are believed
to be important in mediating the allergic responses controlled by AAF1. AAF2
has been discovered in humans as a key second gene candidate in the AAF1
pathway, and other genes have also been identified by the Company. The Company
has filed patent applications and has licensed intellectual property relating
to AAF1, AAF2 and certain other genes in the treatment of asthma and allergy.
The Company continues to investigate the role of these genes in the allergic
inflammatory response, with the objective of utilizing the optimal biologic
gene targets in the development of novel therapeutics for asthma and allergy.

Other Research Programs

The Company is evaluating additional magainin peptides in a number of disease
indications. One such program is directed toward the treatment of pseudomonas
infections in cystic fibrosis patients. In this program, early stage efforts
include compound formulation activities necessary to deliver the peptide in an
aerosolized manner appropriate for inhalation therapy. Additional magainin
peptides are under evaluation in the treatment of other infections.

The Company is also pursuing other research programs related to squalamine.
Due to the unique mechanism of action of squalamine, it may also have
application in a number of disease conditions characterized by abnormal blood
vessel growth, including rheumatoid arthritis, diabetic retinopathy, psoriasis
and age related macular degeneration of the eye. Additionally, the Company has
early research efforts directed toward the reformulation of squalamine as an
oral agent. As compared to the current intravenous formulation, an oral
formulation of squalamine may be of benefit in the treatment of chronic disease
conditions.

The Company has discovered a number of other aminosterol compounds in the
shark, each differing from squalamine in chemical structure. Each is believed
to interact with a different, specific receptor, and, as a consequence, alter
the intracellular metabolism in a manner that disturbs the target cell response
to certain growth factors, hormones and other signals. The Company is
evaluating the role of aminosterols in altering metabolism as it affects
obesity. Other therapeutic opportunities for these compounds may include
various malignancies, inflammatory diseases, and viral infections.

In addition, the Company has a number of other early stage research programs.
In one such program, the Company is engaged in research efforts on defensins.
Defensins are compounds found in animals and man which have host defense
properties similar to magainins and aminosterols. The Company believes that the
longer-term evolution of the host defense field may lie in the discovery of
compounds that regulate endogenous defensin expression, rather than direct
application of the defensin molecules themselves.

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<PAGE>

The Company conducts the majority of its research and development activities
through its own staff and facilities, including the Magainin Research
Institute, an internal division of the Company focused on host defense
research, and the Magainin Institute of Molecular Medicine, an internal
division of the Company focused on the genomics of asthma. The Company also
employs contract research organizations, independent consultants and other
research professionals to aid in its research and development activities, and
maintains a Scientific Advisory Board to help guide its efforts.

COLLABORATIVE ARRANGEMENTS

Development and Marketing Collaborations. Collaborations may allow the
Company to leverage its own scientific and financial resources and gain access
to markets and technologies that would not otherwise be available to the
Company. In the long term, development and marketing arrangements with
established companies in the markets in which potential products will compete
may allow the Company's products easier access to their intended market and may
accordingly conserve Company resources. The Company expects that it will enter
into development and marketing arrangements for most of the products it may
develop. From time to time, the Company holds discussions with various
potential partners. See "Risk Factors - Dependence on Sales and Marketing
Partners; Marketing Uncertainties."

Research and License Agreements. The Company has rights under license
agreements to several patents and patent applications under which the Company
expects to owe royalties on sales of any products which are covered by issued
patent claims. Additionally, certain of these agreements also provide that if
the Company elects not to pursue the commercial development of any licensed
technology, or does not adhere to an acceptable schedule of commercialization,
then the Company's exclusive rights to such technology would terminate. The
Company also funds research at certain institutions, and these relationships
may provide the Company with an option to license any results of the research.

MANUFACTURING

The Company does not have the resources, facilities or capabilities to
manufacture any of its proposed products. The Company has no current plans to
establish a manufacturing facility. The Company expects that it will be
dependent to a significant extent on contract manufacturers for commercial
scale manufacturing of its proposed products in accordance with regulatory
standards. The Company's dependence on third parties for manufacturing may
adversely affect operating results as well as the Company's ability to develop
and deliver products on a timely and competitive basis. Production of peptides
(such as Cytolex and other magainins) is expensive relative to production of
traditional antibiotics. Additionally, there are a limited number of companies
currently able to produce bulk peptides on the scale which the Company expects
to require to commercialize Cytolex. There can be no assurance that qualified
outside contractors will be available to manufacture materials for the Company,
or do so at costs which are affordable by the Company.

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technology and have ownership of the Drug Master File, the Company's reliance
on such contract manufacturer is increased, and the Company may have to obtain
a license from such contract manufacturer to have its products manufactured by
another party. Successful technology transfer from the original contract
manufacturer may be required. There can be no assurance that any such license
will be available on terms acceptable to the Company, or, if available, that
such technology will be successfully transferred to the Company. Any such
technology transfer may require transfer of requisite data for regulatory
purposes, including information contained in a proprietary Drug Master File
held by a contract manufacturer. There can be no assurance that any such
transfer can be completed.
The Company is working with Abbott with regard to the manufacture of bulk
drug substance for Cytolex. This arrangement provides for the development by
Abbott of a solution phase chemical process to manufacture bulk drug substance
for Cytolex on a commercial scale, for the production of bulk drug substance
for Cytolex for development purposes, and for Abbott to perform those
activities necessary to submit a Drug Master File to the FDA in support of any
filing for marketing approval of Cytolex. There can be no assurance that
Abbott will satisfy any or all of its obligations under this arrangement in a
timely manner.

The Company and Abbott have agreed that, upon completion of Abbott's
development activities, they will negotiate in good faith a supply agreement
for the Company's worldwide supply needs of bulk drug substance for Cytolex.
Early stage discussions as to supply cost have occurred with Abbott, and,
based on these discussions, the Company believes that further progress in
scale-up and manufacturing development efforts will be required to enable the
Company to manufacture and sell Cytolex on a profitable basis. This may
require substantial additional funds. No assurance can be given that a cost-
effective manufacturing process can ultimately be developed, or that any such
process would be approved by the FDA, or that the Company, Abbott, or others
will be able to manufacture Cytolex on a commercially viable basis. See
"Government Regulation."

The Company is currently dependent upon Abbott for the production of bulk
drug substance for Cytolex. In the event that bulk drug substance for Cytolex
is not manufactured at Abbott, the Company will need to secure other
manufacturing arrangements. The process developed by Abbott is proprietary,
and in the event the Company desires to utilize, or have another party
utilize, such technology, the Company would be required to make license
payments to Abbott. The Company has certain efforts underway with respect to
alternative manufacturing sources, including recombinant manufacturing;
however, these programs are at an early stage, and significant expenditures
over an extended period of time will be required to develop a commercially
viable process, and there can be no assurance that such efforts will be
successful.
The Company also expects to conduct significant manufacturing development
activities for its other products under development. The Company is currently
working with outside contractors for the chemical production of squalamine.
The Company expects to expend significant resources in the production of
squalamine and any other compounds under development, and there can be no
assurance that these efforts will be successful.

GOVERNMENT REGULATION

The production and marketing of the Company's products and its research and
development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. In the United States,
drug products are subject to rigorous review by the FDA. The Federal Food,
Drug, and Cosmetic Act and other federal statutes and regulations govern or
influence the testing, manufacture, safety, efficacy, labeling, storage,
recordkeeping, approval, advertising, promotion and distribution of such
products. Noncompliance with applicable requirements can result in Warning
Letters, fines, recall or seizure of products, refusal of the government to
approve marketing applications or to allow the Company to enter into
government supply contracts, the withdrawal of previously approved new drug
applications and criminal prosecution.
In order to obtain FDA approval to market a new drug product, the Company
must submit proof of safety, efficacy and quality. Such proof entails
extensive and time consuming preclinical and clinical testing. The results of
preclinical studies are submitted to the FDA as part of an IND. Preclinical
studies involve laboratory evaluation of product characteristics and animal
studies to assess the efficacy and safety of the

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<PAGE>

product. Once the IND is effective, human clinical trials may be conducted.
Human clinical trials are typically conducted in three sequential phases, but
the phases may overlap. Phase I trials consist of testing the product in a
small number of patients or healthy volunteer subjects primarily for safety at
one or more doses. In Phase II, in addition to safety, the efficacy of the
product is evaluated in a patient population somewhat larger than Phase I
trials. Phase III trials typically involve additional testing for safety and
clinical efficacy in an expanded population at geographically dispersed test
sites. A clinical plan, or "protocol," accompanied by the approval of the
Institutional Review Board participating in the trials, must be submitted to
the FDA prior to commencement of clinical trials. Various reports must be
submitted to the FDA during the course of the trials, and the FDA may order
the temporary or permanent discontinuation of a clinical trial at any time.
The results of the clinical trials are submitted to the FDA as part of an NDA.

Detailed manufacturing information is also required to be included in the
NDA for review and approval by the FDA. Among other things, the Company must
submit data indicating that the drug product can be consistently manufactured
at the same quality standard, that the drug product is stable over time, and
that the level of chemical impurities in the drug product is under specified
levels. Peptides are an especially difficult compound to manufacture at these
standards, particularly at the scale at which Cytolex will be required to be
manufactured. There can be no assurance that the manufacturing information
submitted for Cytolex, or other products under development, will be sufficient
for approval by the FDA.

Following extensive review of the NDA, the FDA may grant marketing approval,
require additional testing or information, or deny the application. Sales of a
new drug may commence following FDA approval of an NDA and satisfactory
completion of a pre-approval inspection of the manufacturing facility,
including a review of pertinent production records. If there are any
modifications to the drug, including any changes in indication, manufacturing
process, labeling or manufacturing facility, an NDA supplement may be required
to be submitted to the FDA. The FDA may also require post-marketing testing
and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of
such products. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained, or if problems concerning safety,
efficacy or quality of the product occur following approval.

Continued compliance with all FDA requirements and conditions in an approved
application, including those concerning product specification, manufacturing
process, validation, labeling, promotional material, recordkeeping and
reporting, is necessary for all approved drug products. Failure to comply
could result in Warning Letters, product recall or other FDA-initiated
actions, which could delay further marketing until the products are brought
into compliance.

In October 1992, PDUFA was enacted, imposing substantial fees on a one-time
basis for applications for approval, and on an annual basis for the
manufacturing and marketing, of prescription drugs. Legislation reauthorizing
PDUFA is currently pending in Congress and it is anticipated that such user
fees will continue and may increase in the future.

Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval by comparable
regulatory authorities of foreign countries must be obtained prior to the
commencement of marketing in those countries. The time required to obtain such
approval may be longer or shorter than that required for FDA approval.

PATENT AND PROPRIETARY RIGHTS; LICENSED TECHNOLOGY

The Company's success will depend in part upon its ability to obtain patent
protection for compounds, uses of compounds, and processes. Patent matters
involve complex legal and factual issues, and can be highly

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<PAGE>

uncertain. Host defense compounds can be isolated from a wide variety of
sources, and it is not possible for the Company or any other entity to have
proprietary rights to all such compounds, or their uses. Additionally,
chemical entities that are similar to, but not identical with, the Company's
compounds, may not be protected by issued patents of the Company. In the
genomics area, a number of companies are attempting to identify rapidly and
patent genes whose functions have not yet been characterized. Additional
companies are seeking to patent fully characterized genes. The criteria for
obtaining patent protection for genes is unclear, and the impact of this
uncertainty on the Company's business can not be determined.

The Company owns or has exclusive rights under license agreements to 43
issued patents, and an additional 27 patent applications are pending,
including the patent application relating to Cytolex. Of the 70 patents or
patent applications to which the Company has rights, 45 are related to host
defense and 25 are related to the Company's research efforts in genomics.
There can be no assurance that any patent applications now pending or filed in
the future will result in patents being issued or that any patents now held by
or licensed to the Company, or issued or licensed to the Company in the
future, will afford any competitive advantages for the Company, or will not be
challenged by third parties. The cost of litigation to uphold the validity and
prevent infringement of patents and to enforce licensing rights can be
substantial. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate the technology owned
by or licensed to the Company or design around the patented aspects of such
technology. In addition, there can be no assurance that the products and
technologies the Company will seek to market will not infringe patents or
other rights owned by others, licenses to which may not be available to the
Company.

The Company also relies upon unpatented proprietary technology, and may
determine in appropriate circumstances that its interest would be better
served by reliance on trade secrets or confidentiality agreements rather than
patents. There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to such proprietary technology or that the Company can
meaningfully protect its rights in such unpatented proprietary technology.
Additionally, if the Company is unable to obtain strong proprietary rights
protection of its products after obtaining regulatory clearance, competitors
may be able to market competing products by obtaining regulatory clearance,
through showing equivalency to the Company's product, without being required
to conduct the lengthy clinical tests required to be conducted by the Company.

Virtually all of the Company's key scientists worked at other biotech or
pharmaceutical companies or at universities and research institutions before
joining the Company. Disputes may arise as to whether technology developed by
such scientists while employed by or associated with the Company was first
discovered when they were employed by or associate with others in a manner
that would give third parties rights to such technology superior to the
rights, if any, of the Company. Disputes of this nature have occurred in the
past, and are expected to continue to arise in the future, and there can be no
assurance that the Company will prevail in any such disputes.

To the extent that consultants, vendors or other third parties apply
technological information independently developed by them or by others to the
Company's proposed products, disputes may arise as to the proprietary rights
to such information, which may not be resolved in favor of the Company.
Members of the Company's Scientific Advisory Board and other consultants are
employed by or have consulting agreements with third parties, and any
inventions discovered by such individuals are not likely to become the
property of the Company.

The Company has rights under license agreements to certain patents and
patent applications under which the Company expects to owe royalties on sales
of any products which are covered by issued patent claims. Additionally,
certain of these agreements also provide that if the Company elects not to
pursue the commercial development of any licensed technology, or does not
adhere to an acceptable schedule of commercialization, then the Company's
exclusive rights to such technology would terminate.

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<PAGE>

COMPETITION

The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are working in a number of
areas similar to the Company's field of interest. The Company is aware that
research is being conducted by others in connection with compounds from the
host-defense systems of various animals. Additionally, many companies are
involved in research and development activities focused on the pathogenesis of
disease, and competition among companies attempting to find the genes
responsible for disease is intense. Furthermore, many companies are engaged in
the development and sale of products, such as traditional antibiotics, which
may be, or are, competitive with the Company's proposed products. Most of
these entities have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than the Company. The Company's
proposed products may also be subject to competition from products using
techniques other than those developed by the Company or based on advances that
may render the Company's products obsolete.

The Company expects technological developments in the biopharmaceutical
field to occur at a rapid rate and expects competition to intensify as
advances in this field are made. Accordingly, the Company will be required to
continue to devote substantial resources and efforts to research and
development activities in order to maintain a competitive position in this
field. Compounds, products or processes developed by the Company may become
obsolete before the Company is able to recover a significant portion of its
research and development expenses. The Company will be competing with respect
to its proposed products with companies that have significantly more
experience in undertaking preclinical testing and human clinical trials of new
or improved therapeutic products and obtaining regulatory approvals of such
products. Some of these companies may be in advanced phases of clinical
testing of various drugs that may be competitive with the Company's proposed
products.

Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection
and licensing arrangements to collect royalties for use of technology that
they have developed, some of which may be directly competitive with that of
the Company. In addition, these institutions, along with pharmaceutical and
biotechnology companies, can be expected to compete with the Company in
recruiting highly qualified scientific personnel.

As to the disease areas being targeted by the Company, there can be no
assurance that Cytolex will be successfully marketed against oral antibiotics
for the treatment of infection in diabetic foot ulcers. These infections have
historically been treated with systemically administered antibiotics. There
also can be no assurance that Cytolex can be manufactured at a cost which will
allow it to be sold at a competitive price relative to oral antibiotics, or
other topical antibiotics that may be used for this indication. Significant
efforts are underway by many companies in the development and marketing of
products intended for the additional disease areas being targeted by the
Company, including cancer and asthma. A number of major pharmaceuticals
companies have significant franchises in these disease areas, and can be
expected to invest heavily to protect these interests. In addition, in the
cancer field, antiangiogenic agents are under development at a number of
companies. In the asthma field, other biopharmaceutical companies have also
reported the discovery of genes relating to asthma.

EMPLOYEES

As of September 30, 1997, the Company had 72 full-time employees. No
employees are covered by collective bargaining agreements, and the Company
considers relations with its employees to be good.

PROPERTIES

The Company occupies an aggregate of approximately 21,000 square feet of
space in Plymouth Meeting, Pennsylvania, which is used as office and
laboratory space. The Company leases this space pursuant to a lease expiring
in 1999, which provides for minimum annual rent payments of approximately
$322,000 in the year ending December 31, 1997 and is subject to increases on
an annual basis for the remaining term.

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DIRECTORS AND MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Executive officers and directors of the Company, and their ages as of
September 30, 1997, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jay Moorin.............. 46 Chairman, President and Chief Executive Officer
Michael A. Zasloff,
M.D., Ph.D............. 51 Vice Chairman and Executive Vice President
Michael R. Dougherty.... 39 Executive Vice President, Chief Financial Officer,
and Director
Roy C. Levitt, M.D...... 44 Executive Vice President, and Director
Thomas J. Bigger........ 40 Senior Vice President
Paul A. Litka, M.D...... 48 Senior Vice President
Bernard Canavan, M.D.... 61 Director
Zola P. Horovitz,
Ph.D................... 63 Director
Charles A. Sanders,
M.D.................... 65 Director
Robert F. Shapiro....... 62 Director
James B. Wyngaarden,
M.D.................... 72 Director
</TABLE>

Jay Moorin has served as President and Chief Executive Officer of the
Company since 1991. In July 1996, Mr. Moorin was appointed Chairman of the
Board. Prior to joining the Company, Mr. Moorin served as a Managing Director
at Bear, Stearns & Co., Inc. and was responsible for health care investment
banking and other services to the pharmaceutical and distribution industry.
Mr. Moorin was employed in other capacities by Bear, Stearns from 1988 to
1990. From 1983 to 1988, Mr. Moorin was employed by E. R. Squibb & Co., Inc.
("Squibb"), joining Squibb as its first Corporate National Accounts Director
and subsequently was promoted to Business Area Director and Vice President of
Marketing and Business Development at SquibbMark, a division of Squibb.

Michael A. Zasloff, M.D., Ph.D., has served as Executive Vice President of
the Company and President of the Magainin Research Institute, since July 1992.
In July 1996, Dr. Zasloff was appointed Vice Chairman of the Board. From 1988
until Dr. Zasloff joined the Company on a full-time basis in July 1992, Dr.
Zasloff was the Company's Chief Scientific Advisor and served as the Charles
E.H. Upham Professor, Department of Pediatrics and Genetics, University of
Pennsylvania School of Medicine, and Chief, Division of Human Genetics and
Molecular Biology, the Children's Hospital of Philadelphia. From 1982 until
1988, Dr. Zasloff was Chief, Human Genetics Branch, National Institutes of
Child Health and Human Development, National Institutes of Health. Dr. Zasloff
currently also serves as Adjunct Professor, Department of Human Genetics and
Orthopedics, University of Pennsylvania School of Medicine.

Michael R. Dougherty has served as Executive Vice President and Chief
Financial Officer of the Company since March 1995, and as a Director since
August, 1997. From August 1993, when he joined the Company, until March 1995,
Mr. Dougherty served as Senior Vice President and Chief Financial Officer.
Prior to joining the Company, Mr. Dougherty served in the following capacities
at Centocor, Inc. (a biopharmaceutical company): Senior Vice President, Chief
Financial Officer and Treasurer, from February 1992 to August 1993, Vice
President Corporate Finance from May 1990 to February 1992 and Treasurer from
June 1986 to May 1990.

Roy C. Levitt, M.D., has served as Executive Vice President and the Director
of the Magainin Institute of Molecular Medicine since joining the Company in
January 1996. Dr. Levitt was appointed Chief of Research and Development at
the Company, and a Director in August, 1997. Prior to joining the Company, Dr.
Levitt was a faculty member at Johns Hopkins University in the Department of
Anesthesiology and Critical Care Medicine, from 1986 to 1995, in Neurological
Surgery from 1995 to 1996 and in Environmental Health Sciences from 1988 to
1996.

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<PAGE>

Thomas J. Bigger has served as Senior Vice President Business Development,
Marketing and Sales since joining the Company in July 1996. Mr. Bigger served
as Senior Vice President of Advanced Polymer Systems (a drug development
company), in 1994 and 1995. From 1979 to 1994, Mr. Bigger held a number of
positions of increasing responsibility at Rhone-Poulenc Rorer ("RPR"),
including serving as President of Dermik Laboratories, a subsidiary of RPR.

Paul A. Litka, M.D. has served as Senior Vice President Clinical Research
and Regulatory Affairs of the Company since May 1996. From March 1995, when he
joined the Company, until May 1996, Dr. Litka served as Vice President
Clinical Research. From 1991 to 1994, Dr. Litka was Senior Vice President and
General Manager of the Institute for Biological Research and Development, a
clinical research organization.

Bernard Canavan, M.D. has served as a director of the Company since 1994.
Dr. Canavan was employed by American Home Products Corporation for over
twenty-five years. From June 1990 until his retirement in January 1994, he was
President of American Home Products Corporation and was responsible for all
operations, including its pharmaceutical businesses worldwide. Previously, Dr.
Canavan was Chairman and Chief Executive Officer of American Home Products'
pharmaceutical company, Wyeth-Ayerst Laboratories. Dr. Canavan is also a
director of Alpha-Beta Technology, Inc., and BioChem International Inc.

Zola P. Horovitz, Ph.D. has served as a director of the Company since 1995.
Dr. Horovitz was employed by Bristol-Myers Squibb Company ("Bristol-Myers")
and its predecessor, Squibb Corporation, for over thirty years. At the time of
his retirement in 1994, Dr. Horovitz was Vice President of Business
Development at Bristol-Myers. Dr. Horovitz is currently a consultant to the
pharmaceutical and biotechnology industry, and is a director of Avigen, Inc.,
Clinicor Inc., Procept, Inc., Synaptic Pharmaceutical Corporation, Diacrin,
Inc., BioCryst Pharmaceuticals, Inc. and Roberts Pharmaceutical Corporation,
and is also a member of Magainin's Scientific Advisory Board.

Charles A. Sanders, M.D. has served as a director of the Company since
September 1996. Dr. Sanders is the retired Chairman and Chief Executive
Officer of Glaxo Inc., where he was employed from 1989 to 1995. Previously,
Dr. Sanders was Vice Chairman of Squibb Corporation and also served as General
Director of Massachusetts General Hospital. Dr. Sanders is a director of Scios
Inc., Vertex Pharmaceuticals Incorporated, StaffMark, Inc., Kendle
International and Pharmacopeia, Inc.

Robert F. Shapiro has served as a director of the Company since September
1996. In 1997, Mr. Shapiro joined Klingenstein, Fields and Co., Inc., an
investment management firm, as Vice Chairman and Partner. Since 1988, Mr.
Shapiro has served as President of RFS & Associates, Inc., a private
investment and consulting firm. Previously, Mr. Shapiro served as President
and Co-Chairman of Wertheim Schroder & Co., Inc. and Chairman of New Street
Capital Corporation, investment banking firms. Mr. Shapiro is also a director
of American Buildings Company, The Burnham Fund, Inc., Equitable Capital
Partners, L.P. and The TJX Companies, Inc.

James B. Wyngaarden, M.D. has served as a director of the Company since
September 1996. From 1990 to 1994, Dr. Wyngaarden was Foreign Secretary of the
National Academy of Sciences and Institute of Medicine. Dr. Wyngaarden
previously served in several capacities, including as the Director of the
National Institutes of Health. Dr. Wyngaarden is a director of Hybridon, Inc.
and Human Genome Sciences, Inc. and is also a member of Magainin's Scientific
Advisory Board.

38
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of the
dates indicated by (i) all persons who were beneficial owners of five percent
(5%) or more of the Company's Common Stock as of December 31, 1996 and (ii) as
of September 30, 1997 by each director, each executive officer and all
directors and executive officers as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)
NUMBER OF --------------------------
SHARES BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
- ---------------- ------------------- ----------- -----------
<S> <C> <C> <C>
Amerindo Investment Advisors
Inc.
780 Third Avenue, Suite 3204
New York, NY 10017 (3)....... 957,500 4.9% 4.4%
First Union Corporation
One First Union Center
Charlotte, NC 28288 (4)...... 1,096,245 5.7% 5.0%
FMR Corporation
82 Devonshire Street
Boston, MA 01109 (5)......... 1,539,000 7.9% 7.0%
Oracle Partners, L.P.
135 East 57th Street, 30th
Floor
New York, NY 10022 (6)....... 1,317,000 6.8% 6.0%
Wellington Management Company
75 State Street
Boston, MA 02109 (7)......... 2,711,000 14.0% 12.4%
Jay Moorin (8)............... 759,612 3.8% 3.4%
Michael A. Zasloff, M.D.,
Ph.D. (9).................... 507,320 2.6% 2.3%
Michael R. Dougherty (10).... 154,500 * *
Roy C. Levitt, M.D. (11)..... 74,375 * *
Thomas J. Bigger (12)........ 31,250 * *
Paul A. Litka, M.D. (13)..... 41,000 * *
Bernard Canavan, M.D. (14)... 15,000 * *
Zola P. Horovitz, Ph.D.
(15)......................... 15,000 * *
Charles A. Sanders, M.D.
(16)......................... 3,750 * *
Robert F. Shapiro (17)....... 23,750 * *
James B. Wyngaarden, M.D
(18)......................... 4,250 * *
All current executive
officers and directors as a
group
(11 persons) (19)........... 1,629,807 7.8% 7.0%
</TABLE>
- ---------------------
* Less than one percent.
(1) Beneficial ownership has been determined pursuant to applicable rules of
the Commission.
(2) The percentage for each individual or group is based on the aggregate of
the shares outstanding as of September 30, 1997 (19,379,607 shares).
(3) This information is presented in reliance on information disclosed in a
Schedule 13F filed by Amerindo Investment Advisors Inc. ("Amerindo") with
the Commission reporting as of June 30, 1997.

39
<PAGE>

(4) This information is presented in reliance on information disclosed in a
Schedule 13G filed by First Union Corporation with the Commission
reporting as of December 31, 1996.
(5) This information is presented in reliance on information disclosed in a
Schedule 13F filed by FMR Corporation with the Commission reporting as of
June 30, 1997.
(6) This information is presented in reliance on information disclosed in a
Schedule 13F filed by Oracle Partners, L.P. with the Commission reporting
as of June 30, 1997.
(7) This information is presented in reliance on information disclosed in a
Schedule 13F filed by Wellington Management Company with the Commission
reporting as of June 30, 1997.
(8) Represents 759,112 shares of Common Stock issuable upon exercise of
options. Includes 500 shares owned by Mr. Moorin's wife as to which shares
Mr. Moorin disclaims beneficial ownership.
(9) Includes 305,008 shares of Common Stock issuable upon exercise of options
and 30,000 shares of Common Stock held by trusts for the benefit of
certain members of Dr. Zasloff's family.
(10) Represents 154,500 shares of Common Stock issuable upon exercise of
options.
(11) Includes 61,250 shares of Common Stock issuable upon exercise of options,
and 8,500 shares issuable to Dr. Levitt.
(12)Represents 31,250 shares of Common Stock issuable upon exercise of options.
(13) Represents 41,000 shares of Common Stock issuable upon exercise of
options.
(14) Represents 15,000 shares of Common Stock issuable upon exercise of
options.
(15) Represents 15,000 shares of Common Stock issuable upon exercise of
options.
(16)Represents 3,750 shares of Common Stock issuable upon exercise of options.
(17) Includes 3,750 shares of Common Stock issuable upon exercise of options
and 5,000 shares owned by Mr. Shapiro's wife, as to which shares Mr.
Shapiro disclaims beneficial ownership.
(18)Includes 3,750 shares of Common Stock issuable upon exercise of options.
(19) See (8), (9), (10), (11), (12), (13), (14), (15), (16), (17) and (18)
above.

40
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 45,000,000 shares of
Common Stock, par value $.002 per share, and 9,211,031 shares of Preferred
Stock, par value $.001 per share. At September 30, 1997, there were 19,379,607
shares of Common Stock outstanding, and no shares of Preferred Stock
outstanding. Stock options and warrants for an aggregate of 4,492,707 shares of
Common Stock were outstanding on such date.

COMMON STOCK

The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the board of directors in its
discretion from funds legally available therefor, provided that the per share
amount, if any, of all dividends for the Common Stock in any fiscal year of the
Company, shall not be greater than the per share amount, if any, of all
dividends declared for the Preferred Stock during such fiscal year (assuming
for the calculation of the per share amounts for Preferred Stock the conversion
at the time of such calculation of all Preferred Stock into Common Stock). See
"Dividend Policy." Upon liquidation or dissolution of the Company, the holders
of Common Stock are entitled to receive, pro rata, all assets of the Company
after payment of liabilities and payments to holders of Preferred Stock.
Holders of Common Stock have no preemptive or other subscription rights, and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. The holders of Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
stockholders. The holders of Common Stock do not have cumulative voting rights
in the election of directors. All of the shares of Common Stock are, and the
shares to be sold in this offering will be, fully paid and nonassessable.

PREFERRED STOCK

The Company is authorized to issue up to 9,211,031 shares of Preferred Stock.
The board of directors has the authority to issue Preferred Stock in one or
more series and to fix the designations, powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations and restrictions thereof, including the dividend, conversion,
voting, redemption (including sinking fund provisions) and other rights,
liquidation preferences and the number of shares constituting any series and
the designation of such series, without any further vote or action by the
stockholders of the Company. Because the terms of the Preferred Stock may be
fixed by the board of directors of the Company without stockholder action, the
Preferred Stock could be issued quickly with terms calculated to defeat a
proposed take-over of the Company, or to make the removal of management more
difficult. Under certain circumstances, this could have the effect of
decreasing the market price of the Common Stock. Management of the Company is
not aware of any such threatened transaction to obtain control of the Company.

WARRANTS

As of September 30, 1997, warrants to purchase an aggregate of 1,541,635
shares of Common Stock were outstanding. Of the outstanding warrants, (i)
warrants to purchase 1,011,896 shares were exercisable at a price of $8.4791
per share (the "1996 Warrants"), (ii) warrants to purchase 229,739 shares were
exercisable at a price of $8.00 per share (the "1994 Warrants") and (iii)
warrants to purchase 300,000 shares were exercisable at a price of $7.50 per
share (the "1991 Warrants").

Subject to certain exceptions, the exercise price per share for the 1996
Warrants is subject to adjustment, on a weighted average basis, upon the
following events: (i) the issuance or sale of shares of Common Stock for a
consideration per share of Common Stock less than the then current exercise
price, (ii) the grant or sale by the Company of options for which the exercise
price per share of Common Stock is less than the then current exercise price,
(iii) the issuance or sale by the Company of any securities convertible into
shares of Common Stock for which the conversion price per share of Common Stock
is less than the then current exercise price and (iv) a change in any exercise
price or conversion price for options or convertible securities

41
<PAGE>

to a price below the then current exercise price. In such events, the number of
shares issuable upon exercise of the 1996 Warrants is subject to a
corresponding adjustment. In addition, the exercise price per 1996 Warrant is
subject to a one-time adjustment, at the option of the holder of such 1996
Warrant, in the event that the average of the closing prices for the Common
Stock on the Nasdaq National Market in any calendar month prior to August 1999
is less than $7.7083. In that event, the holder of each 1996 Warrant shall have
the option to reset the exercise price to equal 110% of the average of the
closing price for such month.

LIMITATION OF LIABILITY

As permitted by the Delaware General Corporation Law, the Company's Restated
Certificate of Incorporation provides that directors of the Company shall not
be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, relating to prohibited dividends or
distributions or the repurchase or redemption of stock, or (iv) for any
transaction from which the director derives an improper personal benefit. As a
result of these provisions, the Company and its stockholders may be unable to
obtain monetary damages from a director for breach of his duty of care.
Although stockholders may continue to seek injunctive or other equitable relief
for an alleged breach of fiduciary duty by a director, stockholders may not
have any effective remedy against the challenged conduct if equitable remedies
are unavailable.

The Company currently carries directors and officers liability insurance. In
addition, the Company's By-laws provide for indemnification of all officers and
directors against liabilities or expenses incurred in connection with any
action, suit or proceeding if the director or officer acted in good faith and
in a manner such person reasonably believed to be in, or not opposed to, the
Company's best interests, unless the action, suit or proceeding involves
liability by the director or officer to the Company and no court determines
that such director or officer is entitled to indemnification.

BUSINESS COMBINATION PROVISIONS

The business combination provision contained in Section 203 of the Delaware
General Corporation Law ("Section 203") defines an interested stockholder as
any person (other than the Company and any direct or indirect majority-owned
subsidiary of the Company) that (i) owns, directly or indirectly, 15% or more
of the outstanding voting stock of a corporation, or (ii) is an affiliate or
associate of a corporation and was the owner of 15% or more of the outstanding
voting stock at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an
interested stockholder; and the affiliates and the associates of such person.
Under Section 203, a resident domestic corporation may not engage in any
business combination with any interested stockholder for a period of three
years following the date such stockholders became an interested stockholder,
unless (i) prior to such time the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, or (ii) upon consummation
of the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced
(excluding, for determining the number of shares outstanding, (a) shares owned
by persons who are directors and officers, and (b) employee stock plans, in
certain instances), or (iii) on or subsequent to such time the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. The restrictions imposed by Section 203 will not
apply to a corporation if (i) the corporation's original certificate of
incorporation contains a provision expressly electing not to be governed by
this Section; or (ii) the corporation by the action of its stockholders holding
a majority of outstanding stock adopts an amendment to its certificate of
incorporation or by-laws expressly electing not to be governed by Section 203
(such amendment will not be effective until 12 months after adoption and shall
not apply to any business combination between such corporation and any person
who became an interested stockholder of such corporation on or prior to such
adoption).

42
<PAGE>

The Company has not elected out of the statute and, therefore, the
restrictions imposed by Section 233 apply to the Company. These restrictions
may have the effect of delaying, deferring or preventing a change in control
of the Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company.

43
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, Hambrecht
& Quist LLC, BancAmerica Robertson Stephens and Cowen & Company (the
"Underwriters") have severally agreed to purchase from the Company the
following respective number of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC...........................................
BancAmerica Robertson Stephens..................................
Cowen & Company.................................................
---------
Total........................................................... 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
closing certificates, opinions and letters from the Company and its counsel
and independent auditors. The nature of the Underwriters' obligation is such
that they are committed to purchase all of the shares of Common Stock being
offered hereby if any of such shares are purchased.

The Underwriters propose to offer the underwritten shares in part directly
to the public at the public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share to
certain other brokers and dealers. After the shares are released for sale to
the public, the offering price and other selling terms may from time to time
be varied by the Underwriters.

The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
375,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them as shown in the foregoing table bears to the 2,500,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares.

The officers and directors of the Company have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, directly or
indirectly sell, offer, contract to sell, make any short sale, pledge or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any other rights to
purchase or acquire Common Stock during the 90-day period following the date
of this Prospectus, except that such individuals may transfer shares to
members of their immediate families or to trusts the beneficiaries of which
are such individuals and/or members of their immediate families, so long as
such transferees agree not to dispose of such shares as provided above.
Hambrecht & Quist LLC may release such officers and directors from such
obligations from time to time without notice. In addition, the Company has
agreed that for a period of 90 days after the effective date of the
Registration Statement, it will not offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exchangeable for, or warrants to purchase, any shares of Common Stock, or
grant any option to purchase or right to acquire or acquire any option to
dispose of any shares of Common Stock except in certain limited circumstances.

The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.

44
<PAGE>

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to
these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Common Stock.

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

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

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

In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the commencement of sales in the offering. The Commission
has, however, adopted exemptions from these rules that permit passive market
making under certain conditions. These rules permit an underwriter to continue
to make a market subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with the offering and
that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters, selling group members (if
any) or their respective affiliates intend to engage in passive market making
in the Company's Common Stock during the cooling off period.

LEGAL OPINION

The validity of the shares of Common Stock offered hereby will be passed upon
for the Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.
Certain legal matters will be passed upon for the Underwriters by Stroock &
Stroock & Lavan LLP, New York, New York.

EXPERTS

The financial statements appearing in this Prospectus and contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996,
incorporated by reference in this Prospectus, have been audited by Richard A.
Eisner & Company, LLP, independent auditors, as indicated in their report with
respect thereto, and are included and incorporated herein by reference in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.

45
<PAGE>

MAGAININ PHARMACEUTICALS INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................ F-2
AUDITED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1996 and 1995........................... F-3
Statements of Operations for the years ended December 31, 1996, 1995 and
1994 and for the Period from June 29, 1987 (Inception) to December 31,
1996, ................................................................... F-4
Statements of Changes in Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994 and for the Period from June 29, 1987 (Inception)
through December 31, 1996................................................ F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994 and for the Period from June 29, 1987 (Inception) to December 31,
1996..................................................................... F-7
Notes to Financial Statements............................................. F-8
UNAUDITED FINANCIAL STATEMENTS
Balance Sheet as of September 30, 1997.................................... F-17
Statements of Operations for the three months and nine months ended Sep-
tember 30, 1997 and 1996................................................. F-18
Statements of Cash Flows for the nine months ended September 30, 1997 and
1996..................................................................... F-19
Notes to Financial Statements............................................. F-20
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Magainin Pharmaceuticals Inc.
Plymouth Meeting, Pennsylvania

We have audited the accompanying balance sheets of Magainin Pharmaceuticals
Inc. (a development stage company) as at December 31, 1996, and December 31,
1995 and the related statements of operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1996 and for the period June 29, 1987 (inception) to December 31, 1996.
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 enumerated above present fairly, in
all material respects, the financial position of Magainin Pharmaceuticals Inc.
at December 31, 1996 and December 31, 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1996 and for the period June 29, 1987 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.

/s/ Richard A. Eisner & Company, LLP

Richard A. Eisner & Company, LLP

New York, New York
January 29, 1997

F-2
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,072 $ 1,880
Short-term investments................................... 31,268 32,270
Prepaid expenses and other current assets................ 454 509
-------- --------
Total current assets................................... 33,794 34,659
Fixed assets, net.......................................... 2,506 1,476
Long-term investments...................................... -- 9,516
Other assets............................................... 76 76
-------- --------
Total assets........................................... $ 36,376 $ 45,727
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................... $ 5,145 $ 4,080
Note payable--current.................................... 250 --
Equipment lease obligations--current..................... 123 150
-------- --------
Total current liabilities.............................. 5,518 4,230
Note payable--long-term.................................... 750 --
Equipment lease obligations--long-term..................... 38 161
Deferred rent.............................................. 127 143
-------- --------
Total liabilities...................................... 6,433 4,534
-------- --------
Commitments, contingencies and other matters
Stockholders' equity:
Preferred stock--$.001 par value; shares authorized--
9,211; none issued
Common Stock--$.002 par value; shares authorized--45,000;
shares issued and outstanding--19,364 and 17,052........ 39 34
Additional paid-in capital............................... 125,134 105,662
Unrealized gain on investments........................... 13 120
Deficit accumulated during the development stage......... (95,243) (64,623)
-------- --------
Total stockholders' equity............................. 29,943 41,193
-------- --------
Total liabilities and stockholders' equity............. $ 36,376 $ 45,727
======== ========
</TABLE>

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

F-3
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
JUNE 29, 1987
YEAR ENDED DECEMBER 31, (INCEPTION) TO
---------------------------- DECEMBER 31,
1996 1995 1994 1996
-------- -------- -------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Contract and government grant... $ 150 $ 2,056 $ 85 $ 2,983
Related party contract.......... -- 280 326 1,527
-------- -------- -------- ---------
150 2,336 411 4,510
-------- -------- -------- ---------
Costs and Expenses:
Research and development........ 22,326 18,160 11,258 78,681
General and administrative...... 3,488 3,137 3,468 20,512
Charge for stock issuance
relating to royalty buyout..... 7,080 -- -- 7,080
-------- -------- -------- ---------
32,894 21,297 14,726 106,273
-------- -------- -------- ---------
Loss from operations.............. (32,744) (18,961) (14,315) (101,763)
Interest income................... 2,172 1,778 1,207 7,210
Interest expense.................. (48) (32) (48) (690)
-------- -------- -------- ---------
Net loss.......................... $(30,620) $(17,215) $(13,156) $ (95,243)
======== ======== ======== =========
Net loss per share................ $ (1.71) $ (1.17) $ (0.99)
======== ======== ========
Weighted average shares
outstanding...................... 17,938 14,696 13,301
======== ======== ========
</TABLE>

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

F-4
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
DEFICIT TREASURY
COMMON STOCK ACCUMULATED STOCK UNREALIZED
---------------- ADDITIONAL DURING --------- GAIN (LOSS)
NUMBER PAID IN DEVELOPMENT NUMBER ON
OF SHARES AMOUNT CAPITAL STAGE OF SHARES INVESTMENTS
--------- ------ ---------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
For the period from
inception through
December 31, 1996
Common Stock issued,
$.002 per share
(inception)............ 374 $ 1 $ -- $ -- -- --
Common Stock issued,
$2.00 per share........ 1,750 3 3,496 -- -- --
Net loss................ -- -- -- (1,324) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1988................... 2,124 4 3,496 (1,324) -- --
Acquisition of treasury
shares, $.002 per
share.................. -- -- -- -- 54 --
Common Stock issued,
$.002 to $.30 per
share.................. 2 -- -- -- -- --
Common Stock issued,
exercise of options.... 3 -- -- -- -- --
Common Stock issued,
$3.00 per share........ 1,000 2 2,998 -- -- --
Net loss................ -- -- -- (2,086) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1989................... 3,129 6 6,494 (3,410) 54 --
Fair value of warrants
issued as
compensation........... -- -- 41 -- -- --
Common Stock issued,
$.002 to $.40 per
share.................. 5 -- 1 -- -- --
Common Stock issued,
$3.00 per share (net of
expenses).............. 70 -- 200 -- -- --
Common Stock issued,
$4.00 per share (net of
expenses).............. 1,000 2 3,972 -- -- --
Common Stock issued,
$6.50 per share (net of
expenses).............. 154 -- 986 -- -- --
Common Stock issued,
exercise of options.... 75 -- 13 -- -- --
Net loss................ -- -- -- (4,321) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1990................... 4,433 8 11,707 (7,731) 54 --
Common Stock issued,
$4.00 per share........ 176 -- 702 -- -- --
Common Stock issued,
exercise of warrants
and options............ 394 1 1,958 -- -- --
Fair value of warrants
issued................. -- -- 250 -- -- --
Retirement of treasury
stock.................. (54) -- -- -- (54) --
Common Stock issued
pursuant to initial
public offering, $9.00
per share (net of
expenses).............. 2,000 4 16,212 -- -- --
Net loss................ -- -- -- (5,351) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1991................... 6,949 13 30,829 (13,082) -- --
Common Stock issued as
compensation, $4.00 per
share.................. 1 -- 2 -- -- --
Common Stock issued
pursuant to initial
public offering over-
allotment, $9.00 per
share (net of
expenses).............. 105 1 865 -- -- --
Common Stock issued,
exercise of options.... 54 -- 11 -- -- --
Net loss................ -- -- -- (8,459) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1992................... 7,109 14 31,707 (21,541) -- --
Common Stock issued
pursuant to public
offering, $6.00 per
share (net of
expenses).............. 3,875 8 21,460 -- -- --
Common Stock issued,
exercise of options.... 76 -- 48 -- -- --
Common Stock issued
pursuant to private
placement, $8.75 per
share (net of
expenses).............. 2,200 5 18,019 -- -- --
Net loss................ -- -- -- (12,711) -- --
------ --- ------ ------- --- ---
Balance--December 31,
1993................... 13,260 27 71,234 (34,252) -- --
</TABLE>

F-5
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY--(CONTINUED)

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

F-6
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 29, 1987
DECEMBER 31, (INCEPTION) TO
---------------------------- DECEMBER 31,
1996 1995 1994 1996
-------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss........................ $(30,620) $(17,215) $(13,156) $ (95,243)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Fair value of stock, options
and warrants issued.......... 7,060 1,250 200 8,809
Depreciation and
amortization................. 625 456 551 3,809
Deferred rent................. (16) (6) 7 127
Changes in operating assets
and liabilities:
(Increase) decrease in
prepaid expenses and other
assets..................... 55 (28) 25 (645)
Increase in accounts payable
and accrued expenses....... 1,065 590 632 5,145
-------- -------- -------- ---------
Net cash used in operating
activities............... (21,831) (14,953) (11,741) (77,998)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments......... (28,019) (62,948) (20,856) (182,852)
Proceeds from maturities and
sales of investments........... 38,430 44,821 33,884 151,595
Capital expenditures............ (1,655) (360) (149) (4,196)
-------- -------- -------- ---------
Net cash provided by (used
in) investing
activities............... 8,756 (18,487) 12,879 (35,453)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable..... 1,000 -- -- 1,000
Payments on capitalized
equipment leases............... (150) (186) (352) (1,840)
Proceeds from sale of stock and
exercise of options and
warrants....................... 12,417 32,956 29 116,363
-------- -------- -------- ---------
Net cash provided by (used
in) financing
activities............... 13,267 32,770 (323) 115,523
-------- -------- -------- ---------
Net increase (decrease) in cash
and cash equivalents............. 192 (670) 815 2,072
Cash and cash equivalents at
beginning of period.............. 1,880 2,550 1,735 --
-------- -------- -------- ---------
Cash and cash equivalents at end
of period........................ $ 2,072 $ 1,880 $ 2,550 $ 2,072
======== ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest....................... $ 48 $ 32 $ 48 $ 439
======== ======== ======== =========
</TABLE>

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

F-7
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

NOTE A--THE COMPANY:

Magainin Pharmaceuticals Inc. (the "Company") was incorporated on June 29,
1987. The Company is engaged in the development of medicines for serious
diseases. The Company's development efforts are focused on anti-infectives,
oncology and, pulmonary and allergic disorders.

The Company is in the development stage, and its efforts have been
principally devoted to research and development. The Company is subject to
those risks associated with development stage companies. Substantial financing
will be required by the Company to fund its research and development
activities. There is no assurance that such financing will be available when
needed or that the Company's research and development efforts will be
successful.

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and related notes. Actual results could differ from those estimates.

Cash and Cash equivalents--The Company considers all highly liquid
investment instruments purchased with a maturity of three months or less to be
cash equivalents.

Investments--Investments purchased with a maturity of more than three
months, and which mature less than twelve months from the balance sheet date,
are classified as short-term investments. Long-term investments are those with
maturities greater than twelve months from the balance sheet date. The Company
generally holds investments to maturity, however, since the Company may, from
time to time, sell securities to meet cash requirements, the Company
classifies its investments as available-for-sale as defined by Statement of
Financial Accounting Standards ("SFAS"), No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Available-for-sale securities are
carried at market value with unrealized gains and losses reported as a
separate component of Stockholders' Equity. Gross realized gains and losses on
the sales of investment securities are determined on the specific
identification method and are included in interest income.

Concentration of Credit--The Company invests generally in securities of the
U.S. Treasury, U.S. government agencies, and U.S. government security-based
money market funds. The Company has not experienced any losses on its
investments.

Fixed Assets and Depreciation--Fixed assets are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the assets. Equipment under capital leases and leasehold improvements are
amortized using the straight-line method over the term of the respective
lease, or their estimated useful lives, whichever is shorter. Expenditures for
maintenance and repairs are charged to expense as incurred.

Revenue recognition--Any revenues from research and development arrangements
are recognized pursuant to the terms of the related agreements as work is
performed, or as milestones are achieved.

Research and development--Research and development costs are expensed as
incurred.

Patent costs--Patent-related costs are expensed as incurred.

F-8
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Lease expense--Expense related to the facility lease is recorded on a
straight-line basis over the lease term. The difference between rent expense
incurred and the amount paid is recorded as deferred rent and is amortized
over the lease term.

Income Taxes--The Company accounts for income taxes using the liability
method as prescribed by Financial Accounting Standards Board ("FASB")
Statement No. 109, "Accounting for Income Taxes". Deferred tax assets and
liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits which are not
expected to be realized. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in the period that such tax rate changes
are enacted.

Net loss per share--Net loss per share is computed by dividing the net loss
by the weighted average number of shares of Common Stock outstanding during
each period. Outstanding options and warrants have not been considered because
their inclusion would have an antidilutive effect on net loss per share.

New Pronouncements--In October 1995, the FASB issued SFAS 123 "Accounting
for Stock-Based Compensation Arrangements". SFAS 123 permits a company to
choose either a new fair value-based method of accounting for stock-based
compensation, or retaining the current intrinsic value-based method of
accounting for stock-based compensation provided for in APB Opinion 25. The
statement requires pro forma disclosures of net income and earnings per share
computed as if the fair value-based method had been applied in financial
statements of companies that continue to follow the intrinsic value-based
method of accounting. The Company has adopted SFAS 123 for disclosure purposes
only, and as a result, the adoption of SFAS 123 will not materially impact the
Company's results of operations.

Reclassification--Certain reclassifications have been made to prior years'
financial statements to conform to the 1996 presentation.

NOTE C--SHORT-TERM AND LONG-TERM INVESTMENTS:

The Company invests in U.S. Treasury and U.S. Government agency securities.
Excess cash is invested on a short-term basis in U.S. government based money
market funds. Unrealized gains at December 31, 1996 total $13,000. The Company
has not realized any losses on its investments.

NOTE D--FIXED ASSETS:

Fixed assets are stated at cost and are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Laboratory and office equipment................... $3,766 $2,707
Leasehold improvements............................ 2,433 1,837
------ ------
Total............................................ 6,199 4,544
Less accumulated depreciation and amortization.... 3,693 3,068
------ ------
$2,506 $1,476
====== ======
</TABLE>

F-9
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE E--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Accounts payable................................... $ 176 $ 290
Clinical trial costs............................... 720 1,333
Manufacturing development costs.................... 3,426 1,865
Preclinical costs.................................. 269 --
Professional fees.................................. 200 334
Deferred contract income........................... 87 87
Other.............................................. 267 171
------ ------
$5,145 $4,080
====== ======
</TABLE>

NOTE F--EQUIPMENT LEASE OBLIGATIONS:

The Company leases equipment under various agreements with terms of 36 to 48
months and accounts for these leases as capital leases. Equipment purchases
under these leases were approximately $0, $0, $399,000 and $2,003,000 for the
years ended December 31, 1996, 1995, 1994 and the period June 29, 1987
(inception) through December 31, 1996, respectively. The net book value of the
equipment held under capital leases was approximately $149,000 and $293,000 at
December 31, 1996 and 1995, respectively.

Future lease payments as of December 31, 1996 are as follows (in thousands):

<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1997................................................................. $131
1998................................................................. 42
----
Total.............................................................. 173
Less amounts representing interest................................... 12
----
Present value of future lease payments at end of year................ 161
Less amounts due within one year..................................... 123
----
Amounts due after one year........................................... $ 38
====
</TABLE>

NOTE G--NOTE PAYABLE:

In April 1996, the Company entered into a credit arrangement with a
commercial bank under which up to $1,000,000 may be borrowed to finance the
acquisition of equipment and the costs of improvements to the Company's leased
facilities. Borrowings under this credit facility bear interest at a rate of
8.5% for the three-year term of the loan. The loan provides for monthly
interest payments, with principal payments made in quarterly installments in
the second and third year after borrowings. Under this credit arrangement, the
Company has agreed to maintain, in an unrestricted investment account with the
bank, an investment balance not less than the outstanding loan balance. Any
amounts outstanding shall become immediately due and payable under certain
circumstances, including the failure of the Company to maintain (i) a certain
minimum cash and investment balance, and (ii) certain financial ratios.

F-10
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1996, the Company had borrowed $1,000,000 under this
facility.

The principal repayment obligations as of December 31, 1996 are as follows
(in thousands):

<TABLE>
<S> <C>
1997............................................................... $ 250
1998............................................................... $ 500
1999............................................................... $ 250
-------
Total.............................................................. $ 1,000
</TABLE>

NOTE H--STOCKHOLDERS' EQUITY:

In August 1995, the Company consummated a public offering of 3,500,000
shares of Common Stock with proceeds to the Company (after underwriting
discounts and offering expenses) of approximately $32,627,000.

In October 1995, pursuant to an arrangement with a contract manufacturer,
the Company issued to such manufacturer 125,000 shares of Common Stock with a
fair value of $10 per share. In connection therewith, the Company recorded a
non-cash charge to earnings of $1,250,000.

In May 1996, the Company increased the number of its authorized common
shares to 45,000,000.

In August 1996, the Company completed a private placement of 1,556,763
shares of Common Stock, together with warrants as described below, with
proceeds to the Company (after offering expenses) of approximately
$11,932,000.

In September 1996, pursuant to a buyout of a royalty arrangement, the
Company issued 550,000 shares of Common Stock with a fair value of $12.87 per
share. In connection, therewith, the Company recorded a non-cash charge to
earnings of $7,060,000.

Warrants--Under a 1991 credit agreement with certain stockholders, the
Company granted warrants to the lenders to purchase an aggregate of 250,000
shares of Common Stock exercisable at $8 per share. These warrants expire in
2001. In connection therewith, the Company recorded a non-cash charge to
earnings of $250,000 in 1991. At December 31, 1996, 229,739 of these warrants
are outstanding.

In October 1994, pursuant to an arrangement with a contract manufacturer,
the Company granted to such manufacturer a warrant to purchase 300,000 shares
of Common Stock exercisable at $7.50 per share. The warrant expires in 1999.
In connection therewith, the Company recorded a non-cash charge to earnings of
$200,000 in 1994.

In August 1996, the Company completed a private placement of 1,556,763
shares of Common Stock, together with warrants to purchase an aggregate of
1,011,896 shares of Common Stock. The warrants are exercisable at $8.48 per
share, and contain provisions to decrease the exercise price, and increase the
issuable shares, under certain circumstances. Such circumstances include the
issuance of shares of Common Stock by the Company for a consideration per
share less than the exercise price of the warrants, and the issuance by the
Company of securities convertible into shares of Common Stock for which the
exercise or conversion price is less than the exercise price of the warrants.
The warrant holders also have a one-time right, in the event the average price
of the Company's Common Stock in any month prior to August 1999 falls below a
certain level, to reduce the exercise price of the warrant to 110% of such
average price.

F-11
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Stock option plans--In May 1991, the stockholders approved the 1990 Stock
Option Plan (the "1990 Plan") which provides for the granting of options for
the purchase of up to 160,000 shares of Common Stock. In May 1996, the
stockholders approved the amended 1992 Stock Option Plan (the "1992 Plan")
which provides for the granting of options for the purchase of up to 2,500,000
shares of Common Stock.

The plans provide for the granting of incentive stock options and
nonqualified stock options and are administered by a committee of the Board of
Directors (except as to options awarded to non-employee directors as described
below). The committee has the authority to determine the term during which an
option may be exercised (provided that no option may have a term of more than
10 years), the exercise price of an option and the rate at which options may
be exercised. Incentive stock options may be granted only to employees of the
Company. Nonqualified stock options may be granted to employees, directors or
consultants of the Company. For nonqualified stock options under the 1992 Plan
and incentive stock options, the exercise price can not be less than the fair
market value of the underlying Common Stock on the date of the grant. The 1992
Plan also provides for initial grants to nonemployee directors to purchase
15,000 shares of Common Stock, and annual grants thereafter of options to
purchase 5,000 shares of Common Stock.

In addition to the shares of Common Stock issuable upon exercise of options
granted under the Company's stock option plans, 734,383 shares of Common Stock
are issuable upon exercise of outstanding options granted to officers,
employees and consultants pursuant to other written agreements. The price for
these options was set by the Board of Directors, or a committee designated by
the Board, based upon an evaluation of the fair market value of the Company's
Common Stock. The options vest over various periods, not exceeding five years,
and expire no later than ten years from the date of grant.

During 1994, a number of outstanding options with higher exercise prices
were exchanged for fewer options with an exercise price equal to $3.75 per
share. Pursuant to this program, 499,975 option shares were exchanged for
431,724 new option shares.

The Company applies APB Opinion 25 and related Interpretations in accounting
for its options. Accordingly, no compensation cost has been recognized for its
stock option grants. Had compensation cost for the Company's stock option
grants been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
Net Loss................................... As reported $( 30,620) $( 17,215)
Pro forma $( 31,816) $( 17,410)
Net Loss Per Share......................... As reported $ (1.71) $ (1.17)
Pro forma $ (1.78) $ (1.18)
</TABLE>

The resulting effect on pro forma net loss and net loss per share disclosed
for 1996 and 1995 is not likely to be representative of the effects on net
loss and net loss per share on a pro forma basis in future years, because 1995
and 1996 pro forma results include the impact of only one and two years,
respectively, of grants and related vesting, while subsequent years will
include additional years of grants and vesting.

F-12
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

A summary of the status of the Company's stock options as of December 31,
1994, 1995 and 1996, and changes during the years ending on those dates is
presented below (in thousands, except per share data):

<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000) PRICE (000) PRICE (000) PRICE
- ------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,048 $ 3.97 1,759 $3.07 1,563 $4.13
Granted................. 782 $10.56 504 $7.16 323 $5.49
Exercised............... (196) $ 2.56 (107) $3.08 (25) $1.14
Forfeited............... (168) $ 5.01 (108) $4.90 (102) $8.72
Outstanding at end of
year................... 2,466 $ 6.07 2,048 $3.97 1,759 $3.07
Options exercisable at
year-end............... 1,203 $ 3.00 1,157 $2.39 926 $1.89
Weighted-average fair
value of options
granted during the
year................... $7.54 $5.30 --
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1996 (in thousands, except per share data):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- ---------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
SHARES REMAINING AVERAGE SHARES AVERAGE
RANGE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- ------------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.002-$.40..... 146 2 years $ .022 146 $ .022
$2.00-$3.75.... 1062 6 years $ 2.75 867 $ 2.54
$5.25-$8.00.... 300 8 years $ 6.70 139 $ 6.35
$9.13-$11.63... 943 9 years $10.38 43 $ 9.18
$16.75-$16.75.. 15 8 years $16.75 8 $16.75
----- ------- ------ ----- ------
$.002-$16.75... 2,466 7 years $ 6.07 1,203 $ 3.00
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: dividend yield of zero (.0%)
percent, expected volatility of eighty-two (82%) and seventy-nine (79%)
percent; respectively, risk-free interest rates ranging from 5.6% to 7.25%,
and expected life of six years.

NOTE I--INCOME TAXES:

The Company has approximately $85,522,000 of net operating loss ("NOL")
carryforwards, and approximately $4,258,000 of research and development tax
credits, available to offset future federal income tax, subject to limitations
for alternative minimum tax. The NOL and research and development credit
carryforwards are subject to examination by the tax authorities and expire in
various years from 2003 through 2011. The NOL carryforward differs from the
accumulated deficit due principally to differences in the recognition of
certain research and development expenses for financial and federal income tax
reporting.

The Tax Reform Act of 1986 contains provisions that may limit the NOL and
research and development credit carryforwards available to be used in any
given year upon the occurrence of certain events, including

F-13
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

significant changes in ownership interest. A change in ownership of a company
of greater than 50% within a three-year period results in an annual limitation
on that company's ability to utilize its NOL carryforwards from tax periods
prior to the ownership change. The Company is subject to an annual limitation
on the use of its NOL carryforwards and research and development credits
pursuant to these provisions. The Company does not believe that such
limitation will have a material adverse impact on the utilization of its
carryforwards.

The Company's NOL, research and development tax credit carryforwards and
temporary differences represent a previously unrecognized tax benefit.
Recognition of these benefits requires future income. Because the attainment
of future income is uncertain, the Company has established a valuation
allowance, which increased by approximately $7,698,000 during 1996, for the
entire amount of the tax benefit.

Significant components of the Company's deferred tax assets as of December
31, 1996 and 1995 are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net operating loss carryforwards........................ $ 29,077 $ 24,533
Research credits........................................ 4,258 3,451
Other (net)............................................. 3,213 866
-------- --------
Net deferred tax assets................................. 36,548 28,850
Valuation allowance for deferred tax assets............. $(36,548) $(28,850)
-------- --------
Total deferred tax assets............................... $ -- $ --
======== ========
</TABLE>

NOTE J--COLLABORATIVE AGREEMENTS:

In 1990, the Company entered into a Research and License Agreement with
Colgate-Palmolive Company ("Colgate") pursuant to which the Company received
research funding of approximately $0, $280,000, $326,000, and $1,527,000
during the years ended December 31, 1996, 1995 and 1994 and during the period
from June 29, 1987 (inception) to December 31, 1996, respectively. This
agreement has expired, and the Company does not expect to receive any
additional such funding.

In August 1994, the Company entered into a collaboration in the nutritional
field with Abbott Laboratories ("Abbott"). The Company recorded revenue of
$150,000, $150,000 and $62,500 in the years ended December 31, 1996, 1995 and
1994, respectively, under this arrangement.

The Company recorded revenues of $1.9 million in 1995 relating to the
execution of an agreement in principle with Fisons plc ("Fisons") in September
1995, and the termination by Fisons of this arrangement in November 1995.

Under license agreements, the Company will owe royalties on sales of certain
of its proposed products. Additionally, certain of these agreements also
provide that if the Company elects not to pursue the commercial development of
any licensed technology, or does not adhere to an acceptable schedule of
commercialization, then the Company's exclusive rights to such technology
would terminate.

The Company maintains relationships with, and funds research at, a number of
institutions. These relationships typically provide the Company with an option
to license any results of the research. Generally, the Company would be
obligated to pay royalties based upon any revenue from the licenses.

F-14
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE K--401(K) PLAN:

The Company maintains a 401(k) retirement plan available to all full-time,
eligible employees. Employee contributions are voluntary and are determined on
an individual basis, limited to the maximum amount allowable under federal tax
regulations. The Company, at its discretion, may make certain contributions to
the plan. No such contributions have been made through December 31, 1996.

NOTE L--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:

Manufacturing

The Company contracts with third parties for the manufacture of materials,
and is working with Abbott Laboratories with regard to the manufacture of bulk
Cytolex. The Company's current arrangement with Abbott provides for the
development by Abbott of a chemical process to manufacture bulk Cytolex on a
commercial scale, for the production of bulk Cytolex, and for Abbott to
perform those activities necessary to submit a Drug Master File to the FDA in
support of any filing for marketing approval of Cytolex. The arrangement with
Abbott provides for cash payments by the Company through early 1998
aggregating approximately $12,900,000, as well as the issuance by the Company
to Abbott of up to 500,000 shares of its Common Stock and the obligation to
pay a royalty on future sales of Cytolex. Through December 31, 1996, the
Company has paid Abbott approximately $8,600,000 under this arrangement. Stock
issuances by the Company to Abbott will result in a charge to earnings,
representing the fair value of the shares when issued. The Company issued
125,000 shares of Common Stock to Abbott in October 1995, resulting in a
charge to earnings of $1,250,000 in 1995. Future stock issuances are related
to the achievement by Abbott of contractual performance milestones which could
begin to occur in 1997. Substantial additional funds will also be required to
continue manufacturing development efforts beyond the term of this current
arrangement.

There are a limited number of companies which are currently able to produce
materials on the scale which the Company expects to require to commercialize
its compounds. There can be no assurance that qualified outside contractors
will be available to manufacture materials for the Company, or do so at costs
which are affordable by the Company. The Company is currently dependent upon
Abbott for the production of bulk Cytolex, and, as described above, Abbott is
currently conducting certain manufacturing development activities. The Company
and Abbott have agreed that, upon completion of such activities, they will
negotiate in good faith a supply agreement for the Company's worldwide supply
needs of Cytolex. In the event that this agreement is not entered into, or
Abbott does not otherwise continue to manufacture Cytolex, the Company's
timeline to commercialize Cytolex would be adversely affected, and the Company
may need to spend substantial funds on securing other manufacturing
arrangements or building a manufacturing infrastructure, and licensing
applicable manufacturing related technology from such contract manufacturer.

The Company also expects to conduct significant manufacturing development
activities for its other products under development.

Rent

The Company has entered into an operating lease for its laboratory and
corporate office facility. The lease provides for minimum annual rent payments
through 1999 as follows (in thousands):

<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1997................................................................ $322
1998................................................................ 335
1999................................................................ 319
</TABLE>

F-15
<PAGE>

MAGAININ PHARMACEUTICALS INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The lease provides for escalations relating to increases in real estate
taxes and certain operating expenses.

Rent expense was approximately $310,000, $297,000, $291,000, and $1,978,000
for the years ended December 31, 1996, 1995 and 1994, and for the period from
June 29, 1987 (inception) to December 31, 1996, respectively.

F-16
<PAGE>

MAGAININ PHARMACEUTICALS INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 365 $ 2,072
Short-term investments............................ 24,764 31,268
Prepaid expenses and other current assets......... 437 454
--------- --------
Total current assets............................ 25,566 33,794
Fixed assets, net................................... 3,003 2,506
Other assets........................................ 71 76
--------- --------
Total assets.................................... $ 28,640 $ 36,376
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $ 4,973 $ 5,145
Note payable--current............................. 500 250
Equipment lease obligations--current.............. 64 123
--------- --------
Total current liabilities....................... 5,537 5,518
Note payable--long term............................. 1,000 750
Equipment lease obligations--long term.............. -- 38
Deferred rent....................................... 104 127
--------- --------
Total liabilities............................... 6,641 6,433
--------- --------
Commitments, contingencies and other matters
Stockholders' equity:
Preferred stock--$.001 par value; shares
authorized--9,211, none issued................... -- --
Common Stock--$.002 par value; shares authorized--
45,000; shares issued and outstanding--19,380 and
19,364........................................... 39 39
Additional paid-in capital........................ 125,209 125,134
Unrealized gain on investments.................... 17 13
Accumulated deficit............................... (103,266) (95,243)
--------- --------
Total stockholders' equity...................... 21,999 29,943
--------- --------
Total liabilities and stockholders' equity...... $ 28,640 $ 36,376
========= ========
</TABLE>

See accompanying notes to unaudited financial statements.

F-17
<PAGE>

MAGAININ PHARMACEUTICALS INC.

STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Related party contract............. $ -- $ -- $ -- $ --
Contract and government grant...... 13 37 10,088 112
-------- --------- -------- ---------
13 37 10,088 112
-------- --------- -------- ---------
Costs and expenses:
Research and development........... 6,327 5,788 16,864 17,870
General and administrative......... 826 789 2,475 2,378
Charge for stock issuance relating
to royalty buy out................ -- 7,080 -- 7,080
-------- --------- -------- ---------
7,153 13,657 19,339 27,328
-------- --------- -------- ---------
Loss from operations................. (7,140) (13,620) (9,251) (27,216)
Interest income...................... 431 546 1,301 1,648
Interest expense..................... (29) (8) (73) (18)
-------- --------- -------- ---------
Net loss............................. $ (6,738) $ (13,082) $ (8,023) $ (25,586)
======== ========= ======== =========
Net loss per share................... $ (.35) $ (.72) $ (.41) $ (1.47)
======== ========= ======== =========
Weighted average shares outstanding.. 19,369 18,209 19,366 17,459
</TABLE>

See accompanying notes to unaudited financial statements.

F-18
<PAGE>

MAGAININ PHARMACEUTICALS INC.

STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (8,023) $(25,586)
Adjustments to reconcile net loss to net cash used in
operating activities:
Fair value of stock, options and warrants issued....... -- 7,080
Depreciation and amortization.......................... 709 428
Deferred rent.......................................... (23) (12)
Decrease in prepaid expenses and other assets.......... 22 34
Increase (decrease) in accounts payable and accrued
expenses.............................................. (172) 2,941
-------- --------
Net cash used in operating activities................ (7,487) (15,115)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments................................. (37,426) (24,883)
Proceeds from maturities and sales of investments........ 43,934 27,933
Capital expenditures..................................... (1,206) (1,253)
-------- --------
Net cash provided by investing activities............ 5,302 1,797
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable................ 625 500
Payments on notes payable................................ (125) --
Payments on capitalized equipment leases................. (97) (115)
Proceeds from sale of securities and exercise of options
and warrants............................................ 75 12,419
-------- --------
Net cash provided by financing activities............ 478 12,804
-------- --------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS................ (1,707) (514)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 2,072 1,880
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 365 $ 1,366
======== ========
</TABLE>

See accompanying notes to unaudited financial statements.

F-19
<PAGE>

MAGAININ PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

(A) BASIS OF PRESENTATION

The accompanying condensed financial statements do not include all of the
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles, but in
the opinion of management, contain all adjustments (which consist of only
normal recurring adjustments) necessary for a fair presentation of such
financial information. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years.

The condensed financial statements should be read in conjunction with the
audited financial statements as of December 31, 1996 and for the year then
ended, included in the Company's 1996 Annual Report on Form 10-K, filed with
the Securities and Exchange Commission.

As a result of revenues earned during the nine months ended September 30,
1997, the Company is no longer in the development stage.

(B) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following (in
thousands):

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Accounts payable................................ $ 209 $ 176
Clinical trial costs............................ 726 720
Manufacturing development costs................. 2,273 3,426
Preclinical costs............................... 357 269
Regulatory costs................................ 577 --
Professional fees............................... 163 200
Accrued compensation and benefits............... 612 4
Other........................................... 56 350
------ ------
$4,973 $5,145
====== ======
</TABLE>

The Company entered into a credit arrangement in 1996 with a commercial bank
under which up to $1,000,000 may be borrowed to finance the acquisition of
equipment and the costs of improvements to the Company's leased facilities.
Borrowings under this credit facility bear interest at a rate of 8.5% for the
three year term of the loan. The loan provides for monthly interest payments,
with principal payments made in quarterly installments in the second and third
year after borrowings. Under this credit arrangement, any amounts outstanding
shall become immediately due and payable under certain circumstances,
including the failure of the Company to maintain certain minimum cash and
investments balance, and financial ratios.

As of September 30, 1997, the Company has borrowed $875,000 under this
facility.

The Company entered into an additional credit arrangement in 1997 under
which up to $1,500,000 may be borrowed. Borrowings under this credit facility
bear interest at the prime rate minus one quarter percent, to be established
at the time of borrowing. The loan provides for monthly interest payments,
with all principal due April 1999. Under this credit arrangement, any amounts
outstanding shall become immediately due and payable under certain
circumstances, including the failure of the Company to maintain certain
minimum cash and investments balance, and financial ratios.

As of September 30, 1997, the Company has borrowed $625,000 under this
facility.

F-20
<PAGE>

MAGAININ PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

(D) COLLABORATIVE AGREEMENTS

In February 1997, the Company entered into a development, supply and
distribution agreement (the "Agreement") in North America with SmithKline
Beecham ("SB") for Cytolex(TM). SB has paid the Company $10.0 million under
this Agreement, and may make additional payments to Magainin of up to $22.5
million, upon the occurrence of certain product milestones. SB will also fund a
percentage of any development expenses for any additional indications for
Cytolex(TM). Upon the commencement of commercial sales by SB, Magainin will be
responsible for the supply of Cytolex(TM) and SB will be responsible for the
marketing and sales of Cytolex(TM). Magainin will receive certain percentages
of SB sales revenues under agreed upon terms. The Agreement also gives SB the
right to negotiate for rights to another Magainin product development
candidate, under certain terms and conditions.

(E) NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued FAS No.
128, "Earnings per Share," which is effective for financial statements for
fiscal years ending after December 15, 1997. This statement simplifies the
standards for computing earnings per share previously found in APB Opinion No.
15, making such standards comparable to international EPS standards. The
Company intends to adopt FAS No. 128 for its fiscal year ending December 31,
1997; early adoption is not permitted. The Company does not expect that the
effect of adopting FAS No. 128 will be material.

F-21
<PAGE>

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

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

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................................................. 2
Information Incorporated by Reference................................. 2
Prospectus Summary.................................................... 4
Risk Factors.......................................................... 8
Use of Proceeds....................................................... 17
Price Range of Common Stock........................................... 17
Dividend Policy....................................................... 17
Capitalization........................................................ 18
Dilution.............................................................. 18
Selected Financial Data............................................... 19
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 20
Business.............................................................. 25
Directors and Management.............................................. 37
Principal Stockholders................................................ 39
Description of Capital Stock.......................................... 41
Underwriting.......................................................... 44
Legal Opinion......................................................... 45
Experts............................................................... 45
Index to Financial Statements......................................... F-1
</TABLE>

2,500,000 SHARES

MAGAININ PHARMACEUTICALS INC.

COMMON STOCK

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

HAMBRECHT & QUIST

BANCAMERICA ROBERTSON STEPHENS

COWEN & COMPANY

, 1997

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table shows the estimated expenses of the issuance and
distribution of the securities offered hereby.

<TABLE>
<S> <C>
Commission fee..................................................... $ 9,531
NASD registration fee.............................................. 3,590
Nasdaq listing fee................................................. 17,500
Legal fees and expenses............................................ 100,000
Blue Sky Fees and expenses......................................... 15,000
Printing and engraving expenses.................................... 100,000
Accounting fees and expenses....................................... 25,000
Miscellaneous...................................................... 4,379
--------
Total............................................................ $275,000
========
</TABLE>
- ---------------------
*To be filed by amendment.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations.
Article 9 of the Company's By-Laws provides for the indemnification of
directors, officers, employees and agents of the Company to the maximum extent
permitted by the Delaware General Corporation Law. Section 145 empowers a
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, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer or agent of the
corporation or another enterprise if serving at the request of the
corporation. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. In the case of an action by or in the
right of the corporation, no indemnification may be made with respect to any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.

The Company's By-laws permit it to purchase insurance on behalf of such
person 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
Company would have the power to indemnify him against such liability under the
foregoing provision of the By-laws.

ITEM 16. LISTS OF EXHIBITS

The exhibits filed as part of this registration statement are as follows:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Underwriting Agreement
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of
Securities being registered.
</TABLE>

II-1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Morgan, Lewis & Bockius LLP (included in its opinion
filed as Exhibit 5.1 hereto).
23.2* Consent of Richard A. Eisner & Company, LLP.
24.1 Powers of Attorney (included on signature page).
</TABLE>
- ---------------------
* Filed herewith.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement 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
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Restated Certificates of Incorporation, its By-
laws, 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 of 1933 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
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 a public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

Provided, however, that paragraph (1)(i) and 1(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a 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.

(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the
termination of the offering.

II-2
<PAGE>

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 OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED, IN PLYMOUTH MEETING, PENNSYLVANIA, ON OCTOBER 20, 1997.

Magainin Pharmaceuticals Inc.

/s/ Jay Moorin
By: _________________________________
JAY MOORIN
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER

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

Each person in so signing also makes, constitutes and appoints Jay Moorin,
Chairman, President and Chief Executive Officer, and Michael R. Dougherty,
Executive Vice President and Chief Financial Officer, and each of them acting
alone, his true and lawful attorney-in-fact, with full power of substitution,
to execute and cause to be filed with the Securities and Exchange Commission
pursuant to the requirements of the Securities Act of 1933, as amended, any
and all amendments and post-effective amendments to this registration
statement, and including any registration statement for the same offering that
is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act, with exhibits thereto and other documents in connection therewith, and
hereby ratifies and confirms all that said attorney-in-fact or his substitute
or substitutes may do or cause to be done by virtue hereof.

SIGNATURE TITLE DATE

/s/ Jay Moorin Chairman of the Board, October 20,
_____________________________________ President and Chief 1997
JAY MOORIN Executive Officer
(Principal Executive
Officer)

/s/ Michael R. Dougherty Executive Vice October 20,
_____________________________________ President, Chief 1997
MICHAEL R. DOUGHERTY Financial Officer and
Director (Principal
Financial and
Accounting Officer)

/s/ Michael A. Zasloff Vice Chairman of the October 20,
_____________________________________ Board and Executive 1997
MICHAEL A. ZASLOFF, M.D., PH.D. Vice President

/s/ Roy C. Levitt Executive Vice President October 20,
_____________________________________ and Director 1997
ROY C. LEVITT, M.D.

/s/ Bernard Canavan Director October 20,
_____________________________________ 1997
BERNARD CANAVAN, M.D.

/s/ Zola P. Horovitz Director October 20,
_____________________________________ 1997
ZOLA P. HOROVITZ, PH.D.

/s/ Charles A. Sanders Director October 20,
_____________________________________ 1997
CHARLES A. SANDERS, M.D.

/s/ Robert F. Shapiro Director October 20,
_____________________________________ 1997
ROBERT F. SHAPIRO

/s/ James B. Wyngaarden Director October 20,
_____________________________________ 1997
JAMES B. WYNGAARDEN, M.D.

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DOCUMENT NUMBER
------- -------- ------
<C> <S> <C>
1.1* Underwriting Agreement.......................................
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of
Securities being registered. ...............................
23.1 Consent of Morgan, Lewis & Bockius LLP (included in its
opinion filed as Exhibit 5.1 hereto). ......................
23.2* Consent of Richard A. Eisner & Company, LLP. ................
24.1 Powers of Attorney (included on the signature page). ........
</TABLE>
- ---------------------
* Filed herewith.

<PAGE>

Exhibit 1.1

MAGAININ PHARMACEUTICALS, INC.

2,500,000 Shares/1/

Common Stock

UNDERWRITING AGREEMENT
----------------------

October __, 1997

HAMBRECHT & QUIST LLC
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104

Ladies and Gentlemen:

Magainin Pharmaceuticals, Inc., a Delaware corporation (herein called
the "Company"), proposes to issue and sell 2,500,000 shares of its authorized
but unissued Common Stock, $0.002 par value (herein called the "Common Stock")
(said 2,500,000 shares of Common Stock being herein called the "Underwritten
Stock"). The Company proposes to grant to the Underwriters (as hereinafter
defined) an option to purchase up to 375,000 additional shares of Common Stock
(herein called the "Option Stock" and with the "Underwritten Stock" herein
collectively called the "Stock"). The Common Stock is more fully described in
the Registration Statement and the Prospectus hereinafter mentioned.

The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the "Underwriters", which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each
of the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.

1. Registration Statement. The Company has filed with the Securities
and Exchange Commission (herein called the "Commission") a registration
statement on Form S-3 (No. 333-______), including the related preliminary
prospectus, for the registration under the Securities Act of 1933, as amended
(herein called the "Securities Act") of the Stock. Copies of such registration
statement and of each amendment thereto, if any, including the related
preliminary prospectus (meeting the requirements of Rule 430A of the rules and
regulations of

- --------------------
/1/ Plus an option to purchase from the Company up to 375,000 additional
shares to cover over-allotments.
<PAGE>

the Commission) heretofore filed by the Company with the Commission have been
delivered to you.

The term "Registration Statement" as used in this agreement shall mean
such registration statement, including all documents incorporated by reference
therein, all exhibits and financial statements, all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus referred to
below, in the form in which it became effective, and any registration statement
filed pursuant to Rule 462(b) of the rules and regulations of the Commission
with respect to the Stock (herein called a Rule 462(b) registration statement),
and, in the event of any amendment thereto after the effective date of such
registration statement (herein called the "Effective Date"), shall also mean
(from and after the effectiveness of such amendment) such registration statement
as so amended (including any Rule 462(b) registration statement). The term
Prospectus as used in this Agreement shall mean the prospectus, including the
documents incorporated by reference therein, relating to the Stock first filed
with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing
is required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term "Preliminary Prospectus" as used in this Agreement shall mean each
preliminary prospectus, including the documents incorporated by reference
therein, included in such registration statement prior to the time it becomes
effective.

The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.

2. Representations and Warranties of the Company.

The Company hereby represents and warrants as follows:

(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and as
being conducted, and is duly qualified as a foreign corporation and in
good standing in all jurisdictions in which the character of the
property owned or leased or the nature of the business transacted by
it makes qualification necessary (except where the failure to be so
qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the
Company).

(ii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any materially adverse change in the business, properties,
financial condition or results of operations of the

-2-
<PAGE>

Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary cause of business, other than as set
forth in the Registration Statement and the Prospectus, and since such
dates, except in the ordinary course of business, the Company has not
entered into any material transaction not referred to in the
Registration Statement and the Prospectus.

(iii) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on
which Option Stock is to be purchased, the Prospectus will comply, in
all material respects, with the provisions of the Securities Act and
the Securities Exchange Act of 1934, as amended (herein called the
"Exchange Act") and the rules and regulations of the Commission
thereunder; on the Effective Date, the Registration Statement did not
contain any untrue statement of a material fact and did not omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any
later date on which Option Stock is to be purchased, will not contain
any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in
this subparagraph (iii) shall apply to statements in, or omissions
from, the Registration Statement or the Prospectus made in reliance
upon and in conformity with information herein or otherwise furnished
in writing to the Company by or on behalf of the Underwriters for use
in the Registration Statement or the Prospectus.

(iv) The Stock, when issued and sold to the Underwriters as
provided herein, will be duly and validly issued, fully paid and
nonassessable and conforms to the description thereof in the
Prospectus. No further approval of authority of the stockholders or
the Board of Directors of the Company will be required for the
issuance and sale of the Stock as contemplated herein.

(v) Prior to the Closing Date the Stock to be issued and sold
by the Company will be authorized for listing by the Nasdaq Stock
Exchange upon official notice of issuance.

(vi) The issued and outstanding shares of capital stock of the
Company have been duly authorized, validly issued, are fully paid and
nonassessable and are not subject to any preemptive or similar rights.
Except as set forth in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), such shares are not subject to any preemptive
or similar right. The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus as of the
dates referred to therein (or, if the Prospectus is not in existence,
in the most recent Preliminary Prospectus). The description of the
securities of the Company in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) (or incorporated by reference therein)
is, and at the Closing Date will be, complete and accurate in all
respects. Except as set forth in the

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<PAGE>

Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, in the most recent Preliminary Prospectus) (or
incorporated by reference therein), the Company does not have
outstanding, and at the Closing Date will not have outstanding, any
options to purchase, or any rights or warrants to subscribe for, or
any securities or obligations convertible into, or exchangeable for,
or any contracts or commitments to issue or sell, any shares of
capital stock or other securities.

(vii) This Agreement has been duly authorized and validly
executed and delivered by the Company and is a legal, valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms.

(viii) The holders of the Stock will not be personally liable for
the payment of the Company's debts except as they may be liable by
reason of their own conduct or acts. The Stock, when issued, will
conform to the description thereof set forth in the Prospectus.

(ix) The financial statements and the related notes and
schedules included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus) (or incorporated by reference therein) present
fairly the financial condition of the Company as of the date thereof
and the results of operations, stockholders' equity (deficit) and cash
flows of the Company at the dates and for the periods covered thereby,
all in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the entire period
involved, except as otherwise disclosed therein. No other financial
statements or schedules of the Company or any other entity are
required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. Richard A. Eisner & Company,
L.L.P. (the "Accountants"), who have reported on such financial
statements and schedules to the extent set forth in the Prospectus,
are independent accountants with respect to the Company as required by
the Securities Act and the rules and regulations promulgated
thereunder (the "Rules and Regulations"). The financial statements of
the Company and the related notes and schedules included in the
Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, in the most recent Preliminary Prospectus) (or
incorporated by reference therein) have been prepared in conformity
with the requirements of the Securities Act and the Rules and
Regulations and present fairly the information shown therein.

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

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<PAGE>

(xi) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus and prior to
the Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus (or incorporated by
reference therein), (i) there has not been and will not have been any
change in the capitalization of the Company other than non-material
changes in the ordinary course of business, or any material adverse
change in the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company
arising for any reason whatsoever, (ii) the Company has not incurred
nor will it incur any material liabilities or obligations, direct or
contingent, nor has the Company entered into nor will it enter into
any material transactions other than pursuant to this Agreement, the
Registration Statement and the transactions referred to herein and
therein and (iii) the Company has not and will not have paid or
declared any dividends or other distributions of any kind on any class
of its capital stock.

(xii) Any real property and buildings held under lease to the
Company are held or leased by the Company under valid, binding and
enforceable leases, with such exceptions as do not interfere with the
use made and proposed to be made of such property and buildings by the
Company.

(xiii) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for,
an "investment company," as such terms are defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act").

(xiv) Except as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) (or incorporated by reference therein),
there are no actions, suits or proceedings pending or to the Company's
best knowledge, threatened against or affecting the Company or any of
its officers in their capacity as such, before or by any Federal or
state court, commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, wherein an unfavorable
ruling, decision or finding would reasonably be likely to materially
adversely affect the business, properties, prospects, condition
(financial or otherwise) or results of operations of the Company.

(xv) The Company has, and at the Closing Date will have, (i)
all governmental licenses, permits, consents, orders, approvals and
other authorizations necessary to carry on its business as presently
conducted, (ii) complied with all laws, regulations and orders
applicable to either it or its business, where the failure to so
comply would have a material adverse effect on the business,
properties, prospects, condition (financial or otherwise) or results
of operations of the Company, and (iii) performed all its obligations
required to be performed, and is not, and at the Closing Date will not
be, to the Company's best knowledge, in default, under any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement, lease, contract or other agreement or
instrument (collectively, a "contract or other agreement") to which

-5-
<PAGE>

it is a party or by which its property is bound or affected, except as
otherwise set forth in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus) (or incorporated by reference therein) and
except where such default would not have a material adverse effect on
the business, properties, prospects, condition (financial or
otherwise) or results of operations of the Company, and, to the
Company's best knowledge, no other party under any contract or other
agreement to which it is a party is in default in any respect
thereunder. The Company is not in violation of any provision of its
organizational or governing documents.

(xvi) The Company has all corporate power and authority to
enter into this Agreement and to carry out the provisions
and conditions hereof and all consents, authorizations,
approvals and orders required in connection herewith and
therewith have been obtained.

(xvii) Neither (i) the issuance, offering and sale of the Stock
pursuant hereto, nor (ii) the compliance by the Company
with the other provisions hereof require the consent,
approval, authorization, registration or qualification of
or with any governmental authority, except such as have
been obtained, such as may be required under state
securities or Blue Sky laws or the bylaws and rules of
the National Association of Securities Dealers, Inc. (the
"NASD") and, if the Registration Statement is not
effective under the Securities Act as of the time of
execution hereof, such as may be required (and shall be
obtained as provided in either this Agreement) under the
Securities Act.

(xviii) Neither the execution of this Agreement, nor the
issuance, offering or sale of the Stock, nor the
consummation of any of the transactions contemplated
herein, nor the compliance by the Company with the terms
and provisions hereof or thereof will conflict with, or
will result in a breach of, any of the terms and
provisions of, or has constituted or will constitute a
default under, or has resulted in or will result in the
creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to
the terms of any contract or other agreement to which the
Company may be bound or to which any of the property or
assets of the Company is subject; nor will such action
result in any violation of the provisions of the
Company's organizational or governing documents, or any
statute or any order, rule or regulation applicable to
the Company or of any court or of any federal, state or
other regulatory authority or other government body
having jurisdiction over the Company.

(xix) There is no document or contract of a character required
to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the
Registration Statement which is not described or filed as
required. All such contracts to which the Company is a
party have been duly authorized, executed and delivered by
the Company, constitute valid and binding agreements of
the Company, and are enforceable against the Company in
accordance with the terms thereof.

(xx) No statement, representation or warranty made by the
Company in this Agreement or made in any certificate or
document required by this Agreement to be

-6-

<PAGE>

delivered to the Underwriters was or will be, when made, inaccurate,
untrue or incorrect in any material respect.

(xxi) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action
intended, or which might reasonably be expected, to cause or result,
under the Securities Act or otherwise, in, or which has constituted,
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Stock.

(xxii) No holder of securities of the Company has rights to the
registration of any securities of the Company as a result of the
filing of the Registration Statement, except for such rights as have
been waived.

(xxiii) The Company is not involved in any material labor dispute
nor is any such dispute threatened.

(xxiv) Neither the Company nor any of its employees or agents
has made any payment of funds or received or retained any funds in
violation of any law, rule or regulation of a character required to be
disclosed in the Prospectus (or, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus) (or incorporated
by reference therein).

(xxv) Except as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus), the business, operations and
properties of the Company have been and are being conducted in
compliance with all applicable laws, ordinances, rules, regulations,
licenses, permits, approvals, plans, authorizations or requirements
relating to occupational safety and health, or pollution, or
protection of health or the environment (including, without
limitation, those relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants or hazardous or toxic
substances, materials or wastes into ambient air, surface water,
groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling
of chemical substances, pollutants, contaminants or hazardous or toxic
substances, materials or wastes, whether solid, gaseous or liquid in
nature) of any governmental department, commission, board, bureau,
agency or instrumentality of the United States, any state or political
subdivision thereof, or any foreign jurisdiction, and all applicable
judicial or administrative agency or regulatory decrees, awards,
judgments and orders relating thereto, except where the failure to be
in such compliance will not, individually or in the aggregate, have a
material adverse effect on the ability of the Company to carry on its
business as presently conducted; and the Company has not received any
notice from any governmental instrumentality or any third party
alleging any material violation thereof or liability thereunder
(including, without limitation, liability for costs of investigating
or remediating sites containing hazardous substances and/or damages to
natural resources).

-7-
<PAGE>

(xxvi) To the Company's knowledge, the Company owns or
possesses, or can acquire on reasonable terms, adequate patents,
patent rights, licenses, inventions, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and
trade names necessary to carry on its business as presently conducted
by the Company.

(xxvii) Each officer and director of the Company listed on
Exhibit A hereto has delivered to the Underwriters an agreement to the
effect that he or she will not, for a period of 90 days after the
Closing Date, without the prior written consent of Hambrecht & Quist
LLC, on behalf of the Underwriters, directly or indirectly, (x) sell,
offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer
or dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (y) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic consequences
or ownership of Common Stock, whether any such transaction described
in clause (x) or (y) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.

(xxviii) The Company has no subsidiaries.

3. Purchase of the Stock by the Underwriters.

(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
2,500,000 shares of the Underwritten Stock to the several Underwriters and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $______ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.

(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the

-8-
<PAGE>

remaining shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting Underwriters
shall not be obligated to purchase the shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
shares of the Stock exceeds 10% of the total number of shares of the Stock which
all Underwriters agreed to purchase hereunder. If the total number of shares of
the Stock which the defaulting Underwriter or Underwriters agreed to purchase
shall not be purchased on absorbed in accordance with the two preceding
sentences, the Company shall have the right, within 24 hours next succeeding the
24-hour period above referred to, to make arrangements with other underwriters
or purchasers satisfactory to you for purchase of such shares and portion on the
terms herein set forth. In any such case, either you or the Company shall have
the right to postpone the Closing Date determined as provided in Section 5
hereof for not more than seven business days after the date originally fixed as
the Closing Date pursuant to said Section 5 in order that any necessary changes
in the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the non-defaulting Underwriters nor the
Company shall make arrangements within the 24-hour periods stated above for the
purchase of all the shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
to any non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.

(c) On the basis of the representation, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 375,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.

4. Offering by Underwriters.

(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.

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<PAGE>

(b) The information set forth in the last paragraph on the front
cover page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Stock filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for inclusion
in the Registration Statement, any Preliminary Prospectus, and the Prospectus,
and you on behalf of the respective Underwriters represent and warrant to the
Company that the statements made therein are correct.

5. Delivery of and Payment for the Stock.

(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 a.m., San Francisco time, on the date two
business day preceding the Closing Date), and payment therefor, shall be made at
the office of Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New
York, at 7:00 a.m., San Francisco time, on the [fourth] business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such [fourth] business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.

(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Stroock & Stroock & Lavan, 180
Maiden Lane, New York, New York, at 7:00 a.m., San Francisco time, on the third
business day after the exercise of such option.

(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 on the business day prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, on the business day
preceding the date of purchase.

It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall
not relieve such Underwriter from any of its obligations hereunder.

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<PAGE>

6. Further Agreements of the Company. The Company covenants and
agrees as follows:

(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A and (ii) not file any amendment to
the Registration Statement or supplement to the Prospectus of which
you shall not previously have been advised and furnished with a copy
or to which you shall have reasonably objected in writing or which is
not in compliance with the Securities Act or the rules and regulations
of the Commission.

(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, (ii) the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement,
(iii) the institution or notice of intended institution of any action
or proceeding for the purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of
the Stock for sale in any jurisdiction, or (v) the receipt by it of
notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time
be issued, to obtain the withdrawal thereof at the earliest possible
moment.

(c) The Company will (i) on or before the Closing Date,
deliver to you a signed copy of the Registration Statement as
originally filed and of each amendment thereto filed prior to the time
the Registration Statement becomes effective and, promptly upon the
filing thereof, a signed copy of each post-effective amendment, if
any, to the Registration Statement (together with, in each case, all
exhibits thereto unless previously furnished to you) and will also
deliver to you, for distribution to the Underwriters, a sufficient
number of additional conformed copies of each of the foregoing (but
without exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to
the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many
additional copies of the Prospectus and as many copies of any
supplement to the Prospectus and of any amended prospectus, filed by
the Company with the Commission, as you may reasonably request for the
purposes contemplated by the Securities Act.

(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by you, shall occur as a result of which it is
necessary, in the opinion of counsel for the Company or of counsel for
the Underwriters, to supplement or amend the Prospectus in order to
make the Prospectus not

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<PAGE>

misleading in the light of the circumstances existing at the time it
is delivered to a purchase of the Stock, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus so that the Prospectus as so supplemented or
amended will not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the
time such Prospectus is delivered to such purchaser, not misleading.
If, after the initial public offering of the Stock by the Underwriters
and during such period, the Underwriters shall propose to vary the
terms of offering thereof by reason of changes in general market
conditions or otherwise, you will advise the Company in writing of the
proposed variation, and, if in the opinion either of counsel for the
Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company
will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus setting forth such variation.
The Company authorizes the Underwriters and all dealers to whom any of
the Stock may be sold by the several Underwriters to use the
Prospectus, as from time to time amended or supplemented, in
connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules
and regulations thereunder for such period.

(e) Prior to the filing thereof with the Commission, the
Company will submit to you, for your information, a copy of any post-
effective amendment to the Registration Statement and any supplement
to the Prospectus or any amended prospectus proposed to be filed.

(f) The Company will cooperate, when and as requested by you,
in the qualification of the Stock for offer and sale under the
securities or blue sky laws of such jurisdictions as you may designate
and, during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, in keeping such qualifications
in good standing under said securities or blue sky laws; provided,
however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation
in any jurisdiction in which it is not so qualified. The Company will,
from time to time, prepare and file such statements, reports, and
other documents as are or may be required to continue such
qualifications in effect for so long a period as you may reasonably
request for distribution of the Stock.

(g) During a period of five years commencing with the date
hereof, the Company will furnish to you, and to each Underwriter who
may so request in writing, copies of all periodic and special reports
furnished to stockholders of the Company and of all information,
documents and reports filed with the Commission.

(h) Not late than the 45/th/ day following the end of the
fiscal quarter first occurring after the first anniversary of the
Effective Date, the Company will make generally available to its
security holders an earnings statement in accordance with Section
11(a) of the Securities Act and Rule 158 thereunder.

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<PAGE>

(i) The Company agrees to pay all costs and expenses incident to
the performance of its obligations under this Agreement, including all
costs and expenses incident to (i) the preparation, printing and filing
with the Commission and the National Association of Securities Dealers,
Inc. of the Registration Statement, any Preliminary Prospectus and the
Prospectus, (ii) the furnishing to the Underwriters of copies of any
Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 6 to be so furnished, (iii) the printing of this
Agreement and related documents delivered to the Underwriters, (iv) the
preparation, printing and filing of all supplements and amendments to the
Prospectus referred to in paragraph (d) of this Section 6, (v) the
furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees.

(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements
(including counsel fees and disbursements and cost of printing memoranda
for the Underwriters) paid by or for the account of the Underwriters or
their counsel in qualifying the Stock under state securities or blue sky
laws and in the review of the offering by the NASD.

(k) The Company hereby agrees that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company
will not, for a period of 90 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (x)
sell, offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (y) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of Common
Stock, whether any such transaction described in clause (x) or (y) above is
to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (A) the Stock to be
sold to the Underwriters pursuant to this Agreement, (B) shares of Common
Stock issued by the Company upon the exercise of options granted under the
stock option plans of the Company (the "Option Plans") or upon the exercise
of warrants outstanding as of the date hereof, all as described in footnote
(degree) to the table under the caption "Capitalization" in the Preliminary
Prospectus, and (C) options to purchase Common Stock granted under the
Option Plans.

(l) The Company agrees to use its best efforts to cause all
directors and officers to agree that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity
will not, for a period of [90] days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly,
(i) sell, offer, contract to sell, make any short sale, pledge, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common

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<PAGE>

Stock or any securities convertible into or exchangeable or exercisable for
or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.

(m) The Company is familiar with the Investment Company Act of
1940, as amended, and has in the past conducted its affairs, and will in
the future conduct its affairs, in such a manner to ensure that the Company
was not and will not be an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment Company Act
of 1940, as amended, and the rules and regulations thereunder.

7. Indemnification and Contribution.

(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act, or the common law or otherwise, and
the Company agrees to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this paragraph (a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of

-14-
<PAGE>

the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or
supplemented) was not sent or delivered to such person (excluding the documents
incorporated therein by reference) and the untrue statement or omission of a
material fact contained in such Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented) unless the failure is
the result of noncompliance by the Company with paragraph (c) of Section 6
hereof. The indemnity agreements of the Company contained in this paragraph (a)
and the representations and warranties of the Company contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.

(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto.
The indemnity agreement of each Underwriter contained in this paragraph (b)
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.

(c) Each party indemnified under the provision of paragraphs (a) and (b)
of this Section 7 agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such paragraphs, it
will promptly give written notice (herein called the Notice) of such service or
notification to the party or parties

-15-
<PAGE>

from whom indemnification may be sought hereunder. No indemnification provided
for in such paragraphs shall be available to any party who shall fail so to give
the Notice if the party to whom such Notice was not given was unaware of the
action, suit, investigation, inquiry or proceeding to which the Notice would
have related and was prejudiced by the failure to give the Notice, but the
omission so to notify such indemnifying party or parties of any such service or
notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of such indemnity agreement. Any indemnifying party
shall be entitled at its own expense to participate in the defense of any
action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(herein called the Notice of Defense) to the indemnified party, to assume (alone
or in conjunction with any other indemnifying party or parties) the entire
defense of such action, suit, investigation, inquiry or proceeding, in which
event such defense shall be conducted, at the expense of the indemnifying party
or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.

(d) If the indemnification provided for in this Section 7 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a) or (b)
of this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable

-16-
<PAGE>

law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of each
indemnifying party in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities, or actions in respect thereof,
as well as any other relevant equitable considerations. The relative benefits
received by the Company and the Underwriters shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Stock
received by the Company and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.

The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.

Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).

(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.

-17-
<PAGE>

8. Termination. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraph (i) and (j) of Section 6 hereof.

9. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:

(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and
no proceedings therefor shall be pending or threatened by the Commission.

(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as
to the financial statements contained therein), shall have been approved at
or prior to the Closing Date by Stroock & Stroock & Lavan LLP, counsel for
the Underwriters.

18
<PAGE>

(c) You shall have received from Morgan Lewis & Bockius LLP,
counsel for the Company, and from patent counsel for the Company, opinions,
addressed to the Underwriters and dated the Closing Date, in such forms
agreed upon by the parties, and if Option Stock is purchased at any date
after the Closing Date, additional opinions from each such counsel,
addressed to the Underwriters and dated such later date, confirming that
the statements expressed as of the Closing Date in such opinions remain
valid as of such later date.

(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not
misleading, (ii) since the Effective Date, no event has occurred which
should have been set forth in a supplement or amendment to the Prospectus
which has not been set forth in such a supplement or amendment, (iii) since
the respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change
in or affecting the business, properties, financial condition or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, the Company has not entered into any material
transaction not referred to in the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein,
(iv) the Company does not have any material contingent obligations which
are not disclosed in the Registration Statement and the Prospectus, (v)
there are not any pending or known threatened legal proceedings to which
the Company is a party or of which property of the Company is the subject
which are material and which are not disclosed in the Registration
Statement and the Prospectus, (vi) there are not any franchises, contracts,
leases or other documents which are required to be filed as exhibits to the
Registration Statement which have not been filed as required, (vii) the
representations and warranties of the Company here are true and correct in
all material respects as of the Closing Date or any later date on which
Option Stock is to be purchased, as the case may be, and (viii) there has
not been any material change in the market for securities in general or in
political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to
make a public offering of the Stock, or a material adverse change in market
levels for securities in general (or those of companies in particular) or
financial or economic conditions which render it inadvisable to proceed.

(e) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the Closing
Date or such later date, as the case may be, and signed by the President
and the Chief Financial Officer of the Company, stating that the respective
signers of said certificate have carefully examined the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein and any supplements or amendments thereto, and
that the

19
<PAGE>

statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.

(f) You shall have received from Richard A. Eisner & Company
L.L.P., a letter or letters addressed to the Underwriters and dated the
Closing Date and any later date on which Option Stock is purchased,
confirming that they are independent public accountants with respect to the
Company within the meaning of the Securities Act and the applicable
published rules and regulations thereunder and based upon the procedures
described in their letter delivered to you concurrently with the execution
of this Agreement (herein called the Original Letter), but carried out to a
date not more than three business days prior to the Closing Date or such
later date on which Option Stock is purchased (i) confirming, to the extent
true, that the statements and conclusions set forth in the Original Letter
are accurate as of the Closing Date or such later date, as the case may be,
and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to reflect
any changes in the facts described in the Original Letter since the date of
the Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any change,
or any development involving a prospective change, in or affecting the
business or properties of the Company which, in your sole judgment, makes
it impractical or inadvisable to proceed with the public offering of the
Stock or the purchase of the Option Stock as contemplated by the
Prospectus.

(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 6 hereof.

(h) Prior to the Closing Date, the Stock to be issued and sold by
the Company shall have been duly authorized for listing by the Nasdaq Stock
Exchange National Market upon official notice of issuance.

(i) On or prior to the Closing Date, you shall have received from
all directors and officers agreements, in form reasonably satisfactory to
Hambrecht & Quist LLC, stating that without the prior written consent of
Hambrecht & Quist LLC, on behalf of the Underwriters, such person or entity
will not, for a period of 90 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (x)
sell, offer, contract to sell, made any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (y) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of Common
Stock, whether any such transaction described in clause (x) or (y) above is
to be settled by delivery of Common Stock or such other securities, in cash
or otherwise.

20
<PAGE>

All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Stroock & Stroock & Lavan LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.

In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all out-
of-pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the transactions
contemplated hereby.

10. Conditions of the Obligation of the Company. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.

In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.

11. Reimbursement of Certain Expenses. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigation or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.

21
<PAGE>

12. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 7 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.

13. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104, Attention: ; and if to the
Company, shall be mailed, telegraphed or delivered to it at its office, 5110
Campus Drive, Plymouth Meeting, Pennsylvania 19462, Attention: Mr. Michael R.
Dougherty. All notices given by telegraph shall be promptly confirmed by
letter.

14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraphs
(k) and (1) of Section 6 hereof shall be of no further force or effect.

This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.

22
<PAGE>

Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.

Very truly yours,

MAGAININ PHARMACEUTICALS INC.

By
-------------------
Name:
Title:

The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.

HAMBRECHT & QUIST LLC
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY
By: Hambrecht & Quist LLC

By
-----------------------
Name:
Title: Managing Director

Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.

23
<PAGE>

SCHEDULE I

UNDERWRITERS

Number of Shares
Underwriters to be Purchased
- ------------ ----------------
<S> <C>
Hambrecht & Quist LLC..................
BancAmerica Robertson Stephens.........
Cowen & Company........................

-----------
Total........................ 2,500,000
===========
</TABLE>

<PAGE>

Exhibit 5.1

Morgan, Lewis & Bockius LLP
Counselors at Law
2000 One Logan Square
Philadelphia, Pennsylvania 19103-6993
Telephone: (215) 963-5000
Fax: (215) 963-5299

October 20, 1997

Magainin Pharmaceuticals Inc.
5110 Campus Drive
Plymouth Meeting, PA 19462

Re: Magainin Pharmaceuticals Inc.
Registration Statement on Form S-3
----------------------------------

Ladies and Gentlemen:

We have acted as counsel to Magainin Pharmaceuticals Inc., a Delaware
corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-3 (the "Registration Statement") filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), relating to the public offering of an aggregate of 2,875,000 shares
(the "Shares") of the common stock, par value $.002 per share, of the Company
(the "Common Stock"), to be sold in a public offering (the "Offering"),
including 375,000 Shares subject to an overallotment option, all of which shares
are authorized but heretofore unissued.

In this connection, we have reviewed (a) the Registration Statement; (b) the
Company's Restated Certificate of Incorporation and Bylaws; (c) certain records
of the Company's corporate proceedings as reflected in its minute books; and (d)
the form of Underwriting Agreement filed as Exhibit 1.1 to the Registration
Statement, to be executed by the Company and Hambrecht & Quist LLC, BancAmerica
Robertson Stephens and Cowen & Company as Representatives of the Underwriters
(the "Underwriting Agreement"). In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity with the original of all documents submitted to
us as copies thereof.

Based upon the foregoing, we are of the opinion that the Shares to be sold by
the Company as described in the Registration Statement, when and to the extent
purchased by the Underwriters in accordance with the Underwriting Agreement,
will be validly issued, fully paid and nonassessable.

We hereby consent to the use of this opinion as Exhibit 5.1 to the Registration
Statement and to all references to our firm in the Registration Statement. In
giving such consent, we do not thereby admit that we are acting within the
category of persons whose consent is required under Section 7 of the Act and the
rules and regulations of the Securities and Exchange Commission thereunder.

Very truly yours,

/s/ MORGAN, LEWIS & BOCKIUS LLP

<PAGE>

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the inclusion and the incorporation by reference in the
Registration Statement on Form S-3 being filed under the Securities Act of
1933 by Magainin Pharmaceuticals Inc. of our report dated January 29, 1997 on
the financial statements included elsewhere herein and in the December 31,
1996 Annual Report on Form 10-K of Magainin Pharmaceuticals Inc. We also
consent to the references to our firm under the captions "Selected Financial
Data" and "Experts" in the Prospectus.

Richard A. Eisner & Company, LLP

New York, New York
October 17, 1997