PROCEPT INC, 10-K405/A, 1998-06-23

PROCEPT INC
10-K405/A, 1998-06-23
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

X AMENDMENT NO. 1 TO AND RESTATEMENT OF ANNUAL REPORT PURSUANT TO SECTION 13
- -- OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997

Commission File Number: 0-21134

Procept, Inc.
-------------
(Exact name of registrant as specified in its charter)

Delaware 04-2893483
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

840 Memorial Drive, Cambridge, Massachusetts 02139
- -------------------------------------------- -----
(Address of principal executive offices) (zip code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock $0.01 par value per share
--------------------------------------
(Title of Class)

Registrant's telephone number, including area code: (617) 491-1100

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES_X_ NO___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. __X__

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1998 was $8,804,033.

The number of shares of the registrant's common stock outstanding as of March
25, 1998 was 8,807,435 (or 880,744 as restated for the May 18, 1998 Reverse
Stock Split as described in Note E to the Financial Statements).

Documents incorporated by reference:
Portions of the Definitive Proxy Statement to be filed
with the Securities and Exchange Commission relative to the
1998 Annual Meeting of Shareholders are incorporated
by reference into Part III of this report.

<PAGE>

PROCEPT, INC.
FORM 10-K/A, DECEMBER 31, 1997

This Form 10-K/A constitutes Amendment No. 1 to and Restatement of the
registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
This Form 10-K/A amends and restates Items 5, 6, 7, 8, 10 and 14 and restates
the remainder of the registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 filed with the Commission on March 31, 1998. As indicated in
Note E to the Financial Statements, Shareholders' Equity has been restated to
give retroactive effect to the one-for-ten reverse stock split of the Company's
Common Stock effected on June 1, 1998.

PART I
------

ITEM 1. BUSINESS.

CORPORATE SUMMARY

Procept, Inc. ("Procept" or the "Company") is a biopharmaceutical company
currently engaged in the development of novel drugs for the prevention of HIV
and other infectious diseases. The Company is also seeking the acquisition or
in-license of drug development candidates that would benefit from Procept's
expertise in various therapeutic areas.

The Company was recently pursuing three principal research and development
programs. In order to focus its limited resources on its lead drug candidate,
PRO 2000 Gel, the Company suspended work in 1998 on its other research programs,
which it hopes to out-license, and underwent a significant downsizing, reducing
its staff from 38 on January 1, 1997 to 13 by March 13, 1998.

The lead product candidate from the Company's AIDS program, PRO 2000 Gel, is a
vaginal topical microbicide designed to prevent the sexual transmission of HIV
and other sexually transmitted disease ("STD") pathogens. The results of
recently completed Phase I clinical trials indicated that PRO 2000 Gel is safe
and well tolerated by healthy women. In addition, through the Company's research
in immunomodulation, the Company discovered a series of small molecule
compounds, T cell enzyme inhibitors, that have demonstrated significant
immunosuppressive activity in animal models. The Company is currently seeking
out-licensing opportunities for these compounds.

In addition to the continued development of PRO 2000, Procept is seeking to
identify strategic opportunities to in-license drug development candidates which
would benefit from Procept's expertise, thereby focusing its resources on
"development" rather than "research" programs.

PRO 2000 GEL: A TOPICAL MICROBICIDE TO PREVENT HIV INFECTION

The lead product candidate from the Company's AIDS program, PRO 2000 Gel is a
vaginal topical microbicide designed to prevent the sexual transmission of HIV
and other STD pathogens. PRO 2000 was shown in laboratory studies to be
effective at preventing HIV infection of cultured T cells, macrophages, and
dendritic cells (dendritic cells are believed to be the first cells infected
during sexual transmission). PRO 2000 showed high activity against HIV strains
from both the developed and developing world, and the virus did not develop
resistance to the compound even

<PAGE>

after prolonged exposure. Recently, PRO 2000 was also shown to be active against
herpes viruses including herpes simplex virus type 2, the major cause of genital
herpes infection. Genital herpes lesions are a significant public health
problem, and are believed to promote HIV infection.

The Company first evaluated PRO 2000 as an injectable therapy for HIV infection.
Early stage clinical testing showed that single injections of the drug are well
tolerated, but that doses are limited by side effects directly related to the
presence of PRO 2000 in the circulation. This, coupled with the competitive
environment for AIDS therapies, prompted the Company to suspend development of
PRO 2000 as an injectable therapy.

The Company believes there is a need for new technologies to prevent the sexual
transmission of HIV and other STDs. HIV infection usually leads to AIDS, a
severe, life-threatening impairment of the immune system. HIV causes
immunosuppression by attacking and destroying T cells, which coordinate much of
the network of normal immune responses. The progression from HIV infection to
symptomatic disease may take many years. The Centers for Disease Control
recently estimated that there are approximately 240,000 individuals with AIDS in
the United States. Up to 900,000 people in the United States are estimated to be
infected by HIV. Despite years of effort, an effective HIV vaccine remains
elusive. Worldwide, approximately 70% of HIV transmission occurs through
heterosexual intercourse. In addition, The New York Times reported that an
estimated 10-12 million new cases of sexually transmitted diseases are reported
to the disease center each year, particularly human papillomavirus, chlamydia
and herpes. Male condoms are known to prevent STD transmission, but rates of
consistent and correct use are low, perhaps because they are unacceptable for
many couples and their use is controlled by the male partner. "Topical
microbicides," which are designed to provide a chemical barrier to infection,
are an attractive alternative: they are likely to be more acceptable than
condoms, and offer women a method they can use to protect themselves.
Development of topical microbicides is a high priority for both the U.S.
government and international agencies.

Preclinical studies demonstrate that PRO 2000 is a more effective anti-HIV agent
than nonoxynol-9. In addition, in vitro preclinical studies have demonstrated
that PRO 2000 is active against other sexually transmitted agents including
herpes simplex type 2 and Chlamydia trachomatis. The Company believes that PRO
2000 is ideally suited for use as a topical microbicide to prevent infection by
HIV and other sexually transmitted pathogens. In addition to its broad antiviral
activity, the compound is straightforward to manufacture, highly stable,
odorless and virtually colorless. PRO 2000 Gel has also been formulated for
intravaginal use. Preclinical studies suggest that PRO 2000 Gel will be safe.
Importantly, no PRO 2000 was detected in the circulation following repeated
vaginal application of the gel. In other studies, PRO 2000 Gel was shown to be
non-mutagenic, non-sensitizing, and compatible with latex condoms.

Procept recently completed two Phase I clinical trials to assess the safety and
tolerance of PRO 2000 Gel in healthy, female volunteers. The trials were
conducted at the Institute of Tropical Medicine in Antwerp, Belgium and at St.
Mary's Hospital in London, England, the latter with funding from the British
Medical Research Council ("MRC"). Preliminary results indicate that PRO 2000 Gel
was safe and well tolerated, and that no PRO 2000 was absorbed into the
circulation. Furthermore, participants generally found the product to be
aesthetically acceptable. The Company is now preparing to conduct a series of
Phase II clinical trials to assess safety and tolerance of PRO 2000 Gel in more
diverse populations, including groups at high risk for infection. Upon
completion of Phase II clinical trials, if successful, a Phase III clinical
trial may be conducted to evaluate efficacy. Discussions are underway with the
NIH and British MRC regarding financial and logistical support for this clinical
program.

The Company holds two issued patents on the use of PRO 2000 to prevent HIV
infection. Additional patent applications have been filed.

3
<PAGE>

The Company's intentions with respect to the further development of PRO 2000 Gel
are forward looking statements, based on current management expectations.
Factors that could cause such expectations to change, resulting in the delay or
cancellation of the PRO 2000 research program and related preclinical and
clinical studies include the following: the availability of financing for the
Company's continued research and development operations; technical risks
associated with the development of PRO 2000; changes in regulatory requirements;
anticipated market acceptance of such new drug; and competitive factors and
pricing pressures.

DHODH PROGRAM: INTRACELLULAR T CELL ENZYME INHIBITORS FOR AUTOIMMUNE DISEASES

In 1997, Procept implemented a new research program that focused on an
intracellular enzyme ("DHODH") that is known to be critical for the activation
of the immune response, thus making it a possible target for intervention in
transplantation and autoimmune disease. The potential market sizes for such
indications are immense, over $1 billion in size. Procept has made significant
progress and achieved a number of important milestones in this program in the
past year, including the cloning and expression of the human recombinant enzyme
and the identification of lead compounds with potent enzyme inhibitory
properties. Initial studies indicate that several lead compounds also possess
oral activity in animal models of immunosuppression. The Company intends to
out-license this program to a major pharmaceutical or biotechnology company.
However, there can be no assurance regarding the success of such out-licensing
effect.

THE VACTEX DRUG DEVELOPMENT PROGRAM -- TB VACCINE

In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex") to develop novel vaccines based on the CD1 antigen
presentation system. The program, conducted in conjunction with Dr. Michael
Brenner at Brigham & Women's Hospital and Harvard Medical School, focuses on a
novel receptor system for presentation of lipid antigens from infectious disease
pathogens. This CD1 receptor system is thought to be critical in mediating the
immune response to tuberculosis bacteria ("TB") and other related bacteria. TB
kills more people than any other infectious agent. Over a third of the world's
population is infected with this bacterium. There is now no cure for some
multidrug resistant TB strains, and the current vaccine has been ineffective in
stopping the epidemic. VacTex is funding vaccine studies in in vivo models
involving presentation of lipids by the novel CD1 system.

During 1997, under the Sponsored Research Agreement, Procept received $0.5
million in research funding from VacTex and 150,000 shares of VacTex Common
Stock. In order to apply available resources to the PRO 2000 development
program, Procept did not seek to renew the Sponsored Research Agreement with
VacTex, which expired on January 8, 1998. The Company retains its equity
position in VacTex.

STRATEGIC CORPORATE ALLIANCES

A combination of large pharmaceutical partners and capital markets has provided
the financial support for Procept's research and development projects. The
Company's goal is to share the risk of product development while maintaining the
prospect of substantial rewards for our investors and partners. In addition to
discussions relating to PRO 2000 to actively partner this program, the Company
is engaged in discussions with several pharmaceutical companies regarding
potential licensing agreements for the Company's other research programs with
respect to which the Company ceased activities in 1998. If agreements are
successfully negotiated, the Company would expect to receive up-front fees and
milestone payments in addition to royalties.

4
<PAGE>

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's policy is to protect its technology by, among other things, filing
or causing to be filed on its behalf, patent applications for technology
relating to the development of its business. Currently, the Company is awaiting
action on various patent applications relating to technology or the uses or
products thereof which it owns or which it has licensed.

The Company has been issued U.S. patents related to its AIDS program and to its
small molecule immunosuppressive program. The Company has filed patent
applications in the United States relating to (i) compounds and methods for
inhibiting immune response, (ii) compounds (which include PRO 2000) and methods
for inhibiting HIV infection and (iii) methods for making compounds that inhibit
HIV. Corresponding foreign patent applications have been filed on certain
compounds and will be filed on other compounds, as appropriate.

To protect its right to and to maintain the confidentiality of trade secrets and
proprietary information, the Company requires employees, Scientific Advisory
Board members, consultants, and collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. These agreements prohibit the disclosure of confidential information to
anyone outside the company and require disclosure and assignment to the company
of ideas, development, discoveries and inventions made by employees,
consultants, advisors and collaborators.

The Company's ability to compete effectively with other companies will depend,
in part, on the ability of the Company to maintain the proprietary nature of its
technology. Although the Company has been granted, has filed applications for
and has licensed a number of patents in the United States and foreign countries,
there can be no assurance as to the degree of protection offered by these
patents, as to the likelihood that pending patents will be issued or as to the
validity or enforceability of any issued patents.

Competitors in both the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with the
Company's ability to make and sell its products. There can be no assurance that
other third parties will not assert infringement claims against the Company or
that such claims will not be successful. There can also be no assurance that
competitors will not infringe the Company's patents. Further, with respect to
licensed patents, which, in the case of the Company, represent a significant
portion of the Company's proprietary technology, the defense and prosecution of
patent suits may not be in the Company's control.

The Company also relies on unpatented proprietary technology which is
significant to the development of the Company's technology, and there can be no
assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology. If
the Company is unable to maintain the proprietary nature of its technology, the
Company could be adversely affected.

GOVERNMENT REGULATION

Regulations imposed by U.S. federal, state and local authorities, as well as
their counterparts in other countries, are a significant factor in the conduct
of the research, development, manufacturing and marketing activities for the
Company's proposed products.

Before testing of any compounds with potential therapeutic value in human test
subjects may begin, stringent government requirements for pre-clinical data must
be satisfied. These data, obtained both from in vivo studies and in vitro
studies, are submitted in an Investigational New

5
<PAGE>

Drug Application or its equivalent in countries outside the U.S. where clinical
studies are to be conducted. These pre-clinical data must provide an adequate
basis for evaluating both the safety and the scientific rationale for the
initial (Phase I) studies in human volunteers.

Phase I clinical studies are commonly performed in healthy human subjects or,
less commonly, selected patients with the targeted disease or disorder. Their
goal is to establish initial data about tolerance and safety of the drug in
humans. Also, the first data regarding the absorption, distribution, metabolism
and excretion of the drug in humans are established.

In Phase II human clinical studies, preliminary evidence is sought about the
pharmacological effects of the drug and the desired therapeutic efficacy in
limited studies with small numbers of carefully selected patients. Efforts are
made to evaluate the effects of various dosages and to establish an optimal
dosage level and dosage schedule. Additional safety data are also gathered from
these studies.

The Phase III clinical development program consists of expanded, large-scale
studies of patients with the target disease or disorder, to obtain definitive
statistical evidence of the efficacy and safety of the proposed product and
dosage regimen. These studies may include investigation of the effects in
subpopulations of patients, such as the elderly.

At the same time that the human clinical program is being performed, additional
non-clinical in vivo studies are also conducted. Expensive, long duration
toxicity and carcinogenicity studies are done to demonstrate the safety of drug
administration for the extended period of time required for effective therapy.
Also, a variety of laboratory, and initial human studies are performed to
establish manufacturing methods for delivering the drug, as well as stable,
effective dosage forms.

All data obtained from a comprehensive development program are submitted in a
New Drug Application ("NDA") or Product License Application ("PLA") to the FDA
and the corresponding agencies in other countries for review and approval.
Although the FDA policy is to review priority applications within 180 days of
their filing, in practice longer times may be required. The FDA also frequently
requests that additional information be submitted, requiring significant
additional review time. Any proposed product of the Company would likely be
subject to demanding and time-consuming NDA or PLA approval procedures in
virtually all countries where marketing of the products is intended. These
regulations define not only the form and content of safety and efficacy data
regarding the proposed product but also impose specific requirements regarding
manufacture of the product, quality assurance, packaging, storage, documentation
and record keeping, labeling, advertising and marketing procedures.

In addition to the regulations relating specifically to product approval, the
activities of the Company, its partners and licensees are subject to laws and
regulations regarding laboratory and manufacturing working conditions, handling
and disposition of potentially hazardous material, and use of laboratory
animals. In many markets, effective commercialization also requires inclusion of
the product in national, state, provincial or institutional formularies or cost
reimbursement systems.

Completing the multitude of steps necessary before marketing can begin requires
the expenditure of considerable resources and can consume a long period of time.
Delay or failure in obtaining the required approvals, clearances, permits or
inclusions by the Company, its collaborators or its licensees would have an
adverse effect on the ability of the Company to generate sales or royalty
revenue. In addition, the impact of new or changed laws or regulations cannot be
predicted.

6
<PAGE>

COMPETITION

The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of the Company in the United
States and abroad are numerous and include, among others, major pharmaceutical
and chemical companies, specialized biotechnology firms and universities and
other research institutions. Competition may increase further as a result of
potential advances in the commercial application of biotechnology and greater
availability of capital for investment in these fields. Acquisitions of
competing companies and potential competitors by large pharmaceutical companies
or others could enhance financial, marketing and other resources available to
such competitors. As a result of academic and government institutions becoming
increasingly aware of the commercial value of their research findings, such
institutions are more likely to enter into exclusive licensing agreements with
commercial enterprises, including competitors of the Company, to market
commercial products. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than any which are being developed by the Company or which would render the
Company's technology obsolete and noncompetitive, or that such competitors will
not succeed in obtaining FDA or other regulatory approvals for products more
rapidly than the Company.

MANUFACTURING

The Company has no manufacturing facilities and plans to rely upon outside
manufacturers to produce any near term products. The Company believes that there
is currently substantial capacity worldwide for the production of its
anticipated products and that the Company will be able to establish
manufacturing arrangements on acceptable terms.

HUMAN RESOURCES

As of December 31, 1997, the Company had 35 full-time employees, 25 of whom were
engaged in research and development and 10 in management, administration and
finance. Doctorates were held by 12 of the Company's employees. On January 19,
1998, 15 full-time employees were terminated in an effort to conserve cash and
focus the Company's research and development efforts on its lead drug candidate,
PRO 2000. Each of the Company's employees has signed an agreement which
prohibits the disclosure of confidential information to anyone outside the
Company and requires disclosure and assignment to the Company of ideas,
developments, discoveries and inventions made by the employee.

The Company's employees are not covered by a collective bargaining agreement.
The Company has never experienced employment-related work stoppage and considers
its employee relations to be excellent.

ITEM 2. PROPERTIES.

The Company's headquarters and research and development facilities are located
in Cambridge, Massachusetts. At its 840 Memorial Drive location, the Company
leases a total of approximately 41,200 square feet of space, which includes
approximately 34,800 square feet of research laboratories. The Company currently
licenses approximately 50% of the laboratory space at its headquarters to
start-up pharmaceutical companies and is negotiating to license an additional
75% of the remaining available space to start-up pharmaceutical companies. The
Company also leases approximately 3,400 square feet of space at 84 Hamilton
Street, which includes approximately 1,100 square feet of research laboratories.
The Company believes such laboratory space will be adequate for its existing
research and drug development activities.

7
<PAGE>

ITEM 3. LEGAL PROCEEDINGS.

On October 23, 1997, Commonwealth Associates ("Commonwealth") filed a Complaint
with the United States District Court for the Southern District of New York
naming the Company as a defendant (the "Complaint"). The Complaint alleges that
the Company breached obligations to Commonwealth under the Underwriting
Agreement between Commonwealth and the Company dated February 8, 1996, giving
Commonwealth a right of first refusal to act as co-lead underwriter or
co-managing agent of a public offering or Private Placement of the Company's
securities during the period ended August 8, 1997. In the Complaint,
Commonwealth seeks aggregate compensatory damages in the amount of $375,000,
incidental and consequential damages in an amount to be proven at trial, costs,
disbursements and accrued interest and such other and further relief as the
court deems proper. Discovery has commenced in this action. The Company believes
that Commonwealth's claims are without factual or legal merit. The Company does
not believe this action will have a material adverse effect on the Company's
business and it intends to vigorously defend this action. However, given the
early stage of this litigation, no assurance may be given that the Company will
be successful in its defense. A decision by the court in Commonwealth's favor or
any other conclusion of this litigation in a manner adverse to the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company is not a party to any material legal proceedings, except as set
forth above.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

8
<PAGE>

PART II
-------

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

The dollar values in this amended and restated Item 5 have been adjusted to
reflect the one-for-ten reverse split of the Company's Common Stock effected on
June 1, 1998.

From February 17, 1994, the date of the Company's initial public offering, until
March 26, 1998, the Common Stock has been quoted on the Nasdaq National Market
under the symbol "PRCT". Since March 27, 1998, the Common Stock has been quoted
on the Nasdaq Small Cap Market under the symbol "PRCTC." The following table
sets forth the range of high and low closing sale prices for the Common Stock as
reported by the Nasdaq National Market for the periods indicated below.

<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
Fourth Quarter $31.25 $10.00
Third Quarter $41.58 $21.91
Second Quarter $67.83 $32.83
First Quarter $135.66 $56.91

1996
Fourth Quarter $98.42 $72.17
Third Quarter $166.25 $91.91
Second Quarter $236.25 $126.91
First Quarter $227.50 $152.04
</TABLE>

As of March 25, 1998 there were 298 holders of record. On March 25, 1998 the
closing price reported on the Nasdaq National Market for the Common Stock was
$10.00.

Dividend Policy

The Company has never paid cash dividends on the Common Stock and does not
anticipate paying such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in the Company's
business. See "Management Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."

9
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

The selected financial data set forth below as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 are derived
from the Company's financial statements included elsewhere in this Report, which
have been audited by Coopers & Lybrand L.L.P., independent accountants. The
selected financial data set forth below as of December 31, 1995, 1994 and 1993
and for the years ended December 31, 1994 and 1993 are derived from audited
financial statements not included in this Report. This data should be read in
conjunction with the Company's financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this report.

SELECTED FINANCIAL DATA

YEARS ENDED DECEMBER 31,

1997 (restated) 1996 1995 1994 1993
--------------- ---- ---- ---- ----
(in thousands, except share data)

<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $781 $2,278 $4,647 $7,571 $5,798
---- ------- ------ ------- --------
Costs and expenses:
Research and development 6,619 9,925 12,406 11,559 7,957
General and administrative 2,715 3,176 3,723 3,805 2,532
Restructuring charges 460 273 -- -- --
Interest 40 139 230 171 130
----- ------- ------ ------- --------

Total costs and expenses 9,834 13,513 16,359 15,535 10,619
----- ------- ------ ------- --------

Net loss (9,053) (11,236) (11,712) (7,964) (4,821)
Accretion of discount on
preferred stock -- -- -- (20) (160)

Less: dividends on preferred stock (4,217) -- -- -- --
------ ------- -------- ------- --------
Net loss available to
common shareholders $(13,270) $(11,236) $(11,712) $(7,984) $(4,981)
======== ======== ========= ======= =========

Basic and diluted loss per share $(63.68) $(68.16) $(127.65) $(98.24) $(847.54)
======== ======== ======== ======= ========

Weighted average number of
common shares outstanding 208,371 164,836 91,752 81,271 5,877
======= ======= ======== ======= ========
</TABLE>

AS OF DECEMBER 31,
------------------

1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)

<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $535 $1,962 $565 $7,450 $2,862
Marketable securities -- 4,002 2,006 9,393 --
Total assets 2,168 8,917 6,397 19,704 5,777
Capital lease obligations net of current
portion and other non-current liabilities 355 456 907 860 858
Redeemable convertible
preferred stock -- -- -- -- 21,039
Total shareholders' equity (deficit) 260 6,316 1,439 12,851 (17,792)
Common stock dividends -- -- -- -- --
</TABLE>

10
<PAGE>

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

RESULTS OF OPERATIONS

Since its inception, the Company has generated no revenues from product sales.
The Company is dependent upon research and development collaborations, equity
financing and interest on invested funds to provide the working capital required
to pursue its intended business activities. The Company has not been profitable
since incorporation and has an accumulated deficit of $57.8 million through
December 31, 1997. Losses have resulted principally from costs incurred in
research and development activities related to the Company's efforts to develop
drug candidates and from the associated administrative costs required to support
those efforts. The Company expects to incur significant additional operating
losses over the next several years due to its ongoing development efforts and
expanded preclinical and clinical testings. The Company's potential for future
profitability is dependent on its ability to effectively license-in and develop
pharmaceutical products and obtain regulatory approvals and adequate financing
for such products. Future profitability will require that the Company establish
agreements for product development, commercialization and sales of its products
with corporate sponsors.

Years ended December 31, 1997 and 1996

The Company's 1997 total revenues decreased to $0.8 million from $2.3 million in
1996, principally as a result of the scheduled completion of the Sandoz
Agreement. In 1997, revenues consisted of $0.5 million earned under the VacTex
Agreement, $0.1 million under a grant from the National Cooperative Drug
Discovery Group and $0.1 million in interest earned on invested funds. In 1996,
revenues consisted of $1.3 million earned under the Sandoz Agreement, $0.6
million earned under the VacTex Agreement and $0.4 million in interest earned on
invested funds.

The Company's 1997 total operating expenses decreased to $9.8 million from $13.5
million in 1996, principally as a continuing result of a decrease in personnel
in the Company's research and development organization and their related
research costs. General and administrative expenses decreased 18% to $2.7
million in 1997 from $3.2 million in 1996 as a result of a $0.1 million savings
from a decrease in administrative personnel as well as a savings of $0.4 million
from cost control measures. In 1997, the Company restructured its operations
resulting in an expense charge of $0.5 million consisting of salary and benefit
costs relating to the restructuring. Interest expense decreased 71% to $40,000
in 1997 from $0.1 million in 1996 as a result of the scheduled completion of
many of the Company's lease financing arrangements.

Years ended December 31, 1996 and 1995

The Company's 1996 total revenues decreased to $2.3 million from $4.6 million in
1995, principally as a result of a decrease in research revenue due to an
amendment of the Sandoz Agreement. In 1996, revenues consisted of $1.3 million
earned under the Sandoz Agreement, $0.6 million earned under the VacTex
Agreement, and $0.4 million in earned interest on invested funds. In 1995,
revenues consisted of $3.9 million earned under the Sandoz Agreement, $29,000
earned under the Bristol-Myers Squibb Agreement, $0.1 million in grant revenue
and $0.6 million in earned interest on invested funds.

The Company's 1996 total operating expenses decreased to $13.5 million from
$16.4 million in 1995. Research and development expenses decreased 20% to $9.9
million in 1996 from $12.4 million in 1995 as a result of the restructuring that
the Company completed in September 1996. The restructuring resulted in a
decrease of 19 research employees. General and administrative expenses decreased
15% to $3.2 million in 1996 from $3.7 million in 1995 as a result of

11
<PAGE>

management's efforts to control and reduce discretionary spending and maximize
the use of cost-effective resources. In 1996, the Company restructured its
operations resulting in an expense charge of $0.3 million consisting of salary
and benefit costs relating to the restructuring. There was no comparable charge
in 1995. Interest expense decreased 40% to $0.1 million in 1996 from $0.2
million in 1995 as a result of the scheduled completion of many of the Company's
capital equipment leases.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception in 1985, through December 31, 1997, the Company has financed
its operations from the sale of $58.0 million of its securities, the receipt of
$29.3 million under collaborative research agreements and $2.7 million in
interest income. At December 31, 1997, the Company's aggregate cash, cash
equivalents and marketable securities were $0.5 million, as compared with $6.0
million at December 31, 1996, a decrease of $5.5 million.

For the year ended December 31, 1997, the Company's decrease in cash of $1.4
million is primarily attributable to $8.1 million used in operations and $0.6
million applied to principal payments on capital leases, offset by an equity
financing of $2.7 million and cash provided by investing activities of $4.4
million.

In July 1997, the Company reduced staffing in its research organization through
the elimination of six senior research positions. As a result of this reduction
in force and other cost control measures, the Company reduced its cash burn rate
to approximately $0.5 million per month by year end.

In order to focus its limited resources on PRO 2000, in January 1998 the Company
terminated work on most other research programs and underwent a significant
downsizing, reducing its staff to 13 people. This is expected to reduce the
Company's cash burn rate to approximately $0.2 million per month by the end of
1998. In the first quarter of 1998, the Company has accrued $0.2 million for
costs associated with this downsizing.

As part of a unit offering targeted at raising up to $6.0 million in the first
quarter of 1998, the Company has received net proceeds of $3.0 million through
the sale of units of Common Stock and warrants to purchase Common Stock. In
addition, The Aries Funds have committed to invest up to $2.0 million in the
Company. The Company expects that its current funds, the funds raised in the
Company's unit offering of which The Aries Funds have committed to invest up to
$2.0 million, interest income and equipment lease financing will be sufficient
to fund Procept's operations through March of 1999. Although management
continues to pursue additional funding arrangements, no assurance can be given
that such financing will be available to the Company. If the Company is unable
to enter into an additional corporate collaboration(s) that produce revenue for
the Company, or secure additional financing, the Company's financial condition
will be materially adversely affected.

The Company's expectations regarding its rate of spending and the sufficiency of
its cash resources over future periods are forward-looking statements. The rate
of spending and sufficiency of such resources will be affected by numerous
factors including the rate of planned and unplanned expenditures by the Company
and the execution of new collaboration agreements for the Company's research and
development programs.

The Company will need to raise substantial additional funds to support its
operations. The Company intends to seek such additional funding through public
or private financing or collaborative or other arrangements with corporate
partners. If additional funds are raised by issuing equity securities, further
dilution to existing shareholders will result and future investors

12
<PAGE>

may be granted rights superior to those of existing shareholders. Other
important factors that may affect achieving the Company's strategic goals and
other forward-looking statements are set forth in Exhibit 99.1 to this Form
10-K, all of which are incorporated herein by reference.

The Company's working capital and other cash needs will depend heavily on the
success of the Company's clinical trials. Success in early-stage clinical trials
would lead to an increase in working capital requirements. The Company's actual
cash requirements may vary materially from those now planned because of the
results of research and development, clinical trials, product testing,
relationships with strategic partners, changes in the focus and direction of the
Company's research and development programs, competitive and technological
advances, the process of obtaining United States Food and Drug Administration or
other regulatory approvals and other factors.

RECENTLY ISSUED FINANCIAL AND ACCOUNTING STANDARDS

The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 will become effective for fiscal years beginning in the
first quarter of the fiscal year ended December 31, 1998. The Company does not
believe that the adoption will have a material effect on results from
operations.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. SFAS 131 will become effective for fiscal years
beginning after December 31, 1998. The Company does not believe that the
adoption will have a material effect.

YEAR 2000

The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculation or system failures. Based on
preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in the future periods. However, if
the Company or its vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly, the
Company plans to devote the necessary resources to resolve all significant year
2000 issues in a timely manner.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Not applicable.

13
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page(s)
-------

<S> <C>
Report of Independent Accountants 15

Balance Sheets as of December 31, 1997 and 1996 16

Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 17

Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 18

Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 19

Notes to Financial Statements 20
</TABLE>

Financial statement schedules have been omitted
since they are not required or are inapplicable.

14
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Procept, Inc.:

We have audited the accompanying balance sheets of Procept, Inc. as of December
31, 1997 and 1996, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Procept, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

As disclosed in Note A to the financial statements, the Company restated its
financial statements for the year ended December 31, 1997.

Coopers & Lybrand L.L.P.

Boston, Massachusetts

June 15, 1998

15
<PAGE>

PROCEPT, INC.

BALANCE SHEETS
----------------

<TABLE>
<CAPTION>
December 31
-----------
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $535,242 $1,962,229
Accounts receivable (Note F) 81,951 172,812
Marketable securities (Note C) -- 4,001,625
Prepaid expenses and other current assets 50,111 111,237
---------- ----------
Total current assets 667,304 6,247,903

Property and equipment, net (Notes D and I) 889,258 1,863,200
Restricted investment (Notes I and J) -- 469,000
Deferred financing charges (Note E) 54,424 --
Deposits (Note I) 250,615 135,975
Investment in VacTex (Note F) 300,000 150,000
Other assets 6,411 51,188
---------- ----------
Total assets $2,168,012 $8,917,266
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,069,952 $773,501
Accrued compensation 320,463 122,712
Accrued contract research costs (Note I) -- 438,513
Other current liabilities 142,680 196,610
Current portion of capital lease obligations (Note I) 20,231 614,063
----------- -----------
Total current liabilities 1,553,326 2,145,399

Capital lease obligations, less current portion (Note I) -- 20,231
Deferred rent (Note I) 257,827 285,529
Other noncurrent liabilities 96,875 150,000

Commitments and contingencies (Notes F and I)

Shareholders' equity (Note E):
Preferred stock, par value $.01 per share; 1,000,000
shares authorized
Series A 30,061 shares designated; 30,060 shares
issued and outstanding at December 31, 1997
(Liquidation preference; $4,208,400 at Dec. 31, 1997) 301 --
Common stock, $.01 par value; 30,000,000 shares authorized
at December 31, 1997 and 1996; 196,204 and 195,434
shares issued at December 31, 1997 and 1996,
respectively 1,962 1,954
Additional paid-in capital 62,242,741 55,095,433
Cumulative dividends on preferred stock (Note E) (4,217,388) --
Receivable from sale of stock -- (73,242)
Accumulated deficit (57,755,775) (48,703,200)
Unrealized loss on securities available for sale (Note C) -- (4,838)
Treasury stock, at cost; 1,186 and 0 shares at
December 31, 1997 and 1996, respectively (11,857) --
---------- -----------
Total shareholders' equity 259,984 6,316,107
---------- -----------
Total liabilities and shareholders' equity $2,168,012 $8,917,266
========== ===========
</TABLE>

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

16
<PAGE>

PROCEPT, INC.

STATEMENTS OF OPERATIONS
--------------

for the years ended December 31,
--------------------------------
1997 (restated) 1996 1995
--------------- ---- ----

<S> <C> <C> <C>
Revenues:
Research and development revenue
under collaborative agreements
(Note F) $-- $1,275,000 $3,925,000
Research and development revenue
under collaborative agreements
from related party (Note F) 519,552 562,500 28,645
Revenue from grant (Note F) 113,854 -- 105,264
Interest income 147,766 440,075 587,964
------- ------- ------

Total revenues 781,172 2,277,575 4,646,873
------- --------- --------

Costs and expenses:
Research and development
(Notes F and I) 6,618,836 9,925,315 12,406,290
General and administrative 2,714,678 3,176,136 3,723,014
Restructuring charges (Note A) 459,969 273,324 --
Interest expense 40,264 138,560 229,856
------ ------- -------

Total costs and expenses 9,833,747 13,513,335 16,359,160
--------- ---------- ----------

Net loss (9,052,575) (11,235,760) (11,712,287)
Less: dividends on preferred stock (Note E) (4,217,388) -- --
------------ ------------- ------------
Net loss available to common shareholders $(13,269,963) $(11,235,760) $(11,712,287)
============ ============= ============

Basic and diluted net loss per common share $(63.68) $(68.16) $(127.65)
======== ======== ========

Weighted average number of common
shares - basic and diluted 208,371 164,836 91,752
======= ======= ======
</TABLE>

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

17
<PAGE>

Procept, Inc.
Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
Common Stock Preferred Stock Series A Additional Receivable
------------ ------------------------ Paid-in From
Shares Par Value Shares Par Value Capital Sale of Stock
------ --------- ------ --------- ------- -------------

<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 90,794 $908 $38,747,032 $(25,022)
Employee stock purchase plan 1,042 10 131,721 --
Exercise of stock options 607 6 58,938 (23,092)
Issuance of stock in payment of bonus 49 1 8,499 --
Unrealized gain on securities for sale -- -- -- --
Collection on receivable from sale of stock -- -- -- 6,007
Exercise of common stock warrants 23 -- -- --
Issuance of common stock warrants -- -- 300 --
Net loss -- -- -- --
---------- ---------- ------------ -----------

Balance at December 31, 1995 92,515 925 38,946,490 (42,107)
Employee stock purchase plan 857 8 96,758 --
Issuance from secondary offering 33,571 336 5,263,162 --
Issuance from private placement 67,690 677 11,578,403 --
Payment of costs of financings -- -- (855,673) --
Exercise of stock options 801 8 66,073 (50,150)
Unrealized loss on securities for sale -- -- -- --
Collection on recivable from sale of stock -- -- -- 19,015
Issuance of common stock warrants -- -- 220 --
Net loss -- -- -- --
---------- ---------- ------------ -----------

Balance at December 31, 1996 195,434 1,954 55,095,433 (73,242)
Employee stock purchase plan 764 8 55,192 --
Exercise of stock options 6 -- 410 --
Issuance from private placement 85,333 853 2,799,147 --
Payment of private placement costs -- -- (131,382) --
Conversion of note payable and
common stock to preferred stock (85,333) (853) 30,060 $301 206,553 --
Cancellation of notes receivable -- -- -- -- -- 73,242
Dividends on preferred stock -- -- -- -- 4,217,388 --
Maturity of marketable securites -- -- -- --
Net loss -- -- -- -- -- --
----------- ------- ------- ---- ------------- ----------

Balance at December 31, 1997 196,204 $1,962 30,060 $301 $62,242,741 --
======= ====== ====== ==== =========== ==========

Procept, Inc.
Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995

<CAPTION>
Cumulative Gain (Loss)
Dividends on Securities Total
on Preferred Accumulated Available Treasury Shareholders'
Stock Deficit For Sale Stock Equity
----- ------- -------- ----- ------

Balance at December 31, 1994 $(25,755,153) $(116,356) $12,851,409
Employee stock purchase plan -- -- 131,731
Exercise of stock options -- -- 35,852
Issuance of stock in payment of bonus -- -- 8,500
Unrealized gain on securities for sale -- 117,444 117,444
Collection on receivable from sale of stock -- -- 6,007
Exercise of common stock warrants -- -- --
Issuance of common stock warrants -- -- 300
Net loss (11,712,287) -- (11,712,287)
------------ ------------ ------------

Balance at December 31, 1995 (37,467,440) 1,088 1,438,956
Employee stock purchase plan -- -- 96,766
Issuance from secondary offering -- -- 5,263,498
Issuance from private placement -- -- 11,579,080
Payment of costs of financings -- -- (855,673)
Exercise of stock options -- -- 15,931
Unrealized loss on securities for sale -- (5,926) (5,926)
Collection on recivable from sale of stock -- -- 19,015
Issuance of common stock warrants -- -- 220
Net loss (11,235,760) -- (11,235,760)
------------ ------------ ------------

Balance at December 31, 1996 (48,703,200) (4,838) 6,316,107
Employee stock purchase plan -- -- 55,200
Exercise of stock options -- -- 410
Issuance from private placement -- -- 2,800,000
Payment of private placement costs -- -- (131,382)
Conversion of note payable and
common stock to preferred stock -- -- 206,001
Cancellation of notes receivable -- -- $(11,857) 61,385
Dividends on preferred stock $(4,217,388) -- -- -- --
Maturity of marketable securites -- 4,838 4,838
Net loss -- (9,052,575) -- (9,052,575)
------------ ----------- ----------- ----------- -----------
Balance at December 31, 1997 $(4,217,388) $(57,755,775) $ -- $(11,857) $259,984
=========== ============= ============ ========= ========

</TABLE>

18
<PAGE>

PROCEPT, INC.

STATEMENTS OF CASH FLOWS
-------------
<TABLE>
<CAPTION>
for the years ended December 31,
--------------------------------
1997 1996 1995
<S> <C> <C> <C>
---- ---- ----
Cash flows from operating activities:
Net loss $(9,052,575) $(11,235,760) $(11,712,287)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,057,952 1,234,448 982,637
Non-cash related party revenue (150,000) (150,000) --
Compensation expense associated with cancellation
of notes receivable 112,789 -- --
Gain on sale of equipment (40,895) -- --
Loss on sale/leaseback of equipment -- -- 3,270
Gain on sale of marketable securities -- (1,359) --
Changes in operating assets and liabilities:
Accounts receivable 90,861 (163,868) (8,944)
Prepaid expenses and other current assets 61,126 36,274 8,512
Deposits (114,640) 10,000 --
Other assets (6,627) (18,243) (8,923)
Accounts payable 296,451 (115,199) (689,365)
Accrued compensation 197,751 (71,403) 1,005
Accrued contract research (438,513) 21,160 71,606
Other current liabilities (53,930) (54,210) 79,061
Deferred revenue -- (1,275,000) (1,725,000)
Deferred rent (27,702) 12,390 --
Other noncurrent liabilities (53,125) 150,000 63,893
------------ ------------ ------------

Net cash used in operating activities (8,121,077) (11,620,770) (12,934,535)
---------- ------------ ------------

Cash flows from investing activities:
Capital expenditures (84,010) (297,888) (533,855)
Proceeds from sale of equipment 40,895 -- --
Proceeds from sale/leaseback of equipment -- -- 116,784
Proceeds from sale of marketable securities -- 2,004,070 5,485,252
Proceeds from maturity of marketable securities 4,006,463 3,000,000 2,000,000
Purchase of marketable securities -- (6,989,032) --
(Increase) decrease in restricted investment 469,000 53,000 (85,000)
------- ------ --------

Net cash provided by (used in) investing activities 4,432,348 (2,229,850) 6,983,181
--------- ------------ ---------

Cash flows from financing activities:
Proceeds from issuance of common stock -- 5,282,514 --
Payment of IPO and common stock financing costs -- (855,673) --
Proceeds from exercise of common stock options 410 15,931 41,859
Proceeds from employee stock purchase plan 55,200 96,766 131,731
Proceeds from issuance of warrants -- 220 300
Proceeds from private placement of stock 2,800,000 11,579,080 --
Expenses from private placement securities (131,382) -- --
Payment on note payable -- (115,851) --
Proceeds from note payable 206,001 -- 115,851
Deferred financing charges (54,424) 152,773 (152,773)
Principal payments on capital lease obligations (614,063) (908,432) (1,069,839)
--------- -------- ----------

Net cash provided by (used in) financing activities 2,261,742 15,247,328 (932,871)
--------- ------------ ----------

Net change in cash and cash equivalents (1,426,987) 1,396,708 (6,884,225)
Cash and cash equivalents at beginning of year 1,962,229 565,521 7,449,746
-------- ------------ ----------
Cash and cash equivalents at end of year $535,242 $1,962,229 $565,521
======== ============ ==========

Supplemental disclosure of cash flow information:
Interest paid $27,609 $146,772 $222,396
======== ============ ==========
Property and equipment acquired under capital leases -- -- $1,266,772
======= ============ ==========
Unrealized gain (loss) on securities available for sale -- $(5,926) $117,444
======= ============ ==========

Supplemental disclosure of non-cash transactions:
Common stock converted to preferred stock $2,800,000 -- --
========== ========== ==========
Note payable converted to preferred stock $ 206,001 -- --
========== ========== ==========
Common stock received in exchange for cancellation of
notes receivable $ 11,857 -- --
============ ========== ==========
Preferred stock dividends $ 4,217,388 -- --
============ ========== ==========
</TABLE>

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

19
<PAGE>

NOTES TO FINANCIAL STATEMENTS

A. Nature of Business:
-------------------

Procept, Inc. ("Procept" or the "Company") is a biopharmaceutical company
currently engaged in the development of novel drugs for the prevention of
HIV and other infectious diseases. The Company is also seeking the
acquisition or in-license of drug development candidates that would benefit
from Procept's expertise in various therapeutic areas.

The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, compliance with FDA government
regulations and the ability to obtain financing.

Restatement of Financial Statements
-----------------------------------

The Company restated its financial statements for the year ended December
31, 1997 to include the effects of recording non-cash dividends to the
preferred stockholders totaling $4,217,388 not previously recorded in the
financial statements for the year ended December 31, 1997. The preferred
stock dividend had the effect of increasing net loss available to common
shareholders by $4,217,388 and increasing net loss per share (basic and
diluted) by $19.73 from $(43.95) to $(63.68) for the year December 31, 1997
after effecting the one-for-ten reverse stock split.

Plan of Operations
------------------

Since its inception the Company has generated no revenue from product
sales. The Company has not been profitable since inception and has incurred
an accumulated deficit of $57.8 million through December 31, 1997. Losses
have resulted principally from costs incurred in research and development
activities related to the Company's efforts to develop drug candidates and
from the associated administrative costs. The Company expects to incur
significant additional operating losses over the next several years and
expects cumulative losses to increase substantially due to preclinical and
clinical testing and development of marketing, sales and production
capabilities.

Because of its continuing losses from operations, the Company will be
required to obtain additional funds in the short term to satisfy its
ongoing capital needs and to continue operations. Although management
continues to pursue additional funding arrangements and/or strategic
partnering there can be no assurance that additional funding will be
available from any of these sources or, if available, will be available on
acceptable or affordable terms. If the Company is unable to obtain
financing on acceptable terms in order to maintain operations through the
next fiscal year, it could be forced to curtail or discontinue its
operations. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

The Aries Funds have committed to invest up to $2.0 million in the Company
which will, together with cash on hand at December 31, 1997, $3.0 of net
proceeds from the Company's private placement offering of common stock
units in January and February of 1998, and/or any additional funds raised
from the Company's private placement, fund the operations of the Company
through March of 1999. (Also see Note E.)

20
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Restructuring
-------------

In September 1996, the Company implemented a restructuring plan that
resulted in the elimination of 20 positions, mostly from the research
organization. The amount of termination benefits accrued and charged to
restructuring costs in the statement of operations for the year ended
December 31, 1996 was $0.3 million. The amount of termination benefits paid
and charged against the liability for the year ended December 31, 1996 was
$0.3 million.

In July 1997, the Company further reduced staffing in its research
organization through the elimination of six senior research positions. The
amount of termination benefits accrued and charged to restructuring costs
in the statement of operations for the year ended December 31, 1997 was
$0.5 million. The amount of termination benefits paid and charged against
the liability for the year ended December 31, 1997 was $0.2 million.

In order to focus its limited resources on PRO 2000, in January 1998 the
Company terminated work on all other research programs and underwent a
significant downsizing, reducing its staff to 13 people. In the first
quarter of 1998, the Company has accrued $0.2 million for costs associated
with this restructuring.

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 certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.

Cash Equivalents and Marketable Securities
------------------------------------------

The Company considers all short-term investments purchased with an original
maturity of three months or less at the date of acquisition to be cash
equivalents, all short-term investments with a scheduled maturity date of
less than twelve (12) months at the balance sheet date are considered to be
current marketable securities, and all investments purchased with a
scheduled maturity date greater than twelve (12) months at the balance
sheet date are noncurrent marketable securities.

Property and Equipment
----------------------

Property and equipment is recorded at cost and depreciated on a
straight-line basis over the following estimated useful lives:

<TABLE>
<S> <C>
Laboratory equipment 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Equipment and furniture under capital lease Estimated useful life or term of
lease, if shorter
Leasehold improvements Estimated useful life or term of
lease, if shorter
</TABLE>

21
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Major additions and improvements are capitalized, while repairs and
maintenance are expensed as incurred. Upon retirement or other disposition,
the cost and related accumulated depreciation are removed from the accounts
and the resulting gain or loss is included in the determination of net
loss.

Research and Development
------------------------

Research and development costs are expensed as incurred.

Income Taxes
------------

The Company provides for income taxes under the liability method which
requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement basis of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse. A
valuation allowance is provided for net deferred tax assets if, based on
the weighted available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.

Revenue Recognition
-------------------

Revenue is recognized under collaborative research and development
agreements and research grants as earned based upon the performance
requirements of each agreement. Payments received in advance under these
agreements are recorded as deferred revenue until earned. Amounts received
under research and development agreements and research grants are
non-refundable and are not contingent on the outcome of research efforts.
The Company does not incur future performance commitments from amounts
received.

Financial Instruments
---------------------

Cash, cash equivalents and marketable securities are financial instruments
which potentially subject the Company to concentrations of credit risk. The
Company invests its excess cash in corporate obligations rated as A or
better by Moody's Investment Rating Service, U.S. Treasury securities and
money market instruments.

New Accounting Standards
------------------------

The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standard No. 130 "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence
as other financial statements. SFAS 130 will become effective for fiscal
years beginning in the first quarter of the fiscal year ended December 31,
1998. The Company does not believe that the adoption will have a material
effect on results from operations.

22
<PAGE>

NOTES TO FINANCIAL STATEMENTS

become effective for fiscal years beginning after December 31, 1998. The
Company does not believe that the adoption will have a material effect.

Net Loss Per Share
------------------

Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings Per Share". This
statement specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") to simplify the existing
computational guidelines and increase comparability on an international
basis. This statement replaces primary EPS with basic EPS, the principal
difference being the exclusion of common stock equivalents in the
computation of basic EPS. In addition, this statement requires the dual
presentation of basic and diluted EPS on the face of the statement of
operations.

Under SFAS 128, the Company is required to present two EPS amounts, basic
and diluted. Basic EPS is calculated based on income available to common
shareholders and the weighted-average number of shares outstanding during
the reported period. Diluted EPS may include additional dilution from
potential common stock, such as stock issuable pursuant to the exercise of
shareholders options and warrants outstanding and the conversion of
preferred stock.

For the year ended December 31, 1997, the Company had convertible preferred
stock, stock options and stock warrants outstanding that were anti-dilutive
(see Note E). For the years ended December 31, 1996 and 1995, the Company
had stock options and stock warrants outstanding that were anti-dilutive
(see Note E). These securities could potentially dilute basic EPS in the
future and were not included in the computation of diluted EPS because to
do so would have been anti-dilutive for the periods presented.
Consequently, there were no differences between basic and diluted EPS for
these periods.

Related Parties
---------------

Certain members of the Company's Board of Directors are also retained as
consultants by the Company. Management believes the consulting agreements
have been negotiated at an "arms-length" basis and are immaterial. Included
in other assets is a note receivable from an officer and shareholder in the
amount of $30,000 at December 31, 1996. Included in shareholders' equity
are two notes receivable from the same officer and shareholder in the
amount of $73,242 at December 31, 1996. All three notes bear interest at
prime plus 1% and are payable upon termination. On December 31, 1997, in
connection with a severance agreement with the officer and shareholder, all
three notes and the associated accrued interest, in the amount of $124,646,
were canceled in exchange for 1,186 shares of Common Stock resulting in
treasury stock of $11,857 recorded at cost and $112,789 of compensation
expense which is included in general and administrative expenses for 1997.

In addition, Michael Weiss, who became a member of the Board of Directors
in July 1997, is a Senior Managing Director of Paramount Capital, Inc.
("Paramount") which may be deemed an affiliate of Paramount Capital Asset
Management, the general partner and investment manager, respectively of two
significant shareholders of the Company who together , at December 31,
1997, owned 30,060 shares of the outstanding Series A Preferred Stock of
the Company and "New Warrants" then exercisable for 328,314 shares of
Common Stock at $10.90 per share. Such shareholders exchanged their Series
A Preferred Stock, including accrued dividends, and the New Warrants in

23
<PAGE>

connection with the final closing of the Company's unit offering on April
9, 1998 (the "Final Closing Date"), for 814,680 shares of Common Stock and
Class C Warrants to purchase an equal number of shares of Common Stock at
an exercise price currently set at $5.00 per share. The number of shares of
Common Stock, the number of shares of Common Stock issuable upon exercise
of the Class C Warrants and the per-share exercise price of the Class C
Warrants are based on the minimum of $5.00 and 75% of the average closing
bid price of Procept Common Stock for the 5 days and the 30 days
immediately prior to the Final Closing Date. If 75% of either average is
less than $5.00, the number of shares of Common Stock and the number of
shares of Common Stock issuable upon exercise of the Class C Warrants will
be adjusted upward and the per-share exercise price of the Class C Warrants
will be adjusted downward. However, as described in Note E, the per-share
price of the Final Closing was $5.00. As a result, no adjustments were made
to the number of shares of Common Stock, the number of shares of Common
Stock issuable upon exercise of the Class C Warrants or the per-share
exercise price of the Class C Warrants. Upon the Final Closing Date, the
Company will enter into a Financial Advisory Agreement with Paramount.

Reclassifications
-----------------

Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with 1997 presentation.

C. Marketable Securities:
----------------------

The marketable securities of the Company, consisting of U. S. Government
Agencies have been classified as available for sale. Realized gains and
losses on disposition of securities are determined on the specific
identification method and are reflected in the statement of operations. Net
unrealized gains and losses are recorded directly in a separate
shareholders' equity account, except those losses that are deemed to be
other than temporary, which losses, if any, are reflected in the statement
of operations.

Fair values are estimated based on quoted market prices. Interest is
recognized when earned. The amortized cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization and interest are included in interest income.

24
<PAGE>

NOTES TO FINANCIAL STATEMENTS

The following table presents the amortized cost, fair value and unrealized
gains and losses of the marketable securities for the year ended December
31, 1996. All marketable securities were held until January 27, 1997, which
was the maturity date.

<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------------
Amortized Unrealized
Cost Fair Value (Loss)
---- ---------- ------

Marketable securities, current:

<S> <C> <C> <C>
U.S. Government Agencies: $4,006,463 $4,001,625 $(4,838)
---------- ---------- --------
$4,006,463 $4,001,625 $(4,838)
========== ========== ========
</TABLE>

The contractual maturities of all securities available for sale was one
month.

D. Property and Equipment:
-----------------------

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----

<S> <C> <C>
Laboratory equipment $3,784,184 $3,845,739
Furniture and fixtures 147,123 147,123
Office equipment 570,954 547,476
Leasehold improvements 1,198,542 1,164,570
--------- ---------
5,700,803 5,704,908

Less: accumulated depreciation & amortization (4,811,545) (3,841,708)
----------- -----------
Property and equipment, net $889,258 $1,863,200
======== ==========
</TABLE>

Depreciation and amortization expense amounted to $1.1 million, $1.3
million and $1.0 million for the years ended December 31, 1997, 1996 and
1995, respectively.

Included above in property and equipment are the following assets that were
acquired pursuant to capital lease arrangements: December 31, 1997 1996

<TABLE>
<S> <C> <C>
Laboratory equipment $2,480,802 $2,568,918
Furniture and fixtures 119,557 119,557
Office equipment 213,570 213,570
Leasehold improvements 273,008 273,008
------- -------
3,086,937 3,175,053

Less: accumulated amortization (2,265,522) (1,759,347)
----------- -----------

$821,415 $1,415,706
======== ==========
</TABLE>

25
<PAGE>

NOTES TO FINANCIAL STATEMENTS

E. Shareholders' Equity:
---------------------

Common and Preferred Stock
--------------------------

On May 18, 1998, Procept's shareholders approved a one-for-ten reverse
split of the Company's Common Stock (the "May 18, 1998 Reverse Stock
Split"). The May 18, 1998 Reverse Stock Split was effected on June 1, 1998.
Shareholders' equity has been restated to give retroactive application to
the May 18, 1998 Reverse Stock Split in prior periods by reclassifying from
Common Stock to additional paid in capital the par value of the eliminated
shares arising from the May 18, 1998 Reverse Stock Split. In addition, all
references in the financial statements to the number of shares, per share
amounts and stock option and warrant data of the Company's Common Stock
have been restated.

On September 29, 1997, Procept's shareholders approved a one-for-seven
reverse split of the Company's Common Stock (the "September 29, 1997
Reverse Stock Split"). The September 29, 1997 Reverse Stock Split was
effected on October 14, 1997. Shareholders' equity has been restated to
give retroactive application to the September 29, 1997 Reverse Stock Split
in prior periods by reclassifying from Common Stock to additional paid in
capital the par value of the eliminated shares arising from the September
29, 1997 Reverse Stock Split. In addition, all references in the financial
statements to number of shares, per share amounts, and stock option and
warrant data of the Company's Common Stock have been restated.

On June 30, 1997, The Aries Fund and The Aries Domestic Fund L.P.
(collectively the "Aries Funds") made a direct investment of $3.0 million
into the Company. The Company received proceeds of $2.8 million for the
issuance of 85,334 shares of Common Stock (the "Common Shares"). The Common
Shares contained certain contractual obligations including, but not limited
to, the right to convert the Common Shares into preferred stock (the
"Preferred Stock") upon Procept shareholder approval of such Preferred
Stock. The Company also received from Aries an additional $0.2 million for
the issuance of two convertible promissory notes. The notes accrued
interest at a rate of 12% per year and were due on or before September 30,
1997. In addition to the Common Shares and the notes, the Aries Funds
received (i) Class A Warrants exercisable for an aggregate of 39,182 shares
of Procept Common Stock at an initial exercise price of $0.70 and (ii)
Class B Warrants exercisable for an aggregate of 108,603 shares of Procept
Common Stock at an initial exercise price of $32.80. The Company did not
separately value the Class A and Class B Warrants from the Preferred Stock
since the resulting accounting treatment for both securities is to record
their value in Additional Paid in Capital within the equity section of the
balance sheet. Additionally, since the Preferred Stock and the Class A and
Class B Warrants are not redeemable, no accretion is required. All of the
Class A Warrants and the Class B Warrants contemplated that such warrants
would be converted on September 30, 1997 into "New Warrants" having the
same aggregate exercise price as the Class A and Class B Warrants
converted, but with a per share exercise price equal to the lesser of (i)
$20.30 or (ii) 50% of the trading price (determined per a formula) at
September 30, 1997. The Class A and Class B Warrants further provided that
the exercise price of the New Warrants would be adjusted at the time

26
<PAGE>

NOTES TO FINANCIAL STATEMENTS

of the Company's next equity financing to ensure that the exercise price of
the New Warrants was at least 50% of the pricing in such future equity
financing. The Class A and Class B Warrants were converted to New Warrants
for 328,314 shares of Procept Common Stock having a per share exercise
price of $10.90. In a negotiated transaction with the Aries Funds, the New
Warrants were exchanged in April 1998 for Class C Warrants for an aggregate
of 814,680 shares of Procept Common Stock having an exercise price of
$5.00.

At an adjourned session of the Company's 1997 annual meeting held on July
15, 1997, its shareholders approved an amendment and restatement of the
Company's Restated Certificate of Incorporation which authorized 1,000,000
shares of preferred stock. On August 1, 1997, the Board of Directors
established a series of 30,061 shares of Series A Convertible Preferred
Stock (the "Series A Preferred Stock"). Upon the establishment of this
Series A Preferred Stock, the purchasers of the securities issued in the
June 1997 direct investment exercised the right to convert their Common
Shares to shares of Series A Preferred. On August 22, 1997, the Aries Funds
converted the 85,334 Common Shares into 28,000 shares of Series A Preferred
Stock. On September 30, 1997, the Aries Funds converted the convertible
promissory notes and the corresponding accrued interest into 2,060 shares
of Series A Preferred Stock.

The Series A Preferred Stock was initially convertible into Common Stock at
a conversion price equal to $32.80. The terms of the Series A Preferred
Stock provided that the conversion price would adjust on September 30, 1997
(or earlier, if certain events occurred) to a new conversion price equal to
the lesser of (i) $20.30 or (ii) 50% of the trading price (determined per a
formula) at September 30, 1997. On September 30, 1997, the conversion price
of the Series A Preferred Stock adjusted to $10.90. In connection with this
adjustment, the Company recorded a preferred stock dividend in the amount
of $4,217,388 which reflects the intrinsic value of the beneficial
conversion feature based upon the difference between the $26.25 per share
fair market value of the Company's Common Stock on the date of issuance and
the $10.90 per share adjusted conversion price of the Series A Preferred
Stock. Additionally, since the Series A Preferred Stock is not redeemable,
no accretion is required. As of December 31, 1997, the conversion price of
the Series A Preferred Stock was $10.90, but remains subject to further
conversion rate adjustments based on future events. At December 31, 1997,
the Series A Preferred Stock was convertible into 274,748 shares of Common
Stock. After the September 30, 1997 conversion price adjustment, the terms
of the Series A Preferred Stock provided for further reduction of the
conversion price of the Series A Preferred Stock (i) on June 30, 1998 to
ensure that the market price at that time was at least 140% of the
conversion price, (ii) if equity securities were issued in the future with
a pricing reset feature, on the reset date of such future equity securities
(if such a reset date occurred on or prior to June 30, 1999), so that the
conversion price of the Series A Preferred Stock was reduced
proportionately to the price reduction in the future equity securities,
(iii) if no reset date for future equity securities occurred by June 30,
1999, to ensure that the market price at that time was at least 200% of the
conversion price, and (iv) on future issuances of equity securities at a
price below the then effective conversion price or the then market price,
to a

27
<PAGE>

NOTES TO FINANCIAL STATEMENTS

price determined by a weighted average formula reflecting such dilutive
issuance. Other significant features of the Series A Preferred Stock
include (1) a per share cumulative annual dividend, payable in cash or in
kind, of 10% of the sum of $140 per share plus accrued but unpaid
dividends, (ii) the right to participate in most subsequent dividend
distributions to Common Stock, (iii) the right to vote the Series A
Preferred Stock on an as converted to Common Stock basis reflecting the
then effective conversion price, and (iv) the right to a liquidation
preference of $140 per share plus accrued but unpaid dividends.

Furthermore, on September 30, 1997 in accordance with the original terms of
the Class A and Class B Warrants issued in the June 1997 private placement,
such warrants were exchanged for 328,314 "New Warrants" at an exercise
price of $10.90 per share. The $10.90 exercise price of the New Warrants
was determined based on a formula set forth in the Class A Warrants and
Class B Warrants. The formula provided that the exercise price of the New
Warrants would equal the lesser of (i) $20.30 or (ii) 50% of the trading
price (determined per a formula) at September 30, 1997. The formula trading
price at September 30, 1997 was $21.80, and the exercise price was fixed at
$10.90. The Company incurred costs in the amount of $0.1 million related to
the June 1997 private placement and the subsequent conversion events which
were charged to additional paid-in capital.

As a part of a unit offering, the Company sold an aggregate of 1,960,500
shares of Common Stock in January, February, and April of 1998 together
with five-year Class C Warrants to purchase 1,960,500 shares of Common
Stock at an exercise price of $5.00 per share (the "1998 Offering"). The
$5.00 per share exercise price of the Class C Warrants was determined as
part of the terms of the 1998 Offering in a negotiation between the Company
and the placement agent for the 1998 Offering. The Company did not
separately value the Class C Warrants from the Common Stock issued in the
1998 Offering since the resulting accounting treatment for both securities
is to record their value in Additional Paid in Capital within the equity
section of the balance sheet. These securities were sold for gross proceeds
of $9.8 million. The purchasers in the 1998 Offering are entitled to
certain contractual rights requiring contingent additional issuances of
Common Stock to the purchasers, (x) based on the market price (i) for the
5-day and 30-day periods immediately prior to the Final Closing Date of the
1998 Offering and (ii) on the first anniversary of the Final Closing Date
of the 1998 Offering, (y) to protect them against future dilutive sales of
securities and (z) as a dividend substitute beginning 18 months after the
Final Closing Date of the 1998 Offering. In the event of (i) a liquidation,
dissolution or winding up of the Company, (ii) the sale or other
disposition of all or substantially all of the assets of the Company, or
(iii) any consolidation, merger, combination, reorganization or other
transaction in which the Company is not the surviving entity, the
purchasers are entitled to receive an amount equal to 140% of such
purchaser's investment as a liquidation "preference." Except in the case of
a liquidation, dissolution or winding up, such payment will be in the form
that equity holders will receive such as in cash, property or securities of
the entity surviving the acquisition transaction. In the event of a
liquidation, dissolution or winding up, such payment is contingent upon the
Company having available resources to make such payment. These

28
<PAGE>

NOTES TO FINANCIAL STATEMENTS

contractual rights will terminate after the first anniversary of the Final
Closing Date if the Common Stock trades at $15.00 per share or more.

On May 17, 1996, the Company completed a self-managed private placement of
units. Each Unit consisted of one share of the Company's Common Stock and
one callable warrant to purchase one share of the Company's Common Stock.
The Warrants are subject to redemption at the sole option of the Company
upon 30 days prior notice to the holders of the Warrants beginning May 17,
1998 at a price of $0.10 per Warrant Share in the event that the average
closing price of the Company's Common Stock for any 20 consecutive trading
day period exceeds $262.50. The initial exercise price of the Warrants per
share of common stock is $175.00. The Company did not separately value the
warrants from the common stock issued in the May 17, 1996 private placement
of units since the resulting accounting treatment for both securities is to
record their value in Additional Paid-In Capital within the equity section
of the balance sheet. The Company received proceeds of $11.6 million for
the issuance of 67,690 Units. The Company incurred additional costs in the
amount of $0.6 million related to this financing which were charged to
additional paid-in capital in 1996.

On February 8, 1996 the Company closed on a second public offering. The
Company received proceeds of $4.9 million (net of underwriting discount and
underwriter's offering expenses) for the issuance of 31,429 shares of
Common Stock. On March 27, 1996, the associated over allotment option was
partially exercised and the Company issued and sold an additional 2,143
shares of the Company's Common Stock resulting in net proceeds to the
Company of $0.3 million. The Company incurred costs in the amount of $0.2
million related to this financing at December 31, 1995. The deferred
financing costs were charged to additional paid-in capital in 1996.

On February 17, 1994, the Company closed its initial public offering. The
Company received proceeds of $18.6 million (net of underwriting discount
and underwriter's offering expenses) for the issuance of 34,500 shares of
common stock. In addition, all of the then outstanding shares of redeemable
convertible preferred stock (the "Preferred Stock") converted automatically
into 49,677 shares of common stock.

Each holder of common stock is entitled to one vote for each share of
common stock held. Each share of common stock issued and outstanding is
identical in all respects to each other share. The Company has reserved at
December 31, 1997, and kept available out of the authorized but unissued
shares of common stock, 551,326 shares for issuance upon the exercise of
outstanding options and warrants.

1989 Stock Plan
---------------

Under the Company's 1989 Stock Plan (the "Plan") adopted by the Board of
Directors during 1989, and subsequently amended and restated, the Company
is permitted to sell or award common stock or to grant stock options for
the purchase of common stock to employees, officers and consultants up to a
maximum of 16,245 shares. In March 1996, the Board of Directors approved an
amendment to the Plan to increase the number of shares covered by the Plan
by 3,571 which amendment was approved by the shareholders at the 1996
Annual Meeting of Shareholders. In March 1997, the Board of

29
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Directors approved an amendment to the Plan to increase the number of
shares covered by the Plan by 7,143 shares to 26,959 shares, which
amendment was approved by the shareholders at the 1997 Annual Meeting of
Shareholders. In April 1998, the Board of Directors approved an amendment
to the Plan to increase the number of shares covered by the Plan to
1,500,000 shares, which amendment was approved at the 1998 Annual Meeting
of Shareholders. At December 31, 1997, there were 15,516 shares available
for future grants.

The Plan provides for the granting of incentive stock options (ISOs) and
nonqualified stock options. In the case of ISOs, the exercise price shall
not be less than 100% (110% in certain cases) of the fair market value per
share of the common stock, on the date of grant. In the case of
nonqualified options, the exercise price shall be not less than the lesser
of (a) book value per share of common stock as of the fiscal year of the
Company immediately preceding the date of such grant, or (b) 50% of the
fair market value of the common stock on the date of grant. All stock
options under the Plan have been granted at exercise prices at least equal
to the fair market value of the common stock.

The options either become exercisable immediately on the date of grant or
shall become exercisable in such installments as the Compensation Committee
may specify, generally over a 4 year period. Each option shall expire on
the date specified by the Compensation Committee, but not more than ten
years and one day from the date of grant in the case of nonqualified
options, and generally ten years from the date of grant in the case of ISOs
(five years in certain cases).

Director Stock Option Plan
--------------------------

In June 1994, the shareholders of the Company adopted the 1994 Director
Stock Option Plan (the "Director Plan"). The Director Plan was established
to attract and retain highly qualified, non-employee directors. The price
per share for each option granted under this plan shall be the current fair
market value at date of grant. The options vest over a period of three
years and have a term of ten years. As originally adopted, the aggregate
number of shares of the Company's common stock which may be optioned under
this plan is 2,143 shares. In March 1997, the Board of Directors approved
an amendment to the Director Plan to increase the number of shares covered
by the Director Plan by 2,143 shares, which amendment was approved by the
shareholders at the 1997 Annual Meeting of Shareholders. In April 1998, the
Board of Directors approved an amendment to the Director Plan to increase
the number of shares covered by the Director Plan to 500,000, which
amendment was approved at the 1998 Annual Meeting of Shareholders.

Supplemental Disclosures for Stock-Based Compensation
-----------------------------------------------------

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation", ("SFAS 123")
issued in 1995, defined a fair value method of accounting for stock options
and other equity instruments. Under the fair value method, compensation
cost is measured at grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
The Company elected to continue to apply the accounting provisions of APB
Option No. 25 for stock options. The required disclosures under SFAS 123 as
if the Company had applied the new method of accounting are made below.

30
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Activity under all stock plans related to all the ISOs and nonqualified
stock options for the three years ended December 31, 1997 is listed below.

ISO Nonqualified Weighted Avg.
Shares Shares Option Price Exercise Price
------ ------ ------------ --------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 8,103 3,993 $70.00-$892.50 $333.90

Granted 2,293 1,452 $149.10-$577.50 $224.70
Exercised (358) (250) $70.00-$374.50 $97.30
Canceled (965) (43) $70.00-$735.00 $408.80
----- ----

Outstanding at December 31, 1995 9,073 5,152 $70.00-$892.50 $310.10

Granted 6,669 740 $87.50-$227.50 $107.10
Exercised (729) (71) $70.00-$187.60 $82.60
Canceled (2,967) (3,405) $70.00-$892.50 $261.80
------- -------

Outstanding at December 31, 1996 12,046 2,416 $70.00-$892.50 $244.30

Granted 110,943 13,214 $10.00-$96.30 $22.70
Exercised (6) -- $70.00 $70.00
Canceled (4,038) (91) $70.20-$892.50 $250.70
------- ----
Outstanding at December 31, 1997 118,945 15,539 $10.00-$892.50 $39.50
======= ======
</TABLE>

Summarized information about stock options outstanding at December 31, 1997
is as follows:

<TABLE>
<CAPTION>
Exercisable
Weighted Avg. ----------------------
Range of No. of Options Remaining Weighted Avg. Number of Weighted Avg.
Exercise Prices Outstanding Contract. Life Exercise Price Options Exercise Price
--------------- ----------- -------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
$10.00-$18.80 2,272 9.91 $16.60 0 $--
$21.90 119,800 9.75 $21.90 16,293 $21.90
$32.80-$96.30 7,189 7.46 $76.80 3,230 $76.80
$148.80-$187.30 1,981 7.30 $169.10 1,273 $171.80
$201.30-$392.00 744 6.08 $307.70 684 $313.90
$402.50-$892.50 2,498 6.24 $608.40 2,057 $605.40

</TABLE>

Options for the purchase of 23,538 shares, 5,925 shares and 8,177 shares
are exercisable at December 31, 1997, 1996 and 1995, respectively. The
total exercise proceeds for all options outstanding at December 31, 1997 is
approximately $5.3 million.

31
<PAGE>

NOTES TO FINANCIAL STATEMENTS

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 75% 75% 75%
Risk free interest rate 6.00% 6.25% 6.96%
Expected life of option 5.0 5.0 5.0
</TABLE>

All options granted in 1997, 1996 and 1995 were granted at fair value. The
weighted average fair value of options granted was $15.90, $70.70 and
$148.40 for 1997, 1996 and 1995, respectively.

Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards made in 1997, 1996 and
1995 consistent with the provisions of SFAS No. 123, the Company's net loss
and loss per share would have been increased to the pro forma amounts shown
below:

1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(9,052,575) $(11,235,760) $(11,712,287)
Net loss - pro forma $(9,368,531) $(11,455,536) $(11,950,312)
Basic and diluted net loss per
common share - as reported $(63.68) $(68.16) $(127.65)
Basic and diluted net loss per
common share - pro forma $(65.20) $(69.50) $(130.25)
</TABLE>

The effects of applying SFAS 123 in the pro forma disclosure are not
indicative of future amounts.

1994 Employee Stock Purchase Plan
---------------------------------

In April 1994, the Board of Directors adopted the 1994 Employee Stock
Purchase Plan (the "1994 Plan"). Under the 1994 Plan, eligible employees of
the Company may purchase shares of Common Stock, through payroll
deductions, at the lower of 85% of fair market value of the stock at the
time of grant or 85% of fair market value at the time of exercise. As
originally adopted, a total of 3,572 shares were reserved for issuance
under the 1994 Plan. In March 1997, the Board of Directors approved an
amendment to the 1994 Plan to increase the number of shares covered by the
1994 Plan by 3,572 shares, which amendment was approved by the shareholders
at the 1997 Annual Meeting of Shareholders. In April 1998, the Board of
Directors approved an amendment to the 1994 Plan to increase the number of
shares covered by the 1994 Plan to 200,000, which amendment was approved at
the 1998 Annual Meeting of Shareholders. Shares are granted twice yearly,
on February 28 and August 31, and are exercisable upon issuance. The
Company issued 763 shares, 857 shares and 1,042 shares in 1997, 1996 and
1995, respectively. The weighted average fair values of grants at fair
value under the 1994 Plan during 1997, 1996 and 1995 were $14.10, $70.00
and $84.00, respectively.

32
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Common Stock Warrants
---------------------

On December 16, 1992, the Company issued warrants, which expired on
December 16, 1997, to purchase an aggregate of 59 shares of common stock at
an initial exercise price of $421.40 in connection with a bridge loan to
the Company in the amount of $0.3 million, which was subsequently repaid
with interest thereon. In January 1993, the Company issued warrants, which
expire on December 14, 1998, to purchase 1,148 shares of the Company's
common stock to an underwriter at an initial exercise price of $506.10 per
share, in connection with the private placement of the Class F Preferred
Stock.

On February 10, 1994, in connection with the closing of the initial public
offering the Company's underwriter purchased for $210.00 warrants to
purchase 3,000 shares of the Company's common stock at an exercise price of
$833.00 per share. The warrants expire on February 10, 1999.

On April 1, 1994, in connection with the Company's $2 million master lease
agreement, the Company issued common stock warrants for a purchase price of
$350.00 to purchase 500 shares of common stock at a price of $595.00 at any
time on or after April 1, 1995 and on or before April 1, 1999.

On September 11, 1995, the Company issued common stock warrants for a
purchase price of $300.00 to purchase 425 shares of the Company's common
stock to Oppenheimer & Co., Inc. at an exercise price of $490.00 per share,
in connection with the engagement of Oppenheimer & Co., Inc. to provide
investment banking services to the Company. These warrants are exercisable
beginning September 11, 1996 and expire September 10, 2000.

On February 14, 1996, the Company issued common stock warrants for a
purchase price of $220.00 to purchase up to $3,143 shares of the Company's
common stock to Commonwealth Associates at an exercise price of $219.10 per
share in connection with a public financing. These warrants are exercisable
beginning February 14, 1997 and expire on February 13, 2001.

On May 17,1996, the Company issued a common stock warrant to purchase
11,283 shares of the Company's common stock at an exercise price of $175.00
per share to David Blech in connection with financial advisory services to
the Company. This warrant is exercisable beginning May 17, 1996 and expires
on May 17, 2001.

On January 6, 1997, the Company issued a common stock warrant to purchase
1,071 shares of the Company's common stock to Furman Selz LLC at an
exercise price of $105.00 per share in connection with financial advisory
services to the Company. This warrant is exercisable beginning January 6,
1997 and expires on January 6, 2002.

In August 1991 and September 1992, the Company issued warrants to purchase
up to 432 and 286 shares, respectively, of the Company's Class D Preferred
Stock (the "Class D Warrants") at a minimum exercise price of $175.00 per
share, in connection with leasing arrangements. The Class D Warrants were
automatically converted into warrants to purchase 268 shares of common
stock at an exercise price of $468.30 per share upon

33
<PAGE>

NOTES TO FINANCIAL STATEMENTS

the closing of the Company's initial public offering on February 17, 1994.
The warrants expire on February 10, 1999.

In connection with promissory notes issued in September 1992, the Company
granted warrants to acquire an aggregate of 1,270 shares of Class F
Preferred Stock at an exercise price of $157.50 per share. Upon conversion
of all Class F Preferred Stock effected by the initial public offering, the
warrants converted into warrants to purchase 475 shares of common stock at
an exercise price of $421.40 per share. In the year ended December 31,
1995, 139 of these warrants were exercised. The remaining warrants expired
on September 15, 1997.

At December 31, 1997 there were 416,841 warrants outstanding, all of which
are exercisable.

F. Collaborative Research and Development Agreements:
--------------------------------------------------

In September 1993, the Company signed a Research and Development Agreement
with Sandoz Pharma Ltd. (the "Sandoz Agreement") to identify and develop
compounds which bind to CD4 or CD2, or their respective ligands, and
interfere with their interaction, as therapeutic agents for immune
suppression. Effective as of September 1, 1995, the Company's sponsored
research agreement with Sandoz Pharma Ltd. was amended to focus the
research program on compounds targeting CD4 and its ligand and to limit the
research program with respect to compounds that bind to CD2 and its ligand
to certain screening activities being conducted by Sandoz through the end
of 1995. In connection with this amendment, the research and license fees
due for the third year of the research program were reduced from $5 million
to $2.2 million. Of the $2.2 million received, $0.9 million was recorded as
revenue in 1995 and $1.3 million as deferred revenue at December 31, 1995
and was subsequently recorded as revenue in 1996. Under the terms of the
Sandoz Agreement, the Company has received $14.2 million in initial license
fees and research funding to date. Procept remains eligible to receive $12
million in milestone payments as compounds discovered in these research
programs progress through clinical development.

In 1994, the Company received $8.0 million and recorded as revenue $5.0
million for research performed by the Company under the Sandoz agreement.
The $3.0 million was advance payment for research to be performed in fiscal
year 1995 and is recorded as revenue in 1995.

In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex"), to provide research services relating to the
development of novel vaccines based on discoveries licensed from the
Brigham and Women's Hospital and Harvard Medical School. These discoveries
shed light on a previously unknown aspect of immunology, the CD1 system of
lipid antigen presentation.

Under the Sponsored Research Agreement, Procept conducted specified
research tasks on behalf of VacTex for which Procept received a combination
of cash and equity in VacTex based on the number of full-time equivalent
employees of Procept engaged in the research, but subject to maximum cash
and stock limits. The Sponsored Research Agreement also includes a
provision requiring Procept to issue to VacTex or its shareholders warrants
to purchase an aggregate of 1,429 shares of Procept Common Stock at an
exercise price of $245.00 per share.

34
<PAGE>

NOTES TO FINANCIAL STATEMENTS

In the year ended December 31, 1997, the Company recorded revenue of $0.5
million which consisted of $0.4 million in cash and 150,000 shares of
VacTex common stock. In the year ended December 31, 1996, the Company
recorded revenue of $0.6 million which consisted of $0.4 million in cash
and 150,000 shares of VacTex common stock. At December 31, 1997, the
Company had an accounts receivable of $21,000, which was subsequently paid
in January 1998, and an investment in VacTex of $0.3 million.

In order to apply available resources to the PRO 2000 development program,
the Company did not seek to renew the Sponsored Research Agreement with
VacTex, which expired on January 8, 1998.

On April 13, 1998, VacTex, Inc. ("VacTex") was acquired by Aquila
Biopharmaceuticals, Inc. ("Aquila"). The Company's investment in VacTex of
300,000 shares of common stock was converted to 113,674 shares of Aquila
common stock and $128,501 of 7% debentures. As a result, the Company is
accounting for its investment under Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" as an available for sale security and marked it to market by
recording an unrealized gain of $475,022 as part of Shareholders' Equity,
based on Aquila's common stock closing price on April 13, 1998. The
Company's investment in VacTex was originally accounted for under the cost
method since it was a restricted security, it did not have a readily
determinable fair value and Procept owned less than twenty percent of
VacTex.

In July 1997, the Company announced that it had been awarded a Phase I
Small Business Innovation Research Grant from the National Institutes of
Health to support the development of novel vaccines for tuberculosis. Under
the terms of the Phase I Grant, Procept will receive $0.1 million in
financial support. The Company proposes to identify and develop an
effective tuberculosis vaccine by utilizing the CD1 system of lipid antigen
presentation. The Company plans to apply for additional funding under a
Phase II SBIR grant late in 1997.

G. Income Taxes:
-------------

No federal or state income taxes have been provided for as the Company has
incurred losses since its inception. At December 31, 1997, the Company had
Federal and State tax net operating loss ("NOL") carryforwards of
approximately $57.3 million and $50.7 million which will expire beginning
in the year 2000 through 2012 for Federal and beginning in the year 1998
through 2002 for State, respectively. Additionally, the Company had Federal
and State research and experimentation credit carryforwards of
approximately, $1.6 million and $1.0 million, respectively, both of which
will expire in the year 2012.

The Internal Revenue Code of 1986 (the "Code") contains provisions which
limit the net operating loss carryforwards and tax credits available to be
used in any given year upon the occurrence of certain events, including
significant changes in ownership interests. In conjunction with the initial
public offering, such a change in ownership as defined in the Code
occurred. Accordingly, certain available NOL carryforwards and tax credits
are subject to these limitations.

35
<PAGE>

NOTES TO FINANCIAL STATEMENTS

The components of Procept's net deferred tax assets were as follows at
December 31:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards $22,665,000 $19,021,000
Tax credit carryforwards 2,660,000 1,947,000
Depreciation 1,263,000 1,057,000
Vacation and benefits 4,000 22,000
Capital leases and other (1,257,000) (957,000)
Valuation allowance (25,335,000) (21,090,000)
------------ ------------

Total net deferred tax assets $ 0 $ 0
========== ===========
</TABLE>

As required by Financial Accounting Statement No. 109, management of the
Company has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets which are comprised principally of
net operating loss and tax credit carryforwards. Management has considered
the Company's history of losses and concluded, in accordance with the
applicable accounting standards, that it is more likely than not that the
Company will not recognize the benefit of the net deferred tax assets.
Accordingly, the deferred tax assets have been fully reserved. Management
re-evaluates the positive and negative evidence on an annual basis.

H. Savings and Retirement Plan:
----------------------------

On July 1, 1990, the Company established the Procept, Inc. Savings and
Retirement Plan (the "401(k) Plan"), a profit-sharing plan under Section
401 of the Code. Employees are eligible to participate in the 401(k) Plan
by meeting certain requirements, including length of service and minimum
age. The Company may contribute to the 401(k) Plan, without regard to
current or accumulated net profits, in an amount not to exceed the maximum
allowable under applicable provisions of the Code. The amount is to be
allocated to active participants based on their annual pay as a percentage
of the total annual pay of all such participants. Participants may also
contribute to the 401(k) Plan, but no more than the maximum permissible
amount allowed by regulatory definitions. For the years ended December 31,
1997, 1996 and 1995, the Company did not contribute to the 401(k) Plan.

I. Commitment and Contingencies:
-----------------------------

Operating Leases
----------------

On February 28, 1989, the Company entered into an operating lease
arrangement for its facility. The Company has made several amendments to
its operating lease arrangement for its facility to include additional
leased space and extension of the lease terms. The commitment under the
operating lease requires the Company to pay monthly base rent and an
allocable percentage of operating costs and property taxes.

The monthly base rent is subject to increases during the course of the
lease term which are unrelated to increases in utilized space. Accordingly,
the Company is providing for rent expense based on an amortization of the
lease payments on a straight-line basis over the life of the lease
arrangement.

36
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Pursuant to the aforementioned leasing arrangements, at December 31, 1997
and 1996, the Company has recorded noncurrent liabilities of $0.3 million
and $0.3 million, respectively, for rent expense in excess of cash
expenditures for leased facilities.

Gross rent expense for leased facilities and equipment amounted to
approximately $1.8 million, $1.6 million and $1.7 million, for the years
ended December 31, 1997, 1996 and 1995, respectively. The approximate
future minimum annual rental payments for leased facilities for the next
five years under the lease arrangements consist of the following at
December 31,1997:

<TABLE>

Pursuant to the facility lease agreement, the Company had provided an open
letter of credit for the term of its leases in the amount of $0.4 million
which would provide for payment to the lessor of its main facility in the
event of default by the Company. The Company held a certificate of deposit,
which was classified as a restricted investment (see also Note J), solely
for the purpose of collateralizing this letter of credit in the amount of
$0.4 million. During September 1997, in substitution of the letter of
credit and restricted investment arrangement, the Company increased its
rent deposit with the lessor to $0.2 million.

Capital Leases
--------------

In 1992, the Company entered into a leasing agreement which allowed the
Company to lease up to $1.0 million of capital equipment at implicit
interest rates ranging from approximately 11% to 13% for a 42 month term.

In 1994, the Company entered into a $2 million master lease agreement for
the lease and sale/leaseback of certain equipment and leasehold
improvements. The implicit interest rates for the leases under this
agreement range from approximately 5.5% to 7% for a 36 month term. During
fiscal year 1994, the Company purchased and leased $0.7 million of
laboratory equipment, office equipment and furniture and fixtures pursuant
to this leasing arrangement. During fiscal year 1995, the Company purchased
and leased $1.3 million of laboratory equipment, office equipment and
leasehold improvements pursuant to this leasing arrangement. These
equipment leasing agreements have been fully utilized at December 31, 1996.

Future minimum lease payments with initial or remaining terms of one year
or more consist of the following at December 31, 1997:
<TABLE>

<S> <C> <C>
1998 $20,519

Less: amount representing interest (288)
-------
Present value of future minimum lease payments $20,231
=======
</TABLE>

37
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Contract Research
-----------------

In February 1987, the Company entered into a Research and Licensing
Agreement with Dana-Farber, a Massachusetts not-for-profit corporation. As
part of the Agreement, the Company had agreed to fund certain research and
development projects conducted by Dana-Farber in relation to the
development and eventual commercialization of products related to T cell
activation in exchange for exclusive rights to technologies developed. The
Research and Licensing Agreement expired on March 31, 1997, as the Company
chose not to extend funding.

The amount of contract research costs under the Agreement incurred by the
Company and included in research and development expense amounted to $0.2
million, $0.8 million and $0.8 million in 1997, 1996 and 1995,
respectively. The Company has accrued $0 and $0.4 million at December 31,
1997 and 1996, respectively, payable to Dana-Farber under this Agreement.

Legal Proceedings
-----------------

On October 23, 1997, Commonwealth Associates ("Commonwealth") filed a
Complaint with the United States District Court for the Southern District
of New York naming the Company as a defendant (the "Complaint"). The
Complaint alleges that the Company breached obligations to Commonwealth
under the Underwriting Agreement between Commonwealth and the Company dated
February 8, 1996, giving Commonwealth a right of first refusal to act as
co-lead underwriter or co-managing agent of a public offering or Private
Placement of the Company's securities during the period ended August 8,
1997. In the Complaint, Commonwealth seeks aggregate compensatory damages
in the amount of $375,000, incidental and consequential damages in an
amount to be proven at trial, costs, disbursements and accrued interest and
such other and further relief as the court deems proper. Discovery has
commenced in this action. The Company believes that Commonwealth's claims
are without factual or legal merit. The Company does not believe this
action will have a material adverse effect on the Company's business and it
intends to vigorously defend this action. However, given the early stage of
this litigation, no assurance may be given that the Company will be
successful in its defense. A decision by the court in Commonwealth's favor
or any other conclusion of this litigation in a manner adverse to the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations.

J. Note Payable:
-------------

On February 15, 1995, the Company signed a term note with Bristol-Myers
Squibb Company in the amount of $0.1 million. The term note provided for
scheduled payments of $38,617 on April 1, July 1, and October 1, 1996. The
interest rate for the note was 8.0%. Upon the occurrence of certain
financing events, the entire balance of the note, including all accrued and
unpaid interest, became due and payable. This Note was repaid in full in
1996 upon the closing of the secondary offering.

38
<PAGE>

NOTES TO FINANCIAL STATEMENTS

Line of Credit:
---------------

The Company maintained a $0.1 million line of credit through the use of
corporate credit cards. This line of credit was collateralized with a
certificate of deposit of $0.1 million and was classified as a restricted
investment on the balance sheet. The certificate of deposit was recorded at
cost, which approximated market. Interest earned on the certificate of
deposit was not restricted; accordingly, any accrued interest was
considered a cash equivalent. See also Note B. In September 1997, the
Company reduced its line of credit to $35,000 and was no longer required to
maintain the line of credit and certificate of deposit.

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

None.

39
<PAGE>

PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information concerning disclosure pursuant to Item 405 of Regulation S-K is
included under the caption "Compliance with Section 16(a) of the Securities
Exchange Act" in the Proxy Statement and is incorporated herein by reference.

The current Executive Officers and Directors of the Company are as follows:

<TABLE>

<S> <C> <C>
John F. Dee 40 President; Chief Executive Officer; Director
Michael S. Weiss 32 Director, Chairman of the Board
Zola P. Horovitz, Ph.D. 63 Director
Max Link, Ph.D. 57 Director
Ellis L. Reinherz, M.D. 47 Director
Mark C. Rogers, M.D. 55 Director
Elliott H. Vernon 54 Director
</TABLE>

JOHN F. DEE has served as President, Chief Executive Officer and a member of the
Board of Directors of Procept since joining the Company in February 1998. From
April 1997 to October 1997, Mr. Dee was Interim Chief Executive Officer of Genta
Incorporated. From 1994 to 1997 and 1988 to 1992, Mr. Dee was a Senior
Management Consultant with McKinsey & Company, Inc. and from 1992 to 1994 served
as Chief Operating Officer, Chief Financial Officer, and Director of Walden
Laboratories, Inc. (now AVAX Technologies, Inc.). Mr. Dee holds an M.S. in
Chemical Engineering from Stanford University and an M.B.A. from Harvard
University.

MICHAEL S. WEISS has been a director of the Company, and the Chairman of its
Board of Directors, since July 8, 1997. Mr. Weiss is presently a Senior Managing
Director of Paramount Capital, Inc. Prior to joining Paramount, Mr. Weiss was an
attorney with Cravath, Swaine & Moore. Mr. Weiss is currently Vice-Chairman of
the Board of Directors of Genta Incorporated, a director of Pacific
Pharmaceuticals, Inc., AVAX Technologies, Inc. and Palatin Technologies, Inc.,
and is the Secretary of Atlantic Pharmaceuticals, Inc., each of which is a
publicly traded biopharmaceutical company. Additionally, Mr. Weiss is currently
a member of the boards of directors of several privately held biopharmaceutical
companies. Mr. Weiss received his J.D. from Columbia University School of Law
and a B.S. in Finance from the State University of New York at Albany. Mr. Weiss
devotes only a portion of his time to the business of the Company.

ZOLA P. HOROVITZ, Ph.D. has been a director of the Company since 1992. Dr.
Horovitz, currently a consultant to pharmaceutical companies, served as Vice
President - Business Development and Planning at Bristol-Myers Squibb
Pharmaceutical Group, from August 1991 to April 1994, and as Vice President -
Licensing, from 1989 to August 1991. Prior to 1989, Dr. Horovitz spent 30 years
as a member of the Squibb Institute for Medical Research, most recently as Vice
President - Research Planning. He is also a director of seven other
biotechnology and pharmaceutical companies: Avigen, Inc., BioCryst, Inc.,
Clinicor, Inc., Diacrin, Inc., Magainin Pharmaceuticals, Inc., Roberts
Pharmaceutical Corporation and Synaptic Pharmaceuticals, Inc. Dr. Horovitz
received his Ph.D. from the University of Pittsburgh.

MAX LINK, Ph.D. has been a director of the Company since 1995. Dr. Link has held
a number of executive positions with pharmaceutical and healthcare companies.
Most recently, he served as Chief Executive Officer of Corange Limited, from May
1993 until June 1994. Prior to joining Corange, Dr. Link served in a number of
positions with Sandoz Pharma Ltd., including Chief Executive Officer, from 1987
until April 1992, and Chairman, from April 1992 until May 1993. Dr. Link
currently serves on the board of directors of six publicly traded life science
companies:

40
<PAGE>

Access Pharmaceuticals, Inc., Alexion Pharmaceuticals, Inc., Cell
Therapeutics, Inc., CytRx Corporation, Human Genome Sciences, Inc. and Protein
Design Labs, Inc. Dr. Link received his Ph.D. in Economics from the University
of St. Gallen in 1970.

ELLIS L. REINHERZ, M.D. has been a director of the Company since 1985. Dr.
Reinherz is a founder of Procept and has served as Chairman of its Scientific
Advisory Board since October 1985. Since 1984, he has served as Chief,
Laboratory of Immunobiology at the Dana-Faber Cancer Institute and as Professor
of Medicine at Harvard Medical School. He received his M.D. from Harvard Medical
School in 1975. Dr. Reinherz serves on the editorial and review boards of key
medical and scientific publications in hematology and immunology.

MARK C. ROGERS, M.D. has been a director of the Company since December 1997. Dr.
Rogers is presently the President of Paramount Capital, Inc. From 1996 until
1998, Dr. Rogers was Senior Vice President, Corporate Development and Chief
Technology Officer at The Perkin-Elmer Corporation. From 1992 to 1996, Dr.
Rogers was the Vice Chancellor for Health Affairs at Duke University Medical
Center, and Executive Director and Chief Executive Officer of Duke University
Hospital and Health Network. Prior to his employment at Duke, Dr. Rogers was on
the faculty of Johns Hopkins University for 15 years where he served as a
Distinguished Faculty Professor and Chairman of the Department of Anesthesiology
and Critical Care Medicine, Associate Dean for Clinical Affairs, Director of the
Pediatric Intensive Care Unit and Professor of Pediatrics. Dr. Rogers currently
serves on the board of directors of three publicly traded companies: Discovery
Laboratories, Inc., Galileo Corporation and HCIA, Inc. Dr. Rogers received his
M.D. from Upstate Medical Center, State University of New York and has his
M.B.A. from The Wharton School of Business. He received his B.A. from Columbia
University and held a Fulbright Scholarship.

ELLIOTT H. VERNON has been a director of the Company since December 1997. Mr.
Vernon has been the Chairman of the Board, President and Chief Executive Officer
of Healthcare Imaging Services, Inc., a publicly held operator of fixed-site
magnetic resonance imaging centers in the northeast, since its inception in
1991. For the past ten years, Mr. Vernon has also been the managing partner of
MR General Associates, a New Jersey general partnership which is the general
partner of DMR Associates, L.P., a Delaware limited partnership. Mr. Vernon was
also one of the founders of Transworld Nurses, Inc., the predecessor of
Transworld HealthCare, Inc., a publicly held regional supplier of a broad range
of alternate site healthcare services and products. Mr. Vernon is also a
principal of Healthcare Financial Corp., LLC, a healthcare financial consulting
company engaged primarily in FDA matters. From January 1990 to December 1994,
Mr. Vernon was a director, Executive Vice President and General Counsel of Aegis
Holdings Corporation, an international provider of financial services through
its investment management and capital markets consulting subsidiaries. Mr.
Vernon is currently a director of Pacific Pharmaceuticals, Inc., a publicly held
medical products company.

The term of office of each officer extends until the meeting of the Board of
Directors following the next annual meeting of Shareholders and until his
successor is elected and qualified or until his earlier resignation or removal.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 11 is included under the captions "Compensation
Committee Interlocks and Insider Participation," and "Executive Compensation" in
the Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

41
<PAGE>

The information required by Item 12 is included under the caption "Share
Ownership" in the Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Item 13 is included under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.

PART IV
-------

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

<TABLE>

<S> <C>
(a) 1. FINANCIAL STATEMENTS.

The financial statements are listed under Part II, Item 8 of this
Report.

2. FINANCIAL STATEMENT SCHEDULES.

None.

3. EXHIBITS.

The exhibits are listed under Part IV, Item 14(c) of this Report.

(b) REPORTS ON FORM 8-K.

Current Report dated December 10, 1997 filed with the Securities and
Exchange Commission on December 12, 1997 relating to the Company's
private placement of common stock units.
</TABLE>

Exhibit
No. Description
--- -----------

3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended and restated by Certificate of Amendment
dated July 15, 1997. Filed as Exhibit 3.1 to the Company's
Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein by
reference.

3.2 By-laws of the Company. Filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Commission
File No. 33-57188, and incorporated herein by reference.

4.1 Specimen Stock Certificate for Common Stock $.01 par value.
Filed as Exhibit 4.1 to the Company's Registration Statement
on Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.

42
<PAGE>

4.2 Warrant Agreement to Purchase Class D Convertible Preferred
Stock dated August 1, 1991, issued to Comdisco, Inc. Filed
as Exhibit 4.2 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.

4.3 Warrant Agreement to Purchase Class D Convertible Preferred
Stock dated September 11, 1992, issued to Comdisco, Inc.
Filed as Exhibit 4.3 to the Company's Registration Statement
on Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.

4.4 Unit Purchase Warrant Agreement dated May 17, 1996, issued
to David Blech. Filed as Exhibit 4.1 to the Company's Form
10-Q for the quarter ended June 30, 1997, Commission File
No. 0-21134, and incorporated herein by reference.

4.5 [Reserved.]

4.6 Warrant to Purchase Common Stock dated January 5, 1993,
issued to Tucker Anthony Incorporated. Filed as Exhibit 4.6
to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

4.7 Warrant to Purchase Common Stock dated as of February 17,
1994, issued to D. Blech & Company, Incorporated. Filed as
Exhibit 4.6 to the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.

4.8 Warrant Agreement dated February 17, 1994 between the
Company and D. Blech & Company, Incorporated. Filed as
Exhibit 4.7 to the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.

4.9 Warrant to Purchase Common Stock dated as of April 1, 1994,
issued to Hambrecht & Quist Guaranty Finance, L.P. Filed as
Exhibit 4 to the Company's Form 10-Q for the quarter ended
March 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.

4.10 Warrant to Purchase Common Stock dated as of September 11,
1995, issued to Oppenheimer & Co., Inc. Filed as Exhibit
4.10 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96798, and incorporated herein by
reference.

4.11 Form of Warrant Agreement between the Company and
Commonwealth Associates. Filed as Exhibit 4.11 to the
Company's Registration Statement on Form S-1, Commission
File No. 33-96798, and incorporated herein by reference.

4.12 Form of Warrant to Purchase Common Stock dated May 17, 1996
and schedule of holders. Filed as Exhibit 4.12 to the
Company's

43
<PAGE>

Form 10-K for the year ended December 31, 1996, Commission
File No. 0-21134, and incorporated herein by reference.

4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC
dated January 6, 1997. Filed as Exhibit 4.13 to the
Company's Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and incorporated herein by
reference.

4.14 "New Warrant" dated September 30, 1997 issued to the Aries
Fund. Filed as Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended September 30, 1997, Commission File No.
0-21134, and incorporated herein by reference.

4.15 "New Warrant" dated September 30, 1997 issued to Aries
Domestic Fund, L.P. Filed as Exhibit 4.2 to the Company's
Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein by
reference.

10.1 Master Lease Agreement (equipment) dated as of August 1,
1991 between the Company and Comdisco, Inc. Filed as Exhibit
10.1 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

10.2 Master Lease Agreement (equipment) dated as of September 11,
1992 between the Company and Comdisco, Inc. Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

10.3 Master Lease Agreement (equipment) dated as of April 1, 1994
between the Company and Hambrecht & Quist Guaranty Finance
L.P. Filed as Exhibit 10.3 to the Company's Form 10-Q for
the quarter ended March 31, 1995, Commission File No.
0-21134, and incorporated herein by reference.

10.4 The 1989 Stock Plan, as amended. Filed as Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended June 30, 1997,
Commission File No. 0-21134, and incorporated herein by
reference.

10.5 The 1994 Employee Stock Purchase Plan, as amended. Filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter
ended June 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.

10.6 The 1994 Director Stock Option Plan, as amended. Filed as
Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended June 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.

10.7 Registration Rights Agreement dated as of January 5, 1993
among the Company and certain of its security holders named
therein. Filed as Exhibit 10.4 to the Company's Registration
Statement on

44
<PAGE>

Form S-1, Commission File No. 33-51788, and incorporated
herein by reference.

10.8 Amendment No. 1 to Registration Rights Agreement dated as of
March 2, 1994 among the Company and certain of its security
holders named therein. Filed as Exhibit 10.3 to the
Company's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by
reference.

10.9 Amendment No. 2 to Registration Rights Agreement dated as of
September 11, 1995 between the Company and Oppenheimer &
Co., Inc. Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96798, and incorporated herein by reference.

10.10 Lease for 840 Memorial Drive dated February 28, 1989 between
the Company and Robert Epstein et al., Trustee of the 840
Memorial Drive Trust, as amended February 28, 1989 and April
4, 1989. Filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.

10.11 Lease for 840 Memorial Drive dated August 21, 1990 between
the Company and Robert Epstein et al., Trustee of 840
Memorial Drive Trust. Filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.

10.12 Lease for 840 Memorial Drive dated February 10, 1992 between
the Company and Robert Epstein et al., Trustee of the 840
Memorial Drive Trust. Filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.

10.13 Lease for 840 Memorial Drive dated September 8, 1992 between
the Company and Robert Epstein et al., Trustee of the 840
Memorial Drive Trust. Filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1, Commission
File No. 33-57188, and incorporated herein by reference.

10.14 Lease for 840 Memorial Drive dated April 27, 1994 between
the Company and Robert Epstein et al., Trustee of the 840
Memorial Drive Trust. Filed as Exhibit 10 to the Company's
Form 10-Q for the quarter ended March 31, 1994, Commission
File No. 0-21134, and incorporated herein by reference.

+10.15 Amended and Restated Research and Licensing Agreement dated
as of February 19, 1987 between the Company and the
Dana-Farber Cancer Institute, as amended by Letter
Agreements between the Company and Dana-Farber Cancer
Institute dated as of October 17, 1987, October 20, 1987,
January 20, 1988, March 1, 1988, March 22, 1989, March 27,
1989, March 5, 1990, May 3, 1993, May 4, 1993, May 10, 1993
and May 12, 1993 (as amended, the "DFCI Agreement"). Filed
as Exhibit 10.11 to the Company's Registration

45
<PAGE>

Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.

+10.16 Letter Agreements between the Company and Dana-Farber Cancer
Institute dated April 29, 1994 and May 6, 1994, amending the
DFCI Agreement. Filed as Exhibit 10.16 to the Company's Form
10-K for the year ended December 31, 1994, Commission File
No. 0-21134, and incorporated herein by reference.

+10.17 Collaboration Agreement dated as of January 1, 1992 between
the Company and the Molecular Modeling and Design Unit of
the University of California, San Francisco. Filed as
Exhibit 10.13 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.

10.18 Confidential Screening Agreement dated as of July 24, 1992
between the Company and the Division of Acquired
Immunodeficiency Syndrome (AIDS), National Institute of
Allergy and Infectious Diseases. Filed as Exhibit 10.14 to
the Company's Registration Statement on Form S-1, Commission
File No. 33-57188, and incorporated herein by reference.

10.19 Extension of Consulting Agreement dated August 9, 1990
between the Company and Dr. Ellis L. Reinherz. Filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.

10.20 Non-Competition Agreement dated as of August 21, 1990
between the Company and Stanley C. Erck. Filed as Exhibit
10.18 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

10.21 Non-Competition Agreement dated as of January 11, 1992
between the Company and James C. Jenson. Filed as Exhibit
10.19 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

10.22 Key Employee Confidentiality, Inventions, and
Non-Competition Agreement dated January 13, 1993 between the
Company and A. James Ueberroth. Filed as Exhibit 10.20 to
the Company's Registration Statement on Form S-1, Commission
File No. 33-57188, and incorporated herein by reference.

10.23 Consulting and Confidentiality Agreement dated as of May 1,
1994 between the Company and Zola P. Horovitz, Ph.D. Filed
as Exhibit 10 to the Company's Form 10-Q for the quarter
ended June 30, 1994, Commission File No. 0-21134, and
incorporated herein by reference.

+10.24 Collaborative Research Agreement dated March 6, 1992 between
the Company and the President and Fellows of Harvard College
(re: Harrison). Filed as Exhibit 10.22 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.

46
<PAGE>

+10.25 Collaborative Research Agreement dated March 2, 1994 among
the Company, the President and Fellows of Harvard College
and Howard Hughes Medical Institute (re: Harrison). Filed as
Exhibit 10.27 to the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.

+10.26 Sponsored Research Agreement dated August 4, 1992 between
the Company and President and Fellows of Harvard College
(re: Wagner). Filed as Exhibit 10.23 to the Company's
Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.

+10.27 Research and Development Agreement between the Company and
Sandoz Pharma Ltd. dated as of September 16, 1993. Filed as
Exhibit 10.24 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated
herein by reference.

+10.28 Amendment No. 1 to Research and Development Agreement
between the Company and Sandoz Pharma Ltd. dated as of
January 25, 1995. Filed as Exhibit 10.30 to the Company's
Form 10-K for the year ended December 31, 1994, Commission
File No. 0-21134, and incorporated herein by reference.

+10.29 The Second Amendment to Research and Development Agreement
dated March 31, 1995 between the Company and Sandoz Pharma
Ltd. Filed as Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended March 31, 1995, Commission File No.
0-21134, and incorporated herein by reference.

10.30 Consulting and Confidentiality Agreement dated as of April
20, 1995 between the Company and Max Link, Ph.D. Filed as
Exhibit 10.30 to the Company's Registration Statement on
Form S-1, Commission File No. 33-96798, and incorporated
herein by reference.

+10.31 Third Amendment to Research and Development Agreement dated
August 31, 1995 between the Company and Sandoz Pharma Ltd.
Filed as Exhibit 10.32 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.

+10.32 Research Agreement dated as of March 1, 1993 between the
Company and The General Hospital Corporation (re: Hirsch).
Filed as Exhibit 10.25 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.

+10.33 Research Agreement dated as of March 1, 1993 between the
Company and The General Hospital Corporation (re: Drake).
Filed as Exhibit 10.26 to the Company's Registration
Statement on Form

47
<PAGE>

S-1, Commission File No. 33-57188, and incorporated herein
by reference.

+10.34 Peptoid Library Screening Agreement dated September 27, 1994
between the Company and Chiron Corporation. Filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter ended
September 30, 1994, Commission File No. 0-21134, and
incorporated herein by reference.

10.35 Underwriting Agreement dated February 8, 1996 between the
Company and Commonwealth Associates. Filed as Exhibit 1 to
the Company's Registration Statement on Form S-1, Commission
File No. 33-96798, and incorporated herein by reference.

10.36 Registration Rights Agreement dated January 6, 1997 between
the Company and Furman Selz LLC. Filed as Exhibit 10.36 to
the Company's Form 10-K for the year ended December 31,
1996, Commission File No. 0-21134, and incorporated herein
by reference.

10.37 Executive Severance and Indemnification Agreement between
the Company and Stanley C. Erck dated as of June 25, 1997.
Filed as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended September 30, 1997, Commission File No.
0-21134, and incorporated herein by reference.

10.38 Executive Severance and Indemnification Agreement between
the Company and Michael J. Higgins dated as of June 25,
1997. Filed as Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended September 30, 1997, Commission File No.
0-21134, and incorporated herein by reference.

10.39 Form of Indemnification Agreement filed as Exhibit 10.3 to
the Company's Form 10-Q for the quarter ended September 30,
1997, Commission File No. 0-21134, and incorporated herein
by reference.

10.40 Placement Agency Agreement between the Company and Paramount
Capital, Inc. dated as of October 26, 1997. Filed as Exhibit
10.40 to the Company's Form 10-K for the year ended December
31, 1997, Commission File No. 0-21134, and incorporated
herein by reference.

23.1 Consent of Coopers & Lybrand L.L.P., independent accountants
to the Company. Filed herewith.

27.1 Financial Data Schedule. Filed herewith.

99.1 Important factors regarding forward-looking statements.
Filed as Exhibit 99.1 to the Company's Form 10-K for the
year ended December 31, 1997, Commission File No. 0-21134,
and incorporated herein by reference.

48
<PAGE>

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

+ Confidential treatment has been granted for the deleted portions Exhibits
10.15, 10.16, 10.17, 10.24, 10.25, 10.26, 10.27, 10.28, 10.29, 10.32,
10.33 and 10.34.

Exhibits 10.4 through 10.7, 10.19 through 10.23, 10.30 and 10.37 through
10.39 are management contracts or compensatory plans, contracts or
arrangements in which executive officers or directors of the Company
participate.

49
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by on this 23rd day of June, 1998.

PROCEPT, INC.
(Registrant)

/s/John F. Dee
-----------------------------------------------
John F. Dee,
President, Chief Executive Officer and Director

50
<PAGE>

EXHIBIT INDEX
-------------

Exhibit
No. Description
--- -----------

3.1 Amended and Restated Certificate of Incorporation of the Company,
as amended and restated by Certificate of Amendment dated July 15,
1997. Filed as Exhibit 3.1 to the Company's Form 10-Q for the
quarter ended September 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.

3.2 By-laws of the Company. Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1, Commission File No. 33-57188,
and incorporated herein by reference.

4.1 Specimen Stock Certificate for Common Stock $.01 par value. Filed
as Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.

4.2 Warrant Agreement to Purchase Class D Convertible Preferred Stock
dated August 1, 1991, issued to Comdisco, Inc. Filed as Exhibit
4.2 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

4.3 Warrant Agreement to Purchase Class D Convertible Preferred Stock
dated September 11, 1992, issued to Comdisco, Inc. Filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

4.4 Unit Purchase Warrant Agreement dated May 17, 1996, issued to
David Blech. Filed as Exhibit 4.1 to the Company's Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.

4.5 [Reserved.]

4.6 Warrant to Purchase Common Stock dated January 5, 1993, issued to
Tucker Anthony Incorporated. Filed as Exhibit 4.6 to the Company's
Registration Statement on Form S-1, Commission File No. 33-57188,
and incorporated herein by reference.

4.7 Warrant to Purchase Common Stock dated as of February 17, 1994,
issued to D. Blech & Company, Incorporated. Filed as Exhibit 4.6
to the Company's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by reference.

4.8 Warrant Agreement dated February 17, 1994 between the Company and
D. Blech & Company, Incorporated. Filed as Exhibit 4.7 to the
Company's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by reference.

51
<PAGE>

4.9 Warrant to Purchase Common Stock dated as of April 1, 1994, issued
to Hambrecht & Quist Guaranty Finance, L.P. Filed as Exhibit 4 to
the Company's Form 10-Q for the quarter ended March 31, 1994,
Commission File No. 0-21134, and incorporated herein by reference.

4.10 Warrant to Purchase Common Stock dated as of September 11, 1995,
issued to Oppenheimer & Co., Inc. Filed as Exhibit 4.10 to the
Company's Registration Statement on Form S-1, Commission File No.
33-96798, and incorporated herein by reference.

4.11 Form of Warrant Agreement between the Company and Commonwealth
Associates. Filed as Exhibit 4.11 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.

4.12 Form of Warrant to Purchase Common Stock dated May 17, 1996 and
schedule of holders. Filed as Exhibit 4.12 to the Company's Form
10-K for the year ended December 31, 1996, Commission File No.
0-21134, and incorporated herein by reference.

4.13 Warrant to Purchase Common Stock issued to Furman Selz LLC dated
January 6, 1997. Filed as Exhibit 4.13 to the Company's Form 10-K
for the year ended December 31, 1996, Commission File No. 0-21134,
and incorporated herein by reference.

4.14 "New Warrant" dated September 30, 1997 issued to the Aries Fund.
Filed as Exhibit 4.1 to the Company's Form 10-Q for the quarter
ended September 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.

4.15 "New Warrant" dated September 30, 1997 issued to Aries Domestic
Fund, L.P. Filed as Exhibit 4.2 to the Company's Form 10-Q for the
quarter ended September 30, 1997, Commission File No. 0-21134, and
incorporated herein by reference.

10.1 Master Lease Agreement (equipment) dated as of August 1, 1991
between the Company and Comdisco, Inc. Filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.

10.2 Master Lease Agreement (equipment) dated as of September 11, 1992
between the Company and Comdisco, Inc. Filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.

10.3 Master Lease Agreement (equipment) dated as of April 1, 1994
between the Company and Hambrecht & Quist Guaranty Finance L.P.
Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended March 31, 1995, Commission File No. 0-21134, and
incorporated herein by reference.

10.4 The 1989 Stock Plan, as amended. Filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 30, 1997,
Commission File No. 0-21134, and incorporated herein by reference.

52
<PAGE>

10.5 The 1994 Employee Stock Purchase Plan, as amended. Filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June
30, 1997, Commission File No. 0-21134, and incorporated herein by
reference.

10.6 The 1994 Director Stock Option Plan, as amended. Filed as Exhibit
10.3 to the Company's Form 10-Q for the quarter ended June 30,
1997, Commission File No. 0-21134, and incorporated herein by
reference.

10.7 Registration Rights Agreement dated as of January 5, 1993 among
the Company and certain of its security holders named therein.
Filed as Exhibit 10.4 to the Company's Registration Statement on
Form S-1, Commission File No. 33-51788, and incorporated herein by
reference.

10.8 Amendment No. 1 to Registration Rights Agreement dated as of March
2, 1994 among the Company and certain of its security holders
named therein. Filed as Exhibit 10.3 to the Company's Form 10-K
for the year ended December 31, 1994, Commission File No. 0-21134,
and incorporated herein by reference.

10.9 Amendment No. 2 to Registration Rights Agreement dated as of
September 11, 1995 between the Company and Oppenheimer & Co., Inc.
Filed as Exhibit 10.9 to the Company's Registration Statement on
Form S-1, Commission File No. 33-96798, and incorporated herein by
reference.

10.10 Lease for 840 Memorial Drive dated February 28, 1989 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust, as amended February 28, 1989 and April 4, 1989. Filed
as Exhibit 10.7 to the Company's Registration Statement on Form
S-1, Commission File No. 33-57188, and incorporated herein by
reference.

10.11 Lease for 840 Memorial Drive dated August 21, 1990 between the
Company and Robert Epstein et al., Trustee of 840 Memorial Drive
Trust. Filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.

10.12 Lease for 840 Memorial Drive dated February 10, 1992 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.

10.13 Lease for 840 Memorial Drive dated September 8, 1992 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10.10 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.

10.14 Lease for 840 Memorial Drive dated April 27, 1994 between the
Company and Robert Epstein et al., Trustee of the 840 Memorial
Drive Trust. Filed as Exhibit 10 to the Company's Form 10-Q for
the quarter ended March 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.

53
<PAGE>

January 20, 1988, March 1, 1988, March 22, 1989, March 27, 1989,
March 5, 1990, May 3, 1993, May 4, 1993, May 10, 1993 and May 12,
1993 (as amended, the "DFCI Agreement"). Filed as Exhibit 10.11 to
the Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.

+10.16 Letter Agreements between the Company and Dana-Farber Cancer
Institute dated April 29, 1994 and May 6, 1994, amending the DFCI
Agreement. Filed as Exhibit 10.16 to the Company's Form 10-K for
the year ended December 31, 1994, Commission File No. 0-21134, and
incorporated herein by reference.

+10.17 Collaboration Agreement dated as of January 1, 1992 between the
Company and the Molecular Modeling and Design Unit of the
University of California, San Francisco. Filed as Exhibit 10.13 to
the Company's Registration Statement on Form S-1, Commission File
No. 33-57188, and incorporated herein by reference.

10.18 Confidential Screening Agreement dated as of July 24, 1992 between
the Company and the Division of Acquired Immunodeficiency Syndrome
(AIDS), National Institute of Allergy and Infectious Diseases.
Filed as Exhibit 10.14 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated herein by
reference.

10.19 Extension of Consulting Agreement dated August 9, 1990 between the
Company and Dr. Ellis L. Reinherz. Filed as Exhibit 10.17 to the
Company's Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.

10.20 Non-Competition Agreement dated as of August 21, 1990 between the
Company and Stanley C. Erck. Filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.

10.21 Non-Competition Agreement dated as of January 11, 1992 between the
Company and James C. Jenson. Filed as Exhibit 10.19 to the
Company's Registration Statement on Form S-1, Commission File No.
33-57188, and incorporated herein by reference.

10.22 Key Employee Confidentiality, Inventions, and Non-Competition
Agreement dated January 13, 1993 between the Company and A. James
Ueberroth. Filed as Exhibit 10.20 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.

10.23 Consulting and Confidentiality Agreement dated as of May 1, 1994
between the Company and Zola P. Horovitz, Ph.D. Filed as Exhibit
10 to the Company's Form 10-Q for the quarter ended June 30, 1994,
Commission File No. 0-21134, and incorporated herein by reference.

+10.24 Collaborative Research Agreement dated March 6, 1992 between the
Company and the President and Fellows of Harvard College (re:
Harrison). Filed as Exhibit 10.22 to the Company's Registration
Statement on Form S-1, Commission File No. 33-57188, and
incorporated herein by reference.

54
<PAGE>

+10.25 Collaborative Research Agreement dated March 2, 1994 among the
Company, the President and Fellows of Harvard College and Howard
Hughes Medical Institute (re: Harrison). Filed as Exhibit 10.27 to
the Company's Form 10-K for the year ended December 31, 1994,
Commission File No. 0-21134, and incorporated herein by reference.

+10.26 Sponsored Research Agreement dated August 4, 1992 between the
Company and President and Fellows of Harvard College (re: Wagner).
Filed as Exhibit 10.23 to the Company's Registration Statement on
Form S-1, Commission File No. 33-57188, and incorporated herein by
reference.

+10.27 Research and Development Agreement between the Company and Sandoz
Pharma Ltd. dated as of September 16, 1993. Filed as Exhibit 10.24
to the Company's Registration Statement on Form S-1, Commission
File No. 33-57188, and incorporated herein by reference.

+10.28 Amendment No. 1 to Research and Development Agreement between the
Company and Sandoz Pharma Ltd. dated as of January 25, 1995. Filed
as Exhibit 10.30 to the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 0-21134, and incorporated
herein by reference.

+10.29 The Second Amendment to Research and Development Agreement dated
March 31, 1995 between the Company and Sandoz Pharma Ltd. Filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
March 31, 1995, Commission File No. 0-21134, and incorporated
herein by reference.

10.30 Consulting and Confidentiality Agreement dated as of April 20,
1995 between the Company and Max Link, Ph.D. Filed as Exhibit
10.30 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96798, and incorporated herein by
reference.

+10.31 Third Amendment to Research and Development Agreement dated August
31, 1995 between the Company and Sandoz Pharma Ltd. Filed as
Exhibit 10.32 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96798, and incorporated herein by
reference.

+10.32 Research Agreement dated as of March 1, 1993 between the Company
and The General Hospital Corporation (re: Hirsch). Filed as
Exhibit 10.25 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

+10.33 Research Agreement dated as of March 1, 1993 between the Company
and The General Hospital Corporation (re: Drake). Filed as Exhibit
10.26 to the Company's Registration Statement on Form S-1,
Commission File No. 33-57188, and incorporated herein by
reference.

+10.34 Peptoid Library Screening Agreement dated September 27, 1994
between the Company and Chiron Corporation. Filed as Exhibit 10.1
to the Company's Form 10-Q for the quarter ended September 30,
1994, Commission File No. 0-21134, and incorporated herein by
reference.

10.35 Underwriting Agreement dated February 8, 1996 between the Company
and Commonwealth Associates. Filed as Exhibit 1 to the Company's
Registration

55
<PAGE>

Statement on Form S-1, Commission File No. 33-96798, and
incorporated herein by reference.

10.36 Registration Rights Agreement dated January 6, 1997 between the
Company and Furman Selz LLC. Filed as Exhibit 10.36 to the
Company's Form 10-K for the year ended December 31, 1996,
Commission File No. 0-21134, and incorporated herein by reference.

10.37 Executive Severance and Indemnification Agreement between the
Company and Stanley C. Erck dated as of June 25, 1997. Filed as
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
September 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.

10.38 Executive Severance and Indemnification Agreement between the
Company and Michael J. Higgins dated as of June 25, 1997. Filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended
September 30, 1997, Commission File No. 0-21134, and incorporated
herein by reference.

10.39 Form of Indemnification Agreement filed as Exhibit 10.3 to the
Company's Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 0-21134, and incorporated herein by reference.

10.40 Placement Agency Agreement between the Company and Paramount
Capital, Inc. dated as of October 26, 1997. Filed as Exhibit 10.40
to the Company's Form 10-K for the year ended December 31, 1997,
Commission File No. 0-21134, and incorporated herein by reference.

23.1 Consent of Coopers & Lybrand L.L.P., independent accountants to
the Company. Filed herewith.

27.1 Financial Data Schedule. Filed herewith.

99.1 Important factors regarding forward-looking statements. Filed as
Exhibit 99.1 to the Company's Form 10-K for the year ended
December 31, 1997, Commission File No. 0-21134, and incorporated
herein by reference.

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

+ Confidential treatment has been granted for the deleted portions Exhibits
10.15, 10.16, 10.17, 10.24, 10.25, 10.26, 10.27, 10.28, 10.29, 10.32, 10.33
and 10.34.

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements of
Procept, Inc. on Form S-3 (File No. 333-09987 and 333-51245) and Form S-8 (File
Nos. 33-76252, 33- 81394, 33-81392, 333-06035, 333-36145, 333-36147 and
333-36149) or our report, which includes an explanatory paragraph related to the
restatement of the financial statements for the year ended December 31, 1997,
dated June 15, 1998, on our audits of the financial statements of Procept, Inc.
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, which report is included in this Annual Report on Form
10-K/A filed on June 23, 1998. We also consent to the reference to our firm
under the caption "Selected Financial Data".

/s/ COOPERS & LYBRAND L.L.P.

COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
June 23, 1998

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from balance
sheet at December 31, 1997 and the statement of operations for the twelve months
ended December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 535,242
<SECURITIES> 0
<RECEIVABLES> 81,951
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 667,304
<PP&E> 5,700,803
<DEPRECIATION> 4,811,545
<TOTAL-ASSETS> 2,168,012
<CURRENT-LIABILITIES> 1,553,326
<BONDS> 0
0
301
<COMMON> 1,962
<OTHER-SE> 257,721
<TOTAL-LIABILITY-AND-EQUITY> 2,168,012
<SALES> 0
<TOTAL-REVENUES> 781,172
<CGS> 0
<TOTAL-COSTS> 9,833,747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,264
<INCOME-PRETAX> (9,052,575)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,052,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,052,575)
<EPS-PRIMARY> (63.68)
<EPS-DILUTED> (63.68)

</TABLE>