ZONAGEN INC, S-3/A, 1997-06-30

ZONAGEN INC
S-3/A, 1997-06-30
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1997

REGISTRATION NO. 333-28945

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 1

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

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

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DELAWARE 76-0233274
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

2408 TIMBERLOCH PLACE, SUITE B-4
THE WOODLANDS, TEXAS 77380
(281) 367-5892
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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JOSEPH S. PODOLSKI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ZONAGEN, INC.
2408 TIMBERLOCH PLACE, SUITE B-4
THE WOODLANDS, TEXAS 77380
(281) 367-5892
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:
ANDREWS & KURTH L.L.P. COOLEY GODWARD LLP
2170 BUCKTHORNE PLACE, SUITE 150 FIVE PALO ALTO SQUARE
THE WOODLANDS, TEXAS 77380 3000 EL CAMINO REAL
(713) 220-4801 PALO ALTO, CALIFORNIA 94306
ATTENTION: JEFFREY L. WADE (415) 843-5000
ATTENTION: BRIAN C. CUNNINGHAM
JULIA L. DAVIDSON

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

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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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

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<PAGE>

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

SUBJECT TO COMPLETION, DATED JUNE 30, 1997
2,000,000 SHARES

[LOGO OF ZONAGEN APPEARS HERE]

COMMON STOCK

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All of the 2,000,000 shares of Common Stock offered hereby are being sold by
Zonagen, Inc. ("Zonagen" or the "Company"). The Common Stock of the Company is
quoted on The Nasdaq Small Cap Market under the symbol "ZONA" and on the
Pacific Stock Exchange under the symbol "ZNG." On June 26, 1997, the last sale
price of the Common Stock as reported on The Nasdaq Small Cap Market was $22.00
per share. See "Price Range of Common Stock and Dividend Policy." The Common
Stock has been approved for inclusion on The Nasdaq National Market, subject to
official notice of issuance.

-----------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5 THROUGH 13.

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

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<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............................. $ $ $
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Total(3).............................. $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock, on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
the Underwriters exercise this option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."

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The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them, and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject any orders in whole or in part. It is expected
that the certificates for the shares of Common Stock will be available for
delivery at the offices of Volpe Brown Whelan & Company, LLC, One Maritime
Plaza, San Francisco, California on or about , 1997.

VOLPE BROWN WHELAN & COMPANY RAYMOND JAMES & ASSOCIATES, INC.

The date of this Prospectus is , 1997.
<PAGE>

[PHOTOGRAPH OF PROPOSED VASOMAX PRODUCT]

VASOMAX(TM), THE COMPANY'S LEAD PRODUCT CANDIDATE, IS AN ORAL TREATMENT FOR
MALE ERECTILE DYSFUNCTION. VASOMAX(TM) HAS NOT BEEN APPROVED FOR COMMERCIAL
MARKETING BY THE FDA AND IS LIMITED TO INVESTIGATIONAL USE. THERE CAN BE NO
ASSURANCE THAT VASOMAX(TM) WILL RECEIVE FDA APPROVAL FOR COMMERCIAL MARKETING.

VASOMAX(TM) AND IMMUMAX(TM) ARE TRADEMARKS OF THE COMPANY. TRADE NAMES AND
TRADEMARKS OF OTHER COMPANIES APPEARING IN THIS PROSPECTUS ARE THE PROPERTY OF
THEIR RESPECTIVE HOLDERS.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND CERTAIN OTHER SELLING
GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all financial data
and share information in this Prospectus assume no exercise of the
Underwriters' over-allotment option. This Prospectus contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), which statements reflect the Company's current
views with respect to future events and financial performance and are subject
to certain risks, uncertainties and assumptions that could cause actual results
to vary materially from those reflected in such statements, including those
discussed in "Risk Factors" on pages 5 through 13.

THE COMPANY

Zonagen, Inc. ("Zonagen" or the "Company") is a biopharmaceutical company
engaged in the research, development and marketing of products which address
conditions and diseases associated with the human reproductive system. The
Company has recently completed two pivotal Phase 3 clinical trials in the
United States of its lead product candidate, Vasomax, an oral treatment for
male erectile dysfunction, commonly referred to as impotence. Based upon
clinical trial results, the Company believes that Vasomax will improve the
erectile function, intercourse success rates and overall sexual experience of a
significant percentage of impotent men. The Company is also engaged in the
research and development of a therapy for female sexual dysfunction, new
approaches to contraception, including zona pellucida-based vaccines in
collaboration with Schering AG ("Schering"), treatments for urological diseases
such as benign prostatic hyperplasia ("BPH") and prostate cancer, and an
adjuvant to enhance the effectiveness of vaccines. In addition to its
proprietary development activities, the Company markets and distributes a
variety of third-party fertility-related products to obstetrics/gynecology,
urology and fertility specialists through its wholly owned subsidiary,
Fertility Technologies, Inc. ("FTI").

A leading study published in the Journal of Urology in 1994, the
Massachusetts Male Aging Study, estimated that in the United States alone
approximately 18 million men between the ages of 40 and 70 suffered from
erectile dysfunction in 1990. Because male erectile dysfunction is most
strongly attributable to age and age-related conditions, current aging trends
suggest that the number and percentage of men in the United States suffering
from the condition will increase. Currently there are a number of products
available for the treatment of male erectile dysfunction, including needle
injection therapy, a urethral catheter device, vacuum constriction devices,
penile implants and oral medications. However, most of these treatments are
invasive, painful, inconvenient, or result in an erection the onset and
duration of which are determined by the treatment rather than by actual sexual
stimulation. In addition, many therapies produce undesirable side effects and
potential complications.

Vasomax is a fast-acting oral treatment for male erectile dysfunction that
systemically delivers phentolamine mesylate ("phentolamine"). Phentolamine has
been approved by the U.S. Food and Drug Administration (the "FDA") for the
treatment of hypertension and for use in the diagnosis of certain tumors of the
adrenal gland, and has been used "off-label" by urologists, either alone or in
combination with other drugs, in penile needle injection therapies for the
treatment of erectile dysfunction. The Company's clinical trial results
indicate that Vasomax may help restore penile function within 15 to 30 minutes
of administration in the presence of actual sexual stimulation. In addition,
Vasomax does not appear to cause the penile pain or burning experienced by
users of many alternative treatments. As a result of Vasomax's painless, non-
invasive mode of administration, speed of efficacy, normal stimuli-induced
penile response and low side effect profile, the Company believes that Vasomax
could increase the number of men who will seek and receive medical treatment
for male erectile dysfunction.

The Company's Phase 3 clinical trial results indicate that Vasomax yielded a
statistically significant improvement over placebo, with 40% and 34% of the men
in the two trials, respectively, responding to the 40mg dose. Zonagen intends
to submit a New Drug Application (an "NDA") to the FDA for Vasomax promptly
following the completion of certain in-process studies and data analysis that
are expected to be completed in late 1997. The Company intends to seek a
corporate partner for the marketing of Vasomax, and is currently in discussions
with several potential partners.

The Company's objective is to become a leading provider of innovative
products and services for the management of reproductive health. The Company's
strategy to achieve this goal incorporates the following key elements: (i)
develop proprietary and acquired technologies; (ii) establish collaborations
with corporate partners; (iii) expand specialty marketing business; and (iv)
expand intellectual property portfolio.

3
<PAGE>

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by the Company............... 2,000,000 shares
Common Stock to be outstanding after the offering. 9,855,974 shares (1)
Use of proceeds................................... To fund continued clinical
development of and
regulatory submissions
relating to Vasomax,
continued research and
development of the
Company's other potential
products, the exercise of
an option to buy out the
rights of a third party to
royalties on sales of
Vasomax, capital
expenditures and for
general corporate purposes.
Nasdaq Stock Market Symbol........................ ZONA
Pacific Stock Exchange Symbol..................... ZNG
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- --------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Total revenues.......... $ 258 $ 101 $ 962 $2,954 $3,293 $ 790 $ 943
Total costs and
expenses............... 1,841 2,633 4,932 7,241 12,763 2,341 5,235
Net loss................ (1,583) (2,532) (3,970) (4,287) (9,470) (1,551) (4,292)
Net loss per common
share (2).............. (0.83) (0.83) (1.07) (1.11) (1.92) (0.35) (0.62)
Weighted average shares
used in computing loss
per common share....... 1,904 3,066 3,712 3,858 4,925 4,432 6,887
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
ACTUAL AS ADJUSTED(3)
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 7,780 $48,645
Total assets........................................... 10,357 51,222
Deficit accumulated during the development stage....... (30,703) (30,703)
Total stockholders' equity............................. 7,497 48,362
</TABLE>
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(1) Based on the number of shares of Common Stock outstanding as of June 26,
1997. Excludes (i) 905,520 shares of Common Stock that may be issued upon
the exercise of outstanding options at a weighted average exercise price of
$6.07 per share, (ii) 534,436 additional shares of Common Stock reserved
for issuance under the Company's employee and director stock option plans,
(iii) 85,763 shares of Common Stock that may be acquired upon the exercise
of outstanding warrants at a weighted average exercise price of $3.85 per
share and (iv) 1,160,552 shares of Common Stock that may be issued upon the
conversion of the Company's Series B Convertible Preferred Stock ("Series B
Preferred Stock"), including shares of Series B Preferred Stock issuable
upon the exercise of outstanding warrants. The number of shares of Common
Stock that may be issued upon the conversion of the Series B Preferred
Stock will be adjusted on a weighted-average basis to the extent the price
per share of Common Stock sold in this offering is less than the closing
bid price per share of the Common Stock on the date of this Prospectus. See
"Description of Capital Stock--Warrants" and "Description of Capital
Stock--Series B Convertible Preferred Stock."
(2) See Note 2 of Notes to Consolidated Financial Statements for a description
of the computation of net loss per common share.

(3) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered
hereby at an assumed public offering price of $22.00 per share. See "Use of
Proceeds" and "Capitalization."

4
<PAGE>

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing any shares of Common Stock offered
hereby.

UNCERTAINTIES RELATED TO EARLY STAGE OF DEVELOPMENT; MODIFICATION OF REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS

The Company is a development stage company. Problems, delays, expenses and
complications are typically encountered by companies in the development stage,
many of which may be beyond the Company's control. These include, but are not
limited to, unanticipated problems and costs relating to the development,
testing, production and marketing of its products, regulatory approvals and
compliance, availability of adequate financing and competition. There can be
no assurance that the Company will be able to complete successfully the
transition from a development stage company to the successful introduction of
commercially viable products. The Company has generated only limited revenue
from product sales since its inception. The Company's independent public
accountants have included an emphasis of a matter paragraph in their report on
the Company's Consolidated Financial Statements as of December 31, 1996
concerning the Company's need to obtain additional financing in order to
complete the research and development and other activities necessary to
commercialize its products. The Company's independent public accountants have
informed the Company that if, at the time of their audit of the financial
statements for the year ending December 31, 1997, the Company's available
capital resources are anticipated not to be adequate to fund its operations
through December 31, 1998, their report on those financial statements will
include an explanatory paragraph expressing substantial doubt about the
Company's ability to continue as a going concern or, if there is a material
uncertainty whether those resources will be adequate to fund its operations
for a reasonable period of time beyond December 31, 1998, will include an
emphasis of a matter paragraph concerning the Company's need to obtain
additional financing in order to complete research and development and other
activities necessary to commercialize its products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and Note 1 of Notes to Consolidated Financial Statements.

UNCERTAINTIES RELATED TO CLINICAL TRIAL RESULTS

The Company must obtain FDA approval of an NDA prior to commercializing
Vasomax or any other pharmaceutical product in the United States. Similar
approvals will be required from the regulatory authorities of other countries
prior to commercialization of any pharmaceutical products in such countries.
The FDA and other regulatory authorities generally require that the safety and
efficacy of a drug be supported by results from adequate and well-controlled
Phase 3 clinical trials before approval for commercial sale. The Company only
recently completed two pivotal Phase 3 clinical trials of Vasomax, and none of
the Company's other products have yet entered into clinical trials. The
results of preclinical studies and initial clinical trials of the Company's
products are not necessarily predictive of the results from large-scale
clinical trials. If the results of the Company's clinical trials do not
demonstrate the safety and efficacy of its products in the treatment of
patients suffering from the diseases or conditions for which such products are
being tested, the Company will not be able to submit an NDA to the FDA. Even
if the Company believes the Phase 3 clinical trials demonstrate the safety and
efficacy of Vasomax or any other product in the treatment of a disease or
condition, the FDA and other regulatory authorities may not accept the
Company's assessment of the results. In either case, the Company may have to
conduct additional clinical trials in an effort to demonstrate the safety and
efficacy of its products.

The Company must demonstrate through preclinical studies and clinical trials
that its products are safe and effective before the Company can obtain
regulatory approvals for the commercial sale of those products. These studies
and trials are very costly and time-consuming. The speed with which the
Company is able to enroll patients in clinical trials is an important factor
in determining how quickly clinical trials may be completed. Many factors
affect the rate of patient enrollment, including the size of the patient
population, the proximity of patients to clinical sites, and the eligibility
criteria for the study. Delays in patient enrollment in the trials may result
in increased costs, program delays, or both, which could have a material
adverse effect on the Company.

5
<PAGE>

The administration of any product the Company develops may produce
undesirable side effects in humans. The occurrence of side effects could
interrupt or delay clinical trials of products and could result in the FDA or
other regulatory authorities denying approval of the Company's products for
any or all targeted indications. In addition, the Company, the FDA or other
regulatory authorities may suspend or terminate clinical trials at any time.
Even if the Company receives FDA and other regulatory approvals, the Company's
products may later exhibit adverse effects that limit or prevent their
widespread use or that necessitate their withdrawal from the market. There can
be no assurance that any of the Company's products will be safe for human use,
nor can there be any assurance that the Company will obtain regulatory
approval for the commercialization of Vasomax or any other product on a timely
basis, or at all. Without regulatory approval, the Company will not be able to
commercialize its products, which would have a material adverse effect on the
Company. Furthermore, delays in the approval process could have a material
adverse effect on the Company, even if regulatory approval is ultimately
obtained. See "Business--The Vasomax Solution" and "Business--Government
Regulation."

SUBSTANTIAL DEPENDENCE ON ONE PRODUCT; EARLY STAGE OF DEVELOPMENT OF OTHER
PRODUCTS

The Company has not completed the development of any proprietary product,
and substantially all of the Company's revenues currently are derived from
sales by FTI of products developed or manufactured by third parties. The
Company has dedicated a substantial portion of its resources over the last
several years to the development of Vasomax. Products, if any, resulting from
the Company's other research and development programs are not expected to be
commercially available for at least several years, if at all. As a result, the
Company's future prospects are substantially dependent on timely approval by
the FDA and the successful commercialization of Vasomax. Failure to obtain
regulatory approval and successfully commercialize Vasomax would have a
material adverse effect on the Company. The development or acquisition of
commercially viable products other than Vasomax will require significant
further investment, research, development, preclinical studies, clinical
testing and regulatory approvals, both foreign and domestic. In addition,
there can be no assurance that the Company will be able to produce Vasomax or
any other product at reasonable cost, or market such products successfully.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business--The Vasomax Solution" and "Business--Products in
Preclinical Development."

HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT

The Company has experienced significant operating losses in each fiscal year
since its inception. As of March 31, 1997, the Company had an accumulated
deficit of approximately $30.7 million. The Company may incur substantial
additional operating losses over at least the next several years in connection
with its research and development and preclinical and clinical activities. The
Company's ability to achieve profitability will depend, among other things, on
successfully completing the development of its products, obtaining regulatory
approvals, establishing marketing, sales and manufacturing capabilities or
collaborative arrangements with others which possess such capabilities and
raising sufficient funds to finance its activities. There can be no assurance
that the Company will be able to achieve profitability or that profitability,
if achieved, can be sustained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

6
<PAGE>

on many factors, including the problems, delays, expenses and complications
frequently encountered by development stage companies; the progress of the
Company's preclinical and clinical activities; whether the Company is able to
successfully conclude a collaborative arrangement for the marketing of
Vasomax; the progress of the Company's future collaborative research,
manufacturing, marketing or other funding arrangements; the costs and timing
of seeking regulatory approvals of the Company's products; the Company's
ability to obtain regulatory approvals; the success of the Company's sales and
marketing programs; the cost of filing, prosecuting and defending and
enforcing any patent claims and other intellectual property rights; and
changes in economic, regulatory or competitive conditions or the Company's
planned business. Estimates about the adequacy of funding for the Company's
activities are based on certain assumptions, including the assumption that the
development and regulatory approval of the Company's products can be completed
at projected costs and that product approvals and introductions will be timely
and successful. There can be no assurance that changes in the Company's
research and development plans, acquisitions or other events will not result
in accelerated or unexpected expenditures. To satisfy its capital
requirements, the Company may seek to raise additional funds in the public or
private capital markets. The Company's ability to raise additional funds in
the public or private markets will be adversely affected if the results of its
current or future clinical trials are not favorable. The Company is seeking a
collaborative agreement with respect to Vasomax and may seek additional
funding through other corporate collaborations and financing vehicles. There
can be no assurance that the Company will successfully enter into such
agreement with respect to Vasomax or that any other such funding will be
available to the Company on favorable terms or at all. If adequate funds are
not available, the Company may be required to curtail significantly one or
more of its research or development programs, or it may be required to obtain
funds through arrangements with future collaborative partners or others that
may require the Company to relinquish rights to some or all of its
technologies or products. If the Company is successful in obtaining additional
financing, the terms of such financing may have the effect of diluting or
adversely affecting the holdings or the rights of the holders of the Company's
Common Stock. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

UNCERTAINTY OF PROTECTION FOR PATENTS AND PROPRIETARY TECHNOLOGY

The Company's ability to commercialize any products will depend, in part,
upon its ability to obtain patents, enforce those patents, preserve trade
secrets, and operate without infringing upon the proprietary rights of third
parties. The patent positions of biotechnology and pharmaceutical companies
are highly uncertain and involve complex legal and factual questions. The
Company's issued U.S. patent relating to Vasomax is a method-of-use patent
that covers only the use of certain compounds to treat specified conditions,
rather than a composition-of-matter patent which would cover the chemical
composition of the active ingredient. The Company's pending patent application
relating to Vasomax covers both methods of use and formulations of the active
ingredient in Vasomax. There can be no assurance that the pending Vasomax
patent application or any other patent applications owned by or licensed to
the Company will result in issued patents, that patent protection will be
secured for any particular technology, that any patents that have been or may
be issued to the Company or its licensors will be held valid or enforceable,
that any patents will provide meaningful protection to the Company, that
others will not be able to design around the patents, or that the Company's
patents will provide a competitive advantage or have commercial application.
The failure to obtain adequate patent protection would have a material adverse
effect on the Company and may adversely effect the Company's ability to enter
into, or the terms of, any arrangement for the marketing of any product.

There can be no assurance that patents owned by or licensed to the Company
will not be challenged by others. The Company could incur substantial costs in
proceedings, including interference proceedings, before the U.S. Patent and
Trademark Office and comparable proceedings before similar agencies in other
countries. These proceedings could result in adverse decisions about the
patentability of the Company's inventions and products as well as about the
enforceability, validity or scope of protection afforded by the patents.

7
<PAGE>

to the Company or that the Company will prevail in any patent litigation.
Patent litigation is costly and time consuming, and there can be no assurance
that the Company will have sufficient resources to bring such litigation to a
successful conclusion. If the Company does not obtain a license under such
patents, is found liable for infringement, or is not able to have such patents
declared invalid, the Company may be liable for significant money damages, may
encounter significant delays in bringing products to market, or may be
precluded from participating in the manufacture, use or sale of products or
methods of treatment requiring such licenses.

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

Several bills affecting patent rights have been introduced in the U.S.
Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination, subject matter and enforceability.
It is not certain whether any of these bills will be enacted into law or what
form new laws may take. Accordingly, the effect of legislative change on the
Company's intellectual property is uncertain. See "Business--Patents and
Proprietary Information."

GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL

The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are
subject to extensive regulation by the FDA and other regulatory authorities in
the United States. These activities are also regulated in other countries
where the Company intends to test and market its products.

Any drug developed by the Company must undergo an extensive regulatory
approval process before it may be marketed and sold. The regulatory process,
which includes preclinical studies and clinical trials of each compound to
establish its safety and efficacy, takes many years and requires the
expenditure of substantial resources. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent FDA regulatory approval. Although the FDA may have
been consulted in developing protocols for clinical trials, that consultation
provides no assurance that the FDA will accept the clinical trials as adequate
or well-controlled or accept the results of those trials as establishing
safety or efficacy. In addition, delays or rejections may be encountered based
upon changes in FDA policy for drug approval during the period of product
development and FDA regulatory review of each submitted NDA. Similar delays
and rejections may also be encountered in foreign countries. There can be no
assurance that, even after such time and expenditures, regulatory approval
will be obtained for any drugs developed by the Company. Moreover, if
regulatory approval of a drug is granted, such approval may entail limitations
on the indicated uses for which it may be marketed or may be conditioned upon
post-marketing surveillance studies. Further, even if such regulatory approval
is obtained, a marketed drug, its manufacturer and its manufacturing
facilities are subject to continual review and periodic inspections, and later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on the product or manufacturer, including
a withdrawal of the product from the market. Failure to comply with the
applicable regulatory requirements can, among other things, result in warning
letters, fines, suspensions or withdrawals of regulatory approvals, product
recalls or seizures,

8
<PAGE>

operating restrictions, injunctions, civil penalties and criminal prosecution.
Further, additional government regulation may be established that could
prevent or delay regulatory approval of the Company's products. The United
States Congress has been considering legislation that would substantially
reform FDA regulations, including the requirements for NDA approval. It is not
certain whether any such legislation will be enacted into law, what form any
new law will take, or what effect any new law would have on the Company.

The Company's business is also subject to regulation under state and federal
laws regarding environmental protection, hazardous substances control and
exposure to blood-borne pathogens. These laws include the Occupational Safety
and Health Act, the Environmental Protection Act and the Toxic Substance
Control Act. In addition, the Company's diagnostic laboratory operations are
required to be certified or licensed under the federal Clinical Laboratory
Improvement Act of 1967, as amended in 1988 ("CLIA"), the Medicare and
Medicaid programs and various state and local laws. Any violation of, and the
cost of compliance with, these laws and regulations could adversely affect the
Company. There can be no assurance that statutes or regulations applicable to
the Company's business will not be adopted that impose substantial additional
costs or otherwise materially adversely affect the Company's operations. See
"Business--Government Regulation."

LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON FUTURE COLLABORATORS

The Company has limited experience in the sales, marketing and distribution
of pharmaceutical products. The Company plans to enter into an agreement for
the marketing and sale of Vasomax with one or more pharmaceutical companies
having established marketing and sales capabilities, and may seek similar
arrangements regarding other proprietary product candidates. To the extent the
Company enters into marketing or distribution arrangements with others, any
revenues the Company receives will depend upon the efforts of third parties.
There can be no assurance that any third party will devote sufficient
resources to the Company's products or market the Company's products
successfully, or that any third-party collaboration will be on terms favorable
to the Company. If any marketing partner does not market a product
successfully, the Company would be materially adversely affected. If the
Company fails to reach an agreement to market Vasomax or fails to reach or
elects not to enter into a similar arrangement with respect to any of its
other proprietary product candidates, the Company will need to develop a sales
and marketing force with supporting distribution capability substantially in
excess of the capability currently possessed by FTI to be able to market such
products directly. Significant additional expenditures would be required for
the Company to develop a sales and marketing force and supporting distribution
capability. There can be no assurance that the Company will be able to
establish sales, marketing and distribution capabilities or that it or its
collaborators will be successful in gaining market acceptance for any products
that the Company may develop. The Company's failure to establish marketing
capabilities or to enter into marketing arrangements with third parties would
have a material adverse effect on the Company. See "Business--Sales and
Marketing."

MANUFACTURING UNCERTAINTIES; RELIANCE ON THIRD PARTIES

The Company does not have any manufacturing facilities and does not expect
to establish any significant manufacturing capacity in the near future. The
Company has relied upon one third-party manufacturer to manufacture and supply
each component of Vasomax, including bulk phentolamine, tablets and packaging,
in the quantities necessary for the Company's clinical trials. The Company
intends to contract with one or more third parties for the manufacture and
supply of commercial quantities of bulk phentolamine, tablets and packaging,
and for the manufacture and supply of other products that it may develop.
There can be no assurance that the Company will be able to obtain supplies of
its products from third-party suppliers on terms or in quantities acceptable
to the Company. Also, the Company's dependence on third parties for the
manufacture of its products may adversely affect the Company's product margins
and its ability to develop and deliver products on a timely basis. Any such
third-party suppliers or any manufacturing facility the Company establishes
will be required to meet FDA manufacturing requirements. FDA certification,
for compliance with current Good Manufacturing Practices requirements, of
manufacturing facilities for a drug are a prerequisite to approval of an NDA
for that drug. The Company may encounter significant delays in obtaining
supplies from third-party

9
<PAGE>

manufacturers or experience interruptions in its supplies. The effects of any
such delays or interruptions will be more severe if the Company relies upon a
single source of supply, as is presently the case with each component of
Vasomax. If the Company is unable to obtain adequate supplies, its business
would be materially adversely affected. See "Business--Manufacturing."

COMPETITION AND TECHNOLOGICAL CHANGE

The Company is engaged in pharmaceutical product development, an industry
which is characterized by extensive research efforts and rapid technological
progress. Many established biotechnology and pharmaceutical companies,
universities and other research institutions with resources significantly
greater than the Company's may develop or have developed products that
directly compete with the Company's products. These products may be safer,
more effective or less costly than the Company's products. Even if the
Company's products should prove to be more effective than those developed by
other companies, other companies may be more successful than the Company
because of greater financial resources, greater experience in conducting
preclinical studies and clinical trials and obtaining regulatory approval,
stronger sales and marketing efforts, earlier receipt of approval for
competing products and other factors. If the Company commences significant
commercial sales of its products, the Company or its collaborators will
compete in areas in which the Company has little or no experience, such as
manufacturing and marketing. There can be no assurance that the Company's
products, if commercialized, will be accepted and prescribed by healthcare
professionals. The Company believes that competition will be intense for all
of its products.

Vasomax faces competition from currently available therapies for male
erectile dysfunction as well as potential competition from new therapies,
including new oral, injectable and topical therapies that are currently being
developed by other companies. Some of the Company's competitors, including
Pfizer, Inc. ("Pfizer") and TAP Pharmaceuticals, Inc. ("TAP"), are active in
the development of oral therapies for the treatment of male erectile
dysfunction. Pfizer's Viagra(TM) oral medication for the treatment of erectile
dysfunction is currently in Phase 3 clinical trials. TAP is developing an oral
treatment, currently in Phase 2/3 clinical trials, for erectile dysfunction
caused by psychogenic factors. The Company's other competitors include Vivus,
Inc., which commenced marketing of a urethral catheter device in the United
States in January 1997, Pharmacia & Upjohn Inc., which markets a penile
injection therapy, and Schwarz Pharma AG, which recently received marketing
approval for a penile injection therapy. Marketing of these and other products
that treat disease indications targeted by the Company could adversely affect
the market acceptance of the Company's products as a result of the established
market recognition and physician familiarity with the competing products. The
presence of directly competitive products could also result in more intense
price competition than might otherwise exist, which could have a material
adverse effect on the Company. See "Business--Competition."

PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE

The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
use of the Company's product candidates in clinical trials may expose the
Company to product liability claims and possible adverse publicity. These
risks also exist with respect to the Company's product candidates, if any,
that receive regulatory approval for commercial sale. Clinical trials and
commercial sales, if any, of the Company's proposed female contraceptive
products will involve particularly significant product liability
considerations, in light of the substantial amount of litigation involving
female contraceptives and other products affecting the female reproductive
system. The Company currently carries $10 million of product liability
coverage for the clinical research use of Vasomax and $2 million of product
liability coverage for the operations of FTI. There can be no assurance that
such coverage is adequate or that it will continue to be available in
sufficient amounts or at acceptable costs. The Company does not have product
liability insurance for the commercial sale of Vasomax or any of its other
product candidates. There can be no assurance that the Company will be able to
obtain additional insurance coverage at acceptable costs, or at all, or that
the Company will not experience losses due to product liability claims in the
future. A product liability claim, product recall or other claim, or claims
for uninsured liabilities or for amounts exceeding the limits of the Company's
insurance, could have a material adverse effect on the Company.

10
<PAGE>

RELIANCE ON CONTRACT RESEARCH ORGANIZATIONS

During 1996, the Company established arrangements with two contract research
organizations, PPD Pharmaco and Affiliated Research Centers, Inc., relating to
the Company's U.S. clinical development of Vasomax. These companies have
collaborated with the Company in the design and conduct of the Company's
United States clinical trials, including the pivotal Phase 3 clinical trials,
of Vasomax. In addition, these companies have been responsible for managing
the conduct of and analyzing data from such clinical trials on behalf of the
Company. These companies may terminate these arrangements at any time. If such
companies were to terminate these arrangements or were unable or unwilling to
devote adequate resources to the Company's projects or to provide services on
acceptable terms, the Company would be required to establish relationships
with other contract research organizations, or to develop internally the
capacity to conduct clinical trials. This could result in significant
additional expense and delays in the Company's clinical trials, and could have
a material adverse effect on the Company. See "Business--Collaborative and
Licensing Agreements--Contract Research Organizations."

NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT

The Company's ability to commercialize its products successfully will depend
in part on the extent to which appropriate reimbursement levels for the cost
of the products and related treatment are obtained from third-party payors,
including government authorities, private health insurers and other
organizations, such as health maintenance organizations ("HMOs"). Third-party
payors are increasingly challenging the prices charged for medical products
and services. Accordingly, if less costly treatments are available, third-
party payors may not authorize reimbursement for the Company's products even
if they offer advantages in safety or efficacy. Also, the trend toward managed
healthcare and government insurance programs significantly influences the
purchase of healthcare services and products, which could result in lower
prices and reduced demand for the Company's products. The cost containment
measures that healthcare providers are instituting and any healthcare reform
could affect the Company's ability to sell its products and may have a
material adverse effect on the Company. There can be no assurance that
reimbursement in the United States or foreign countries will be available for
any of the Company's products, that any reimbursement granted will be
maintained, or that limits on reimbursement available from third-party payers
will not reduce the demand for, or negatively affect the price of, the
Company's products. The unavailability or inadequacy of third-party
reimbursement for the Company's products could have a material adverse effect
on the Company. The Company is unable to anticipate what additional
legislation or regulation relating to the healthcare industry or third party
coverage and reimbursement may be enacted in the future, or what effect the
legislation or regulation would have on the Company's business.

DEPENDENCE ON KEY PERSONNEL

The success of the Company depends in large part on the Company's ability to
attract and retain highly qualified scientific and management personnel. The
Company faces competition for such personnel from other companies, research
and academic institutions, government entities and other organizations. There
can be no assurance that the Company will be successful in hiring or retaining
key personnel.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price for the Common
Stock. Substantially all of the 9,855,974 shares of Common Stock to be
outstanding upon completion of this offering (as well as the 1,160,552 shares
of Common Stock issuable upon conversion of the outstanding Series B Preferred
Stock and warrants to purchase Series B Preferred Stock and the 991,283 shares
issuable upon exercise of outstanding options and warrants to purchase Common
Stock) will be eligible for sale without restriction under the Securities Act
(except for shares of Common Stock held by affiliates of the Company whose
shares may be sold subject to the volume limitations and certain other
requirements of Rule 144 under the Securities Act). The holders of 1,536,020
shares of Common Stock and of

11
<PAGE>

Series B Preferred Stock convertible into 301,886 shares of Common Stock have
agreed not to sell such shares for a period of 90 days following the effective
date of the registration statement of which this Prospectus is a part without
the consent of Volpe Brown Whelan & Company, LLC. The number of shares of
Common Stock which may be issued upon the conversion of the outstanding Series
B Preferred Stock will be adjusted on a weighted-average basis to the extent
the price per share of Common Stock sold in this offering is less than the
closing bid price per share of the Common Stock on the date of this
Prospectus. See "Description of Capital Stock" and "Underwriting."

IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS

Purchasers of the Common Stock in the offering will experience an immediate
and substantial dilution in net tangible book value per share. These investors
will also experience additional dilution upon the exercise of outstanding
options and warrants. See "Dilution." The Company has not declared or paid any
dividends on its Common Stock since inception and does not anticipate paying
cash dividends in the foreseeable future. See "Price Range of Common Stock and
Dividend Policy."

LIMITED TRADING VOLUMES; POSSIBLE STOCK PRICE VOLATILITY

The historical trading volume of the Company's Common Stock has been
limited. There can be no assurance that an active public market for the Common
Stock will develop or be sustained. The trading price of the Common Stock and
the price at which the Company may sell securities in the future could be
subject to large fluctuations in response to announcements of research
activities, technological innovations or new products by the Company or its
competitors, the establishment or termination of collaborative, licensing or
marketing arrangements, changes in government regulations, developments
concerning proprietary rights, quarterly variations in operating results,
litigation, results of preclinical studies or clinical trials, approval or
denial of NDAs, general market conditions, the liquidity of the Company and
its ability to raise additional funds and other events. The market price of
the Common Stock, and the market prices for securities of biotechnology and
pharmaceutical companies generally, have experienced extreme fluctuations in
recent years. These fluctuations have sometimes been unrelated to the
operating performance of the affected companies. These market fluctuations as
well as general fluctuations in the stock markets may also affect the price of
the Common Stock.

CONCENTRATION OF STOCK OWNERSHIP

The Company's officers and directors and their affiliates beneficially owned
approximately 27.4% of the Company's Common Stock as of March 31, 1997.
Accordingly, these stockholders will be able to exercise significant influence
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. See "Principal
Stockholders."

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation: (i) requires certain procedures
to be followed and time periods to be met for any stockholder to propose
matters to be considered at annual meetings of stockholders, including
nominating directors for election at those meetings; (ii) prohibits
stockholders from calling special meetings of stockholders; and (iii)
authorizes the Board of Directors of the Company to issue up to 5,000,000
shares of preferred stock without stockholder approval and to set the rights,
preferences and other designations, including voting rights, of those shares
as the Board of Directors may determine. These provisions, alone or in
combination with each other and with the matters described under "--
Concentration of Stock Ownership," may discourage transactions involving
actual or potential changes of control of the Company, including transactions
that otherwise could involve payment of a premium over prevailing market
prices to holders of Common Stock. The Company also is subject to provisions
of the Delaware General Corporation Law that may make some business
combinations more difficult. See "Description of Capital Stock--Certain
Provisions of the Company's Charter and Bylaws and Delaware Law."

12
<PAGE>

FORWARD-LOOKING STATEMENTS

This Prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act. The words "anticipate," "believe,"
"expect," "estimate," "project" and similar expressions are intended to
identify forward-looking statements. Such statements reflect the Company's
current views with respect to future events and financial performance and are
subject to certain risks, uncertainties and assumptions, including those
discussed in "Risk Factors" on pages 5 through 13. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
believed, estimated or projected.

13
<PAGE>

THE COMPANY

The Company was incorporated in Delaware in August 1987. The Company's
corporate headquarters is located at 2408 Timberloch Place, Suite B-4, The
Woodlands, Texas 77380, and its telephone number is (281) 367-5892.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $22.00 per
share (the last sale price of the Common Stock on June 26, 1997, as reported
on The Nasdaq Small Cap Market) are estimated to be approximately $40.9
million ($47.0 million if the Underwriters' over-allotment option is exercised
in full).

The Company anticipates that the net proceeds of this offering will be used
to fund the continued development of and regulatory submissions relating to
Vasomax, the continued research and development of other potential products
for the treatment of conditions or diseases associated with the human
reproductive system, the exercise of an option to buy out the rights of a
third party to royalties on sales of Vasomax, capital expenditures and other
general corporate purposes. The Company may use a portion of the net proceeds
of the offering to in-license, obtain distribution rights to or acquire
selected technologies, products or businesses, but is not currently in
discussions regarding any such transaction. Exact allocation of the proceeds
for such purposes and timing of the expenditures will vary depending on
numerous factors, including the hiring of additional personnel, the progress
of the Company's research and development programs, the results of preclinical
studies and clinical trials of its products, the cost and timing of regulatory
approvals, technological advances, the commercial potential of its products,
the terms of any collaborative arrangements entered into by the Company and
the status of competitive products.

Pending application of the proceeds as described above, the Company intends
to invest the net proceeds in cash equivalents and short-term, investment
grade, interest bearing investments, including United States government
securities and high-grade corporate investments, commercial paper and bankers
acceptances.

14
<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is quoted on The Nasdaq Small Cap Market under the symbol
"ZONA" and on the Pacific Stock Exchange under the symbol "ZNG." The Common
Stock has been approved for inclusion on the Nasdaq National Market, subject
to official notice of issuance. The following table shows the high and low
sale prices per share of Common Stock, as reported on The Nasdaq Small Cap
Market, during the periods presented.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter.................................................... $ 7.63 $ 4.25
Second Quarter................................................... 5.50 3.38
Third Quarter.................................................... 5.63 3.63
Fourth Quarter................................................... 11.50 5.00
1996
First Quarter.................................................... $19.25 $ 8.25
Second Quarter................................................... 12.00 8.06
Third Quarter.................................................... 9.38 5.75
Fourth Quarter................................................... 12.00 7.50
1997
First Quarter.................................................... $19.88 $ 9.12
Second Quarter (through June 26, 1997)........................... 24.75 14.81
</TABLE>

All of the foregoing prices reflect interdealer quotations, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions in the Common Stock.

On June 26, 1997, the last sale price of the Common Stock, as reported on
The Nasdaq Small Cap Market, was $22.00 per share. On June 26, 1997, there
were approximately 238 holders of record and more than 5,000 beneficial
holders of the Company's Common Stock.

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

15
<PAGE>

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of March 31, 1997 and as adjusted to give effect to the sale by the Company of
the shares of Common Stock offered hereby at an assumed public offering price
of $22.00 per share (the last reported sale price of the Common Stock on June
26, 1997, as reported on The Nasdaq Small Cap Market). This table should be
read in conjunction with "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................ $ 7,780 $48,645
======== =======
Long-term obligations.................................... $ 13 $ 13
-------- -------
Stockholders' equity (1)
Undesignated Preferred Stock, $0.001 par value;
3,075,000 shares authorized; none issued and
outstanding, actual and as adjusted................... -- --
Series B Convertible Preferred Stock, $0.001 par value;
1,925,000 shares authorized; 910,701 issued and
outstanding, actual and as adjusted(2)................ 1 1
Common Stock, $0.001 par value; 20,000,000 shares
authorized; 7,377,106 shares issued and outstanding,
actual; 9,377,106 shares issued and outstanding, as
adjusted(3)........................................... 7 9
Additional paid-in capital............................. 38,323 79,186
Deferred compensation.................................. (131) (131)
Deficit accumulated during development stage........... (30,703) (30,703)
-------- -------
Total stockholders' equity........................... 7,497 48,362
-------- -------
Total capitalization..................................... $ 7,510 $48,375
======== =======
</TABLE>
- --------
(1) See Note 7 of Notes to Consolidated Financial Statements.
(2) Excludes 169,250 shares of Series B Preferred Stock issuable as of March
31, 1997 upon the exercise of outstanding warrants at an exercise price of
$11.00 per share. See "Description of Capital Stock--Warrants."

(3) Excludes (i) 910,520 shares of Common Stock shares issuable as of March
31, 1997 upon the exercise of outstanding options at a weighted average
exercise price of $6.07 per share, (ii) 534,436 additional shares of
Common Stock reserved for issuance under the Company's employee and
director stock option plans, (iii) 97,383 shares of Common Stock issuable
at March 31, 1997 upon the exercise of outstanding warrants at a weighted
average exercise price of $3.87 per share and (iv) 1,630,078 shares of
Common Stock issuable at March 31, 1997 upon conversion of the Company's
Series B Preferred Stock, including the shares of Series B Preferred Stock
outstanding at March 31, 1997 and shares issuable upon the exercise of
outstanding warrants. The number of shares of Common Stock which may be
issued upon the conversion of the Series B Preferred Stock will be
adjusted on a weighted-average basis to the extent the price per share of
Common Stock sold in this offering is less than the closing bid price per
share of the Common Stock on the date of this Prospectus. See "Description
of Capital Stock--Warrants" and "Description of Capital Stock--Series B
Convertible Preferred Stock."

16
<PAGE>

DILUTION

At March 31, 1997, the Company had a pro forma net tangible book value of
$5.9 million or $0.67 per share. Pro forma net tangible book value per share
represents the total tangible assets of the Company reduced by its total
liabilities and divided by the number of shares of Common Stock outstanding as
of March 31, 1997 (assuming the conversion of the Series B Preferred Stock).
After giving effect to the sale of the Common Stock offered hereby at an
assumed public offering price of $22.00 per share and the deduction of the
estimated underwriting discounts and commissions and offering expenses payable
by the Company in connection therewith, the pro forma net tangible book value
of the Company as of March 31, 1997 would have been $46.8 million or $4.35 per
share. This represents an immediate increase in the pro forma net tangible book
value of $3.68 per share to existing stockholders and an immediate dilution of
$17.65 per share to new investors purchasing shares of Common Stock in this
offering. The following table illustrates the per share dilution to new
investors purchasing Common Stock in this offering:

<TABLE>
<S> <C> <C>
Assumed public offering price per share(1)................... $22.00
------
Pro forma net tangible book value per share as of March 31,
1997(2)................................................... $ 0.67
Increase per share attributable to new investors........... 3.68
-------
Pro forma net tangible book value as adjusted for this offer-
ing(2)...................................................... 4.35
------
Dilution per share to new investors(2)....................... $17.65
======
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and commissions and other
offering expenses payable by the Company.

(2) Assumes no exercise of any outstanding options or warrants to purchase
Common Stock or Series B Preferred Stock. As of March 31, 1997, there were
(i) outstanding options to purchase an aggregate of 910,520 shares of
Common Stock at a weighted average exercise price of $6.07 per share, (ii)
outstanding warrants to purchase an aggregate of 97,383 shares of Common
Stock at a weighted average exercise price of $3.87 per share and (iii)
outstanding warrants to purchase an aggregate of 169,250 shares of Series B
Preferred Stock at an exercise price of $11.00 per share. See "Description
of Capital Stock--Warrants."

Assuming that all options and warrants to purchase Common Stock outstanding
on March 31, 1997 were exercised on that date (and in the case of the Series B
Preferred Stock issuable upon exercise of warrants, converted into shares of
Common Stock), pro forma net tangible book value per share as of March 31, 1997
would have been $1.36, increase in pro forma net tangible book value per share
attributable to new investors would have been $3.18, and the dilution per share
to new investors would have been $17.46. See "Description of Capital Stock--
Warrants."

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected consolidated financial data set forth below are derived from
the Company's audited consolidated financial statements as of and for each of
the years in the five year period ended December 31, 1996, and from the
Company's unaudited consolidated financial statements as of and for each of
the three-month periods ended March 31, 1996 and 1997. The Company's audited
financial statements as of and for each of the years ended December 31, 1994,
1995 and 1996 have been audited by Arthur Andersen LLP, independent public
accountants as indicated in their report included elsewhere herein. The report
of independent public accountants for the Company's consolidated financial
statements as of December 31, 1996 includes an emphasis of matter paragraph
concerning the Company's need to obtain additional financing in order to
complete the research and development and other activities necessary to
commercialize its products. The Company's unaudited financial statements as of
and for the three-month periods ended March 31, 1996 and 1997 include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such information as of and for such periods. Operating results
for the three months ended March 31, 1997 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997. The
selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Product sales......... $ -- $ -- $ 801 $ 2,838 $ 3,022 $ 739 $ 822
Licensing fee......... 250 -- -- -- -- -- --
Interest income....... 8 101 161 116 271 51 121
------- ------- -------- -------- -------- ------- --------
Total revenues...... 258 101 962 2,954 3,293 790 943
Costs and Expenses:
Cost of products sold. -- -- 570 2,162 2,087 517 571
Research and
development.......... 1,047 1,512 2,702 2,795 7,936 1,163 4,012
Selling, general and
administrative....... 754 842 1,603 2,068 2,516 607 598
Interest expense and
amortization of
intangibles.......... 40 279 57 216 224 54 54
------- ------- -------- -------- -------- ------- --------
Total costs and
expenses........... 1,841 2,633 4,932 7,241 12,763 2,341 5,235
------- ------- -------- -------- -------- ------- --------
Net loss................ $(1,583) $(2,532) $ (3,970) $ (4,287) $ (9,470) $(1,551) $ (4,292)
======= ======= ======== ======== ======== ======= ========
Net loss per common
share (1).............. $ (0.83) $ (0.83) $ (1.07) $ (1.11) $ (1.92) $ (0.35) $ (0.62)
======= ======= ======== ======== ======== ======= ========
Weighted average shares
used in computing loss
per common share....... 1,904 3,066 3,712 3,858 4,925 4,432 6,887
<CAPTION>
MARCH 31,
DECEMBER 31, 1997
---------------------------------------------- -----------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 153 $ 6,057 $ 2,478 $ 4,190 $ 11,075 $ 7,780
Total assets............ 469 6,567 5,274 6,652 13,712 10,357
Long-term obligations... 1,010 -- 83 66 17 13
Deficit accumulated dur-
ing the development
stage.................. (6,150) (8,682) (12,653) (16,940) (26,410) (30,703)
Total stockholders' eq-
uity (deficit)......... (5,781) 6,457 4,248 5,425 11,577 7,497
</TABLE>
- -------
(1) See Note 2 of Notes to Consolidated Financial Statements for a description
of the computation of net loss per common share.

18
<PAGE>

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

The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act. Such statements reflect the
Company's current views with respect to future events and financial
performance and are subject to certain risks, uncertainties and assumptions,
including those discussed in "Risk Factors." Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated in such
forward-looking statements.

OVERVIEW

Zonagen is a biopharmaceutical company in the development stage engaged in
the research, development and marketing of products which address conditions
and diseases associated with the human reproductive system. In addition to its
proprietary development activities, the Company markets and distributes a
variety of third-party fertility-related products to obstetrics/gynecology,
urology and fertility specialists through its wholly owned subsidiary, FTI.
The Company's objective is to become a leading provider of innovative products
and services for the management of reproductive health.

The Company has recently completed two pivotal Phase 3 clinical trials in
the United States of its lead product candidate, Vasomax, an oral treatment
for male erectile dysfunction. The Company has dedicated a substantial portion
of its resources over the last several years to the development of Vasomax.
The Company's future prospects are substantially dependent on approval by the
FDA and the successful commercialization of Vasomax. See "Risk Factors--
Substantial Dependence on One Product; Early Stage of Development of Other
Products."

Substantially all of the Company's revenues are derived from sales of third-
party fertility-related products by FTI. The Company acquired FTI in 1994 to
enter the market for female reproductive healthcare products and services.
Revenues from FTI will not be sufficient to fund the Company's planned
operations.

As of March 31, 1997, the Company had an accumulated deficit of $30.7
million. There can be no assurance that the Company will be able to complete
successfully the transition from a development stage company to the successful
introduction of commercially viable products. The Company's ability to achieve
profitability will depend, among other things, on successfully completing the
development of its products, obtaining regulatory approvals, establishing
marketing, sales and manufacturing capabilities or collaborative arrangements
with others which possess such capabilities, and raising sufficient funds to
finance its activities. There can be no assurance that the Company will be
able to achieve profitability or that profitability, if achieved, can be
sustained. The Company's independent public accountants have included an
emphasis of a matter paragraph in their report on the Company's consolidated
financial statements as of December 31, 1996 concerning the Company's need to
obtain additional financing in order to complete the research and development
and other activities necessary to commercialize its products. Although the
financial statements for the three months ended March 31, 1997 have not been
audited by the Company's independent accountants, such accountants have
informed the Company that if, at the time of their audit of the financial
statements for the year ending December 31, 1997, the Company's available
capital resources are anticipated not to be adequate to fund its operations
through December 31, 1998, their report on those financial statements will
include an explanatory paragraph expressing substantial doubt about the
Company's ability to continue as a going concern or, if there is a material
uncertainty whether those resources will be adequate to fund its operations
for a reasonable period of time beyond December 31, 1998, will include an
emphasis of a matter paragraph concerning the Company's need to obtain
additional financing in order to complete research and development and other
activities necessary to commercialize its products. See "Risk Factors--
Uncertainties Related to Early Stage of Development; Modification of Report of
Independent Public Accountants," "Risk Factors--History of Operating Losses;
Accumulated Deficit," "Business" and Note 1 of Notes to Consolidated Financial
Statements.

19
<PAGE>

RESULTS OF OPERATIONS

Comparison of Three Month Periods Ended March 31, 1997 and 1996

Revenues. Total revenues increased 19% to $943,000 for the quarter ended
March 31, 1997 as compared to $790,000 for the same period in the prior year.
Product sales, substantially all of which were derived from FTI, increased 11%
to $821,000 for the quarter ended March 31, 1997 as compared to $739,000 for
the same period in the prior year. The increase was due primarily to increased
sales and marketing efforts by FTI. Interest income increased 136% to $121,000
for the quarter ended March 31, 1997 as compared to $51,000 for the same
period in the prior year. The increase was due primarily to increased cash
balances as a result of a private placement completed in October 1996.

Cost of Products Sold. Cost of products sold increased 10% to $571,000 for
the quarter ended March 31, 1997 as compared to $517,000 for the same period
in the prior year. Gross margin from product sales remained relatively
constant at 30%.

Research and Development Expenses. Research and development expenses
increased 245% to $4.0 million for the quarter ended March 31, 1997 as
compared to $1.2 million for the same period in the prior year. Expenses
associated with the development of Vasomax increased 448% to $3.3 million for
the quarter ended March 31, 1997 as compared to $607,000 for the same period
in the prior year. The increase was due primarily to the additional costs
associated with the development of Vasomax, including U.S. Phase 3 clinical
trials which commenced in late 1996. Other research and development expenses
increased 23% to $684,000 for the quarter ended March 31, 1997 as compared to
$556,000 for the same period in the prior year. The Company expects its
research and development expenses to increase during the remainder of 1997 and
for at least the next several years.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased slightly to $598,000 for the quarter ended
March 31, 1997 from $607,000 for the same period in the prior year.

Interest Expense and Amortization of Intangibles. Interest expense and
amortization of intangibles remained relatively constant at $54,000 for the
quarter ended March 31, 1997 and the same period in the prior year. The
Company recorded $52,000 of amortization during the first quarter of 1997
related to the excess of cost over fair value of tangible assets associated
with the acquisition of FTI.

Comparison of Years Ended December 31, 1996 and 1995

Revenues. Total revenues increased 11% to $3.3 million in 1996 as compared
to $3.0 million in 1995. Product sales increased 6% to $3.0 million in 1996 as
compared to $2.8 million in 1995. The increase was due primarily to increased
sales and marketing efforts by FTI in the second half of 1996. Interest income
increased 134% to $271,000 in 1996 as compared to $116,000 in 1995. The
increase was due primarily to interest on proceeds from the Company's private
placement completed in October 1996.

Cost of Products Sold. Cost of products sold decreased slightly to $2.1
million in 1996 as compared to $2.2 million in 1995. Gross margin from product
sales increased to 31% in 1996 as compared to 24% in 1995. The increase was
due primarily to a shift in FTI's product mix to higher margin products in the
second half of 1996, as well as the costs associated with the disposal of
inventory of discontinued products in 1995.

Research and Development Expenses. Research and development expenses
increased 184% to $7.9 million in 1996 as compared to $2.8 million in 1995.
The increase was due primarily to the additional costs associated with the
development of Vasomax. Expenses associated with the development of Vasomax
increased 740% to approximately $6.0 million in 1996 as compared to $710,000
in 1995. Other research and development expenses were $2.0 million and $2.1
million in 1996 and 1995, respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 22% to $2.5 million in 1996 from $2.1
million in 1995. A substantial portion of this increase was due to reduced
levels of expenditures in the second half of 1995 as the Company took steps to
conserve cash.

20
<PAGE>

Interest Expense and Amortization of Intangibles. Interest expense and
amortization of intangibles increased slightly to $224,000 in 1996 from
$216,000 in 1995.

Comparison of Years Ended December 31, 1995 and 1994

Revenues. Total revenues increased 207% to $3.0 million in 1995 from
$962,000 in 1994. Product sales, substantially all of which were derived from
FTI, increased 254% to $2.8 million in 1995 from $801,000 in 1994, primarily
as a result or inclusion of FTI's sales in its consolidated financial
statements for all of 1995 and for only the fourth quarter of 1994. Interest
income decreased 28% to $116,000 in 1995 from $161,000, in 1994, primarily as
a result of reduced cash balances.

Cost of Products Sold. Cost of products sold increased 280% to $2.2 million
in 1995 as compared to $570,000 in 1994. Gross margins from product sales
decreased to 24% in 1995 as compared to 29% in 1994. The decrease was
primarily due to costs associated with disposal of inventory of discontinued
products.

Research and Development Expenses. Research and development expenses were
relatively constant at $2.8 million and $2.7 million in 1995 and 1994,
respectively. Research and development expenses relating to Vasomax, including
clinical trial and manufacturing scale-up expenses, increased 120% to $710,000
in 1995 from $322,000 in 1994. The increase was primarily due to a Phase 2
clinical trial of Vasomax conducted in Europe in 1995. Other research and
development expenses were $2.1 million and $2.4 million for 1995 and 1994,
respectively.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 29% to $2.1 million from $1.6 million in
1995 and 1994, respectively. The increase in 1995 was primarily due to
inclusion of a full year of expenses associated with the operations of FTI in
the Company's 1995 results.

Interest Expense and Amortization of Intangibles. Interest expense and
amortization of intangibles increased 282% to $216,000 in 1995 as compared to
$57,000 in 1994. This increase was due primarily to the amortization of the
excess of cost over fair value of tangible assets acquired in connection with
the acquisition of FTI.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily with
proceeds from the private placement and public offering of equity securities.
In April 1993, the Company received net proceeds of approximately $7.0 million
from its initial public offering. In December 1993, the Company received net
proceeds of $2.5 million from the sale of Common Stock to an affiliate of
Schering in connection with the Company's collaboration with Schering. In
October 1995, the Company received net proceeds of $5.3 million from the
private placement of Series A Preferred Stock. In September and October 1996,
the Company received aggregate net proceeds of $14.4 million from the private
placement of Series B Preferred Stock.

The Company used net cash of $8.0 million for operating activities in the
year ended December 31, 1996 as compared to $3.2 million for the year ended
December 31, 1995. The Company used net cash of $3.3 million for operating
activities for the three months ended March 31, 1997 as compared to $1.4
million for the three months ended March 31, 1996. The Company had cash and
cash equivalents of $7.8 million at March 31, 1997. The increased use of cash
for the year ended December 31, 1996 and three months ended March 31, 1997 was
primarily due to the increase in expenses related to the clinical development
of Vasomax.

21
<PAGE>

Company believes that its existing capital resources, together with the
proceeds of this offering, will be sufficient to fund its operations through
at least the next twelve months. The Company's capital requirements will
depend on many factors, including the problems, delays, expenses and
complications frequently encountered by development stage companies; the
progress of the Company's clinical and preclinical activities; the progress of
the Company's future collaborative research, manufacturing, marketing or other
funding arrangements; the costs and timing of seeking regulatory approvals of
the Company's products; the Company's ability to obtain regulatory approvals;
the success of the Company's sales and marketing programs; the cost of filing,
prosecuting and defending and enforcing any patent claims and other
intellectual property rights; and changes in economic, regulatory or
competitive conditions or the Company's planned business. Estimates about the
adequacy of funding for the Company's activities are based on certain
assumptions, including the assumption that the development and regulatory
approval of the Company's products can be completed at projected costs and
that product approvals and introductions will be timely and successful. There
can be no assurance that changes in the Company's research and development
plans, acquisitions or other events will not result in accelerated or
unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets. The
Company's ability to raise additional funds in the public or private markets
will be adversely affected if the results of its current or future clinical
trials are not favorable. The Company may seek additional funding through
corporate collaborations and other financing vehicles. There can be no
assurance that any such funding will be available to the Company on favorable
terms or at all. If adequate funds are not available, the Company may be
required to curtail significantly one or more of its research or development
programs, or it may be required to obtain funds through arrangements with
future collaborative partners or others that may require the Company to
relinquish rights to some or all of its technologies or products. If the
Company is successful in obtaining additional financing, the terms of such
financing may have the effect of diluting or adversely affecting the holdings
or the rights of the holders of the Company's Common Stock.

The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair market value of the Common Stock at the time of
grant. In December 1996, the Company established a new nonemployee director
stock option plan and a committee of the Board of Directors approved the grant
of options under the plan entitling the Company's nonemployee directors to
purchase an aggregate of 175,000 shares of Common Stock at an exercise price
of $8.38 per share. The grants were contingent upon stockholder approval of
the new nonemployee director option plan. For purposes of determining the
amount of any deferred compensation, such options were deemed granted upon
stockholder approval, which was received at the Company's Annual Meeting of
Stockholders on June 18, 1997. The Company recorded deferred compensation of
$2.4 million in the quarter ending June 30, 1997 based upon the difference
between the fair market value of the Common Stock of $22.25 per share (the
last sale price of the Common Stock as reported by The Nasdaq Small Cap
Market) on the deemed grant date and the exercise price of the options. The
deferred compensation will be amortized and recorded as compensation expense
over the five year vesting period. In addition, options to purchase an
aggregate of 12,500 shares granted to an employee and a consultant at a
weighted average exercise price of $6.64 per share vest based upon the
achievement of certain performance criteria. The Company will record
compensation expense to the extent the fair market value of such options at
the time such performance criteria are met exceeds the exercise price.
Compensation expense related to the options for 10,000 shares granted to the
employee will be recorded at each reporting period prior to the achievement of
milestones based on the vesting period of the options and the amount by which
the fair market value exceeds the exercise price on the financial statement
date. See Note 8 of Notes to Consolidated Financial Statements.

22
<PAGE>

BUSINESS

OVERVIEW

Zonagen, Inc. ("Zonagen" or the "Company") is a biopharmaceutical company
engaged in the research, development and marketing of products which address
conditions and diseases associated with the human reproductive system. The
Company has recently completed two pivotal Phase 3 clinical trials in the
United States of its lead product candidate, Vasomax, an oral treatment for
male erectile dysfunction, commonly referred to as impotence. Based upon
clinical trial results, the Company believes that Vasomax will improve the
erectile function, intercourse success rates and overall sexual experience of
a significant percentage of impotent men. The Company is also engaged in the
research and development of a therapy for female sexual dysfunction, new
approaches to contraception, including zona pellucida-based vaccines in
collaboration with Schering AG ("Schering"), treatments for urological
diseases such as benign prostatic hyperplasia ("BPH") and prostate cancer, and
an adjuvant to enhance the effectiveness of vaccines. In addition to its
proprietary development activities, the Company markets and distributes a
variety of third-party fertility-related products to obstetrics/gynecology,
urology and fertility specialists through its wholly owned subsidiary,
Fertility Technologies, Inc. ("FTI").

The Company's Phase 3 clinical trial results indicate that Vasomax yielded a
statistically significant improvement over placebo, with 40% and 34% of the
men in the two clinical trials, respectively, responding to the 40mg dose.
Zonagen intends to submit a New Drug Application (an "NDA") to the FDA for
Vasomax promptly following the completion of certain in-process studies and
data analysis that are expected to be completed in late 1997. The Company
intends to seek a corporate partner for the marketing of Vasomax and is
currently in discussions with several potential partners.

MALE ERECTILE DYSFUNCTION

Background

Male erectile dysfunction, or impotence, has historically been narrowly
defined as the persistent inability to attain and maintain an erection
adequate to permit satisfactory sexual performance. More recently, however, a
leading study published in the Journal of Urology in 1994, the Massachusetts
Male Aging Study, determined that male erectile dysfunction is best defined
using broader, more flexible criteria, including an assessment of erectile
difficulty during intercourse, frequency of sexual activity and erection, and
satisfaction with the quality of the erection and the overall sexual
experience.

The Massachusetts Male Aging Study concluded that male erectile dysfunction
is a major health concern. The study found that 52% of men studied between the
ages of 40 and 70 suffered from erectile dysfunction, suggesting that
approximately 18 million American men in that age category suffered from
erectile dysfunction in 1990. More than 80% of those afflicted were
characterized as having a mild to moderate condition.

The health variable most strongly associated with erectile dysfunction is
age. According to the Massachusetts Male Aging Study, the prevalence of
erectile dysfunction overall increases from 40% at age 40 to 67% at age 70.
Further, the probability of complete erectile dysfunction triples, while the
probability of moderate erectile dysfunction doubles over that age range.
Factors other than age which may contribute to erectile dysfunction include
heart disease, hypertension and diabetes, certain therapeutic drugs and anger
or depression. Current aging trends suggest that the number and percentage of
men in the United States suffering from erectile dysfunction will increase.

Erectile dysfunction occurs when one or more of the underlying factors
results in (i) an inadequate supply of blood to the penis, (ii) a failure to
relax the smooth muscle tissue in the penis so that the penis can become
engorged with blood, (iii) a failure to retain blood in the penis, or (iv) a
combination of these factors. Blood is carried to the penis in two large
arteries that terminate in a maze of blood vessels contained in three erectile
bodies of the penis: the corpus spongiosum, which surrounds the urethra, and
two corpora cavernosa. Smooth muscle tissue surrounds each individual blood
vessel in the erectile bodies. When the penis is flaccid, the smooth muscle
tissue is in a contracted state, which constricts the blood vessels resulting
in reduced blood flow. During

23
<PAGE>

stimulation, signals are sent to the nerve endings in the penis that cause the
smooth muscle tissues in the penis to relax, which allows the blood vessels to
expand. This expansion allows arterial blood to fill the erectile bodies and
causes the penis to become engorged with blood and erect. As the erectile
bodies expand, the venous outflow of blood is restricted so that the erection
can be maintained.

Current Therapies

A number of products are currently available for the treatment of male
erectile dysfunction, including needle injection therapy, a urethral catheter
device, vacuum constriction devices, penile implants and oral medications.
However, most of these treatments are invasive, painful, inconvenient or
result in an erection the onset and duration of which is determined by the
treatment rather than by actual sexual stimulation. In addition, many
currently available therapies produce undesirable side effects and potential
complications.

Needle injection therapy involves the direct injection into the penis of
vasoactive compounds, such as alprostadil (prostaglandin E) and phentolamine
mesylate and papaverine used on an off-label basis. These compounds may be
administered alone or in combination. Needle injection therapy has a
relatively high degree of efficacy in producing an erection of maximal
rigidity within a short period of time after administration. However, the
erection is produced regardless of actual sexual stimulation and maintained
for a period of time determined by the dose rather than by the normal course
of sexual activity. Needle injection therapy can also involve significant
undesirable effects, including the pain of the injection, local pain or aching
and complications such as hematomas, bleeding and nodule formation.

The currently available urethral catheter device administers a small pellet
of alprostadil directly into the penis by a catheter which is inserted through
the opening of the urethra, where the drug is then absorbed. Use of the device
produces an erection within a short period of time, regardless of actual
sexual stimulation. The erection is maintained for a period of time determined
by the dose rather than by the normal conduct of sexual activity. This
transurethral treatment can be used to treat a significant number of impotent
men, but may cause pain and some degree of urethral burning during and after
administration, as well as other systemic side effects.

A vacuum constriction device is a mechanical system that creates a vacuum
around the penis, causing the erectile bodies to fill with blood. A
constriction band is then placed around the base of the penis to impede blood
drainage and maintain the erection until the band is removed. This device can
be inconvenient to use, may cause the penis to become cold and discolored due
to the constriction of blood flow, and may produce such complications as pain
and difficulty ejaculating. Prolonged periods of constricted blood flow may
produce permanent damage to tissue in the penis.

Penile implant therapy involves the surgical implantation of a semi-rigid,
rigid or inflatable device into the penile structure to mechanically simulate
an erection. In addition to the risks and scarring associated with the
surgical procedures, complications include infection and mechanical failure of
the device, which may necessitate a second surgical procedure. Penile implant
surgery is irreversible and involves substantial cost. Surgical implants
require the removal of tissue from the penis, effectively eliminating the
patient's ability to subsequently use other, less radical methods of
treatment.

The currently available oral medication that is most frequently used to
treat erectile dysfunction is yohimbine, an extract from tree bark. Yohimbine
is available by prescription in a concentrated form or as a food supplement at
health food stores and other retailers. Yohimbine must be chronically
administered, may cause irritability, sweating, nausea and hypertension, and
has not demonstrated statistically significant performance compared to
placebo. Several oral therapies other than Vasomax are currently under
development by other companies. See "--Competition."

The Company believes that many men do not seek treatment for erectile
dysfunction because of the invasiveness, pain, inconvenience and other
undesirable effects of the therapies that are currently available, and that
the number of men with erectile dysfunction who seek treatment would increase
if an effective orally administered therapy were available.

24
<PAGE>

THE VASOMAX SOLUTION

Vasomax

Vasomax is a fast-acting oral treatment for male erectile dysfunction that
systemically delivers phentolamine mesylate ("phentolamine"). Zonagen has
recently completed two pivotal Phase 3 clinical trials of Vasomax. Vasomax
produces an alpha-adrenergic block of relatively short duration, leading to
vasodilative effects on vascular smooth muscles to help restore normal penile
function. Phentolamine has been approved by the FDA for the treatment of
hypertension and for use in the diagnosis of certain tumors of the adrenal
gland, and has been used "off-label" by urologists, either alone or in
combination with other drugs, in penile needle injection therapies for the
treatment of erectile dysfunction. The Company believes that due to its mode
of action, Vasomax will provide the greatest benefit to men who suffer from
mild to moderate erectile dysfunction, a significant percentage of men with
the condition.

Based on the Company's clinical trial results, Vasomax's expected benefits
and advantages include the following:

. Oral Administration. Vasomax is a tablet which is taken orally, and
therefore is painless, non-invasive, convenient and discreet for the user.

. Speed of Efficacy. Vasomax's fast-dissolving formulation enables an
erectile response within 15 to 30 minutes of administration.

. Normal Penile Response. Vasomax more closely duplicates normal sexual
function by enabling and maintaining an erection only in the presence of
actual sexual stimulation.

. Reduced Side Effects. Vasomax may produce fewer side effects than many
of the currently available treatments.

Clinical Trials

The Company completed two pivotal Phase 3 clinical trials of Vasomax in May
1997. These Phase 3 trials were designed to evaluate Vasomax's effectiveness
in treating men suffering from erectile dysfunction, using the Erectile
Function Domain of the International Index of Erectile Function ("IIEF"). The
IIEF is a validated statistical analysis of erectile dysfunction, based upon
15 questions answered by each participant. The Company also measured secondary
endpoints in the Phase 3 trials which included successful intercourse rates
and other measures of overall sexual experience. The trials included men with
a broad variety of medical conditions, including cardiovascular conditions,
diabetes and prostate conditions, and men who took other medications during
the trials. Because the Company believes that an intact nervous system is
required for Vasomax to be effective, men with erectile dysfunction caused by
spinal cord injury or radical prostectomy were intentionally excluded from the
trials.

The first of these clinical trials to have been completed was a double-
blinded, placebo-controlled study involving 435 men at 20 centers across the
United States testing 40mg and 80mg doses of Vasomax against a placebo.
Physician diagnoses indicated that substantially all of the patients enrolled
in the trial suffered from erectile dysfunction with physiological causes, a
majority of which involved vasculogenic conditions; the erectile dysfunction
of only 2% of enrolled patients was classified as having purely psychogenic
causes by the attending physician. Vasomax yielded a statistically significant
(p<0.001) improvement over placebo using the primary IIEF endpoint, with 40%
of the men in the study responding to the 40mg dose of Vasomax and 48%
responding to the 80mg dose of Vasomax, as compared to 17% responding to
placebo. Vasomax also yielded a statistically significant (p<0.001)
improvement over placebo using successful intercourse as a secondary endpoint,
with 42% of the men in the study responding to the 40mg dose of Vasomax and
39% responding to the 80mg dose of Vasomax, as compared to 22% responding to
placebo. The study included an in-office test dose of 80mg on all of the men
considered for participation in the study to assess side effects before
exposing men to at-home use of Vasomax. Although one patient exhibited both an
increase in heart rate and a decrease in blood pressure of greater than 30%
and another patient experienced chest pain, both in the in-office 80mg study,
no other serious

25
<PAGE>

adverse events related to drug were observed in either the in-office or at-
home portions of the trial. The Company and PPD Pharmaco are continuing to
evaluate the safety data from the clinical trial.

The second trial was a double-blinded, placebo-controlled study involving
293 men at 14 centers across the United States, testing 40mg doses of Vasomax
against a placebo. Vasomax yielded a statistically significant (p<0.01)
improvement over placebo using the primary IIEF endpoint, with 34% of the men
in the study responding to the 40mg dose of Vasomax as compared to 21%
responding to placebo. The trial included an in-office test dose of 40mg on
all of the men considered for participation in the study to assess side
effects before exposing men to at-home use of Vasomax. No serious adverse
events were observed in either the in-office or at-home portions of the trial.
The Company and PPD Pharmaco are continuing to evaluate the safety data from
the clinical trial.

Zonagen intends to submit an NDA to the FDA for Vasomax promptly following
the completion of certain in-progress studies and data analysis that are
expected to be completed in late 1997. There can be no assurance that the NDA
will be filed on a timely basis or that it will ultimately be approved by the
FDA.

The Company is also currently conducting an open-label clinical trial of
Vasomax involving approximately 300 patients, and is preparing to commence a
second open-label clinical trial involving approximately 1,000 patients. The
pivotal clinical trials necessary for the submission of an NDA for Vasomax
have been completed. The Company intends to use the additional data generated
by the open-label trials for marketing purposes.

The foregoing expressions of the Company's expectations regarding the
completion of clinical trials and other studies, the filing of an NDA and
other matters relating to the clinical development of Vasomax are forward-
looking statements which are subject to certain risks and uncertainties,
including those described under "Risk Factors--Uncertainties Related to
Clinical Trial Results" and "Risk Factors--Government Regulation."

BUSINESS STRATEGY

Develop Proprietary and Acquired Technologies. The Company's development
activities are focused on providing a broad portfolio of proprietary
products in reproductive healthcare. In order to more rapidly expand its
portfolio, the Company augments its own research activities by acquiring
and developing technologies from third parties. For example, while certain
of the Company's contraceptive development programs were initiated in-
house, the Company acquired rights in 1994 to certain technology which
formed the basis for the Company's development of its proposed Vasomax
product.

Establish Collaborations with Corporate Partners. Where appropriate,
Zonagen seeks to collaborate with corporate partners for the development
and marketing of certain technologies and products. In December 1993, the
Company entered into an agreement with Schering (the "Schering Agreement")
to jointly research, develop and test contraceptive vaccines. In addition
to providing milestone payments and research funding to the Company, this
agreement provides for Schering to market the product and pay a royalty on
net sales to the Company. Zonagen also intends to seek a corporate partner
for the marketing of Vasomax, and is in discussions with several potential
prospects.

Expand Specialty Marketing Business. The Company believes that the highly
fragmented market for fertility-related products provides a significant
opportunity for consolidation and integration of a full range of services
focused on the management of reproductive health. The Company intends to
expand FTI's business by (i) expanding its product offerings through in-
licensing and distribution arrangements and

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selected acquisitions, (ii) entering into other markets served by
obstetrics/gynecology, urology and fertility specialists and (iii)
marketing certain of the proprietary products that may be developed by the
Company. In addition, the Company will continue to draw upon FTI's
relationships with leading reproductive health specialists to identify
needs and opportunities for new products.

Expand Intellectual Property Portfolio. The Company will continue to seek
patent protection for its technologies and formulations in the United
States and key international markets. Zonagen currently owns a total of two
issued patents and 11 patent applications (with respect to one of which the
Company has received a notice of allowance) in the United States, and five
issued patents and 40 patent applications outside the United States.

PRODUCTS IN PRECLINICAL DEVELOPMENT

The Company has several product candidates in preclinical development in the
areas of sexual dysfunction, contraception, urological diseases and adjuvants.

Vasomax for Female Sexual Dysfunction

A study published in The New England Journal of Medicine, evaluating couples
with sexual dysfunction, revealed that 40% of the men had erectile dysfunction
whereas 63% of the women had arousal or orgasmic dysfunction. Similar to male
sexual dysfunction, the prevalence of female sexual dysfunction has been shown
to increase with age and be associated with vascular risk factors. Post-
menopausal women and women with a history of vascular risk factors have been
shown to have significantly more complaints of self-reported female vaginal
and clitoral dysfunction than pre-menopausal women or women without vascular
risks.

A recently presented study, accepted for publication in the International
Journal of Impotence Research, suggests that the male and female reaction to
sexual stimuli share similar physiological characteristics. The study
indicates that vasodilators which are effective in treating male erectile
dysfunction may also have application in treating vasculogenic female sexual
dysfunction. The Company has begun a program under its current Investigational
New Drug application ("IND") for Vasomax to test the utility of Vasomax in
treating this indication.

Combination Therapies for Sexual Dysfunction

Combinations of drugs are often used on an off-label basis in penile needle
injection therapy to improve erectile response. These drugs are believed to
operate using different mechanisms of action, and therefore are administered
in combination with the objective of improving success rates over single-drug
treatments. Based on its evaluation of the mechanisms responsible for erectile
function, the Company believes that the use of Vasomax in combination with
certain other drugs which possess different mechanisms of action may yield
improved erectile response in some men. The Company plans to commence
preliminary studies to test the safety and efficacy of such combination
therapies.

Contraceptives

Approximately 70 million women around the world use oral contraceptives on a
daily basis, and many other women employ alternative forms of contraception,
both reversible and irreversible. The Company believes that a variety of
factors, including the disadvantages of the hormones used in currently
available oral contraceptives and the rapidly growing populations of many
developing countries, present a significant opportunity for new contraceptive
approaches.

The Company is developing contraceptive products for women based on
proprietary technology relating to the zona pellucida. The zona pellucida
surrounds the mammalian egg and is analogous to an eggshell. Based upon the
Company's primate research to date, the Company believes that a vaccine based
on the unique proteins which comprise the zona pellucida could cause temporary
infertility or sterility in women.

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Zonagen's proposed zona pellucida-based contraceptive vaccines may offer a
convenient, nonhormonal, nonsurgical approach to female birth control that the
Company believes would require only infrequent (e.g., annual) periodic
administration. The Company believes that its proposed human contraceptive
products could also provide an attractive alternative for those women who
currently elect to undergo voluntary female sterilization. Moreover, ease of
administration, long-term efficacy and potential low cost also could make the
Company's proposed female contraceptive products attractive for use in
population control in developing countries in which there are few widely
available, long-lasting female contraceptives.

The Company established a strategic alliance with Schering in 1993, pursuant
to which the Company and Schering agreed to jointly research, develop and test
zona pellucida-based human contraceptive vaccines. See "--Collaborative and
Licensing Agreements--Schering AG."

In addition to its development of zona pellucida-based contraceptive
products, the Company is conducting studies in collaboration with the Shanghai
Family Planning and Research Institute in China towards the development of a
recombinant human Chorionic Gonadotropin ("hCG") vaccine, employing an adjuvant
developed by the Company, for use as a contraceptive agent. Initial animal
studies indicated that the Company's hCG vaccine produced an immune response
which prevented ovulation in rabbits. The Company believes that these studies
suggest that its hCG vaccine might be effective in preventing successful
pregnancy in women. Animal safety studies are currently being conducted in
China with the goal of beginning human trials in China as soon as practical.

Finally, the Company has successfully completed an in vivo study of a natural
bioadhesive as an intravaginal contraceptive agent. The Company's bioadhesive
product demonstrated equivalent effectiveness in rabbit studies to a gel
containing nonoxidil-9. Because the preparation contains no irritating
detergents, it may have a significant advantage over currently available
intravaginal agents.

Urological Diseases

The National Institutes of Health ("NIH") estimates that approximately two
million men in the United States suffer from diseases of the prostate,
principally BPH and prostate cancer. BPH is a condition involving the
enlargement of the prostate as a result of cellular proliferation, causing
bladder and urinary tract problems. Although the causes of BPH are not well
understood, the prevalence of the condition is strongly correlated with age.
More than 50% of men over age 60 and between 80% and 90% of men over age 80 are
affected by BPH. Prostate cancer, which will afflict approximately one out of
every five American men in their lifetimes, is the most common cancer in
American men other than skin cancer. The American Cancer Society estimates that
approximately 209,900 new cases of prostate cancer will be diagnosed and that
approximately 41,800 men will die of prostate cancer in 1997.

Current treatments for BPH include surgery, balloon urethroplasty,
transurethral microwave therapy and two approved drugs, one of which inhibits
production of a hormone that is involved in prostate enlargement and the other
of which relaxes the smooth muscle of the prostate and bladder neck to improve
urinary flow and reduce bladder outlet obstruction. Current treatments for
prostate cancer include surgery (usually either radical prostatectomy or
transurethral resection of the prostate), radiation therapy, hormone therapy
and chemotherapy.

Research conducted by the Company and its academic collaborators has
identified product candidates which may be useful in treating BPH or prostate
cancer. These product candidates include two small molecules selected from a
screen of several compounds identified by the NIH as potential anti-cancer
agents, which have been shown to reduce cellular proliferation and prostate
size in animal studies conducted by the Company. The Company has also
identified two potential immunological therapies, one of which is a recombinant
vaccine which neutralized the effects of gonadotropic releasing hormone (GnRH)
in animal studies and the other of which is a recombinant prostate-specific
antigen which is currently being tested in vivo.

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Adjuvants

Adjuvants are substances used in conjunction with an antigen (i.e., a
substance that the body regards as foreign or potentially dangerous, and
against which it produces antibodies) to enhance an immune response. Adjuvants
play an important role in enhancing the effectiveness of vaccines. The Company
believes that adjuvants will be particularly important in developing the newer
generations of recombinant vaccines, which when administered alone may not
produce a sufficient immune response.

As a result of research conducted to develop an adjuvant that could be used
in conjunction with the Company's proposed zona pellucida-based contraceptive
vaccine, the Company believes that it has discovered a new adjuvant, ImmuMax,
which may enhance the effectiveness of vaccines. In animal studies conducted
by the Company, ImmuMax has produced elevated immune responses compared to
other known adjuvants.

The primary advantages of ImmuMax are expected to include the rapid onset of
immunity and its natural origin, which should limit side effects. The Company
believes that ImmuMax has application for a variety of vaccines, and therefore
intends to out-license this technology on a non-exclusive basis to companies
that develop or market vaccines. In connection with that strategy, the Company
has made ImmuMax available to several vaccine manufacturers for evaluation in
connection with currently available vaccines.

The Company's preclinical product candidates are in an early stage of
development and have not been demonstrated to be safe or effective. Even if
the Company is able to successfully complete its development efforts with
respect to a particular product, there can be no assurance that regulatory
approvals will be obtained or that any such product can be successfully
manufactured and commercialized. Any products which may be developed from such
efforts are not expected to be commercially available for at least the next
several years, if at all. See "Risk Factors--Uncertainties Related to Clinical
Trial Results", "Risk Factors--Substantial Dependence on One Product; Early
Stage of Development of Other Products" and "Risk Factors--Government
Regulation; No Assurance of Regulatory Approval."

FERTILITY TECHNOLOGIES, INC.

Infertility is a physical condition affecting approximately 4.5 million
couples of reproductive age in the United States annually, of whom
approximately two million couples seek some form of treatment. Industry
sources estimate that the overall United States fertility market was
approximately $2.6 billion in 1996. The study estimates that one in ten
couples worldwide experiences problems associated with infertility.

The Company markets and distributes a variety of third-party fertility-
related products to obstetrics/gynecology, urology and fertility specialists
through FTI, which it acquired in 1994. FTI's primary products currently
include reproduction associated diagnostic kits, fertility analysis
instrumentation and disposable products and media for laboratory use. The
Company has recently added a CLIA-certified laboratory for the analysis of
diagnostic test results, and established a pharmacy through which it sells
specialized fertility-related pharmaceutical products.

The Company believes that the highly fragmented market for fertility-related
products provides a significant opportunity for consolidation and integration
of a full range of services focused on the management of reproductive health.
The Company intends to continue to expand FTI's business by (i) expanding its
product offerings in the fertility-related market through in-licensing and
distribution arrangements and selected acquisitions, (ii) entering into other
markets served by obstetrics/gynecology, urology and fertility specialists and
(iii) marketing certain of the proprietary products that may be developed by
the Company. In addition, the relationships with the leading
obstetrics/gynecology, urology and fertility specialists that the Company has
been able to establish through FTI allow the Company to identify needs and
opportunities for new products.

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RESEARCH AND DEVELOPMENT

The Company's research and development expenditures have been used primarily
for clinical trials of Vasomax and the development of its preclinical products.
In 1994, 1995, 1996 and the first three months of 1997, research and
development expenses were $2.7 million, $2.8 million, $7.9 million and $4.0
million, respectively. The Company expects these expenses to increase over the
next several years as it continues the clinical development of Vasomax and
begins to advance certain of the Company's preclinical product candidates into
clinical trials.

COLLABORATIVE AND LICENSING AGREEMENTS

The Company seeks to collaborate with corporate partners for the development
and marketing of certain technologies and products, and to in-license existing
and late-stage development products and technologies focused in the area of
human reproductive healthcare. In this regard, the Company has entered into the
collaborative and licensing agreements described below, and is currently in
discussions for a potential corporate partnership with respect to Vasomax.

Schering AG

In December 1993, the Company entered into the Schering Agreement, pursuant
to which the Company and Schering agreed to jointly research, develop and test
zona pellucida-based human contraceptive vaccines. The Company granted to
Schering an exclusive license (including the right to grant sublicenses) in all
countries of the world except India and China to sell and distribute zona
pellucida-based human contraceptive vaccines developed under the Schering
Agreement. Schering also has a right of first negotiation to enter into an
agreement with Zonagen for the manufacture and sale of any contraceptive
products developed by Zonagen outside the field of zona pellucida-based
contraceptive vaccines. The Company granted Schering the right to promote and
market such products in all countries of the world except India and China,
while retaining co-promotion and sales rights in the United States. Schering
will pay the Company 30% of net sales of all products sold by Schering, and the
Company is obligated to pay Schering 30% of the net sales attributable to
products sold by the Company. The license granted under the Schering Agreement
terminates on a country-by-country and product-by-product basis on the later of
(i) ten years after the first commercial sale of each product covered in each
such country or (ii) the expiration of the last patent relating to such product
in each such country. The Schering Agreement is terminable by Schering on 30
days written notice before the commencement of Phase 1 clinical trials relating
to any covered product, and by either party on the occurrence of a breach that
is not cured within 60 days after notice thereof has been given to the other
party. If Schering terminates the Schering Agreement without the occurrence of
a breach and after commencement of Phase 1 clinical trials, Schering must
transfer to the Company ownership of any IND, orphan drug designation and other
regulatory rights relating to any jointly-developed products. The Company
retained manufacturing rights to produce products developed under the Schering
Agreement, and the Company must reimburse Schering for costs pursuant to the
Schering Agreement.

The Company must bear all costs of the development of products under the
Schering Agreement until the Company has developed a "lead compound" that meets
certain specified standards for use in clinical trials. Schering must bear all
costs of the development of the vaccine after formulation of the lead compound,
including all costs of preclinical studies and clinical trials, and costs
associated with obtaining regulatory approvals for sale of the vaccine in the
licensed territory. In addition, the Company must bear costs, until 30 days
after the filing of an NDA with the FDA, relating to stability studies, scale-
up and manufacturing process, obtaining validation of the manufacturing
facility and making other regulatory filings with the FDA. The Schering
Agreement provides that upon the completion of certain research and development
milestones, Schering will make payments to the Company aggregating up to $12.5
million. The first milestone payment of $500,000 is for the development of a
"preliminary lead compound" for a zona pellucida-based human female
contraceptive. Schering must purchase $2.5 million of Common Stock, by either
(i) December 9, 1997, at a premium of 30% over the market price of the Common
Stock at the time of the exercise of the option, if a lead compound has been
accepted by Schering, or (ii) June 9, 1998, at the market price of the Common
Stock at the time of the exercise of the option if a lead compound has not been
accepted by Schering, to retain its rights under the

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Schering Agreement. In addition, Schering has certain rights to require
registration of Common Stock held by it and to purchase additional shares of
stock. See "Description of Capital Stock--Rights of Schering."

Contract Research Organizations

During 1996, the Company established arrangements with two contract research
organizations, PPD Pharmaco and Affiliated Research Centers, Inc., relating to
the Company's U.S. clinical development of Vasomax. These companies have
collaborated with the Company in the design and conduct of the Company's United
States clinical trials, including the pivotal Phase 3 clinical trials, of
Vasomax. In addition, these Companies have been responsible for managing the
conduct of and analyzing data from such clinical trials on behalf of the
Company. Either party may terminate these arrangements at any time. If these
companies were unable or unwilling to devote adequate resources to the
Company's projects and to provide services on a timely basis, and on acceptable
terms, the Company would be required to establish relationships with other
contract research organizations, or to develop internally the capacity to
conduct clinical trials. This could result in significant additional expense
and delays in the Company's clinical trials, and could have a material adverse
effect on the Company. See "Risk Factors--Reliance on Contract Research
Organizations."

Gamogen, Inc.

In April 1994, the Company entered into an assignment agreement (the "Gamogen
Agreement") with Gamogen, Inc. ("Gamogen") and Dr. Adrian Zorgniotti pursuant
to which the Company acquired the rights to a technology for the treatment of
male erectile dysfunction, including rights to a now issued U.S. patent and its
foreign equivalents. In consideration for the assignment of the subject
technology, the Company made a cash payment of $100,000 to Gamogen upon the
execution of the Gamogen Agreement. As consideration for Gamogen's agreement
not to compete, the Company issued 19,512 shares of Common Stock to Gamogen in
April 1996. Gamogen is entitled to payment of a royalty on the aggregate net
sales of any product developed from the subject technology. The Company has a
right of first negotiation to purchase or exclusively license improvements to
any competing product developed by Gamogen.

In January 1997, the Company signed an amendment to the Gamogen Agreement.
The amendment provides the Company with an option to buy out Gamogen's rights
to receive royalties with respect to sales of products developed from the
subject technology. The Company made an initial payment of $75,000 upon
execution of the amendment and is required to make additional payments of
$150,000 per year to maintain the option until the option is exercised or
expires in accordance with its terms in January 1999. The exercise price of the
option, inclusive of payments made to obtain and maintain the option, ranges
from $750,000 to $1,750,000, depending on when the option is exercised. Upon
completion of this offering, the Company intends to use $675,000 of the
proceeds of this offering to exercise the option. See "Use of Proceeds."

PATENTS AND PROPRIETARY INFORMATION

The Company's ability to compete effectively with other companies is
materially dependent on the proprietary nature of the Company's patents and
technologies. The Company actively seeks patent protection for its proprietary
technology, in the United States and abroad. As of May 30, 1997, the Company
had rights to a total of two issued patents and 11 patent applications (with
respect to one of which the Company has received a notice of allowance) in the
United States and five issued patents and 40 patent applications outside the
United States.

The Company has one issued U.S. patent and one pending patent application in
the United States, two issued South African patents and 20 patent applications
outside the United States relating to its male erectile dysfunction technology.
The Company has rights to one issued patent in the United States and India, and
two issued patents in Australia, with respect to products and methods using
specific recombinant zona pellucida peptides. In addition, the Company has
received notification of allowance from the U.S. Patent and Trademark Office
with respect to broader claims covering two classes of zona pellucida proteins.
The Company has a total of eight U.S. and ten foreign patent applications
pending which relate to zona pellucida proteins, their preparation, and their
use. The Company also has two pending U.S. patent applications, a European
regional patent application, patent applications in Australia, Canada and Japan
and a Patent Cooperation Treaty application for ImmuMax.

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The Company's ability to commercialize any products will depend, in part,
upon its or its licensors' ability to obtain patents, enforce those patents,
preserve trade secrets, and its own ability to operate without infringing upon
the proprietary rights of third parties. The patent positions of biotechnology
and pharmaceutical companies are highly uncertain and involve complex legal
and factual questions. The Company's issued U.S. patent relating to Vasomax is
a method-of-use patent that covers only the use of certain compounds to treat
specified conditions, rather than a composition-of-matter patent which would
cover the chemical composition of the active ingredient. In addition, the
Company has a pending U.S. patent application relating to Vasomax that covers
both methods of use and formulations of the active ingredient in Vasomax.
There can be no assurance that this patent application or any other patent
applications owned by or licensed to the Company will result in issued
patents, that patent protection will be secured for any particular technology,
that any patents that have been or may be issued to the Company or its
licensors will be valid or enforceable, that any patents will provide
meaningful protection to the Company, that others will not be able to design
around the patents, or that the Company's patents will provide a competitive
advantage or have commercial application. The failure to obtain adequate
patent protection would have a material adverse effect on the Company and may
adversely affect the Company's ability to enter into, or the terms of, any
arrangement for the marketing of any product.

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

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

Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination, subject matter and

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enforceability. It is not certain whether any of these bills will be enacted
into law or what form new laws may take. Accordingly, the effect of
legislative change on the Company's intellectual property is uncertain. See
"Risk Factors--Uncertainty of Protection for Patents and Proprietary
Technology."

SALES AND MARKETING

The Company plans to enter into an agreement for the marketing and sale of
Vasomax with one or more pharmaceutical companies having established marketing
and sales capabilities, and may seek similar such arrangements regarding other
proprietary product candidates. If the Company fails to reach such an
agreement to market Vasomax or fails to reach or elects not to enter into a
similar arrangement with respect to any of its other proprietary product
candidates, the Company will need to develop a sales and marketing force with
supporting distribution capability substantially in excess of the capability
currently possessed by FTI to be able to market such products directly. The
Company has limited experience in the sales, marketing and distribution of
pharmaceutical products. Significant additional expenditures would be required
for the Company to develop a sales and marketing force and supporting
distribution capability. To the extent the Company enters into marketing or
distribution arrangements with others, any revenues the Company receives will
depend upon the efforts of third parties. There can be no assurance that any
third party will devote significant resources to the Company's products or
market the Company's products successfully or that any third-party
collaboration will be on terms favorable to the Company. If any marketing
partner does not market a product successfully, the Company would be
materially adversely affected. There can be no assurance that the Company will
be able to establish sales, marketing and distribution capabilities or that it
or its collaborators will be successful in gaining market acceptance for any
products that the Company may develop. The Company's failure to establish
marketing capabilities or to enter into marketing arrangements with third
parties would have a material adverse effect on the Company. See "Risk
Factors--Limited Sales and Marketing Experience; Dependence on Future
Collaborators."

MANUFACTURING

The Company does not have any manufacturing facilities and does not expect
to establish any significant manufacturing capacity in the near future. On
November 16, 1995, the Company entered into a development and manufacturing
services agreement with a contract manufacturing organization for the
manufacture and validation of bulk phentolamine for use in clinical trials and
for the purpose of supporting an IND application to permit clinical testing of
Vasomax. The contract manufacturing organization has filed a Drug Master File
("DMF") with the FDA in connection with its manufacture of phentolamine,
allowing the Company to reference that information in its own regulatory
submissions. The agreement also provides for a possible future long term
supply agreement regarding bulk phentolamine. The Company also contracts out
the tableting and packaging of Vasomax.

The Company presently produces all of the zona pellucida proteins necessary
for use in its research and development activities. The Schering Agreement
requires that the Company will have a facility with the capacity to
manufacture an immunocontraceptive product for worldwide sale by the time an
IND for such a product becomes effective.

The Company intends to rely upon third parties for the manufacture and
supply of commercial quantities of Vasomax and for the manufacture and supply
of other products that it may develop. There can be no assurance that the
Company will be able to obtain supplies of its products from third-party
suppliers on terms or in quantities acceptable to the Company. Also, the
Company's dependence on third parties for the manufacture of its products may
adversely affect the Company's product margins and its ability to develop and
deliver products on a timely basis. Any such third-party suppliers or any
manufacturing facility the Company establishes will be required to meet FDA
manufacturing requirements. FDA certification, for compliance with current
Good Manufacturing Practices requirements, of manufacturing facilities for a
drug are a prerequisite to approval of an NDA for that drug. The Company may
encounter significant delays in obtaining supplies from third-party
manufacturers or experience interruptions in its supplies. The effects of any
such delays or interruptions will be

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more severe if the Company relies upon a single source of supply, as is
presently the case with Vasomax. If the Company is unable to obtain adequate
supplies, its business would be materially adversely affected. See "Risk
Factors--Manufacturing Uncertainties; Reliance on Third Parties."

COMPETITION

The Company is engaged in pharmaceutical product development, an industry
which is characterized by extensive research efforts and rapid technological
progress. Many established biotechnology and pharmaceutical companies,
universities and other research institutions with resources significantly
greater than the Company's are marketing or may develop products that directly
compete with the Company's products. Those entities may succeed in developing
products that are safer, more effective or less costly than the Company's
products. Even if the Company's products should prove to be more effective
than those developed by other companies, other companies may be more
successful than the Company because of greater financial resources, greater
experience in conducting preclinical studies and clinical trials and obtaining
regulatory approval, stronger sales and marketing efforts, earlier receipt of
approval for competing products and other factors. If the Company commences
significant commercial sales of its products, the Company or its collaborators
will compete in areas in which the Company has little or no experience such as
manufacturing and marketing. There can be no assurance that the Company's
products, if commercialized, will be accepted and prescribed by healthcare
professionals.

Vasomax faces competition from currently available therapies for male
erectile dysfunction as well as potential competition from new therapies,
including new oral, injection and topical therapies, being developed by other
companies. Some of the Company's competitors, including Pfizer, Inc.
("Pfizer") and TAP Pharmaceuticals, Inc. ("TAP"), are active in the
development of oral therapies to treat male erectile dysfunction. Pfizer's
Viagra oral medication for the treatment of erectile dysfunction is currently
in Phase 3 clinical trials. TAP is developing an oral treatment, currently in
Phase 2/3 clinical trials, for erectile dysfunction caused by psychogenic
factors. The Company's other competitors include Vivus, Inc., which commenced
marketing of a urethral catheter device in the United States in January 1997,
Pharmacia & Upjohn Inc., which markets a penile injection therapy, and Schwarz
Pharma AG, which recently received marketing approval for a penile injection
therapy. The Company believes that Vasomax will compete with such competitive
products on the basis of one or more factors including convenience of
administration, speed of efficacy, duplication of normal sexual function or
reduced side effects, price and the availability of third-party reimbursement.
Marketing of these competitive products and other products that treat disease
indications targeted by the Company could adversely affect the market
acceptance of the Company's products as a result of the established market
recognition and physician familiarity with the competing product. The presence
of directly competitive products could also result in more intense price
competition than might otherwise exist, which could have a material adverse
effect on the Company. The Company believes that competition will be intense
for all of its products. See "Risk Factors--Competition and Technological
Change."

GOVERNMENT REGULATION

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

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The standard process required by the FDA before a pharmaceutical agent may
be marketed in the United States includes: (i) preclinical tests; (ii)
submission to the FDA of an IND which must become effective before human
clinical trials may commence; (iii) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the drug for its
intended application; (iv) submission of an NDA to the FDA; and (v) FDA
approval of the NDA prior to any commercial sale or shipment of the drug.

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

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

Clinical trials are typically conducted in three sequential phases which may
overlap. In Phase 1, the initial introduction of the drug to humans, the drug
is tested for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and pharmacodynamics (clinical pharmacology). Phase 2
involves studies of a limited patient population to gather evidence about the
efficacy of the drug for specific targeted indications, dosage tolerance and
optimal dosage, and to identify possible adverse effects and safety risks.
When a product has shown evidence of efficacy and has an acceptable safety
profile in a Phase 2 evaluation, Phase 3 clinical trials are undertaken to
evaluate clinical efficacy and to test for safety in an expanded patient
population at geographically dispersed clinical trial sites. There can be no
assurance that any of the Company's clinical trials will be completed
successfully or within any specified time period. The Company or the FDA may
suspend clinical trials at any time if, for example, safety issues arise or
regulatory requirements are not satisfied.

The Company has designed the protocols for its pivotal Phase 3 clinical
trials of Vasomax based on its analysis of its research, including various
parts of its German Phase 2 clinical trial and its Mexican product
registration trial. Although copies of its pivotal Phase 3 clinical trial
protocol were submitted to the FDA, there can be no assurance that the FDA,
after the results of the Phase 3 clinical trials have been announced, will not
find deficiencies in the design of the Phase 3 clinical trial protocol. In
addition, the FDA inspects and reviews clinical trial sites, informed consent
forms, data from the clinical trial sites, including case report forms and
record keeping procedures, and the performance of the protocols by clinical
trial personnel to determine compliance with Good Clinical Practice. The FDA
also looks to determine that there was no bias in the conduct of clinical
trials. The conduct of clinical trials in general and the performance of the
pivotal clinical trial protocols are complex and difficult. There can be no
assurance that the design or the performance of the Phase 3 clinical trial
protocols for Vasomax will be successful.

The results of preclinical studies and clinical trials, if successful, are
submitted in an NDA to seek FDA approval to market and commercialize the drug
product for a specified use. FDA approval of the NDA is required before
marketing may begin in the United States. The NDA must include the results of
extensive clinical and other testing and the compilation of data relating to
the product's chemistry, pharmacology and manufacture the cost of all of which
is substantial. The Company is currently conducting a standard animal
carcinogenicity study which it expects to complete in late 1997, prior to
submitting an NDA for Vasomax. The FDA reviews all NDAs submitted before it
accepts them for filing and may request additional information rather than
accepting an NDA

35
<PAGE>

for filing. In such an event, the NDA must be resubmitted with the additional
information and, again, is subject to review before filing. Once the submission
is accepted for filing, the FDA begins an in-depth review of the NDA. Under the
FDC Act, the FDA has 180 days in which to review the NDA and respond to the
applicant. The review process is often significantly extended by FDA requests
for additional information or clarification regarding information already
provided in the submission. The FDA may refer the application to the
appropriate advisory committee, typically a panel of clinicians, for review,
evaluation and a recommendation as to whether the application should be
approved. The FDA is not bound by the recommendation of an advisory committee.
If FDA evaluations of the NDA and the manufacturing facilities are favorable,
the FDA may issue either an approval letter or an approvable letter, which
usually contains a number of conditions that must be met in order to secure
final approval of the NDA. When and if those conditions have been met to the
FDA's satisfaction, the FDA will issue an approval letter, authorizing
commercial marketing of the drug for certain indications. As a condition of NDA
approval, the FDA may require postmarketing testing and surveillance to monitor
the drug's safety or efficacy. If the FDA's evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to approve the
NDA or issue a not approvable letter, outlining the deficiencies in the
submission and often requiring additional testing or information.
Notwithstanding the submission of any requested additional data or information
in response to an approvable or not approvable letter, the FDA ultimately may
decide that the application does not satisfy the regulatory criteria for
approval. Once granted, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or problems occur following initial
marketing.

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

Before the Company's products can be marketed outside of the United States,
they are subject to regulatory approval similar to FDA requirements in the
United States, although the requirements governing the conduct of clinical
trials, product licensing, pricing, and reimbursement vary widely from country
to country. No action can be taken to market any drug product in a country
until an appropriate application has been approved by the regulatory
authorities in that country. FDA approval does not assure approval by other
regulatory authorities. The current approval process varies from country to
country, and the time spent in gaining approval varies from that required for
FDA approval. In some countries, the sale price of a drug product must also be
approved. The pricing review period often begins after market approval is
granted. Even if a foreign regulatory authority approves any of the Company's
products, no assurance can be given that it will approve satisfactory prices
for the products.

The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses, and various radioactive compounds.
Although the Company believes that its procedures for handling and disposing of
those materials comply with state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated.
If such an accident occurs, the Company could be held liable for resulting
damages, which could be material to the Company's financial condition and
business. The Company

36
<PAGE>

is also subject to numerous environmental, health and workplace safety laws
and regulations, including those governing laboratory procedures, exposure to
blood-borne pathogens, and the handling of biohazardous materials. In
addition, the Company's diagnostic laboratory operations are required to be
certified or licensed under the federal Clinical Laboratory Improvement Act of
1967, as amended in 1988 ("CLIA"), the Medicare and Medicaid programs and
various state and local laws. Additional federal, state and local laws and
regulations affecting the Company may be adopted in the future. Any violation
of, and the cost of compliance with, these laws and regulations could
materially and adversely affect the Company. See "Risk Factors--Government
Regulation; No Assurance of Regulatory Approval."

EMPLOYEES

At May 31, 1997, the Company had 35 full-time employees and utilized a
variety of consultants. Of the Company's full-time employees, 19 were engaged
in research, development, clinical research and regulatory affairs, nine were
engaged in sales and sales support and seven were engaged in finance and
administration. The Company relies on its employees to perform most research
and development activities, but also uses outside consultants as needed. The
Company believes its relationship with its employees is good.

LEGAL PROCEEDINGS

On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris County, Texas, naming Baylor College of Medicine
("BCM"), BCM Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands
Venture Capital Company and the Company as defendants (collectively, the
"Defendants"). Dunbar is a cellular and molecular biologist who has been
employed by BCM as a teacher and research scientist since 1981. During the
course of her employment at BCM, Dunbar developed technologies relating to the
use of certain recombinant zona pellucida peptides, the intellectual property
rights to which were assigned to the Company in 1987. Dunbar claimed, among
other things, that her assignment of the patent rights was induced by
statutory and constructive fraud and a civil conspiracy on the part of the
Defendants.

The Court granted partial summary judgement in favor of the Company and the
other defendants in connection with the action. As a result of the rulings,
Dunbar is unable to rescind the assignment of the patent rights and is left
only with ancillary claims. Such ancillary claims are subject to a motion to
sever and abate pending Dunbar's appeal of the Court's orders granting the
Company's motion for summary judgement. The Company believes the ancillary
claims are without merit.

The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.

FACILITIES

The Company leases approximately 21,600 square feet of laboratory and office
space in The Woodlands, Texas under a lease which expires in May 2000. The
Company also leases approximately 2,000 square feet in Natick, Massachusetts
utilized by FTI under a lease which expires in May 2000. The Company believes
that its facilities will be adequate for its operations in the near future.

37
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Martin P. Sutter........ 42 Chairman of the Board
Joseph S. Podolski...... 50 President, Chief Executive Officer and Director
Louis Ploth, Jr......... 43 Vice President of Business Development, Chief Financial
Officer and Secretary
Tommy L. Lee............ 47 Vice President of Corporate Development
Steven Blasnik.......... 40 Director
James L. Currie......... 60 Director
Timothy McInerney,
R.Ph................... 36 Director
David B. McWilliams..... 54 Director
David W. Ortlieb........ 66 Director
Allan D. Rudzik, Ph.D... 62 Director
</TABLE>

Martin P. Sutter. Mr. Sutter, a co-founder of the Company, has served as
Chairman of the Board of Directors since December 1987. Since July 1988, Mr.
Sutter has been the Managing General Partner of The Woodlands Venture
Partners, L.P., a venture capital firm, and the General Partner of The
Woodlands Venture Fund, L.P., one of the Company's principal stockholders. In
addition, Mr. Sutter has been a General Partner of Essex Woodlands Health
Ventures, L.P., a venture capital firm, since September 1994. Mr. Sutter is
the Chairman of the Board of Directors of Aronex Pharmaceuticals, Inc. and a
director of Targeted Genetics Corporation.

Joseph S. Podolski. Mr. Podolski joined the Company in 1989 as Vice
President of Operations and has served as President and Chief Executive
Officer of the Company and as a director since July 1992. Prior to joining the
Company, Mr. Podolski spent twelve years with Monsanto Company in various
engineering, product development and manufacturing positions, including
Director of Manufacturing for a significant product line. Before joining
Monsanto, Mr. Podolski spent eight years at Abbott Laboratories, Dearborn
Chemical Company and Baxter Pharmaceuticals in manufacturing, engineering,
quality control and development of fine chemicals, antibiotics,
pharmaceuticals and hospital products.

Louis Ploth, Jr. Mr. Ploth has served as the Company's Vice President of
Business Development, Chief Financial Officer and Secretary since October
1993. From February 1991 to April 1993, Mr. Ploth served as the Chief
Financial Officer of Unisyn Technologies, Inc., a biotechnology company, and
served as its Vice President of Finance and Administration from July 1992 to
April 1993.

Tommy L. Lee. Mr. Lee joined the Company in February 1996 as Vice President
of Corporate Development. Mr. Lee also serves as the general manager of
Fertility Technologies, Inc., a wholly owned subsidiary of the Company. From
1994 to January 1996, Mr. Lee served as Vice President of Marketing of
Positron Corporation, a medical instrumentation company. Mr. Lee served as
Vice President of Marketing of Optex Biomedical, Inc., a medical device
company, from 1989 to 1994.

Steven Blasnik. Mr. Blasnik has served as a director of the Company since
April 1990. Since 1987, Mr. Blasnik has been employed by the Perot Group, most
recently as President of Perot Investments, Inc., an investment firm owned by
Ross Perot.

James L. Currie. Mr. Currie has served as a director of the Company since
December 1996. Mr. Currie has been Managing General Partner of Essex Venture
Partners, L.P., a venture capital firm, since 1985, and a General Partner of
Essex Woodlands Health Ventures, L.P. since September 1994. Mr. Currie is a
director of Serologicals, Inc. and Ethical Holdings, Ltd.

38
<PAGE>

Timothy McInerney, R.Ph. Mr. McInerney has served as a director of the
Company since December 1996. Since 1992, Mr. McInerney has been a Managing
Director of Paramount Capital, Inc., an investment banking firm.

David B. McWilliams. Mr. McWilliams has served as a director of the Company
since June 1989, and served as President of the Company from that time until
July 1992. Since July 1992, Mr. McWilliams has been the President and a
director of Texas Biotechnology Corporation, a biotechnology company.

David W. Ortlieb. Mr. Ortlieb has served as a director of the Company since
August 1990. Since February 1994, Mr. Ortlieb has been an independent
management consultant. He served as President, Chief Executive Officer and
director of Immunomedics, Inc., a biotechnology company, from July 1992 to
February 1994. He served as President and Chief Executive Officer of Texas
Biotechnology Corporation from April 1990 until July 1992 and as a director
from April 1990 to April 1993.

Allan D. Rudzik, Ph.D. Dr. Rudzik has served as a director of the Company
since 1994. From 1993 until his retirement in 1996, Dr. Rudzik held the
positions of Corporate Vice President, President and Chief Scientific Officer
of Berlex Laboratories, Inc., a pharmaceutical company ("Berlex
Laboratories"), in Richmond, California. From 1991 to 1993, Dr. Rudzik held
the same positions at Berlex Laboratories in Cedar Knolls, New Jersey.

SCIENTIFIC ADVISORS AND CONSULTANTS

The Company benefits from consultation with prominent scientists active in
fields related to the Company's technology. For this purpose, the Company has
consulting relationships with several scientific advisors. At the Company's
request, these advisors review the feasibility of product development programs
under consideration, advise concerning advances in areas related to the
Company's technology and aid in recruiting personnel. Certain of the
consultants receive cash or stock-based compensation for their services. All
of the advisors are employed by academic institutions or other entities and
may have commitments to or advisory agreements with other entities that may
limit their availability to the Company. The Company's consultants are
required to disclose and assign to the Company any ideas, discoveries and
inventions they develop in the course of providing consulting services. The
Company also uses consultants for various administrative needs. None of the
Company's consultants are otherwise affiliated with the Company. The Company's
scientific advisors and consultants include the following persons:

Deborah J. Anderson, Ph.D. Dr. Anderson is an Associate Professor of
Obstetrics, Gynecology and Reproductive Biology at Brigham and Women's
Hospital and Harvard Medical School. Dr. Anderson is also the Director of the
Fearing Research Laboratory.

M. Fathy El Etreby, D.V.M. Dr. Etreby was Director of Research and
Development at the Pharmaceutical Division of Schering in Berlin, Germany and
at Berlex Laboratories in Wayne, New Jersey for 25 years. Currently, Dr.
Etreby is Director of Clinical and Basic Research in the Section of Urology of
the Department of Surgery at the Medical College of Georgia.

David Ferguson, M.D., Ph.D. Dr. Ferguson has been involved in pharmaceutical
research and development since 1968. In 1993, he helped found Affiliated
Research Centers, Inc. ("ARC") one of the first site management organizations,
and served as Senior Vice President for ARC until February 1997. The Company
engaged ARC to assist in the design and implementation of its U.S. clinical
trials.

Irwin Goldstein, M.D. Dr. Goldstein has been co-director of the Urology
Research Laboratory at Boston University School of Medicine since 1980.

Joseph A. Hill, M.D. Dr. Hill is the Director of the Reproductive Medicine
Division and of the Reproductive Endocrinology Fellowship Program and Clinical
Director of the Reproductive Immunology

39
<PAGE>

Division at Brigham and Women's Hospital and Harvard Medical School. Dr. Hill
is an Associate Professor in the Department of Obstetrics, Gynecology and
Reproductive Biology at Brigham and Women's Hospital and Harvard Medical
School.

Vernon Knight, M.D. Dr. Knight was with the Baylor College of Medicine for
over 20 years as Professor and Chairman of the Department of Microbiology and
Immunology, Professor in the Infectious Disease Section of the Department of
Medicine and Director of Baylor's Center for Biotechnology. Dr. Knight is
currently Acting Chairman of the Department of Molecular Physiology and
Biophysics at Baylor College of Medicine.

Alfred Poindexter, M.D. Dr. Poindexter is Professor of Obstetrics and
Gynecology and Director of the Division of Contraceptive Development and
Research at Baylor College of Medicine. He is on the staff at St. Luke's
Episcopal Hospital and The Methodist Hospital in Houston, Texas. Dr.
Poindexter has conducted a clinical practice in reproductive endocrinology and
research in contraceptive technology for the past twenty years.

David W. Russell, Ph.D. Dr. Russell is the McDermott Distinguished Professor
in the Department of Molecular Genetics at the University of Texas
Southwestern Medical Center. His main research interests are cholesterol and
steroid hormone metabolism, reproductive biology, molecular genetics and gene
regulation.

Anthony Sacco, Ph.D. Dr. Sacco is a Professor in the Department of
Obstetrics at Wayne State University School of Medicine and Director of the
Hutzel Hospital, Wayne State University In Vitro Fertilization Laboratory. Dr.
Sacco is an authority on the application of zona pellucida proteins as
infertility agents.

Robert S. Schenken, M.D. Dr. Schenken is Professor of Obstetrics and
Gynecology and Director of the Division of Reproductive Endocrinology and
Infertility at The University of Texas Health Science Center in San Antonio.
He has been a consultant for the Society of Reproductive Surgeons'
Collaborative Endometriosis Treatment Trial, and program chairman of the
Annual Meeting of the Society for Gynecologic Investigation and the American
Society for Reproductive Medicine. Dr. Schenken has received numerous national
awards for his research and has also served as principal investigator on
research projects funded by the National Institutes of Health, World Health
Organization and numerous pharmaceutical companies.

Edward C. Yurewicz, Ph.D. Dr. Yurewicz is an Associate Professor in the
Department of Obstetrics and Gynecology and Associate Member of the Graduate
Faculty in the Department of Biochemistry and Molecular Biology at Wayne State
University School of Medicine. Dr. Yurewicz is a leading authority on zona
pellucida protein chemistry.

BOARD COMMITTEES

Pursuant to delegated authority, various Board functions are discharged by
the standing committees of the Board. The Board of Directors has appointed
four committees: the Executive Committee, the Option Committee, the
Compensation Committee and the Audit Committee. The Executive Committee,
currently comprised of Messrs. Sutter and Podolski, is authorized to exercise,
to the extent permitted by law, the power of the full Board of Directors when
a meeting of the full Board is not practicable or necessary. The Option
Committee, currently comprised of Messrs. Blasnik, Currie and McInerney,
administers the Company's employee stock option plans. The Compensation
Committee, currently comprised of Messrs. Blasnik, Currie and McInerney, has
responsibility for determining compensation to be paid to the Company's
employees. The Audit Committee, currently comprised of Messrs. McWilliams,
Ortlieb and Rudzik, provides assistance to the Board of Directors in
fulfilling its responsibilities relating to corporate accounting and reporting
practices, recommends to the Board of Directors the engagement by the Company
of its independent public accountants, approves services performed by the
Company's independent public accountants, including fee arrangements and the
range of audit and non-audit services, maintains a direct line of
communication between the Board of Directors and the Company's independent
public accountants and performs such other functions as may be prescribed with
respect to audit committees under applicable rules, regulations and policies
of The Nasdaq Stock Market, Inc.

40
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table presents certain information regarding the beneficial
ownership of the Company's Common Stock and Series B Preferred Stock as of
March 31, 1997 by (i) each person who is known by the Company to own
beneficially more than five percent of the outstanding shares of Common Stock
or Series B Preferred Stock, (ii) each director of the Company, (iii) the
Company's chief executive officer and each of the other Named Executive
Officers and (iv) all directors and executive officers as a group. Except as
described below, each of the persons listed in the table has sole voting and
investment power with respect to the shares listed.
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND COMMON STOCK AMOUNT AND
NATURE OF BENEFICIALLY NATURE OF
BENEFICIAL OWNED BENEFICIAL
OWNERSHIP ----------------- OWNERSHIP PERCENTAGE
OF COMMON PRIOR TO AFTER OF SERIES B OF
NAME OF BENEFICIAL OWNER STOCK(1) OFFERING OFFERING PREFERRED STOCK(1) CLASS(2)
- ------------------------ ---------- -------- -------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Petrus Fund, L.P.
12377 Merit Drive,
Suite 1700
Dallas, Texas 75251.... 755,793 10.2% 8.1% -- --
The Woodlands Venture
Fund, L.P.
2170 Buckthorne Place,
Suite 170
The Woodlands, Texas
77380.................. 670,080 9.1% 7.1% -- --
J. Tyler Dean
323 Andover Street
Wilmington,
Massachusetts 01887.... 375,000 5.1% 4.0% -- --
Essex Woodlands Health
Ventures, L.P.
190 S. LaSalle Street,
Suite 2800
Chicago, Illinois
60603.................. 301,886(3) 3.9% 3.1% 200,000 22.0%
SBSF Biotechnology Fund,
L.P.
45 Rockefeller Plaza
New York, New York
10111.................. 166,037(4) 2.2% 1.7% 110,000(5) 12.1%
Martin P. Sutter........ 987,968(6) 12.8% 10.2% 200,000(7) 22.0%
Joseph S. Podolski...... 116,059(8) 1.6% 1.2% -- --
Steven Blasnik.......... 768,293(9) 10.4% 8.2% -- --
James L. Currie......... 435,679(10) 5.6% 4.5% 200,000(11) 22.0%
Tommy L. Lee............ 5,000(12) * * -- --
Timothy McInerney....... 77,247(13) 1.0% * 33,460(14) 3.5%
David B. McWilliams..... 39,974(15) * * -- --
David W. Ortlieb........ 27,342(16) * * -- --
Allan D. Rudzik......... 10,000(17) * * -- --
All directors and
executive officers as a
group (10 persons)..... 2,182,676(6)-(17) 27.4% 21.9% 233,460(7)(11)(14) 24.7%
</TABLE>
- --------
* Does not exceed one percent.
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock and Series B Preferred Stock beneficially owned by such
persons.
(2) In accordance with the rules of the Securities and Exchange Commission,
each beneficial owner's percentage ownership assumes the exercise or
conversion of all options, warrants and other convertible securities held
by such person and that are exercisable or convertible within 60 days
after March 31, 1997.
(3) Represents shares of Common Stock issuable upon conversion of Series B
Preferred Stock.
(4) Represents shares of Common Stock issuable upon conversion of Series B
Preferred Stock. Includes 15,094 shares of Common Stock issuable upon
conversion of shares of Series B Preferred Stock held by SBSF
Biotechnology Partners, L.P.

41
<PAGE>

(5) Includes 10,000 shares of Series B Preferred Stock held by SBSF
Biotechnology Partners, L.P.
(6) Includes (i) 1,002 shares of Common Stock which are held by certain of Mr.
Sutter's family members, (ii) 670,080 shares of Common Stock which may be
deemed to be beneficially owned by Mr. Sutter by virtue of his affiliation
with The Woodlands Venture Fund, L.P., (iii) 301,886 shares of Common
Stock issuable upon conversion of Series B Preferred Stock held by Essex
Woodlands Health Ventures, L.P. which may be deemed to be beneficially
owned by Mr. Sutter by virtue of his affiliation with Essex Woodlands
Health Ventures, L.P., and (iv) 12,500 shares of Common Stock issuable
upon the exercise of options. Mr. Sutter disclaims beneficial ownership of
the shares owned by his family members and, except to the extent of his
pecuniary interest therein, those shares owned by The Woodlands Venture
Fund, L.P. and Essex Woodlands Health Ventures, L.P.
(7) Represents shares of Series B Preferred Stock which may be deemed to be
beneficially owned by Mr. Sutter by virtue of his affiliation with Essex
Woodlands Health Ventures, L.P. Mr. Sutter disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest therein.
(8) Includes (i) 200 shares of Common Stock which are held by certain of Mr.
Podolski's family members and (ii) 107,559 shares of Common Stock issuable
upon the exercise of options. Mr. Podolski disclaims beneficial ownership
of the shares owned by his family members.
(9) Includes (i) 755,793 shares of Common Stock which may be deemed to be
beneficially owned by Mr. Blasnik by virtue of his affiliation with Petrus
Fund, L.P. and (ii) 12,500 shares of Common Stock issuable upon the
exercise of options. Mr. Blasnik disclaims beneficial ownership of the
shares owned by Petrus Fund, L.P.
(10) Represents (i) 133,793 shares of Common Stock which may be deemed to be
beneficially owned by Mr. Currie by virtue of his affiliation with Essex
Venture Partners L.P. and (ii) 301,886 shares of Common Stock issuable
upon conversion of Series B Preferred Stock held by Essex Woodlands
Health Ventures, L.P. which may be deemed to be beneficially owned by Mr.
Currie by virtue of his affiliation with Essex Woodlands Health Ventures,
L.P. Mr. Currie disclaims beneficial ownership of such shares, except to
the extent of his pecuniary interest therein.
(11) Represents shares of Series B Preferred Stock which may be deemed to be
beneficially owned by Mr. Currie by virtue of his affiliation with Essex
Woodlands Health Ventures, L.P. Mr. Currie disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest therein.
(12) Represents shares of Common Stock issuable upon the exercise of options.
(13) Includes (i) 26,742 shares of Common Stock issuable upon the exercise of
warrants and (ii) 50,505 shares of Common Stock issuable upon the
conversion of shares of Series B Preferred Stock that are issuable upon
the exercise of warrants.
(14) Represents shares of Series B Preferred Stock issuable upon the exercise
of warrants.
(15) Includes 12,500 shares of Common Stock issuable upon the exercise of
options.
(16) Represents shares of Common Stock issuable upon the exercise of options.
(17) Represents shares of Common Stock issuable upon the exercise of options.

42
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The Company's Certificate of Incorporation provides for authorized capital
stock of 25,000,000 shares, consisting of 20,000,000 shares of common stock,
par value $0.001 per share, and 5,000,000 shares of preferred stock, par value
$0.001 per share, issuable in one or more series (consisting of 1,925,000
shares of Series B Preferred Stock and 3,075,000 shares of undesignated
preferred stock). The following summary description of the capital stock of
the Company is qualified in its entirety by reference to the Certificate of
Incorporation, the Certificate of Designation of the Series B Preferred Stock
and the Company's Restated Bylaws, copies of which are filed as exhibits to
the Registration Statement of which this Prospectus is a part.

COMMON STOCK

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

PREFERRED STOCK

The Board of Directors has the authority to cause the Company to issue up to
the authorized number of shares of preferred stock in one or more series, to
designate the number of shares constituting any series, and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
voting rights, redemption and conversion rights and liquidation preferences of
such series, without further action by the stockholders. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of the Common Stock, and could have the effect of
delaying or preventing a change in control of the Company. The Company has no
present plan to issue any shares of preferred stock, other than shares of
Series B Preferred Stock that are issuable upon the exercise of outstanding
warrants.

Series B Convertible Preferred Stock

The Series B Preferred Stock is not subject to any sinking fund or other
obligation of the Company to redeem or retire such shares except as described
below. Any Series B Preferred Stock converted, redeemed or otherwise acquired
by the Company will, upon cancellation of such shares, have the status of
authorized but unissued preferred stock subject to issuance by the Board of
Directors as shares of preferred stock of any one or more other series but not
as shares of Series B Preferred Stock.

Holders of Series B Preferred Stock are entitled to receive dividends as,
when and if declared by the Board of Directors out of funds legally available
therefor. No dividend or distribution, as the case may be, will be declared or
paid on any junior stock unless the dividend also is paid to holders of the
Series B Preferred Stock. The Company does not intend to pay cash dividends on
the Series B Preferred Stock.

Shares of Series B Preferred Stock are convertible at the option of the
holders thereof into shares of Common Stock at a conversion price of $6.625
per share, subject to adjustment upon the occurrence of a merger,
reorganization, consolidation, reclassification, stock dividend or stock split
which results in an increase or decrease in the number of shares of Common
Stock outstanding. In addition, the conversion price of the Series B Preferred
Stock is subject to adjustment on October 15, 1997 if the average closing bid
price of the Common Stock for the twenty consecutive trading days immediately
preceding such date is less than 130% of the then

43
<PAGE>

applicable conversion price. In such event, the then applicable conversion
price will be reduced to equal the greater of (i) such average price divided
by 1.3 and (ii) 50% of the then applicable conversion price. The number of
shares of Common Stock which may be issued upon the conversion of the
outstanding Series B Preferred Stock will be adjusted on a weighted-average
basis to the extent the Company sells Common Stock at a price per share of
Common Stock less than the closing bid price per share of the Common Stock on
the date of the sale or issues rights, options, warrants or convertible
securities to all or substantially all holders of Common Stock at a price per
share which is lower than both the then effective conversion price and the
closing bid price. In such instances, the rate at which the Series B
Convertible Preferred Stock may be converted into shares of Common Stock is
multiplied by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately following the sale and the denominator of
which is the number of shares of Common Stock outstanding immediately
following the sale plus the number of shares of Common Stock that would have
been purchasable at the applicable closing bid price with the gross proceeds
of such sale.

The Company has the right at any time after October 15, 1997 to cause the
Series B Preferred Stock to be converted in whole at any time, or in part from
time to time, on a pro rata basis, into shares of Common Stock if the closing
price of the Common Stock exceeds 150% of the then applicable conversion price
for a least 20 trading days in any 30 consecutive trading day period.

Upon (i) a liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary or (ii) a 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 or the shares of Common Stock constituting in
excess of 50% of the voting power of the Corporation are exchanged for or
changed into other stock or securities and/or any other property after payment
or provision for payment of the debts and other liabilities of the Company,
the holders of the Series B Preferred Stock then outstanding will first be
entitled to receive, pro rata (on the basis of the number of shares of the
Series B Preferred Stock then outstanding), and in preference to the holder of
the Common Stock and any other series of preferred stock, an amount per share
equal to $13.00 plus all declared and unpaid dividends. Second, the holders of
shares of the Common Stock and any other shares of participating preferred
stock then outstanding will be entitled to receive such preference to which
they are entitled according to their terms. Third, the holders of shares of
the Series B Preferred Stock, the Common Stock and any other shares of
participating preferred stock then outstanding will share any remaining assets
of the Company on a pari passu, as converted, basis.

The holders of the Series B Preferred Stock have the right at all meetings
of stockholders to the number of votes equal to the number of shares of Common
Stock issuable upon conversion of the Series B Preferred Stock at the record
date for determination of the stockholders entitled to vote. So long as a
majority of the shares of Series B Preferred Stock originally issued
(including shares of Series B Preferred Stock issued upon the exercise of
certain outstanding warrants) remain outstanding, the holders of 66 2/3% of
the Series B Preferred Stock are entitled to approve (i) the issuance of any
securities of the Company senior to or on parity with the Series B Preferred
Stock, (ii) any alteration or change in the rights or preferences or
privileges of the Series B Preferred Stock or (iii) the declaration or payment
of any dividend on any junior stock or the repurchase of any securities of the
Company. Except as provided above or as required by applicable law, the
holders of the Series B Preferred Stock will be entitled to vote together with
the holders of the Common Stock and not as a separate class.

WARRANTS

Zonagen currently has outstanding warrants issued in connection with
financing transactions to purchase (i) an aggregate of 85,763 shares of Common
Stock at a weighted average exercise price of $3.85 per share and (ii) an
aggregate of 163,500 shares of Series B Preferred Stock at an exercise price
of $11.00 per share. The terms of such warrants permit the holder to exercise
such warrants by means of a "cashless" exercise based on the difference
between the fair market value of the Common Stock subject to such warrant and
the exercise price of the warrant, divided by the market price of the Common
Stock at the time of exercise.

44
<PAGE>

RIGHTS OF SCHERING

In connection with the Schering Agreement, the Company issued 239,933 shares
of its Common Stock to Schering Berlin Venture Corporation ("Schering
Berlin"), Schering's United States venture capital affiliate. Schering Berlin
has the right to require the Company to effect two registrations under the
Securities Act of all or any part of the Common Stock owned by Schering Berlin
or its affiliates and to bear the expenses of such registration. In addition,
Schering Berlin has the right to include any or all of its shares of Common
Stock in any registration of shares of Common Stock initiated by the Company.
Further, the Company is required to set aside and reserve for Schering a
portion of any shares of Common Stock or warrants, rights, options or other
securities exercisable for or convertible into Common Stock to be sold in a
public offering or otherwise as shall be necessary to allow Schering Berlin to
maintain its ownership percentage in Common Stock as it exists immediately
prior to such offering or sale. Schering Berlin is entitled to acquire such
Common Stock, warrants, rights, options or other securities on the same terms
as other purchasers.

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

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

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

Stockholder Actions and Meetings. The Company's Bylaws direct that
special meetings of the stockholders may only be called by a majority of
the members of the Board of Directors, the Chairman of the Board of
Directors, the President of the Company or the holders of not less than 10%
of the total voting power of all shares of the Company's capital stock
entitled to vote in the election of directors. The Bylaws further provide
that stockholders' nominations to the Board of Directors and other
stockholder business proposed to be transacted at stockholder meetings must
be timely received by the Company in a proper written form which meets the
prescribed content requirements. These provisions might have the effect of
a deterring or delaying change in control or the management of the Company.

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

Indemnification. To the maximum extent permitted by law, the Company's
Certificate of Incorporation and Bylaws provide for mandatory
indemnification of directors, and permit indemnification of officers,
employees and agents of the Company against all expense, liability and loss
to which they may

45
<PAGE>

become subject or which they may incur as a result of being or having been
a director, officer, employee or agent of the Company. In addition, the
Company must advance or reimburse directors, and may advance or reimburse
officers, employees and agents for expenses incurred by them in connection
with indemnifiable claims.

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

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

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

TRANSFER AGENT

The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.

46
<PAGE>

UNDERWRITING

Subject to certain terms and conditions contained in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the "Underwriters"), and each of such Underwriters, for whom Volpe
Brown Whelan & Company, LLC and Raymond James & Associates, Inc. are acting as
representatives (the "Representatives"), have agreed severally to purchase
from the Company the number of shares of Common Stock set forth opposite its
name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Volpe Brown Whelan & Company, LLC.....................................
Raymond James & Associates, Inc.......................................
---------
Total............................................................... 2,000,000
=========
</TABLE>

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

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
price to the public set forth on the cover page of this Prospectus and to
certain securities dealers (who may include the Underwriters) at such price
less a concession not to exceed $ per share, of which $ may be
reallocated to dealers. After the offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives.
No such reduction shall change the amount of proceeds to be received by the
Company as set forth on the cover page of this Prospectus.

The Company has granted the Underwriters an option for 30 days after the
date of this Prospectus to purchase, at the offering price, less the
underwriting discounts and commissions as set forth on the cover page of this
Prospectus, up to 300,000 additional shares of Common Stock at the same price
per share as the Company receives for the 2,000,000 shares of Common Stock
offered hereby, solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by each of
them, as shown in the foregoing table, bears to the 2,000,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
the over-allotments in connection with the sale of the 2,000,000 shares of
Common Stock offered hereby.

The offering of the shares of Common Stock is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.

The Company, each of the Company's directors and officers, and certain
holders of the Company's outstanding securities, have agreed not to offer,
sell, contract to sell or otherwise dispose of Common Stock or securities
convertible into or exchangeable for, or any rights to purchase or acquire,
shares of Common Stock

47
<PAGE>

for a period of 90 days following the date of effectiveness of the
registration statement of which this Prospectus is a part, without the prior
written consent of Volpe Brown Whelan & Company, LLC, except for shares
disposed of as bona fide gifts or the exercise of options currently
outstanding or granted pursuant to the Company's existing stock option plans
or the exercise of outstanding warrants. Volpe Brown Whelan & Company, LLC, in
its discretion, may waive the foregoing restrictions in whole or in part, with
or without a public announcement of such action.

In accordance with applicable rules of the NASD, no NASD member
participating in the distribution is permitted to confirm sales to accounts
over which it exercises discretionary authority without prior written consent,
and, accordingly, each Underwriter intends to abide by such rules.

In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq Stock Market in
accordance with Rule 103 of Regulation M under the Securities Exchange Act of
1934 (the "Exchange Act"). Passive market making consists of displaying bids
on the Nasdaq Stock Market limited by the bid prices of independent market
makers and making purchases limited by such prices and effected in response to
order flow. Net purchases by a passive market maker on each day are limited to
a specified percentage of the passive market maker's average daily trading
volume in the Common Stock during a specified period and must be discontinued
when such limit is reached. Passive market making may stabilize the market
price of the Common Stock at a level above that which might otherwise prevail
and, if commenced, may be discontinued at any time.

Subject to applicable limitations, the Underwriters, in connection with the
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a
short position created in connection with the offering.

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

LEGAL MATTERS

The validity of the shares to be offered hereby will be passed upon for the
Company by Andrews & Kurth L.L.P., The Woodlands, Texas. Certain matters
relating to the offering will be passed upon for the Underwriters by Cooley
Godward LLP, Palo Alto, California.

EXPERTS

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

The statements in this Prospectus under the captions "Risk Factors--
Uncertainty of Protection for Patents and Proprietary Technology" and
"Business--Patents and Proprietary Information" have been reviewed by
Marshall, O'Toole, Gerstein, Murray & Borun, patent counsel to the Company,
and have been found to provide accurate and complete statements or summaries
of the matters of law therein set forth and are included herein in reliance
upon such review and the authority of such counsel as experts in patent law.

48
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference facilities of the
Commission at its principal offices at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the following regional offices
of the Commission: Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.

The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to hereafter
are not necessarily complete. With respect to each such contract, agreement or
other document filed as an exhibit to the registration statement, reference is
made to the exhibit for a more complete description of the matters involved.
The Registration Statement and any amendments thereto, including exhibits
filed or incorporated by reference as a part thereof, are available for
inspection and copying at the Commission's offices as described above.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus:

1. The Company's Annual Report on Form 10-K (File No. 0-21198) for the year
ended December 31, 1996, as amended;

2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997; and

3. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A, filed with the Commission on
February 2, 1993, as amended by Amendment No. 1 thereto filed with the
Commission on February 12, 1993 and Amendment No. 2 thereto filed with
the Commission on March 25, 1993.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act after the date of this Prospectus and before the
termination of the offering covered hereby will be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference in this Prospectus shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained in this Prospectus or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to
constitute a part of this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or
oral request of such person, a copy of any or all of the documents
incorporated by reference in this Prospectus, (other than exhibits to such
documents which are not specifically incorporated by reference into such
documents). All such requests should be directed to Zonagen, Inc., 2408
Timberloch Place, Suite B-4, The Woodlands, Texas 77380, Attention: Louis
Ploth, Jr., telephone number (281) 367-5892.

49
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31,
1997 (unaudited)......................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996, for the Three Months Ended March 31, 1996 and 1997
(unaudited) and for the Period From Inception (August 20, 1987) Through
March 31, 1997 (unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity for the Period From
Inception (August 20, 1987) Through March 31, 1997 (unaudited)........... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996, for the Three Months Ended March 31, 1996 and 1997
(unaudited) and for the Period From Inception (August 20, 1987) Through
March 31, 1997 (unaudited)............................................... F-8
Notes to Consolidated Financial Statements................................ F-9
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Zonagen, Inc.:

We have audited the accompanying consolidated balance sheets of Zonagen,
Inc. (a Delaware corporation in the development stage), and subsidiary as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

As discussed in Note 1 to the consolidated financial statements, the Company
has operated as a development stage enterprise since its inception by devoting
substantially all of its efforts to raising capital and performing research
and development. In order to complete the research and development and other
activities necessary to commercialize its products, additional financing will
be required. Management's current projections indicate that the Company can
conserve its cash resources to maintain the Company's operations through 1997.
Management's plans in regard to these matters are also described in Note 1.

In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Zonagen, Inc., and subsidiary as of December 31, 1995 and 1996,
and the results of their operations and cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 11, 1997

F-2
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
ASSETS ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......... $ 4,189,858 $ 11,074,902 $ 7,779,878
Accounts receivable............... 327,975 420,149 432,065
Product inventory................. 230,380 174,073 163,232
Prepaids and other current assets. 69,232 141,223 81,673
------------ ------------ ------------
Total current assets............ 4,817,445 11,810,347 8,456,848
LAB EQUIPMENT, FURNITURE AND
LEASEHOLD IMPROVEMENTS, net of
accumulated depreciation and
amortization of $601,792, $706,351
and $734,375, respectively......... 233,315 311,093 301,783
EXCESS OF COST OVER FAIR VALUE OF
TANGIBLE ASSETS ACQUIRED, net of
accumulated amortization of
$240,845, $446,080 and $498,455,
respectively....................... 1,153,939 1,003,329 950,954
OTHER ASSETS, net of accumulated
amortization of $67,532, $116,048
and $129,116, respectively......... 446,856 586,991 647,112
------------ ------------ ------------
Total assets.................... $ 6,651,555 $ 13,711,760 $ 10,356,697
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................. $ 660,673 $ 1,169,999 $ 2,487,317
Accrued liabilities............... 499,631 867,459 344,712
Current portion of notes payable.. -- 80,526 14,759
------------ ------------ ------------
Total current liabilities....... 1,160,304 2,117,984 2,846,788
------------ ------------ ------------
NOTES PAYABLE....................... 66,125 16,799 12,972
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Undesignated preferred stock, $.001
par value, 4,230,000, 2,305,000 and
3,075,000 shares authorized,
respectively, none issued and
outstanding........................ -- -- --
Series A preferred stock, $.001 par
value, 770,000, 770,000 and none
shares authorized, 504,850, none
and none shares outstanding,
respectively....................... 505 -- --
Series B preferred stock, $.001 par
value, none, 1,925,000 and
1,925,000 authorized, respectively,
none, 1,514,906 and 910,701
outstanding, respectively.......... -- 1,515 911
Common stock, $.001 par value,
20,000,000 shares authorized,
4,098,124, 6,033,396 and 7,377,106
shares issued and outstanding,
respectively....................... 4,098 6,033 7,377
Additional paid-in capital.......... 22,473,074 38,124,532 38,322,501
Deferred compensation............... (112,500) (144,718) (131,031)
Deficit accumulated during the
development stage.................. (16,940,051) (26,410,385) (30,702,821)
------------ ------------ ------------
Total stockholders' equity...... 5,425,126 11,576,977 7,496,937
------------ ------------ ------------
Total liabilities and
stockholders' equity........... $ 6,651,555 $ 13,711,760 $ 10,356,697
============ ============ ============
</TABLE>

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

F-3
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 20,
THREE MONTHS ENDED 1987)
YEARS ENDED DECEMBER 31, MARCH 31, THROUGH
------------------------------------- ------------------------ MARCH 31,
1994 1995 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Product sales......... $ 800,747 $ 2,838,532 $ 3,021,940 $ 739,085 $ 821,353 $ 7,482,572
Licensing fee......... -- -- -- -- -- 250,000
Interest income....... 161,171 115,843 270,906 51,357 121,362 1,014,061
----------- ----------- ----------- ----------- ----------- ------------
Total revenues....... 961,918 2,954,375 3,292,846 790,442 942,715 8,746,633
COSTS AND EXPENSES:
Cost of products sold. 569,723 2,162,446 2,087,007 517,360 571,246 5,390,422
Research and
development.......... 2,702,464 2,794,928 7,936,188 1,163,263 4,012,089 22,780,013
Selling, general and
administrative....... 1,603,479 2,068,115 2,515,509 607,334 597,874 10,001,109
Interest expense and
amortization of
intangibles.......... 56,649 216,203 224,476 53,584 53,942 914,527
----------- ----------- ----------- ----------- ----------- ------------
Total costs and
expenses............ 4,932,315 7,241,692 12,763,180 2,341,541 5,235,151 39,086,071
----------- ----------- ----------- ----------- ----------- ------------
LOSS FROM CONTINUING
OPERATIONS............. (3,970,397) (4,287,317) (9,470,334) (1,551,099) (4,292,436) (30,339,438)
LOSS FROM DISCONTINUED
OPERATIONS............. -- -- -- -- -- (288,104)
----------- ----------- ----------- ----------- ----------- ------------
LOSS ON DISPOSAL OF
DISCONTINUED
OPERATIONS............. -- -- -- -- -- (75,279)
----------- ----------- ----------- ----------- ----------- ------------
Net loss............. $(3,970,397) $(4,287,317) $(9,470,334) $(1,551,099) $(4,292,436) $(30,702,821)
=========== =========== =========== =========== =========== ============
LOSS PER COMMON SHARE... $ (1.07) $ (1.11) $ (1.92) $ (0.35) $ (0.62)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES USED IN
COMPUTING LOSS PER
COMMON SHARE........... 3,711,559 3,857,780 4,924,623 4,432,383 6,887,156
=========== =========== =========== =========== ===========
</TABLE>

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

F-4
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
DEFICIT
PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DURING THE TOTAL
-------------- ----------------- PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE EQUITY
------- ------ --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exchange of common stock
($.004 per share) for
technology rights and
services from founding
stockholders........... -- $ -- 245,367 $ 245 $ 805 $ -- $ -- $ 1,050
Net loss............... -- -- -- -- -- -- (27,613) (27,613)
------- ------ --------- ----- --------- --------- ----------- -----------
BALANCE AT DECEMBER 31,
1987 (Unaudited)....... -- -- 245,367 245 805 -- (27,613) (26,563)
Net loss............... -- -- -- -- -- -- (327,412) (327,412)
------- ------ --------- ----- --------- --------- ----------- -----------
BALANCE AT DECEMBER 31,
1988 (Unaudited)....... -- -- 245,367 245 805 -- (355,025) (353,975)
Proceeds from issuance
of common stock....... -- -- 65,431 65 2,735 -- -- 2,800
Net loss............... -- -- -- -- -- -- (966,681) (966,681)
------- ------ --------- ----- --------- --------- ----------- -----------
BALANCE AT DECEMBER 31,
1989 (Unaudited)....... -- -- 310,798 310 3,540 -- (1,321,706) (1,317,856)
Proceeds from issuance
of common stock....... -- -- 467 1 19 -- -- 20
Net loss............... -- -- -- -- -- -- (1,426,320) (1,426,320)
------- ------ --------- ----- --------- --------- ----------- -----------
BALANCE AT DECEMBER 31,
1990 (Unaudited)....... -- -- 311,265 311 3,559 -- (2,748,026) (2,744,156)
Net loss............... -- -- -- -- -- -- (1,819,620) (1,819,620)
------- ------ --------- ----- --------- --------- ----------- -----------
BALANCE AT DECEMBER 31,
1991 (Unaudited)....... -- -- 311,265 311 3,559 -- (4,567,646) (4,563,776)
Conversion of 391,305
shares of Series C
preferred stock into
common stock.......... -- -- 91,442 92 359,908 -- -- 360,000
Purchase of retirement
of common stock....... -- -- (23,555) (24) (984) -- -- (1,008)
Proceeds from issuance
of common stock....... -- -- 16,946 17 6,983 -- -- 7,000
Net loss............... -- -- -- -- -- -- (1,582,808) (1,582,808)
------- ------ --------- ----- --------- --------- ----------- -----------
BALANCE AT DECEMBER 31,
1992 (Unaudited)....... -- -- 396,098 396 369,466 -- (6,150,454) (5,780,592)
Issuance of common
stock for cash, April
1, 1993 and May 12,
1993 ($5.50 per
share), net of
offering costs of
$1,403,400............ -- -- 1,534,996 1,535 7,037,543 -- -- 7,039,078
Issuance of common
stock for cash and
license agreement,
December 9, 1993
($10.42 per share),
net of offering costs
of $46,833............ -- -- 239,933 240 2,453,017 -- -- 2,453,257
Conversion of Series A
preferred stock to
common stock.......... -- -- 179,936 180 600,420 -- -- 600,600
Conversion of Series B
preferred stock to
common stock.......... -- -- 96,013 96 377,903 -- -- 377,999
Conversion of Series C
preferred stock to
common stock.......... -- -- 876,312 877 3,442,530 -- -- 3,443,407
Conversion of Series D
preferred stock to
common stock.......... -- -- 280,248 280 599,352 -- -- 599,632
Conversion of bridge
loan to common stock.. -- -- 64,000 64 255,936 -- -- 256,000
Net loss............... -- -- -- -- -- -- (2,531,883) (2,531,883)
------- ------ --------- ----- --------- --------- ----------- -----------
</TABLE>

F-5
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE TOTAL
---------------- ---------------- PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE EQUITY
-------- ------ --------- ------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1993 (Unaudited)....... -- $ -- 3,667,536 $3,668 $15,136,167 $ -- $ (8,682,337) $ 6,457,498
Deferred compensation
resulting from grant
of options............ -- -- -- -- 187,500 (187,500) -- --
Amortization of
deferred compensation. -- -- -- -- -- 37,500 -- 37,500
Exercise of warrants to
purchase common stock
for cash, June 30,
1994 ($3.94 per
share)................ -- -- 39,623 40 156,079 -- -- 156,119
Issuance of common
stock for purchase of
FTI, October 13, 1994. -- -- 111,111 111 1,567,184 -- -- 1,567,295
Net loss............... -- -- -- -- -- -- (3,970,397) (3,970,397)
-------- ------ --------- ------ ----------- --------- ------------ -----------
BALANCE AT DECEMBER 31,
1994................... -- -- 3,818,270 3,819 17,046,930 (150,000) (12,652,734) 4,248,015
Amortization of
deferred compensation. -- -- -- -- -- 37,500 -- 37,500
Exercise of options to
purchase common stock
for cash, January and
April 1995 ($.10 to
$6.13 per share)...... -- -- 4,546 4 13,919 -- -- 13,923
Issuance of common
stock for cash and a
financing charge,
March 9, 1995......... -- -- 16,000 16 75,984 -- -- 76,000
Issuance of Series A
preferred stock for
cash, October 4, 1995,
and October 19, 1995
($10.00 per share),
net of offering costs
of $651,495........... 598,850 599 -- -- 5,336,406 -- -- 5,337,005
Conversion of Series A
preferred stock into
common stock, November
and December 1995..... (94,000) (94) 259,308 259 (165) -- -- --
Net loss............... -- -- -- -- -- -- (4,287,317) (4,287,317)
-------- ------ --------- ------ ----------- --------- ------------ -----------
BALANCE AT DECEMBER 31,
1995................... 504,850 505 4,098,124 4,098 22,473,074 (112,500) (16,940,051) 5,425,126
Deferred compensation
resulting from grant
of options............ -- -- -- -- 86,250 (86,250) -- --
Amortization of
deferred compensation. -- -- -- -- -- 54,032 -- 54,032
Exercise of warrants to
purchase common stock
for cash, January
through December 1996
($3.63 per share)..... -- -- 227,776 228 826,595 -- -- 826,823
Conversion of Series A
preferred stock into
common stock, January
through November 1996. (507,563) (508) 1,396,826 1,397 (889) -- -- --
Issuance of options for
services, January 12,
1996.................. -- -- -- -- 98,745 -- -- 98,745
Exercise of options to
purchase common stock
for cash, February
through November 1996
($.001 to $5.50 per
share)................ -- -- 23,100 23 75,005 -- -- 75,028
</TABLE>

F-6
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE TOTAL
----------------- ---------------- PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE EQUITY
--------- ------ --------- ------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock for agreement
not to compete, April
13, 1996.............. -- $ -- 19,512 $ 19 $ 199,978 $ -- $ -- $ 199,997
Exercise of warrants to
purchase Series A
preferred stock under
cashless exercise
provision, June 5,
1996.................. 2,713 3 -- -- (3) -- -- --
Issuance of Series B
preferred stock for
cash, September 30,
1996, and October 11,
1996 ($10.00 per
share), net of
offering costs of
$2,557,440............ 1,692,500 1,693 -- -- 14,365,867 -- -- 14,367,560
Conversion of Series B
preferred stock into
common stock, November
through December 1996. (177,594) (178) 268,058 268 (90) -- -- --
Net loss............... -- -- -- -- -- -- (9,470,334) (9,470,334)
--------- ------ --------- ------ ----------- --------- ------------ -----------
BALANCE AT DECEMBER 31,
1996................... 1,514,906 1,515 6,033,396 6,033 38,124,532 (144,718) (26,410,385) 11,576,977
Amortization of
deferred compensation. -- -- -- -- -- 13,687 -- 13,687
Exercise of options to
purchase common stock
for services, February
1997 ($.00 per share). -- -- 5,000 5 (5) -- -- --
Exercise of options to
purchase common stock
for cash, January
through March 1997
($.04 to $7.25 per
share) -- -- 19,473 20 60,491 -- -- 60,511
Exercise of warrants to
purchase common stock
for cash, January
through March 1997
($3.63 per share)..... -- -- 12,228 12 44,375 -- -- 44,387
Issuance of common
stock for a cashless
exercise of Series A
preferred stock
warrants, February
1997 ($.001).......... -- -- 70,112 70 (70) -- -- --
Issuance of common
stock as final
purchase price for
acquisition of FTI,
January 31, 1997
($9.833 per share).... -- -- 305,095 305 (305) -- -- --
Issuance of common
stock as final debt
payment on FTI
acquisition, January
31, 1997 ($9.833 per
share)................ -- -- 19,843 20 93,791 -- -- 93,811
Conversion of Series B
Preferred Stock into
common stock, January
through March 1997.... (604,205) (604) 911,959 912 (308) -- -- --
Net loss............... -- -- -- -- -- -- (4,292,436) (4,292,436)
--------- ------ --------- ------ ----------- --------- ------------ -----------
BALANCE AT MARCH 31,
1997 (Unaudited)....... 910,701 $ 911 7,377,106 $7,377 $38,322,501 $(131,031) $(30,702,821) $ 7,496,937
========= ====== ========= ====== =========== ========= ============ ===========
</TABLE>

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

F-7
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM
INCEPTION
FOR THE THREE (AUGUST 20,
MONTHS ENDED 1987)
FOR THE YEAR ENDED DECEMBER 31, MARCH 31, THROUGH
------------------------------------- ------------------------ MARCH 31,
1994 1995 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(3,970,397) $(4,287,317) $(9,470,333) $(1,551,099) $(4,292,436) $(30,702,820)
Loss on disposal of
discontinued
operations............ -- -- -- -- -- 75,279
Adjustments to
reconcile net loss to
net cash used in
operating
activities--
Noncash financing
costs............... -- 75,984 -- -- -- 315,984
Depreciation and
amortization........ 224,843 317,050 358,310 81,105 93,464 1,312,410
Noncash expenses
related to stock-
based transactions.. 37,500 37,500 152,777 25,834 13,692 241,489
Common stock issued
for agreement not to
compete............. -- -- 199,997 -- -- 199,997
Series B preferred
stock issued for
consulting services. -- -- -- -- -- 17,999
Changes in operating
assets and
liabilities, net of
effects of purchase
of businesses in
1988, 1994 and 1996--
(Increase) decrease
in receivables...... (168,370) 146,120 (119,893) (150,578) 2,349 (151,613)
Increase) decrease in
product inventory... (28,422) 79,570 56,307 (14,376) 10,841 118,296
(Increase) decrease
in prepaids and
other current
assets.............. (167) (1,005) (44,273) (51,447) 45,285 (15,696)
(Decrease) increase
in accounts payable
and accrued
liabilities......... 421,983 383,444 877,154 227,428 822,258 2,614,715
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in
operating
activities......... (3,483,030) (3,248,654) (7,989,954) (1,433,133) (3,304,547) (25,973,960)
----------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures... (35,985) (43,500) (182,337) (70,005) (18,714) (929,413)
Purchase of technology
rights and other
assets................ (189,002) (133,988) (203,651) (22,078) (73,187) (744,209)
Cash acquired in
purchase of FTI....... 2,695 -- -- -- -- 2,695
Proceeds from sale of
subsidiary, less
$12,345 for operating
losses during 1990
phase-out period...... -- -- -- -- -- 137,646
Increase in net assets
held for disposal..... -- -- -- -- -- (212,925)
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities.. (222,292) (177,488) (385,988) (92,083) (91,901) (1,746,206)
----------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of common stock....... 156,119 13,939 901,851 866,403 104,893 10,678,957
Proceeds from issuance
of preferred stock.... -- 5,337,005 14,367,560 -- -- 23,688,522
Proceeds from issuance
of notes payable...... -- -- -- -- -- 2,838,681
Principal payments on
notes payable......... (59,615) (182,714) (8,425) -- (3,469) (1,706,116)
----------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 96,504 5,168,230 15,260,986 866,403 101,424 35,500,044
----------- ----------- ----------- ----------- ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (3,608,818) 1,742,088 6,885,044 (658,813) (3,295,024) 7,779,878
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 6,056,588 2,447,770 4,189,858 4,189,858 11,074,902 --
----------- ----------- ----------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 2,447,770 $ 4,189,858 $11,074,902 $ 3,531,045 $ 7,779,878 $ 7,779,878
=========== =========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION:
Cash paid during the
period for interest... $ 5,660 $ -- $ -- $ -- $ -- $ 129,243
Acquisition of FTI..... 1,567,295 -- -- -- -- 1,567,295
Assumed debt in
purchase of Zygotek
assets................ -- -- 39,625 -- -- 39,625
Reduction of debt due
to final payment, in
stock, of FTI
acquisition........... -- -- -- -- 93,812 93,812
</TABLE>

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

F-8
<PAGE>

ZONAGEN INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS:

Zonagen, Inc., a Delaware corporation, (together with its subsidiary, the
Company), was organized on August 20, 1987 (Inception) and is a
biopharmaceutical company in the development stage engaged in the research,
development and marketing of products which address conditions and diseases
associated with the human reproductive system. The products under development
include Vasomax, an oral treatment for male erectile dysfunction, and products
for the treatment of urological diseases such as benign prostatic hyperplasia
and prostate cancer. The Company is also engaged in the research and
development of a therapy for female sexual dysfunction, new approaches to
contraception, including zona pellucida-based vaccines in collaboration with
Schering AG and an adjuvant to enhance the effectiveness of vaccines. In
addition to its proprietary development activities, the Company markets and
distributes a variety of third-party fertility-related products to
obstetrics/gynecology, urology and fertility specialists through its wholly-
owned subsidiary, Fertility Technologies, Inc. ("FTI"). From Inception through
December 31, 1996, the Company has been primarily engaged in research and
development and is still in a development stage. On April 1, 1993, the Company
completed its initial public offering (the Initial Offering).

The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company will continue to require substantial funds to continue
research and development, including preclinical studies and clinical trials of
its products, and to commence sales and marketing efforts if FDA and other
regulatory approvals are obtained. The Company believes that its existing
capital resources, together with the proceeds of this offering, will be
sufficient to fund its operations through at least the next twelve months. The
Company's capital requirements will depend on many factors, including the
problems, delays, expenses and complications frequently encountered by
development stage companies; the progress of the Company's preclinical and
clinical activities; whether the Company is able to successfully conclude a
collaborative arrangement for the marketing of Vasomax; the progress of the
Company's future collaborative research, manufacturing, marketing or other
funding arrangements; the costs and timing of seeking regulatory approvals of
the Company's products; the Company's ability to obtain regulatory approvals;
the success of the Company's sales and marketing programs; the cost of filing,
prosecuting and defending and enforcing any patent claims and other
intellectual property rights; and changes in economic, regulatory or
competitive conditions or the Company's planned business. Estimates about the
adequacy of funding for the Company's activities are based on certain
assumptions, including the assumption that the development and regulatory
approval of the Company's products can be completed at projected costs and
that product approvals and introductions will be timely and successful. There
can be no assurance that changes in the Company's research and development
plans, acquisitions or other events will not result in accelerated or
unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets. The
Company's ability to raise additional funds in the public or private markets
will be adversely affected if the results of its current or future clinical
trials are not favorable. The Company is seeking a collaborative agreement
with respect to Vasomax and may seek additional funding through other
corporate collaborations and financing vehicles. There can be no assurance
that the Company will successfully enter into such agreement with respect to
Vasomax or that any other such funding will be available to the Company on
favorable terms or at all. If adequate funds are not available, the Company

F-9
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

may be required to curtail significantly one or more of its research or
development programs, or it may be required to obtain funds through
arrangements with future collaborative partners or others that may require the
Company to relinquish rights to some or all of its technologies or products. If
the Company is successful in obtaining additional financing, the terms of such
financing may have the effect of diluting or adversely affecting the holdings
or the rights of the holders of the Company's Common Stock.

On October 13, 1994, the Company purchased all of the outstanding common
stock of FTI (a Massachusetts corporation). The Company currently has sales
through this subsidiary, from the marketing and distribution of a variety of
third-party fertility-related products to obstetrics/gynecology, urology and
fertility specialists.

The following unaudited pro forma information shows the results of operations
for the year ended December 31, 1994, as if the acquisition had occurred on
January 1, 1994 after giving effect to certain adjustments, including
amortization of excess of cost over fair value of tangible assets acquired,
interest expense related to the assumption of debt and intercompany
eliminations.

<TABLE>
<CAPTION>
PRO FORMA
AMOUNTS
1994
-----------
(UNAUDITED)
<S> <C>
Total revenues................................................ $2,785,165
Net loss...................................................... 4,119,886
Pro forma net loss per share.................................. 0.97
Shares used in computing loss per common share................ 4,256,056
</TABLE>

The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchase been
made at January 1, 1994, or of the results which may occur in the future.

On June 7, 1996, FTI purchased substantially all of the assets of Zygotek,
Inc., a Massachusetts corporation (Zygotek), for cash of $15,000 and the
assumption of notes payable of $39,625. FTI also received the rights to a
proprietary product in connection with the purchase.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
FTI, its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated.

Use of Estimates

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

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company
considers all cash accounts and highly liquid investments having original
maturities of three months or less to be cash and cash equivalents.

F-10
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Product Inventory

Product inventory consists primarily of products manufactured by others for
resale to obstetrics/gynecologists, urologists and fertility clinics. Inventory
at December 31, 1996, also includes finished goods manufactured by the Company
for sale to fertility clinics. Inventory is stated at the lower of cost or
market using the first-in, first-out method.

Lab Equipment, Furniture and Leasehold Improvements

Lab equipment, furniture and leasehold improvements are recorded at cost,
less accumulated depreciation and amortization. Depreciation is computed on the
straight-line method over an estimated useful life of five years or, in the
case of leasehold improvements, amortized over the remaining term of the lease.
Depreciation and amortization for tax reporting purposes is computed using the
accelerated cost recovery system. Maintenance and repairs that do not improve
or extend the life of assets are expensed as incurred.

Excess of Cost Over Fair Value of Tangible Assets Acquired

Excess of cost over fair value of tangible assets acquired was recorded in
conjunction with the purchase of FTI and the Zygotek assets and is amortized
using the straight-line method over a seven-year period and six-year period,
respectively.

Other Assets

Other assets consist primarily of patent costs, primarily legal fees. These
costs are being amortized over 17 years, or the lesser of the legal or the
estimated economic life of the patent.

Revenue Recognition

The Company recognizes revenues from product sales upon shipment. Revenues
from licensing activities are recognized as these revenues are earned.

Research and Development Costs

The Company expenses research and development costs in the period they are
incurred.

Loss Per Common Share

Loss per common share is computed by dividing the net loss for the period by
the weighted average number of shares of common stock outstanding during each
period. In all applicable years, all common stock equivalents, including Series
A preferred stock and Series B preferred stock, were antidilutive and,
accordingly, were not included in the computation.

In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) of common stock. This statement simplifies the
standards for computing EPS, previously found in Accounting Principles Board
Opinion (APB) No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. The statement also retroactively revises the
presentation of EPS in the financial statements. The Company will adopt SFAS
No. 128 for the year ended December 31, 1997, and has not currently quantified
the effect of adoption.

F-11
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:

Lab equipment, furniture and leasehold improvements are classified as
follows:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------- MARCH 31,
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Laboratory equipment......................... $475,162 $ 592,479 $ 606,777
Furniture and fixtures....................... 138,720 137,235 139,110
Office equipment............................. 76,043 101,427 101,968
Leasehold improvements....................... 145,182 186,303 188,303
-------- ---------- ----------
835,107 1,017,444 1,036,158
Less--Accumulated depreciation and amortiza-
tion........................................ (601,792) (706,351) (734,375)
-------- ---------- ----------
Total...................................... $233,315 $ 311,093 $ 301,783
======== ========== ==========
</TABLE>

Depreciation expense of $209,259, $96,667, $104,559 and $28,024 (unaudited)
was recorded in the years ended December 31, 1994, 1995 and 1996 and for the
three months ended March 31, 1997, respectively.

4. OPERATING LEASES:

The Company leases laboratory and office space. Rental expense for the years
ended December 31, 1994, 1995 and 1996, and for the three months ended March
31, 1997, was $91,577, $179,640, $179,335
and $38,861 (unaudited) respectively. Future minimum lease payments under
noncancelable leases with original terms in excess of one year as of December
31, 1996, are as follows:

5. NOTES PAYABLE:

In connection with the acquisition of FTI, the Company assumed two note
agreements from the former sole stockholder of FTI. One note agreement
required the payment of four equal quarterly installments of $62,500,
beginning December 31, 1994, through September 30, 1995. The note payments
were satisfied in 1995. The second note agreement required the payment of a
number of shares of common stock on January 31, 1997, determined based upon
the market price of common stock at that date. Interest was imputed at a rate
of 11 percent. On January 31, 1997, the Company issued 19,842 shares of common
stock to satisfy the remaining note obligation.

In connection with the purchase of Zygotek in June 1996, FTI assumed two
note agreements totaling $39,625, one of which was to the former sole
stockholder of Zygotek. The notes bear interest at 8 percent and 11 percent
and mature on May 1, 1999, and October 1, 1998, respectively. Principal and
interest payments of approximately $1,400 are due monthly. The notes are
guaranteed by Zonagen, Inc.

F-12
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. FEDERAL INCOME TAXES:

The Company had losses since inception and, therefore, has not been subject
to federal income taxes. The Company has accumulated approximately $520,000 of
research and development tax credits which will begin to expire in 2002. As of
December 31, 1996, the Company has net operating loss (NOL) carryforwards for
income tax purposes, subject to limitations described below, expiring as
follows:

<TABLE>
<CAPTION>
YEAR EXPIRES--
--------------
<S> <C>
2002......................................................... $ 27,613
2003......................................................... 288,615
2004......................................................... 614,044
2005......................................................... 1,347,926
2006......................................................... 1,839,889
2007......................................................... 1,476,055
2008......................................................... 2,360,658
2009......................................................... 3,388,940
2010......................................................... 3,889,500
2011......................................................... 9,085,559
-----------
Total...................................................... $24,318,799
===========
</TABLE>

The Tax Reform Act of 1986 provided for a limitation on the use of NOL and
tax credit carryforwards following certain ownership changes that could limit
the Company's ability to utilize these NOLs and tax credits. Accordingly, the
Company's ability to utilize the above NOL and tax credit carryforwards to
reduce future taxable income and tax liabilities may be limited. Additionally,
because U.S. tax laws limit the time during which NOLs and tax credit
carryforwards may be applied against future taxable income and tax
liabilities, the Company may not be able to take full advantage of its NOLs
and tax credit carryforwards for federal income tax purposes.

The FASB has issued SFAS No. 109, "Accounting for Income Taxes." As the
Company has incurred losses since inception, and there is no certainty of
future revenues, a deferred tax asset has been recorded and reserved in full
in the accompanying financial statements for the Company's NOL carryforward.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets and liabilities--
Net operating loss carryforwards................... $ 5,179,000 $ 8,268,000
Book/tax difference on basis of assets and license
agreements........................................ 57,000 133,000
Research and development tax credits............... 505,000 520,000
Accruals/expenses not currently deductible......... 68,000 26,000
----------- -----------
Total deferred tax assets........................ 5,809,000 8,947,000
Less--Valuation allowance............................ (5,809,000) (8,947,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>

F-13
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. STOCKHOLDERS' EQUITY:

Series A Preferred Stock

In October 1995, the Company authorized 770,000 shares and issued 598,850
shares of Series A convertible preferred stock (Series A Preferred Stock) for
$10.00 per share. Net proceeds to the Company were approximately $5,337,000.
On November 1, 1996, the Company exercised its right to cause the mandatory
conversion of the Series A Preferred Stock, with the result that all such
shares not previously converted were converted into common stock effective
November 25, 1996. Prior to conversion, each share of Series A Preferred Stock
was convertible at the option of the holder into shares of common stock at an
initial conversion price of $3.625 per share. Holders of the Series A
Preferred Stock were entitled to liquidation preference of $13.00 per share
upon the liquidation, sale or other disposition of all or substantially all of
the assets of the Company. Series A stockholders were entitled to vote as if
their shares had been converted into common stock and were entitled to approve
(a) additional securities of the Company, (b) changes to the rights and
preferences of the Series A Preferred Stock and (c) declaration of dividends
or repurchases of securities of the Company.

Series B Preferred Stock

In September 1996, the Company authorized 1,925,000 shares of Series B
convertible preferred stock (Series B Preferred Stock). On September 30, 1996,
the Company completed an initial closing of a private placement for its Series
B Preferred Stock in which it sold 1,137,750 shares at a price of $10.00 per
share. Net proceeds to the Company from the initial closing of the private
placement were approximately $9.7 million. On October 11, 1996, the Company
completed the final closing of its private placement of Series B Preferred
Stock, in which it sold an additional 554,750 shares of Series B Preferred
Stock at a price of $10.00 per share. Net proceeds from the final closing of
the private placement were approximately $4.7 million. The aggregate offering
consisted of 1,692,500 shares of Series B Preferred Stock with net proceeds of
approximately $14.4 million.

Each share of Series B Preferred Stock is convertible at the option of the
holder into shares of common stock at an initial conversion price of $6.625
per share. In October 1997, the conversion price is subject to adjustment if
the common stock is trading, as defined, less than 130 percent of the
conversion price. Beginning in October 1997, the Company can cause the Series
B Preferred Stock to be converted into common stock if the common stock is
trading, as defined, for more than 150 percent of the conversion price.
Holders of the Series B Preferred Stock are entitled to a liquidation
preference of $13.00 per share upon the liquidation of the Company. Holders of
Series B Preferred Stock are entitled to vote as if their shares had been
converted into common stock and are entitled to approve (a) additional
securities of the Company that are senior to or on parity with the Series B
Preferred Stock, (b) changes to the rights and preferences of the Series B
Preferred Stock and (c) declaration of dividends on junior stock or
repurchases of securities of the Company.

Through December 31, 1996, 177,594 shares of Series B Preferred Stock had
been converted into 268,058 shares of common stock. From January 1, 1997,
through March 31, 1997, 604,205 shares of Series B Preferred Stock have been
submitted by their holders for conversion into 911,961 shares of common stock.

Common Stock

In March 1995, the Company issued 16,000 shares of common stock to The
Woodlands Venture Fund, L.P., for a purchase price of $.001 per share. These
shares were issued in consideration for providing additional financing pending
the completion of the offering of Series A Preferred Stock. The Company
recorded an expense of $75,984 for the difference between the market value of
these shares and the amount received.

F-14
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The acquisition of FTI required a final payment based upon the market price
per share of common stock at January 31, 1997, and whether FTI achieves
certain earnings milestones. On January 31, 1997, the Company issued 305,095
shares of common stock as final payment.

Warrants

In connection with the Initial Offering, the Company issued to the
underwriter warrants to purchase 135,000 shares of common stock at an initial
price per share equal to 120 percent of the initial public offering price per
share. These warrants contain certain antidilution provisions providing for
adjustment of the initial exercise price and the number and type of securities
issuable upon exercise of the warrants upon certain conditions. These warrants
were recorded at zero value in the accompanying financial statements because
the value was determined to be de minimis when issued. In 1995, as a result of
the sale of Series A Preferred Stock, these warrants were converted into
warrants to purchase 245,459 shares of common stock for $3.63 per share. In
November 1996, as a result of the sale of Series B Preferred Stock, the
remaining warrants were converted into warrants to purchase 37,898 shares of
common stock for $2.46 per share. During 1996, warrants for 227,776 shares
were exercised for total proceeds of $826,823. From January 1, 1997, through
March 31, 1997, warrants for 12,228 shares of common stock were exercised by
their holders (unaudited).

In connection with the October 1995 sale of Series A Preferred Stock, the
Company issued warrants to the placement agent to purchase 59,885 shares of
Series A Preferred Stock at a price of $11.00 per share. These warrants expire
in 2000. These warrants were recorded at zero value in the accompanying
financial statements because the value was determined to be de minimis when
issued. During 1996, Series A warrants were exercised and converted into 4,168
shares of common stock under a cashless exercise provision. From January 1,
1997, through March 31, 1997, Series A warrants were exercised and converted
into 70,112 shares of common stock under a cashless exercise provision
(unaudited).

In connection with the issuance of Series B Preferred Stock, the Company
issued warrants to the placement agent to purchase 169,250 shares of Series B
Preferred Stock at a price of $11.00 per share. These warrants expire in 2001.
These warrants were recorded at estimated fair value of $405,269. The fair
value of these warrants is estimated on the date of grant using the Black
Scholes option pricing model with the following weighted average assumptions:
risk-free interest rates of 5.67 percent; no expected dividend yield; expected
life of one year; and expected volatility of 65 percent.

8. STOCK OPTIONS:

The Company has two stock option plans for the granting of options to
purchase a minimum of 1,007,000 shares of common stock by its employees and
consultants. There are no significant differences between the provisions of
each plan. Options are granted with an exercise price per share as determined
by the board of directors, generally equal to the fair market value per share
of common stock on the grant date. Vesting provisions for each grant are
determined by the board of directors and have generally been 20 percent on
each anniversary of the grant date. All options expire no later than the tenth
anniversary of the grant date. At December 31, 1996, 275,866 options are
available to be granted under these plans.

The Company also has a stock option plan for its nonemployee directors that
may grant options to purchase up to 115,000 shares of common stock. The plan
provides that each director receive options to purchase 5,000 shares of common
stock upon initial election to the board of directors and receive options to
purchase 2,500 shares at each reelection. These options are fully vested when
granted and expire no later than the tenth anniversary of the grant date. At
December 31, 1996, 26,658 options were available to be granted under this
plan.

F-15
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company accounts for its stock option plans under APB No. 25 and the
related Interpretations. Accordingly, deferred compensation is recorded for
stock options based on the excess of the market value of the common stock on
the measurement date over the exercise price of the options. This deferred
compensation is amortized over the vesting period of each option.

In January 1994, the president of the Company was granted an option to
purchase 50,000 shares of common stock. This option vests at 20 percent per
year. The difference between the market value of common stock at the date of
grant and the exercise price per common share was recorded as deferred
compensation. Related compensation expense is recognized over the five-year
vesting period.

In January 1996, the Company granted a consultant stock options to purchase
10,000 shares of common stock as compensation for services rendered in 1996.
As a result of this option issuance, the Company recorded $98,745 of general
and administrative expense in 1996.

In December 1996, the board of directors approved the adoption of a new
nonemployee director stock option plan and the issuance of options to purchase
175,000 shares of common stock to members of the Company's board of directors,
subject to stockholder approval. Upon approval of this plan, these stock
options to purchase 175,000 shares of common stock will be granted to the
members of its board of directors. When granted, the Company will record
deferred compensation equal to the amount by which the fair market value
exceeds the exercise price. The deferred compensation will be amortized over
the vesting period.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which, if fully adopted, requires the Company to record stock-
based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 for employee stock-based compensation and has
elected not to record related compensation expense in accordance with this
statement. Had compensation expense for its stock option plans been determined
consistent with SFAS No. 123, the Company's net loss and net loss per share
would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Net loss--
As reported....................................... $4,287,317 $9,470,334
Pro forma......................................... 4,384,651 9,790,780
Loss per share--
As reported....................................... $ 1.11 $ 1.92
Pro forma......................................... 1.14 1.99
</TABLE>

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

F-16
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following is a summary of all stock option activity:

<TABLE>
<CAPTION>
COMMON WEIGHTED
SHARES AVERAGE
UNDER EXERCISE
OPTIONS PRICE
------- --------
<S> <C> <C>
Outstanding at December 31, 1993........................ 367,323 $3.831
Options granted....................................... 165,000 7.039
Options canceled...................................... (3,001) 4.119
-------
Outstanding at December 31, 1994........................ 529,322 4.771
Options granted....................................... 172,500 4.156
Options exercised..................................... (4,546) 3.063
Options canceled...................................... (49,421) 5.881
-------
Outstanding at December 31, 1995........................ 647,855 4.518
Options granted....................................... 206,650 7.794
Options exercised..................................... (23,100) 3.248
Options canceled...................................... (56,400) 6.105
-------
Outstanding at December 31, 1996........................ 775,005 6.405
Options granted....................................... -- --
Options exercised..................................... (24,473) 2.47
Options canceled...................................... (15,012) 4.00
------- ------
Outstanding at March 31, 1997 (unaudited)............... 735,520 5.52
------- ------
Exercisable at December 31, 1994........................ 169,742 3.332
Exercisable at December 31, 1995........................ 249,986 3.816
Exercisable at December 31, 1996........................ 349,364 4.093
Exercisable at March 31, 1997 (unaudited)............... 346,403 4.26
</TABLE>

The exercise price of options outstanding at March 31, 1997, range from
$.001 to $9.00 (unaudited). The weighted average contractual life of options
outstanding at March 31, 1997, was eight years (unaudited).

The weighted average fair value of options granted in 1995 and 1996 was
$2.14 and $5.39, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1995 and
1996, respectively, risk-free interest rates of 6.06 percent and 6.19 percent,
no expected dividend yields for both years, expected lives of 6 years and
expected volatility of 44 percent and 65 percent. There were no options
granted during the period from January 1, 1997, through March 31, 1997.

9. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS:

During 1996, the Company entered into agreements with two contract research
organizations, PPD Pharmaco and Affiliated Research Centers, Inc., for the
U.S. clinical development of Vasomax, the Company's oral treatment for male
impotency. The Company may terminate these agreements upon written
notification and payment of expenses incurred prior to termination. During
1996, the Company made cash payments aggregating $3,162,000 and recorded
payables and accrued expenses of $821,000 as of December 31, 1996. Upon
continued success of the U.S. Vasomax clinical program, it is anticipated that
the Company could spend in excess of $10,000,000 in 1997 to continue the U.S.
clinical development program. If sufficient cash resources are not available,
management intends to reduce expenditures under these agreements.

F-17
<PAGE>

ZONAGEN, INC., AND SUBSIDIARY

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In April 1994, the Company entered into an assignment agreement with
Gamogen, Inc. (the Gamogen Agreement), and Dr. Adrian Zorgniotti pursuant to
which the Company purchased the rights to a technology for the treatment of
male impotence, including rights to a now issued U.S. patent and its foreign
equivalents. In consideration for the assignment of the subject technology,
the Company provided Gamogen, Inc. (Gamogen), with a cash payment of $100,000
in 1994. As consideration for Gamogen's agreement not to compete, the Company
delivered $200,000 or 19,512 shares of the Company's common stock in April
1996. Pursuant to the Gamogen Agreement, Gamogen is to receive a predetermined
royalty, based on the aggregate net sales of any product developed from the
subject technology. In addition, the Company is required to conduct $100,000
per year of research through 1997 in the area of male impotency. The Company
has a right of first negotiation to purchase or exclusively license
improvements to any royalty-bearing product or competing product developed by
Gamogen.

On January 24, 1997, the Company signed an amendment to the Gamogen
Agreement. This amendment expires in 2000 and provides the Company with an
option to purchase back the royalty stream. The Company made an initial
payment of $75,000 upon execution of the amendment and is required to make
additional payments of $150,000 each year through 1999 or until the final
purchase is completed. The Company can cancel the amendment at any time
through nonpayment. The final purchase price, inclusive of amended payments
previously made, is dependent upon the date the option is exercised and will
range from $750,000 up to $1,750,000.

On December 13, 1993, the Company entered into a corporate collaboration
agreement with Schering AG (Schering), a German company, to develop and
commercialize the human application of immunocontraceptive zona pellucida
technology. Under the agreement, the Company will continue to conduct research
studies of its zona pellucida technology, with a focus on identifying and
selecting a lead immunocontraceptive product for humans. Schering will then
conduct the necessary preclinical and clinical development studies of this and
subsequent immunocontraceptive products and will seek the necessary regulatory
approvals. The Company retains the manufacturing rights to the products, as
well as the responsibility to develop scaled-up manufacturing processes and
production capabilities. The Company also retains certain marketing and
manufacturing rights in India and China, and the right to co-promote the
product in the United States. Schering has exclusive marketing rights in all
other countries worldwide. Upon execution of this agreement, the Company sold
239,933 shares of common stock to Schering Berlin Venture Corporation (SBVC)
for $2.5 million, or $10.42 per share. SBVC is a subsidiary of Schering AG.

10. COMMITMENTS AND CONTINGENCIES:

On May 16, 1994, Dr. Bonita Sue Dunbar (Dunbar) filed suit in the 270th
District Court of Harris County, Texas, naming Baylor College of Medicine
(BCM), BCM Technologies, Inc. (BCMT), Fulbright & Jaworski L.L.P., The
Woodlands Venture Capital Company and the Company as defendants (collectively,
the Defendants). Dunbar is a cellular and molecular biologist who has been
employed by BCM as a teacher and research scientist since 1981. During the
course of her employment at BCM, Dunbar developed technologies relating to the
use of certain recombinant zona pellucida peptides, the intellectual property
rights to which were assigned to the Company in 1987. Dunbar claimed, among
other things, that her assignment of the patent rights was induced by
statutory and constructive fraud and a civil conspiracy on the part of the
Defendants.

The Court granted partial summary judgment in favor of the Company and the
other defendants in connection with the action. As a result of the rulings,
Dunbar is unable to rescind the assignment of the patent rights and is left
only with ancillary claims. Such ancillary claims are subject to a motion to
sever and abate pending Dunbar's appeal of the Court's orders granting the
Company's motion for summary judgment. The Company believes the ancillary
claims are without merit and will not have any material adverse effect on the
Company's financial condition and results of operations.

F-18
<PAGE>

ZONAGEN REPRODUCTIVE HEALTHCARE

[CIRCLE GRAPHIC WITH ZONAGEN LOGO AT HUB AND THREE SEGMENTS OF WHEEL: MALE
HEALTH, WITH SUBSETS ERECTILE DYSFUNCTION/VASOMAX(TM), BPH AND PROSTATE
CANCER, FEMALE HEALTH, WITH SUBSETS SEXUAL DYSFUNCTION/VASOMAX(TM),
CONTRACEPTIVES, ADJUVANTS/IMMUMAX(TM), AND FERTILITY, WITH SUBSETS DIAGNOSTICS
AND PROCEDURAL SUPPLIES.]

NONE OF THE COMPANY'S PROPOSED PHARMACEUTICAL PRODUCTS HAS BEEN APPROVED FOR
COMMERCIAL MARKETING BY THE FDA. THERE CAN BE NO ASSURANCE THAT ANY SUCH
PROPOSED PRODUCT WILL RECEIVE FDA APPROVAL FOR COMMERCIAL MARKETING.
<PAGE>

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY UNDERWRITER OR BY ANY OTHER PER-
SON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
The Company............................................................... 14
Use of Proceeds........................................................... 14
Price Range of Common Stock and Dividend Policy........................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 23
Management................................................................ 38
Principal Stockholders.................................................... 41
Description of Capital Stock.............................................. 43
Underwriting.............................................................. 47
Legal Matters............................................................. 48
Experts................................................................... 48
Available Information..................................................... 49
Incorporation of Certain Documents by Reference........................... 49
Report of Independent Accountants......................................... F-1
</TABLE>

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

2,000,000 SHARES

LOGO
[LOGO OF ZONAGEN, INC. APPEARS HERE]

COMMON STOCK

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

PROSPECTUS

JUNE , 1997

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

VOLPE BROWN WHELAN & COMPANY

RAYMOND JAMES & ASSOCIATES, INC.

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

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

<TABLE>
<S> <C>
Registration fee................................................... $ 14,027
NASD filing fee.................................................... 5,129
Nasdaq listing fee................................................. 41,570
Blue Sky fees and expenses......................................... 15,000
Printing and engraving expenses.................................... 45,000
Legal fees and expenses............................................ 85,000
Accounting fees and expenses....................................... 50,000
Miscellaneous fees and expenses.................................... 19,274
--------
Total.......................................................... $275,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

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

The Company's Restated Certificate of Incorporation and Restated Bylaws
require the Company to indemnify the Company's directors to the fullest extent
permitted under Delaware law or any other applicable law in effect, but if
such statute or law is amended, the Company may change the standard of
indemnification only to the extent that such amended statute or law permits
the Company to provide broader indemnification

II-1
<PAGE>

rights to the Company's directors. Pursuant to employment agreements entered
into by the Company with its executive officers and certain other key
employees, the Company must indemnify such officers and employees in the same
manner and to the same extent that the Company is required to indemnify its
directors under its Restated Certificate of Incorporation and Restated Bylaws.
The Company's Restated Certificate of Incorporation limits the personal
liability of a director to the Company or its stockholders to damages for
breach of the director's fiduciary duty.

ITEM 16. EXHIBITS.

The following is a list of all the exhibits filed as part of the
Registration Statement.

EXHIBITS

<TABLE>
<CAPTION>
NUMBER
------
<C> <S>
*1.1 --Underwriting Agreement.
*5.1 --Opinion of Andrews & Kurth L.L.P., as to the validity of the Common Stock.
*23.1 --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
23.2 --Consent of Arthur Andersen LLP.
23.3 --Consent of Marshall, O'Toole, Gerstein, Murray & Borun.
*24.1 --Power of Attorney (included as part of the signature page of this Registration Statement).
</TABLE>
- --------

* Previously filed.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes that:

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

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

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

II-2
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF THE WOODLANDS, STATE OF TEXAS, ON JUNE 30, 1997.

ZONAGEN, INC.

/s/ Joseph S. Podolski
By___________________________________
Joseph S. Podolski
President and Chief Executive
Officer

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Martin P. Sutter* Chairman of the June 30, 1997
- ------------------------------------ Board of Directors
Martin P. Sutter

/s/ Joseph S. Podolski Director, President and June 30, 1997
- ------------------------------------ Chief Executive Officer
Joseph S. Podolski (Principal Executive
Officer)

/s/ Louis Ploth, Jr. Vice President--Business June 30, 1997
- ------------------------------------ Development Chief Financial
Louis Ploth, Jr. Officer and Secretary
(Principal Accounting
Officer and Principal
Financial Officer)

Steven Blasnik* Director June 30, 1997
- ------------------------------------
Steven Blasnik

James L. Currie* Director June 30, 1997
- ------------------------------------
James L. Currie

Timothy McInerney* Director June 30, 1997
- ------------------------------------
Timothy McInerney

David B. McWilliams* Director June 30, 1997
- ------------------------------------
David B. McWilliams

David W. Ortlieb* Director June 30, 1997
- ------------------------------------
David W. Ortlieb

Allan D. Rudzik* Director June 30, 1997
- ------------------------------------
Allan D. Rudzik
</TABLE>

*By /s/ Joseph S. Podolski
_______________________
Joseph S. Podolski

Attorney-in-fact

II-3

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------

As independent public accountants, we hereby consent to the incorporation by
reference and inclusion in this registration statement of our report dated
March 11, 1997 included in Zonagen, Inc's Form 10K/A for the year ended
December 31, 1996 and to all references to our Firm included in this
registration statement.

ARTHUR ANDERSEN LLP

Houston, Texas
June 30, 1997

<PAGE>

Exhibit 23.3

CONSENT OF MARSHALL, O'TOOLE, GERSTEIN, MURRAY & BORUN

We hereby consent to the reference to our firm contained in the
Registration Statement on Form S-3 of Zonagen, Inc. (No. 333-28945) under the
caption "Experts."

MARSHALL, O'TOOLE, GERSTEIN, MURRAY & BORUN

BY:________________________________________

June 30, 1997