ZYMETX INC, 424B1, 1997-10-30

ZYMETX INC
424B1, 1997-10-30
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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<PAGE> 1

Filed Pursuant to Rule 424(b)(1)
Registration number 333-33563

PROSPECTUS

2,300,000 SHARES

ZYMETX LOGO

COMMON STOCK

All of the shares of common stock, $.001 par value (the "Common Stock"),
offered hereby (the "Offering") are being sold by ZymeTx, Inc., a Delaware
corporation (the "Company" or "ZymeTx"). Prior to this Offering, there has been
no public market for the Company's Common Stock. The Company has been approved
for listing of the Common Stock on the Nasdaq National Market under the trading
symbol "ZMTX" subject to notice of issuance.

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

THESE SECURITIES ARE SPECULATIVE IN NATURE, INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGE 5.

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

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

<TABLE>
<CAPTION>
=============================================================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO THE PUBLIC AND COMMISSIONS(1) COMPANY(2)(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $8.00 $.64 $7.36
- -------------------------------------------------------------------------------------------------------------
Total(3).......................... $18,400,000 $1,472,000 $16,928,000
=============================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $928,000. See
"Use of Proceeds" and "Underwriting."
(3) The Company has granted the Underwriters an option, exercisable within 45
business days from the date of this Prospectus, to purchase up to 345,000
additional shares of Common Stock upon the same terms and conditions as set
forth above, solely to cover overallotments, if any. If such overallotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $21,160,000,
$1,692,800 and $19,467,200, respectively. See "Underwriting."

The shares of Common Stock being offered by this Prospectus are offered by
the Underwriters, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters subject to certain other conditions. It is expected
that delivery of the shares of Common Stock will be made against payment
therefor at the offices of Capital West Securities, Inc., 211 North Robinson,
16th Floor, Oklahoma City, Oklahoma, 73102, on or about November 3, 1997.

CAPITAL WEST SECURITIES, INC.
MILLENNIUM FINANCIAL GROUP, INC.
COMVEST PARTNERS, INC.

THE DATE OF THIS PROSPECTUS IS OCTOBER 29, 1997.
<PAGE> 2

[GRAPHIC DEPICTING VIRAZYME THERAPEUTIC TECHNOLOGY]

[CAPTION: Therapeutic applications of the ViraZyme technology involve an
inhibitor compound attaching to a target enzyme which prevents the infection
cycle.]

[GRAPHIC DEPICTING VIRAZYME DIAGNOSTIC TECHNOLOGY]

[CAPTION: Diagnostic applications of the ViraZyme technology involve a two-part
compound (a substrate) which is split by the target enzyme, causing one part of
the compound to generate a blue color visible to the naked eye.]

[4-COLOR ARTWORK]
<PAGE> 3

The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and with quarterly reports for the first three quarters of each
year containing unaudited financial information.
---------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE THEIR MARKET PRICE OR
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
---------------------

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
---------------------
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including Risk Factors and financial statements, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus: (i) reflects a 1-for-4 reverse split of Common Stock effective
July 17, 1997; (ii) assumes the automatic conversion of all outstanding shares
of the Company's Preferred Stock into shares of Common Stock upon the closing of
this Offering; and (iii) assumes that the Underwriters' overallotment option
will not be exercised. "ViraZyme," "ViraSTAT" and "ZstatFlu" are trademarks
owned by or licensed to the Company. This Memorandum includes trademarks and
trade names of companies other than the Company.

THE COMPANY

OVERVIEW

ZymeTx, Inc. (the "Company" or "ZymeTx"), is a development stage
biotechnology company engaged in the discovery and development of unique
products for the diagnosis and treatment of viruses. The scientific foundation
for the Company's plan of operations is based upon the role of enzymes in the
process of viral infection. The Company's strategy is: (i) to develop
therapeutic and diagnostic products for a broad range of viral diseases; and
(ii) to use revenues from marketing "ZstatFlu," the Company's first diagnostic
product, to sustain a comprehensive viral therapeutic research and development
program and to continue the Company's diagnostic research and development
program.

ZYMETX TECHNOLOGY

ViraZyme, the Company's core technology, exploits the subtle structural
differences and characteristics of enzymes to create viral diagnostic and
therapeutic products. The Company's diagnostic technology is a proprietary
two-part compound that will split when the compound contacts a specific target
site (an enzyme). As a result of this split, one part of the compound becomes
visible to the naked eye when collected in the Company's testing device,
permitting the user to make a diagnosis regarding the presence of the virus
targeted by the test. For proposed therapeutic products, a modified version of
the diagnostic compound is used that will bind to a specific enzyme and prevent
the enzyme's contribution to the infection process.

The Company's initial viral targets are respiratory infections including
influenza A and influenza B, respiratory syncytial virus ("RSV"), parainfluenza
and adenovirus, as well as the non-respiratory infections herpes simplex virus
("HSV") and cytomegalovirus ("CMV").

DIAGNOSTIC PROGRAM

The Company's first diagnostic product is ZstatFlu, a disposable
point-of-care ("POC") test that enables physicians to make an influenza
diagnosis in one hour with the product's simple color change detection method.
Under current viral-detection methods, virus cultures must be sent to a clinical
laboratory whose test results are often not available to the physician for
several days. Because ZstatFlu requires no significant instrumentation or staff
training and provides a rapid diagnosis in the physician's own office, the
Company plans to market it directly to physicians. The Company received FDA
clearance for marketing ZstatFlu on September 10, 1997 and has initiated its
marketing plans with managed care organizations and distributors to physicians
to coincide with the 1997-98 influenza season which is expected to begin in
November 1997. See "Business -- Government Regulation."

The Company's diagnostic research and development program for fiscal 1998
will emphasize the next generation of ZstatFlu and the development of diagnostic
products for other viruses.
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<PAGE> 5

THERAPEUTIC PROGRAM

The Company believes that the ViraZyme technology will provide the basis
for the development and delivery of compounds that directly treat a wide range
of viral infections. Laboratory work has verified the Company's concept that
blocking the targeted enzyme active site with ViraZyme inhibitors can prevent a
virus from spreading. The Company is using X-ray crystallography, rational drug
design and its proprietary screening methods to select compounds for clinical
testing. Due to the high costs associated with the research and development of
therapeutic applications of its technology, the Company plans to finance its
operations in collaboration with large corporate partners or, if relationships
with corporate partners are not secured, the Company will be required to seek
additional equity or debt capital to continue these activities. See
"Business -- Sales and Marketing" and "Business -- Therapeutic Research
Program."

MARKET OPPORTUNITY

The Company believes that both POC viral diagnosis and viral therapeutic
intervention represent attractive market opportunities. According to a
compilation of information prepared by Robert S. First, Inc., Management
Consultants, and derived from statistics published by the American Lung
Association, National Center for Health Statistics and Centers for Disease
Control, there are over 155 million significant respiratory viral infections per
year in the U.S. alone. These infections are the single most common reason why
patients visit primary care physicians. However, because very few POC products
exist, physicians often cannot make a timely diagnosis of a virus. Even with a
correct diagnosis, there is currently little that can be done to therapeutically
intervene in the rapid spread of a virus in an infected individual. Of the
approximately 20,000 FDA-approved drugs listed in the 1997 edition of the
Physician's Desk Reference, only 20 were identified by the Company as
antivirals.

The Company believes that because of the lack of rapid diagnosis as well as
the few current therapeutic alternatives, doctors routinely prescribe
antibiotics which may be effective for treating bacterial infections, but have
no effect on viral infections. This unnecessary prescription of antibiotics has
contributed to a major unintended healthcare problem: the rapid growth in
drug-resistant bacteria. According to Science(1992), by 1992 almost all common
pathogenic bacterial species had developed significant drug resistance. Thus,
patients now require stronger -- and more expensive -- antibiotics and longer
hospital stays for bacterial diseases ranging from strep throat to pneumonia.
The annual estimated cost to the U.S. healthcare system of antibiotic-resistant
organisms exceeds $30 billion according to Laurie Garrett, author of The Coming
Plague, a non-fiction analysis of newly emerging diseases world-wide. The
Company believes that products using ViraZyme technology will contribute to the
reduction of the over-prescription of antibiotics and will be marketable to
healthcare professionals and the managed care industry in part based on the
potential economic benefits of such a reduction. See "Business -- Sales and
Marketing."

RECENT DEVELOPMENTS

On August 7, 1997, the Company completed a private placement (the "1997
Private Placement") of 1,437,504 shares of Series C Convertible Preferred Stock,
$.001 par value (the "Series C Preferred"), at a price of $4.00 per share,
resulting in net proceeds to the Company of approximately $4.9 million. All
outstanding shares of Series C Preferred, as well as all outstanding shares of
Series A Convertible Preferred Stock, $.001 par value (the "Series A
Preferred"), and Series B Redeemable Convertible Preferred Stock, $.001 par
value (the "Series B Preferred"), will convert automatically upon closing of
this Offering into an aggregate of 3,056,062 shares of Common Stock. Unless
otherwise indicated, the information in this Prospectus assumes that such
conversion occurred prior to this Offering and that the shares of Common Stock
issuable upon conversion of the Series A Preferred, Series B Preferred and
Series C Preferred were outstanding prior to this Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Pro Forma Balance Sheet."
2
<PAGE> 6

EXECUTIVE OFFICES

The Company was organized in the State of Delaware in 1994. Its address is
800 Research Parkway, Suite 100, Oklahoma City, Oklahoma 73104, and its
telephone number is (405) 271-1314. The Company's website is www.zymetx.com.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered.............. 2,300,000 shares
Common Stock Outstanding:
Prior to the Offering(1)........ 3,975,630
After the Offering(1)........... 6,275,630
Use of Proceeds................. Viral therapeutic and diagnostic research; development,
production and marketing of ZstatFlu for the 1998-99
influenza season; and working capital and other general
corporate purposes. See "Use of Proceeds."
Risk Factors.................... The securities offered hereby involve a high degree of risk,
including risk of timely and successful marketing of
ZstatFlu, development of other Company therapeutic and
diagnostic products, dependence on suppliers and third party
manufacturers, government regulation, competition and the
risks of development stage companies in general. See "Risk
Factors."
Nasdaq National Market Symbol..... ZMTX
</TABLE>

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(1) Does not include (i) shares of Common Stock issuable upon exercise of the
Underwriters' Warrants to be issued in connection with the sale of shares of
Common Stock in this Offering; (ii) 565,847 shares of Common Stock issuable
upon exercise of outstanding warrants; and (iii) 618,750 shares of Common
Stock reserved for issuance under the Company's stock option plans, of which
482,000 shares are subject to outstanding options. See "Underwriting" and
"Management -- Stock Option Plans."
3
<PAGE> 7

SUMMARY -- FINANCIAL AND OPERATING DATA

The following table sets forth selected historical financial information of
the Company for each of the three years in the period ended June 30, 1997. The
following financial information should be read in conjunction with such
financial statements including the notes thereto and the Pro Forma Balance Sheet
included elsewhere herein. Also see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1995(1) 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA
Total revenues........................................... $ 9,197 $ 7,756 $ $9,799
Operating expenses
Research and development............................... 10,441 268,731 1,098,167
Cost of sales.......................................... -- -- 2,200
Acquired technology and patent costs from OMRF......... -- -- 958,505
General and administrative............................. 757 98,911 637,262
Depreciation and amortization.......................... -- 426 27,991
--------- ---------- -----------
Total operating expenses................................. 11,198 368,068 2,724,125
--------- ---------- -----------
Loss from operations..................................... (2,001) (360,312) (2,714,326)
Total other income (expense)............................. (2,969) (9,338) 38,056
--------- ---------- -----------
Net loss................................................. $ (4,970) $ (369,650) $(2,676,270)
========= ========== ===========
Net loss applicable to common stock...................... $ (4,970) $ (369,650) $(2,684,874)
========= ========== ===========
Net loss per common share and common equivalent share.... $ -- $ (.26) $ (1.88)
========= ========== ===========
Weighted average common and common equivalent shares
outstanding............................................ 1,429,334 1,429,334 1,429,829
========= ========== ===========
Supplemental net loss per common and common equivalent
share.................................................. $ (.12) $ (.88)
========== ===========
Supplemental weighted average common and common
equivalent shares...................................... 3,047,928 3,048,423
========== ===========
</TABLE>

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(1) The Company was formed February 24, 1994 but had no operations prior to
fiscal 1995.

(2) Pro forma as adjusted for the 1997 Private Placement gives effect to the
estimated proceeds of $4,925,000, net of offering costs.

(3) Pro forma as adjusted for the Offering gives effect to the 1997 Private
Placement as discussed in (2) above and the sale by the Company of the
Common Stock offered hereby for estimated proceeds, net of offering costs,
of $16,000,000.
4
<PAGE> 8

RISK FACTORS

An investment in the Company involves a high degree of risk. In addition to
the other information contained in this Prospectus, each prospective investor
should carefully consider the following risk factors in evaluating an investment
in the shares of Common Stock offered hereby before making an investment
decision.

History of Operating Losses; No Assurance of Future Profitability. To date
the Company has not generated significant revenues, and has had no historical
manufacturing or marketing activities. For fiscal 1997, the Company had a net
loss of $2.7 million, and through June 30, 1997 has a deficit accumulated during
the development stage of $3.1 million. The Company's future financial
performance and its ability to achieve meaningful near-term revenues are heavily
dependent on the timely introduction of ZstatFlu during the 1997-98 influenza
season, which in the U.S. ordinarily commences in November each year. The
Company's manufacturing and marketing costs related to the launch of ZstatFlu in
fiscal 1998 and the development of its other proposed therapeutic and diagnostic
products will require a substantial increase in expenditures. Because the
Company's ZstatFlu product has no history of sales, there can be no assurance
that the Company will be able to manufacture, market and sell ZstatFlu at a
profitable level. See " -- Reliance on Distributors" and " -- Uncertain
Availability of Healthcare Reimbursement."

No Assurance of Successful or Timely Development of the Company's
Therapeutic or Other Diagnostic Products. The Company's business strategy
involves the discovery and development of products other than ZstatFlu,
particularly therapeutic products. These products are in early stages of
research and development and further research, development and extensive testing
will be required to determine their technical feasibility and commercial
viability. Until the development process for these products is complete, there
can be no assurance that such products will perform in the manner anticipated by
the Company, be commercially viable or even if commercially viable, that such
products will receive FDA clearance. The Company's success will depend on its
ability to achieve scientific and technological advances and to translate such
advances into reliable, commercially competitive products on a timely basis. The
Company may experience delays in the commercial introduction of these products,
and such delays could be significant. The proposed development schedules for the
Company's other diagnostic and therapeutic products may be affected by a variety
of factors, many of which will not be within the control of the Company,
including technological difficulties, proprietary technology of others, possible
changes in government regulation and the availability of funding sources. Any
delay in the development, introduction and marketing of the Company's products
could result either in such products being marketed at a time when their cost
and performance characteristics would not be competitive in the marketplace or
in the shortening of their commercial lives. In light of the foregoing factors,
the long-term nature of the development of certain of the Company's products,
and the other factors described elsewhere in "Risk Factors," there can be no
assurance that the Company will be able to complete or successfully market any
of these products.

Due to the high costs associated with the research and development of
therapeutic applications of its technology, the Company plans to finance its
operations in collaboration with large corporate partners. There are no
preliminary agreements or understandings between the Company and any such large
corporate partners with respect to such financing. If relationships with
corporate partners are not secured, the Company will be required to seek
additional equity or debt capital to continue these activities. There can be no
assurance that the Company can obtain such additional capital upon terms
acceptable to the Company, or at all. See "Business -- Sales and Marketing" and
"Business -- Therapeutic Research Program."

Reliance on Distributors. The Company does not currently have a sales force
for the marketing of ZstatFlu or any other products of the Company. The Company,
under FDA regulations, was unable to market ZstatFlu until FDA 510(k) clearance
was received in September 1997. Accordingly, the Company has only recently
established marketing agreements with distributors. Any delays in establishing
efficient distribution of ZstatFlu units could have a material adverse effect on
the Company. See "Business -- Sales and Marketing."

No Manufacturing Capability; Reliance on Third-Party Manufacturers. The
Company has limited experience in product manufacturing and currently has no
facility capable of manufacturing products on the scale necessary for adequate
market penetration. Because the Company does not currently have a manufactur-

5
<PAGE> 9

ing facility, the Company has engaged Diagnostic Chemicals Limited (USA) ("DCL")
to produce finished units of ZstatFlu to achieve the level of production
necessary for commercialization of ZstatFlu. There can be no assurance that
ZstatFlu will be manufactured at a cost or in quantities that meet the Company's
needs and requirements. Although the Company has produced a portion of its
requirements for the 1997-98 influenza season, not all units have been produced
by DCL. Delays by DCL in delivering finished products in time for the 1997-98
influenza season could have a material adverse effect on the Company.

Although the Company expects that certain of its therapeutic and diagnostic
products under development will share certain production attributes with
existing products, production of such products may require the development of
new manufacturing technologies and expertise. There can be no assurance that
such products can be manufactured by the Company or by any other party at a cost
or in quantities to make such products commercially viable. If the Company is
unable to develop or contract for manufacturing capabilities on acceptable terms
for its products under development, the Company's ability to conduct preclinical
and clinical testing will be adversely affected, resulting in the delay of
submission of products for regulatory clearance or approval and initiation of
new development programs, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company intends to establish its own manufacturing facilities to allow
for high volume production of the chemical compounds contained in ZstatFlu and
other diagnostic and therapeutic products currently under development, when and
if such products are successfully developed. There can be no assurance that
those facilities will be established, that quality control problems will not
arise as the Company attempts to scale-up its manufacturing or that such
manufacturing capability can be achieved in a timely manner or at a commercially
reasonable cost, if at all. See "Business -- Manufacturing Arrangements; Sources
of Raw Material."

Capital Needs. The capital requirements for the Company's research and
development program beyond fiscal 1999 will be substantial, and the Company will
require additional financing to satisfy these requirements. There is no
assurance that the Company will obtain such financing on terms satisfactory to
it, or at all. With respect to therapeutic research and development
requirements, the Company will continue to actively seek research and
development contracts with corporate partners; however, no assurance can be
given that such contracts will be entered into or, if entered into, that
significant funding from such agreements will be obtained. Accordingly, the
Company may be required to fund its research and development activities
primarily from its existing capital resources and from additional equity and
debt financing. No assurance can be made that any of these sources will be
sufficient to fully fund the development of other commercially feasible viral
therapeutic products in the event the Company is unable to affiliate with a
corporate partner. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Limited Sources of Supply of Raw Materials. The Company requires certain
raw materials for ZstatFlu, and while the Company has secured sufficient
quantities of such raw materials for the 1997-98 influenza season, the sources
of supply of such raw materials are limited. Although the Company believes that
alternative sources for such raw materials are available, any interruption in
this supply could have a material adverse effect on the Company's ability to
manufacture ZstatFlu. In addition, an uncorrected impurity or supplier's
variation in a raw material, either unknown to the Company or incompatible with
the manufacturing process, could have a material adverse effect on the Company's
or a third party's ability to manufacture products or, if manufactured, on the
quality of the product manufactured. The Company currently has under development
products other than ZstatFlu which, if developed, may require the Company to
enter into such additional supplier arrangements. There can be no assurance that
the Company will be able to enter into additional supplier arrangements on
commercially reasonable terms, if at all. Failure to obtain a supplier to
manufacture its future products, if any, would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Manufacturing Arrangements; Sources of Raw Material."

Limitations on Protection of Intellectual Property. The Company's success
will depend, in part, on its ability to obtain patents and license patent
rights, to maintain trade secret protection and to operate without infringing on
the rights of other patent holders. All patents covering the Company's current
technology have

6
<PAGE> 10

been licensed to the Company under an exclusive and perpetual license (the "OMRF
License") from Oklahoma Medical Research Foundation ("OMRF"). See
"Business -- Intellectual Property." The patent position of biotechnology firms
for such types of patents generally is highly uncertain and involves complex
legal and factual issues. Certain competitors of the Company may have filed
applications for or have been issued patents and may obtain additional patents
and other proprietary rights relating to virus substrates, chromogens,
inhibitors or processes competitive with those of the Company. The ultimate
scope and validity of such patents are presently unknown. If existing or future
patents obtained by competitors are upheld as valid by the courts, the Company
may be required to obtain licenses from such competitors. The extent to which
such licenses will be available to the Company, and the costs thereof, cannot
currently be determined.

The Company intends to rely heavily on its continuing technological
innovation and the expertise of its employees to achieve and maintain a
technological advantage over its competitors. No assurance can be given,
however, that competitors will not independently develop technologies similar or
superior to the Company's technology. In addition, although the Company requires
that all of its employees and any third parties granted access to the Company's
proprietary technology enter into confidentiality agreements, there can be no
assurance that the confidentiality agreements will be honored. Further, disputes
may arise between the Company and its consultants, licensors and future
corporate partners with respect to the ownership of proprietary technology
developed under consulting, licensing or research and development agreements.
See "Business -- Intellectual Property."

Government Regulation. Regulation by Federal, state, local and foreign
governmental authorities of the Company's research and development activities,
as well as the use and sale of the Company's products at such time as they are
commercially viable, is currently, and is expected to remain, significant.

The introduction of the Company's products are governed by strict FDA rules
and regulations. The Company's diagnostic products are governed by an FDA 510(k)
application requiring a clinical trial that compares the Company's products to a
certain standard or to a prior cleared methodology. While the Company's ZstatFlu
product has received FDA clearance, there can be no assurance that the FDA will
not require longer, more costly protocols than required under the 510(k)
procedure for its future diagnostic products or additional testing for continued
marketing of ZstatFlu.

The testing, manufacturing, labeling, distribution, marketing and
advertising of therapeutic products are subject to extensive regulation by
governmental regulatory authorities in the U.S. and other countries. The FDA and
comparable agencies in foreign countries impose substantial requirements on the
introduction of new pharmaceutical products through lengthy and detailed
clinical testing procedures and other costly and time-consuming compliance
procedures. The Company's therapeutic compounds will require substantial
clinical trials and FDA review as new drugs and such products are in the
discovery stage of development, requiring significant further research,
development, clinical testing and regulatory clearances. None of the Company's
proposed therapeutic products has been tested in humans, nor has the Company
filed an Investigational New Drug Application ("IND") with the FDA. The Company
cannot predict with certainty when it might submit its therapeutic products
currently under development for regulatory review. Once the Company submits its
potential therapeutic products for review, there can be no assurance that FDA or
other regulatory approvals for any such products developed by the Company will
be granted on a timely basis or at all. Due to the extended testing and
regulatory review process required for therapeutic products before marketing
clearance can be obtained, the Company does not expect to be able to
commercialize any therapeutic drug for at least several years, either directly
or through any potential corporate partners or licensees. A delay in obtaining
or failure to obtain such approvals could have a material adverse effect on the
Company's business and results of operations.

Failure to comply with regulatory requirements could subject the Company to
regulatory or judicial enforcement actions, including, but not limited to,
product recalls or seizures, injunctions, civil penalties, criminal prosecution,
refusals to approve new products and withdrawal of existing approvals, as well
as potentially enhanced product liability exposure. Sales of the Company's
products outside the U.S. will be subject to regulatory requirements governing
clinical trials and marketing approval. These requirements vary

7
<PAGE> 11

widely from country to country and could delay introduction of the Company's
products in those countries. See "Business -- Government Regulation."

The Company and its third-party manufacturers such as DCL are subject to
Good Manufacturing Practices ("GMP") regulations promulgated by the FDA. The FDA
will also inspect the Company's manufacturing facilities and the facilities of
its third-party manufacturers on a routine basis for regulatory compliance with
GMP regulations. Although the Company's employees have experience with GMP
protocols, there can be no assurance that the Company or its third-party
manufacturers can satisfy these requirements. The Company would not be allowed
to manufacture its approved or cleared products in the event such GMP protocols
could not be met.

The marketability of the Company's diagnostic products may also be affected
by certain state and Federal legislation covering the use of diagnostic tests in
physician offices, including the Clinical Laboratory Improvement Act of 1988
("CLIA") which requires physicians' offices conducting tests using certain
sophisticated instruments or specially trained personnel to be certified or
licensed under CLIA. Although the Company believes that CLIA regulations apply,
it does not believe such regulations will restrict the use of the Company's
diagnostic products in its target markets; however, there can be no assurance
that this will be true and such restriction could severely limit the
marketability of the Company's planned products. See "Business -- Government
Regulation."

The Company may also be subject to the Environmental Protection Act, the
Occupational Safety and Health Act and other present and future Federal, state
and local regulations.

Management of Growth and Increasing Production Requirements. The Company's
success will depend on its ability to expand and manage its operations and
facilities. Most of the Company's officers and employees have been with the
Company for only a short period of time. There can be no assurance that the
Company will be able to manage its growth, meet the staffing requirements of
manufacturing scale-up or for current or additional collaborative relationships
or successfully assimilate and train its new employees. In addition, to manage
its growth effectively, the Company will be required to expand its management
base and enhance its operating and financial systems. If the Company continues
to grow, there can be no assurance that the management skills and systems
currently in place will be adequate or that the Company will be able to manage
any additional growth effectively. Failure to achieve any of these goals could
have a material adverse effect on the Company's business, financial condition or
results of operations.

Uncertain Availability of Healthcare Reimbursement. The Company's ability
to successfully commercialize its products under development will depend in part
on the extent to which reimbursement for the costs of such products and related
treatments will be available from Medicare, Medicaid or other third-party
payors, including private insurance companies. Significant uncertainty exists as
to the reimbursement status of newly approved healthcare products. There can be
no assurance that adequate third-party insurance coverage will be available for
the Company to establish and maintain price levels sufficient for realization of
an appropriate return on its investment in developing new diagnostic products
and therapies. Government and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new diagnostic and therapeutic products approved for
marketing by the FDA and by refusing, in some cases, to provide any coverage for
uses of approved products for disease indications for which the FDA has not
granted marketing approval. If adequate coverage and reimbursement levels are
not provided by government and third-party payors for uses of the Company's
products, the inability of the Company to generate sufficient revenues and
earnings could have a material adverse effect on the Company.

Product Liability and Insurance. The testing, marketing and sale of
therapeutic products and, to a lesser degree, diagnostic products, entails an
inherent risk of adverse effects and/or medical complications to patients and,
as a result, product liability claims may be asserted against the Company. A
product liability claim or product recall could have a material adverse effect
on the Company. The Company has secured limited product liability insurance in
the aggregate amount of $11.0 million for products that the Company markets.
There can be no assurance that liability will not exceed the insured amount. In
the event of a successful suit against the Company, insufficient insurance or
lack of insurance would have a material adverse effect on the Company.

8
<PAGE> 12

Recognition of Preferred Dividend for Fiscal 1998. As a consequence of the
difference between the price per share of Common Stock in this Offering and the
$4.00 effective price per share in the 1997 Private Placement, the Company will
be required to recognize a preferred non-cash dividend equal to such price
difference. Based on the initial public offering price per share of $8.00, the
Company estimates that the amount of such dividend would be as much as $4.00 per
share on 1,437,504 shares and would reduce net income applicable to Common Stock
and earnings per share. The recognition of a preferred dividend will be made in
the fiscal quarter in which this Offering is completed. Recognition of a
preferred dividend will not, however, reduce cash flow from operations, reduce
net income of the Company in that quarter or increase any net loss. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Recent Issuances of Stock and Warrants at Below the Public Offering
Price. Since May 1996, the Company has (i) issued 750,000 shares of Common Stock
at a purchase price of $.04 per share; (ii) in the 1996 Private Placement issued
the equivalent of 1,579,496 shares of Common Stock at $3.20 per share; (iii)
issued to OMRF in connection with the OMRF License the equivalent of 165,131
shares of Common Stock at $.76 per share; and (iv) in the 1997 Private Placement
issued the equivalent of 1,437,504 shares of Common Stock at $4.00 per share. In
addition, the Company has outstanding warrants to purchase 565,847 shares of
Common Stock at a weighted average exercise price of $3.50 per share.

Anti-takeover Provisions. Certain provisions of the Delaware General
Corporation Law (the "Delaware Act") may delay, discourage or prevent a change
in control of the Company. Such provisions may discourage bids for the Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price and the voting and other rights of the holders of Common
Stock. In addition, the Board of Directors has the authority without action by
the Company's stockholders to fix the rights, privileges and preferences of and
to issue shares of the Company's Preferred Stock which may have the effect of
delaying, deterring or preventing a change in control of the Company. See
"Description of Securities."

In addition to the authorization of Preferred Stock, the Company's
Certificate of Incorporation and Bylaws include several provisions which may
have the effect of inhibiting a change of control of the Company. These include
the division of the Board of Directors into three classes serving staggered
three-year terms which could delay or prevent stockholders from effecting a
change of control of the Company, prohibiting stockholder action by written
consent unless such action has been approved by the Board of Directors and
advance notice requirements for stockholder proposals and director nominations.
These provisions may make it more difficult to change control of the Company or
replace incumbent management.

Uncertainties Relating to Clinical Trials. The Company must demonstrate
through preclinical studies and clinical trials that its proposed therapeutic
products are safe and effective for use in each target indication before the
Company can obtain regulatory approvals for the commercial sale of those
products. These studies and trials may be very costly and time-consuming.

The rate of completion of clinical trials for either diagnostic or
therapeutic products is dependent upon, among other factors, the rate of
enrollment of patients. Enrollment may be impacted by the acute nature and the
seasonality of certain of the Company's disease targets and the impossibility of
anticipating the geographic locations of disease out-breaks. Failure to enroll
an adequate number of clinical patients during the appropriate season could
cause significant delays and increased costs. Such delays and increased costs
could have a material adverse effect on the Company's product development
programs. Furthermore, there can be no assurance that if the Company's clinical
trials are completed, the Company will be able to submit the required FDA
notices or applications as scheduled or that any such application will be
approved or cleared by the FDA in a timely manner, if at all.

The cost to the Company of conducting human clinical trials for any
potential product can vary dramatically based on a number of factors, including
whether the product is a diagnostic or a therapeutic product, the order and
timing of clinical indications pursued and the extent of development and
financial support, if any, from corporate partners. The Company may have
difficulty obtaining sufficient patient populations, clinicians or support to
conduct its clinical trials as planned and may have to expend substantial
additional funds to obtain access to such resources, or delay or modify its
plans significantly.

9
<PAGE> 13

While the Company designs and manages its preclinical studies and clinical
trials, the Company may also engage contract research organizations to perform
certain aspects of such preclinical studies and clinical trials. As a result,
the Company depends on such contract research organizations to assist in the
completion of its studies and trials.

No Assurance of Market Acceptance. There can be no assurance that ZstatFlu
or any of the Company's potential products, if approved or cleared by the FDA
and other regulatory authorities, will achieve market acceptance. The degree of
market acceptance will depend upon a number of factors, including the receipt
and timing of regulatory approvals or clearances, the availability of
third-party reimbursement and the establishment and demonstration in the medical
community of the clinical safety, efficacy and cost-effectiveness of the
Company's products and their advantages over existing technologies and products.
There can be no assurance that the Company will be able to successfully market
its potential products even if they perform successfully in clinical trials.
Furthermore, there can be no assurance that physicians or the medical community
in general will accept and utilize any products that may be developed by the
Company.

Dependence on Corporate Collaborations for Therapeutic Products. The
Company's strategy for the research, development and commercialization of its
potential therapeutic products may require the Company to enter into various
arrangements with corporate and academic collaborators, licensors, licensees and
others. The Company may, therefore, be dependent upon the subsequent success of
these third parties in performing their responsibilities. There can be no
assurance that the Company will be able to enter into collaborative, license or
other arrangements that the Company deems necessary or appropriate to develop
and commercialize its potential therapeutic products, or that any or all of the
contemplated benefits from such collaborative, license or other arrangements
will be realized. Collaborative, license or other arrangements that the Company
may enter into in the future may place responsibility on the Company's
collaborative partners for preclinical testing and human clinical trials and for
the preparation and submission of applications for regulatory approval for
potential therapeutic products. Other collaborations may place responsibility on
partners for marketing, sales and distribution support for product
commercialization. Should any collaborative partner fail to develop or
successfully commercialize any potential therapeutic products to which it has
rights, the Company's business may be materially adversely affected. Moreover,
these arrangements may require the Company to transfer certain material rights
to such corporate partners, licensees and others. In the event that the Company
decides to license or sublicense certain of its commercial rights, there can be
no assurance that such arrangements will not result in reduced product revenue
to the Company. There can be no assurance that any revenues or profits will be
derived from the Company's future collaborative and other arrangements or that
the Company will enter into any future collaborations. Furthermore, there can be
no assurance that future collaborators will not pursue alternative technologies
or therapies either on their own or in collaboration with others, including the
Company's competitors, as a means for developing therapeutics sought to be
addressed by the Company's programs.

Dependence on Key Personnel. The Company is dependent on the efforts of
certain of its officers, executives and scientists. These persons include Peter
G. Livingston, President and Chief Executive Officer, Craig D. Shimasaki, Ph.D.,
Vice President of Research, Gary W. Pedersen, Vice President of Marketing and
Sales, Charles E. Seeney, Vice President of Operations and Strategic
Development, G. Carl Gibson, Controller, Secretary and Treasurer, and Robert J.
Hudson, M.D., Medical Director. The loss of any one of such persons could
materially and adversely affect the Company's business. Also, the Company's
success will depend on its ability to continue to attract and retain highly
capable scientific and management personnel. Currently, other than Mr.
Livingston and Dr. Shimasaki, no officer or other employee has an employment
agreement with the Company; however, they are subject to covenants not to
compete and are currently bound by confidentiality agreements and invention
assignment agreements. Although to date the Company has been able to hire and
retain qualified personnel, there can be no assurance that it will be successful
in recruiting or retaining such personnel in the future. See "Management."

Technology and Competition. The viral diagnostic and therapeutic field is
rapidly evolving, and the pace of technological advancement is expected to
continue. Rapid technological development may result in the Company's products
becoming obsolete before the Company recoups a significant portion of related
research, development and commercialization expenses. Technological competition
from other specialized biomedical companies, as well as from major medical
products companies, universities and research institutions, is expected to
increase. Many of these competitors and potential competitors such as Glaxo
Wellcome plc

10
<PAGE> 14

("Glaxo Wellcome") and F. Hoffman-La Roche Ltd. ("Roche"), which are directly
competing with the Company in the development of anti-influenza therapeutic
products, and Quidel Corp. ("Quidel") and Biostar Inc. ("Biostar"), which are
directly competing with the Company for diagnostic products, have substantially
greater capital resources, research and development capabilities and marketing
resources than the Company. See "Business -- Competition."

Dividends Not Likely. The Company makes no assurances that its proposed
operations will result in sufficient revenues to enable profitable operations or
to generate positive cash flow. For the foreseeable future, the Company
anticipates that it will use any funds available to finance the growth of the
Company and that it will not pay cash dividends to stockholders. See "Dividend
Policy."

Substantial Dilution. The offering price of Common Stock is substantially
in excess of book value. On the basis of the offering price of $8.00 per share,
this Offering involves an immediate dilution of approximately $4.45 per share of
Common Stock (approximately 55.6% of the offering price per share) between the
offering price per share and the pro forma net tangible book value per share of
the Common Stock immediately after the completion of this Offering. See
"Dilution."

Benefits of the Offering to Current Stockholders. The Company's current
stockholders will benefit from the Offering, principally through the creation of
a public market for the Common Stock and the potential unrealized gains in the
value of the Common Stock held by them. Based upon the difference between the
initial public offering price of $8.00 per share and the average price per
share, before deduction of offering costs, of $2.75 paid by such current
stockholders, the current stockholders will have potential unrealized gains of
$5.25 per share, or an aggregate of approximately $20.9 million.

Limited Underwriting Experience. Capital West Securities, Inc ("Capital
West"), one of the Underwriters, was first registered as a broker-dealer in May
1995 and has participated in only seven public equity offerings as an
underwriter, acting as a manager or co-manager in four of those offerings.
Prospective purchasers of the securities offered hereby should consider this
limited experience in evaluating this Offering. See "Underwriting."

Absence of Prior Public Market. Prior to the Offering, there has been no
public market for the Company's Common Stock. The Company has been approved for
listing of the Common Stock on the Nasdaq National Market subject to notice of
issuance; however, there can be no assurance that an active public market will
develop. The initial public offering price was determined solely through
negotiations among the Company and representatives of the Underwriters based on
several factors, and may not be indicative of the market price for the Common
Stock after the completion of the Offering. Among the factors considered in such
negotiations were prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and stages of development
of other companies which the Company and the Underwriters believe to be
comparable to the Company, estimates of the business potential of the Company
and the present state of the Company's development. See "Underwriting."

Possible Volatility of Stock Prices; Seasonality. The trading price of the
Company's Common Stock could be subject to fluctuations in response to quarterly
variations in results of operations, the progress of clinical trials relating to
the Company's products, variations in the Company's anticipated or actual
results of operations, announcements of new products or technological
innovations by the Company or its competitors, FDA and foreign regulatory
actions, developments with respect to patent and proprietary rights, changes in
healthcare policy in the U.S. and foreign countries, the pharmaceutical industry
in general, changes in financial estimates by securities analysts and other
events or factors. See "Business." Recent history relating to the market prices
of emerging growth companies indicates that the market price of the Company's
Common Stock following the Offering may be highly volatile. At various times,
the stock market has experienced volatility that has particularly affected the
market prices for stock of particular industry groups, such as biotechnology
companies, often without regard to a particular company's operating results. In
the past, following periods of volatility in the market price of a company's
stock, securities class action lawsuits have been filed against the
publicly-held company. There can be no assurance that such litigation will not
occur in

11
<PAGE> 15

the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the Company's business and results of
operations. Any adverse determination in such litigation could also subject the
Company to significant liabilities.

So long as the Company's product line is primarily in the influenza
diagnostic and therapeutic market, the Company's revenues will be seasonal,
concurrent with the times of the year in which influenza is active.
Consequently, the Company expects that revenues will be concentrated in the
second and third quarters of each fiscal year. This seasonal effect could have
negative effects on the trading price of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Shares Eligible for Future Sale. Future sales of shares of Common Stock by
the Company or its existing stockholders, or the perception that such sales may
occur, could adversely affect the market price of the Common Stock. Upon
completion of the Offering, 6,275,630 shares of Common Stock will be outstanding
(6,620,630 shares outstanding assuming exercise of the Underwriters'
overallotment option in full). Additionally, the Company may in the future issue
significant amounts of Common and/or Preferred Stock to finance its research,
development, manufacturing and marketing activities. Of the outstanding shares,
the 2,300,000 shares (2,645,000 shares assuming the Underwriters' overallotment
option is exercised in full) sold in the Offering, and 11,864 shares held by
existing stockholders who are not, as of the date of this Prospectus,
"affiliates" of the Company, will be tradeable without restriction. In addition,
3,963,766 shares of Common Stock to be outstanding after the Offering are
"restricted securities" (the "Restricted Shares") within the meaning of Rule 144
under the Securities Act and may not be publicly resold, except in compliance
with the registration requirements of the Securities Act or pursuant to an
exemption from registration, including that provided by Rule 144 promulgated
under the Securities Act.

Stockholders who collectively hold 3,022,366 Restricted Shares (the
"13-Month Lock-up Shares"), or approximately 48.2% of the outstanding shares of
Common Stock after the Offering, have agreed not to offer, sell or otherwise
dispose of any of the 13-Month Lock-up Shares for a period of 13 months after
the date of this Prospectus. Of the 13-Month Lock-up Shares, upon expiration of
the 13-month lockup period, 1,431,254 shares will be eligible for immediate
resale, subject, in certain cases, to certain volume, timing and other
requirements of Rule 144 promulgated under the Securities Act, and 1,591,112
shares will be tradeable without restriction, unless held by "affiliates" of the
Company. Sales of substantial amounts of Common Stock, or the perception that
such sales could occur, could adversely affect the prevailing market price of
the Common Stock. See "Shares Eligible for Future Sale" and "Underwriting."

In addition to the 13-Month Lock-up Shares, stockholders holding 660,311
Restricted Shares (the "24-Month Lock-up Shares"), or approximately 10.5% of the
outstanding shares of Common Stock after the Offering, have agreed not to offer,
sell or otherwise dispose of any 24-Month Lock-up Shares for a period of 24
months after the date of this Prospectus.

Upon the expiration of each of the 13-month lock-up period and the 24-month
lock-up period, the Company has agreed to file a registration statement with the
SEC to permit the holders of the 13-Month Lock-up Shares and 24-Month Lock-up
Shares who have registration rights to resell their respective shares without
restriction. See "Shares Eligible for Future Sale."

Stockholders who collectively hold 183,589 Restricted Shares are not
subject to any lock-up agreement and pursuant to a Registration Rights Agreement
with the Company are entitled to have their shares registered six months after
the closing of the Offering.

In addition to the outstanding shares of Common Stock, there are 565,847
shares subject to outstanding warrants at a weighted average exercise price of
$3.50 per share. There are also 618,750 shares of Common Stock reserved for
issuance under the Company's stock option plans, and 482,000 shares are subject
to outstanding options at a weighted average exercise price of $1.44 per share.
Although these warrants and options are also subject to the 13-month or 24-month
lock-up periods, registration statements are expected to be filed to permit the
resale of shares issuable upon exercise and, to the extent such warrants or
options have

12
<PAGE> 16

been exercised prior to the expiration of the lock-up period, the resale of the
shares acquired upon exercise could adversely affect the prevailing market price
of the Common Stock.

Cautionary Statement Regarding Forward-looking Information. Certain
statements contained in this Prospectus, such as those concerning the Company's
business strategy, products and revenues, capital requirements, governmental
regulation and other statements regarding matters that are not historical facts,
are forward-looking statements (as such term is defined in the Securities Act).
Because such forward-looking statements include risks and uncertainties, actual
results may differ materially from those expressed in or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed herein under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." The Company undertakes no obligation to
publicly release the results of any revision of those forward-looking statements
that may be made to reflect events and circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,300,000 shares being
offered hereby are estimated to be approximately $16.0 million (approximately
$18.4 million if the Underwriters' overallotment option is exercised in full)
after deducting the estimated underwriting discounts and commissions and
offering expenses. The Company expects to use the net proceeds (assuming no
exercise of the Underwriters' overallotment option) in fiscal 1999 approximately
as follows:

<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
USE DOLLAR AMOUNT NET PROCEEDS
--- ------------- -------------
<S> <C> <C>
Inventory production costs................................ $ 8,000,000 50.0%
Research and development.................................. 3,500,000 21.9%
Working capital and general corporate purposes............ 3,500,000 21.9%
Marketing expenses........................................ 1,000,000 6.2%
----------- -----
Total........................................... $16,000,000 100.0%
=========== =====
</TABLE>

The cost, timing and amount of funds required for the foregoing uses of
proceeds by the Company will be based on the amount of sales of ZstatFlu in the
1997-98 influenza season, the anticipated inventory needs for fiscal 1999, and
the results of the Company's research and development programs. The amounts
actually expended for any particular use may vary significantly from the
Company's current plans, particularly given the lack of sales history and the
uncertainty of the Company's research and development progress.

Inventory production costs represent the amount of such costs not covered
by the Company's existing working capital or projected available working
capital. Such costs also include expenditures for opening a manufacturing
facility which are not financed through bank or other debt sources.

Included within the expenditures for research and development for
therapeutic products, as identified in the table, is the purchase of equipment
relating to research and development.

Where appropriate, proceeds of this Offering also may be used to acquire
products or technologies that complement the Company's business, although there
are no present understandings, agreements or commitments with respect to any
such acquisitions.

Any remaining net proceeds are to be used for working capital and other
general corporate purposes. Pending application of the proceeds described above,
the net proceeds of the Offering will be invested in short-term, investment
grade, interest-bearing securities.

13
<PAGE> 17

DIVIDEND POLICY

The Company makes no assurance that its proposed operations will result in
sufficient revenues to enable profitable operations or to generate positive cash
flow. For the foreseeable future, the Company anticipates that it will use any
funds available to finance the growth of the Company and that it will not pay
cash dividends to stockholders.

DILUTION

At June 30, 1997, pro forma net tangible book value of the Company's Common
Stock was approximately $6.2 million, or $1.55 per share, after giving effect to
the 1997 Private Placement, as if completed at June 30, 1997 and the conversion
of all outstanding shares of Preferred Stock into 3,056,062 shares of Common
Stock. "Pro forma net tangible book value" per share of Common Stock is defined
as total tangible assets of the Company less total liabilities, divided by the
total number of shares of Common Stock outstanding. Giving effect to the
Offering, the adjusted pro forma net tangible book value of Common Stock at June
30, 1997 would have been approximately $3.55 per share of Common Stock. This
will represent an immediate dilution of $4.45 per share to new investors
purchasing shares of Common Stock in this Offering. The following table
illustrates the per share dilution to new investors:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $8.00
Pro forma net tangible book value per share at June 30,
1997................................................... $1.55
Increase attributable to new investors.................... 2.00
-----
Pro forma net tangible book value per share after the
Offering.................................................. 3.55
-----
Dilution per share to new investors......................... $4.45
=====
</TABLE>

The following table summarizes the differences in the total consideration
paid to the Company by officers, directors and affiliates thereof in connection
with the purchase of Common Stock and the average price per share paid by such
persons, and the price to be paid by new investors purchasing shares in this
Offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Officers, directors and
affiliates................... 1,518,640 39.8% $ 2,196,093 10.7% $1.45
New investors.................. 2,300,000 60.2% 18,400,000 89.3% $8.00
--------- ----- ----------- ----- -----
Total................ 3,818,640 100.0% $20,596,093 100.0% $5.39
========= ===== =========== ===== =====
</TABLE>

The foregoing discussion and table do not assume the exercise of warrants
and stock options issued to officers, directors and affiliates of the Company
which are outstanding as of the date of this Prospectus to purchase 928,972
shares of Common Stock at a weighted average exercise price per share of $2.48.

14
<PAGE> 18

CAPITALIZATION

The following table sets forth: (i) the capitalization of the Company as of
June 30, 1997; (ii) the effect of the completion of the 1997 Private Placement
with net proceeds to the Company of approximately $4.9 million, as if completed
at June 30, 1997, and the amendment of the Company's Certificate of
Incorporation to increase the number of authorized shares of capital stock; and
(iii) the pro forma capitalization of the Company as of such date, after giving
effect to the conversion of all outstanding shares of Preferred Stock into
Common Stock and the sale of the 2,300,000 shares of Common Stock offered
hereby. This table should be read in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Balance Sheet" and the financial statements and notes
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------
PRO FORMA
------------------------------
AS ADJUSTED
FOR THE 1997
PRIVATE AS ADJUSTED FOR
ACTUAL(1) PLACEMENT(1) THE OFFERING(2)
----------- ------------ ---------------
<S> <C> <C> <C>
Long-term obligations............................... $ 334,865 $ 334,865 $ 334,865
Redeemable preferred stock -- Series B.............. 125,000 125,000 --
Stockholders' equity:
Preferred stock -- Series A, $.001 par value;
9,843,750 shares authorized; 6,318,125 shares
issued and outstanding at June 30, 1997........... 6,318 6,318 --
Preferred stock -- Series C, $.001 par value;
1,750,000 shares authorized; 1,437,504 shares
issued and outstanding as adjusted for the 1997
Private Placement................................. -- 1,438 --
Common Stock; $.001 par value: 30,000,000 shares
authorized; 919,568 shares issued and outstanding
at June 30, 1997; 6,275,630 shares issued and
outstanding as adjusted for the Offering.......... 920 920 6,276
Additional paid-in capital.......................... 4,410,198 9,333,760 25,461,160
Deficit accumulated during the development stage.... (3,050,890) (3,050,890) (3,050,890)
----------- ----------- -----------
Total stockholders' equity..................... 1,373,158 6,298,158 22,423,158
----------- ----------- -----------
Total capitalization........................... $ 1,833,023 $ 6,758,023 $22,758,023
=========== =========== ===========
</TABLE>

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

(1) Excludes 618,750 shares of Common Stock reserved for issuance pursuant to
the Company's stock option plans, and 565,847 shares subject to outstanding
warrants. See "Management -- Stock Option Plans," "Description of
Securities" and "Shares Eligible for Future Sale."

(2) Excludes 618,750 shares of Common Stock reserved for issuance pursuant to
the Company's stock option plans, and 795,847 shares subject to outstanding
warrants. See "Management -- Stock Option Plans," "Description of
Securities" and "Shares Eligible for Future Sale."

15
<PAGE> 19

PRO FORMA BALANCE SHEET

The following unaudited Pro Forma Balance Sheet as of June 30, 1997
reflects the historical financial position of the Company as of that date
adjusted to give pro forma effect to the 1997 Private Placement and the Offering
as if these transactions had occurred as of June 30, 1997.

The pro forma adjustments are based upon available information and
assumptions that management of the Company believes are reasonable and fairly
reflect all costs associated with the 1997 Private Placement and the Offering.
The unaudited Pro Forma Balance Sheet does not purport to represent the
financial position which would have occurred had such transactions been
consummated on the dates indicated or the Company's financial position for any
future date or period. This unaudited Pro Forma Balance Sheet and notes thereto
should be read in conjunction with the historical financial statements and notes
included elsewhere herein.

16
<PAGE> 20

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1997

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR PRO FORMA
THE 1997 FOR THE 1997 PRO FORMA
PRIVATE PRIVATE ADJUSTMENTS FOR PRO FORMA FOR
ACTUAL PLACEMENT PLACEMENT THE OFFERING THE OFFERING
----------- --------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents... $ 226,312 $4,966,000(1) $ 5,192,312 $16,000,000(3) $21,192,312
Marketable securities,
available-for-sale........ 1,594,382 1,594,382 1,594,382
Inventory................... 99,107 99,107 99,107
Prepaid insurance and
other..................... 9,210 9,210 9,210
----------- ---------- ----------- ----------- -----------
Total current
assets............. 1,929,011 4,966,000 6,895,011 16,000,000 22,895,011
Property, equipment and
leasehold improvements,
net......................... 295,393 295,393 295,393
Proprietary technology and
other intangibles, net...... 116,827 116,827 116,827
Deferred offering costs and
other, net.................. 41,746 (41,000)(1) 746 746
----------- ---------- ----------- ----------- -----------
Total assets......... $ 2,382,977 $4,925,000 $ 7,307,977 $16,000,000 $23,307,977
=========== ========== =========== =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............ $ 540,025 $ 540,025 $ 540,025
Other....................... 9,929 9,929 9,929
----------- ----------- -----------
Total current
liabilities........ 549,954 549,954 549,954
Long term obligations --
Note payable to stockholder
due after one year........ 265,836 265,836 265,836
Deferred lease rentals...... 69,029 69,029 69,029
Redeemable preferred stock --
Series B.................... 125,000 125,000 $ (125,000)(2) --
Stockholders' equity:
Preferred stock -- Series
A......................... 6,318 6,318 (6,318)(2) --
Preferred stock -- Series
C......................... -- $ 1,438(1) 1,438 (1,438)(2) --
Common Stock................ 920 920 3,056(2)
2,300(3) 6,276
Additional paid-in
capital................... 4,410,198 4,923,562(1) 9,333,760 129,700(2)
15,997,700(3) 25,461,160
Deficit accumulated during
the development stage..... (3,050,890) (3,050,890) (3,050,890)
Unrealized holding gains on
marketable securities
available for sale........ 6,612 6,612 6,612
----------- ---------- ----------- ----------- -----------
Total stockholders'
equity............. 1,373,158 4,925,000 6,298,158 16,125,000 22,423,158
----------- ---------- ----------- ----------- -----------
Total liabilities and
stockholders'
equity............. $ 2,382,977 $4,925,000 $ 7,307,977 $16,000,000 $23,307,977
=========== ========== =========== =========== ===========
</TABLE>

17
<PAGE> 21

ADJUSTMENTS TO PRO FORMA BALANCE SHEET

The 1997 Private Placement:

(1) Record the issuance of 1,437,504 shares of Series C Preferred Stock of the
Company.

<TABLE>
<S> <C>
Offering proceeds........................................... $5,750,000
Less:
Commissions............................................... (575,000)
Expenses.................................................. (250,000)
----------
Net proceeds................................................ $4,925,000
==========
</TABLE>

The Offering:

(2) Record the conversion of Preferred Stock Series A and B into Common Stock at
the conversion rate of .25 to 1 and the conversion of Series C into Common
Stock at the rate of 1 to 1.

(3) Record Initial Public Offering of 2,300,000 shares of Common Stock of the
Company at the offering price of $8.00 per share.

<TABLE>
<S> <C>
Offering proceeds........................................... $ 18,400,000
Less:
Commissions............................................... (1,472,000)
Expenses.................................................. (928,000)
------------
Net proceeds................................................ $ 16,000,000
============
</TABLE>

18
<PAGE> 22

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

OVERVIEW

Since January 1996, when the Company's management and scientific team
joined the Company from OMRF, the Company's operating activities were related to
the Company's ZstatFlu product, consisting primarily of research and
development, conducting clinical trials and submitting a 510(k) application with
the FDA. The Company has incurred losses since inception and, as of June 30,
1997, had a deficit accumulated during the development stage of $3.1 million.

The Company's ability to achieve revenues and profitability will be
dependent on its ability to scale-up manufacturing and establish distribution
channels for ZstatFlu. If all of these events do not occur before the start of
the 1997-98 influenza season, the Company's ability to earn revenues for fiscal
1998 will be seriously compromised.

Because the Company's initial products are expected to be in the area of
influenza diagnostics and the Company's near term therapeutic research emphasis
is in the area of influenza, the Company's future revenues are likely to be
seasonal, concurrent with the times of the year in which influenza is active.
Consequently, so long as the U.S. influenza market remains the principal market
for the Company's products, the Company's revenues will be concentrated in the
second and third quarters of each fiscal year. See "Risk Factors -- Possible
Volatility of Stock Prices; Seasonality" and "Business -- Competition."

Comparisons of fiscal 1997 to fiscal 1996 are not informative because the
research, development and other activities relating to the Company's products
and technology were conducted by OMRF prior to January 1996.

PLAN OF OPERATIONS

The Company's plan of operations for the next 12 months is to: (i) scale-up
and complete manufacturing of ZstatFlu for the 1997-98 influenza season; (ii)
establish distribution channels and market ZstatFlu; and (iii) continue viral
therapeutic and diagnostic research and development.

After completion of this Offering the Company believes it will have
adequate cash and securities available for sale to fund the planned operations
for the next 12 months. Additional capital is needed to fund larger inventories
for planned sales in fiscal year 2000 and future periods, and for scaled-up
research and development programs.

Expenditures for research and development are estimated by management of
the Company to be $2.0 million for the next 12 months. Research will center
around continued development of compounds for the treatment of influenza and
extension of ViraZyme technology to additional disease targets.

In addition, product development expenditures of $1.0 million for fiscal
1998 are planned for improvements and further development of products which have
been cleared by the FDA. The extent to which the Company increases research and
development expenses in fiscal 1998 is dependent upon revenues generated in
fiscal 1998 from ZstatFlu. See "Business -- ZstatFlu" and
"Business -- Therapeutic Research Program."

The Company will purchase equipment in connection with the expansion of its
research program. The anticipated amount of equipment purchases during the next
12 months is $.8 million, to be funded from existing working capital. Additional
equipment will be required if the Company establishes its own production
facility; the Company expects to finance the equipment for such a facility
through debt or lease financing. The Company may lease a manufacturing facility;
however, if purchase terms were favorable the Company would finance such a
purchase through debt financing.

The Company intends to hire at least five additional employees in the next
12 months.

19
<PAGE> 23

RESULTS OF OPERATIONS

Since its inception the Company has been a development stage company
engaged primarily in research and product development activities, and has not
generated any significant revenues.

Research and development expenses were $1.1 million for fiscal 1997. In
addition, in July 1996, the Company acquired rights to technology and patents
from OMRF, $1.0 million of which represented acquired in-process technology
undergoing research and development. These research and development costs were
attributable to ZstatFlu.

Contract labor expense (which is included in research and development and
general and administrative categories) was $.7 million for fiscal 1997, arising
under the Company's Employee Services Agreement with OMRF. See "Business -- OMRF
Support." The Company will continue this arrangement for five employees; all
other personnel are employees of the Company. Accordingly, as new employees are
hired, compensation expenses related to such persons will be included in both
general and administrative expenses and research and development. See
"Business -- Employees."

General and administrative expenses were $.6 million for fiscal 1997. These
expenses are expected to increase in fiscal 1998 due to increased personnel
expenses. Depreciation expense increased due to the acquisition of equipment in
connection with the expansion of operations.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, the Company had cash and securities available for sale of
$1.8 million and working capital of $1.4 million. The Company funded its
operations through June 30, 1997, primarily through private placements of equity
securities providing net proceeds of approximately $4.4 million completed in the
first and second quarters of fiscal 1997, and interest income earned on the net
proceeds therefrom. Subsequent to June 30, 1997, the Company completed the 1997
Private Placement, providing net proceeds of approximately $4.9 million.

Effective contemporaneous with the execution of the OMRF License, the
Company issued the License Note (the "License Note") in favor of OMRF. The
License Note has a principal amount of $.4 million and bears no interest until
May 15, 1998; thereafter, unpaid principal bears interest at 8% per year. The
License Note requires quarterly installments of interest commencing May 15,
1998, and commencing May 15, 1999, a principal payment of $25,000 per quarter
until the License Note is repaid.

Manufacturing and marketing expenses for ZstatFlu are estimated to be $5.7
million for fiscal 1998, with most of such costs payable in the first two
quarters of fiscal 1998. The Company's business plan contemplates the production
and marketing of approximately 1.0 million units of ZstatFlu. The Company
expects to produce an additional 200,000 units which will be used for
demonstration and marketing purposes. The total cost of packaging and chemical
compound synthesis for that level of production is estimated to be approximately
$4.8 million (approximately $4.00 per unit). In addition, the Company's
marketing costs for ZstatFlu are expected to be approximately $.9 million. The
price per unit to distributors is expected to be approximately $12 to $15.

In addition to the Company's working capital needs for fiscal 1998, the
Company will require significantly larger amounts of capital for production of
inventory for the 1998-99 influenza season. If the Company sells substantially
all of the 1.0 million units of ZstatFlu produced for sale in the 1997-98
influenza season, the Company estimates that production of ZstatFlu will be
approximately 4.0 million units for the 1998-99 influenza season, with a total
manufacturing cost of approximately $16.0 million. The Company can give no
assurance that actual manufacturing costs will fall within the described
estimates.

To the extent that sales of ZstatFlu in fiscal 1998 do not reach 1.0
million units, the Company will be required to reduce planned research and
development expenditures in fiscal 1999 or secure additional equity or debt
capital beyond that required for meeting fiscal 1999 inventory needs. There is
no assurance that the Company will sell all of these units. See "Risk Factors."

20
<PAGE> 24

As a consequence of the difference between the price per share of Common
Stock in this Offering and the $4.00 effective price per share in the 1997
Private Placement, the Company will be required to recognize a preferred
non-cash dividend equal to such price difference. Based on the initial public
offering price per share of $8.00 the Company estimates that the amount of such
dividend would be as much as $4.00 per share on 1,437,504 shares and would
reduce net income applicable to Common Stock and earnings per share. The
recognition of a preferred dividend will be made in the fiscal quarter in which
this Offering is completed. Recognition of a preferred dividend will not,
however, reduce cash flow from operations, reduce net income of the Company in
that quarter or increase any net loss. See "Risk Factors -- Recognition of
Preferred Dividend for Fiscal 1998."

21
<PAGE> 25

BUSINESS

GENERAL

ZymeTx is a development stage biotechnology company engaged in the
discovery and development of unique products for the diagnosis and treatment of
viruses. The scientific foundation for the Company's plan of operations is based
upon the role of enzymes in the process of viral infection. The Company's
strategy is: (i) to develop therapeutic and diagnostic products for a broad
range of viral diseases; and (ii) to earn revenues from marketing "ZstatFlu,"
the Company's first diagnostic product, to sustain a comprehensive viral
therapeutic research and development program and to continue the Company's viral
diagnostic research and development program.

ViraZyme, the Company's core technology, exploits the subtle structural
differences and characteristics of enzymes to create viral diagnostic and
therapeutic products. The Company's diagnostic technology is a proprietary
two-part compound that will split when the compound contacts a specific target
site (an enzyme). As a result of this split, one part of the compound becomes
visible to the naked eye when collected in the Company's testing device,
permitting the user to make a diagnosis regarding the presence of the virus
targeted by the test. For therapeutic products, a modified version of the
diagnostic compound is used that will bind to a specific enzyme and prevent the
enzyme's contribution to the infection process.

The Company's initial viral targets are respiratory infections including
influenza A and influenza B, RSV, parainfluenza and adenovirus, as well as the
non-respiratory infections HSV and CMV.

ZYMETX TECHNOLOGY

Scientific Background. Significant advances made in the field of
microbiology in recent years have increased scientists' understanding of cell
biology, disease process and disease progression. These advances have opened the
field of virology to new approaches. Scientific thought has previously
acknowledged that enzymes have a critical function to perform in viruses.
However, many scientific leaders have asserted that enzyme structure is based
primarily on the function and not on the origin of the enzyme. Contrary to this
assertion, the Company believes that enzymes are gene-encoded products and
possess exploitable differences based upon their origin. The prevailing body of
science, while not in direct conflict with the Company's premise, has maintained
that if such differences in fact existed they would be too insignificant to be
exploited. The Company has demonstrated in clinical trials the ability to
exploit these subtle differences and thus identify enzymes unique to the host
virus.

The Company's ViraZyme technology focuses on the development of highly
specific/selective molecules that will interact only with an enzyme of specific
origin, such as viral, mammalian, bacterial, etc. This permits interaction with
one enzyme while preventing activity with a similar enzyme of different origin.
Using a proprietary series and sequence of assays that is supported by X-ray
crystallography/rational design, the Company believes, based on its clinical
trials, that it can identify the fingerprint of critical enzymes and then build
molecules that will have great preference for only the targeted form of the
enzyme.

The core of the ViraZyme approach is the identification of essential target
sites of viral enzymes and synthetic production of molecules that have selective
action at an identified target site. The Company believes that this approach is
effective for development of both diagnostic and therapeutic products. The early
research for both the diagnostic and therapeutic programs is quite similar and
mutually supportive, with both utilizing a rational design and a traditional
organic chemistry approach.

ViraZyme Technology. Virus particles contain proteins which are essential
for the virus to infect its host. For example, the influenza virus has eight of
these proteins, several of which function as structural components while others
function as enzymes. Enzymes are biological catalysts which are able to
transform one biochemical substance into another, specifically and rapidly,
without being consumed in the reaction. Because of the enzyme's location on the
virus particle and the importance of catalytic reactions to the virus' function,
such sites would typically make an attractive target for diagnostic compounds or
therapeutic inhibitors. However, similar enzymes of bacterial and mammalian
origin are also present in the body and are

22
<PAGE> 26

necessary to perform normal and vital cell functions. Until recently, scientists
believed one could not differentiate among viral, mammalian or bacterial
enzymes, thereby rendering the enzyme on the virus pointless as a viral target.
However, the ViraZyme technology demonstrates that there are subtle differences
in enzyme active sites depending upon whether they are of viral, mammalian or
bacterial origin.

The Company's ViraZyme technology uses a methodology for discovering the
subtle, origin-dependent differences of enzymes and exploiting such differences
through the use of proprietary substrate and inhibitor molecules specific to
viral enzymes. By introducing a chromogen-linked ViraZyme substrate to a virus
in a clinical specimen, only the targeted viral enzyme will continuously cleave
the chromogen from the substrate molecules. The ViraZyme technology utilizes the
naturally occurring enzyme to produce thousands of reactions at the catalytic
site while other methods, such as MAbs and gene probes, employ secondary
reactions which require additional steps to produce multiple reactions. For
therapeutic applications of this technology, specifically designed inhibitor
molecules are administered to a person infected with a virus to inhibit the
natural enzyme activity which is critical to the infection process. This would
theoretically stop the course of the illness. See "-- Therapeutic Research
Program -- Influenza Therapeutic Development."

The Company has developed ZstatFlu using ViraZyme technology and is
developing diagnostic tests utilizing the ViraZyme technology for numerous
medically significant viruses beyond influenza, including HSV and RSV. The
Company also has plans to develop similar diagnostic tests for CMV and
adenovirus, and is in the early stages of research regarding therapeutics
utilizing the ViraZyme technology for enzymes associated with many of these same
viral diseases. See "Risk Factors -- No Assurances of Successful or Timely
Development of the Company's Therapeutic or Other Diagnostic Products."

The selection of viral diseases other than influenza to be targeted for
commercialization of the Company's products is based on the following criteria:
potential market size, the viral disease's incidence, morbidity/ mortality, the
availability of diagnostics and therapeutics, and the existence of possible
corporate partners. See "Business -- Sales and Marketing." Developing any
additional products will require significant ongoing research and development.
See "Risk Factors -- No Assurance of Successful or Timely Development of the
Company's Therapeutic or Other Diagnostic Products."

During fiscal 1996 and fiscal 1997, the Company incurred research and
development expenses of $.3 million and $1.1 million, respectively, and in
fiscal 1997 acquired in-process technology of approximately $1.0 million.

ZSTATFLU

Background. The first product the Company has developed is ZstatFlu, a
rapid POC diagnostic test for influenza. ZstatFlu will permit, for the first
time, the rapid and simple POC detection of the influenza virus directly from a
patient specimen.

ZstatFlu targets the amplifying capability of the influenza neuraminidase
enzyme. The ViraZyme technology incorporates novel substrate molecules which
react with the influenza neuraminidase enzyme and allow the presence of the
influenza virus to be detected.

These substrate molecules include two parts: (i) a "recognition" portion
which enters into the catalytic site of the enzyme; and (ii) a chromogen
"reporter" portion which gives a visible signal after the enzyme has cleaved it
from the recognition portion.

A single influenza virus particle contains over 400 neuraminidase enzyme
molecules on its surface. Clinical tests have demonstrated that the cavity in
this viral enzyme is not present in the same form as that of neuraminidase of a
mammalian or bacterial origin and is the "catalytic site" or the place where the
enzyme causes the reaction to proceed. The enzyme, when placed in a solution
containing the substrate, causes a cascade of reactions where the "reporter"
portion generates a visible color indicating the presence of the virus.

Procedure. The procedure for use of ZstatFlu depicted on the inside front
cover of this Prospectus begins with the collection of a patient sample using a
standard throat swab technique (Step 1). The patient specimen is then dipped
into a plastic tube containing a liquid substance and a dropper cap is placed on
the tube

23
<PAGE> 27

(Step 2). Using the dropper cap, the entire contents of the tube is extracted
and squeezed into a vial containing the dry reagent, the vial is capped, and the
mixture of the sample and the reagent is incubated for 60 minutes (Step 3).
After one hour, the reagent mixture is poured into the ViraZyme collection
device (Step 4). If influenza is present, a blue color will appear, indicating a
positive result; if there is a negative result, there will be no color change in
the device. A positive test result is predictive of influenza, while a negative
test result is presumptive that influenza is not present.

Product Status. The Company received FDA 510(k) clearance for its ZstatFlu
product on September 10, 1997. The Company expects to sell ZstatFlu at a price
to distributors between $12 to $15 per unit, depending on volume discounts.

OTHER PRODUCTS CLEARED BY THE FDA

The following products previously developed by the Company have received
clearance from the FDA and were successfully developed for strategic regulatory
purposes; however, the Company has chosen not to expend resources to market
these products and there can be no assurance that markets for these products
will be significant or that the Company will ever market them.

ViraZyme Culture Screen. ViraZyme Culture Screen is a product available to
clinical labs, in contrast to the use of ZstatFlu in physician office
laboratories. The Company believes that the Culture Screen product reduces
labor-intensive procedures in the clinical laboratory, thereby reducing costs.
The FDA cleared this product in June 1996.

ViraSTAT Parainfluenza 1, 2 and 3. ViraSTAT Parainfluenza 1, 2 and 3 is the
first of a series of clinical lab products developed by the Company using MAb
technology. This product has several distinct advantages over time and
labor-intensive tests of other clinical lab products currently available. The
Company intends to develop other MAb-based products for the detection of
adenovirus, RSV and the influenza A/B products which comprise the respiratory
panel, and HSV types 1 and 2. The FDA cleared this product in 1995.

OTHER DIAGNOSTIC PRODUCTS IN DEVELOPMENT

ViraZyme Influenza ID A/B. The ZstatFlu product is designed to accurately
detect the presence of the influenza virus. However, this product does not
differentiate between Type A and Type B influenza. The identification of
influenza as either Type A or Type B is important for segments of the
marketplace which require definitive diagnosis for epidemiological purposes. The
Company may utilize its proprietary antibodies which target the influenza virus
to create a ViraZyme Influenza ID A/B test which would specifically and rapidly
identify the particular type of influenza present in a specimen should the
market support such a product.

ViraSTAT FITC Labeled Monoclonal Antibodies. The Company's scientific staff
has developed an improved proprietary method for directly labeling MAbs with the
commonly used fluorescent dye molecule fluorescein isothiocynate FITC.
Microscopy utilizing fluorescent antibodies represents the most efficient and
currently accepted method employed by clinical laboratories in the culture and
identification of viruses. Using its improved methods for directly labeling MAbs
with fluorescent dye, the Company has developed labeled MAbs for both Type A and
Type B influenza. These antibodies may be marketed separately or may be marketed
in a panel with other MAbs for detection of respiratory viruses. In-house
testing of these MAbs comparing them to those commercially available has found
the Company's ViraSTAT MAbs to be superior. Both influenza Type A and B MAbs
were successfully tested separately and as a pool in clinical studies during the
fall of 1996. These MAbs will be submitted for clearance under the FDA 510(k)
process. See "Risk Factors -- Government Regulation."

Herpes Simplex Virus. The Company has identified several promising enzyme
targets for HSV and the Company's technology is being focused on delivering a
rapid and simple diagnostic product for HSV for use in physician offices. The
Company has a goal of developing an HSV diagnostic within three years. There can
be no assurance that such a diagnostic product can be developed within such
time, or at all. See "Risk Factors -- No Assurance of Successful or Timely
Development of the Company's Therapeutic or Other Diagnostic Products."

24
<PAGE> 28

THERAPEUTIC RESEARCH PROGRAM

Influenza Therapeutic Development. The Company is pursuing the discovery of
therapeutic compounds for influenza. A significant issue in the development of
an influenza therapeutic is the specificity of the molecule to its targeted
site. The Company has demonstrated in its laboratories specific activity at a
targeted viral enzyme site with its novel compounds and has achieved a
significant advance in the development of its therapeutic program. The Company
has identified specific attributes of a molecule that is highly active as an
inhibitor to the target site of the influenza virus. These newly identified
attributes combined with the Company's demonstrated specificity provide the
basic model for the development of further novel compounds for use as influenza
therapeutics. See "Risk Factors -- No Assurance of Successful or Timely
Development of the Company's Therapeutic or Other Diagnostic Products."

The following are milestones for the development of an influenza
therapeutic. Beginning with Milestone "5" and thereafter, the Company believes
that a pharmaceutical corporate partner will be necessary to co-develop this
drug and perform the clinical trials. The Company has not initiated substantial
discussions with such a partner.

<TABLE>
<CAPTION>
VIRAZYME INFLUENZA THERAPEUTIC DEVELOPMENT MILESTONES STATUS
----------------------------------------------------- ------
<S> <C>
1. Identification of novel, highly specific family of
compounds................................................. Completed
2. Selection of a "lead" compound (specific inhibitors)..... In Process
3. Plaque assay determination of utility.................... In Process
4. Viral specificity testing of potential lead compounds.... In Process
5. Animal testing of potential lead compounds............... 2nd Quarter FY '98
6. Initiate Phase I trials (safety challenge)............... Unscheduled
7. Initiate Phase II trials (dose ranging).................. Unscheduled
8. Initiate Phase III trials (proof of efficacy)............ Unscheduled
</TABLE>

There can be no assurance that such milestones will be achieved on
schedule, or at all. See "Risk Factors -- No Assurance of Successful or Timely
Development of the Company's Therapeutic or Other Diagnostic Products."

Herpes Simplex Virus. Currently the only effective therapeutic products
generally accepted for treatment of HSV are Glaxo Wellcome's acyclovir and
valcyclovir, and SmithKline Beecham's famciclovir. The Company's HSV development
program is focused on enzymes that are oriented to the maturation or propagation
of the HSV virus. The Company believes that the mode of action of a
Company-developed product will be different than that of acyclovir, and that its
technology could lead to an alternative product. The Company has a goal of
identifying in the next four years lead compounds for HSV therapeutic
development. There can be no assurance that such compounds can be identified
within such time or at all. See "Risk Factors -- No Assurance of Successful or
Timely Development of the Company's Therapeutic or Other Diagnostic Products."

SALES AND MARKETING

Primary Care Market. The principal market for the Company's ZstatFlu
product is physicians' office laboratories, of which there are an estimated
100,000 in the U.S. The ability of a physician to conduct diagnostic tests in
the office enables the physician to identify and run additional tests that help
establish the basis for a firm diagnosis and a sound therapeutic decision. The
most effective means of reaching the physicians' office laboratory market is for
the Company to enter into marketing agreements with distributors or other
companies already reaching these physicians, thereby serving the major market
segments. Following FDA 510(k) clearance of ZstatFlu on September 10, 1997, the
Company made distribution arrangements with Bergen Brunswig Drug Co. and
McKesson General Medical Corporation. See "Risk Factors -- Reliance on
Distributors."

The focus of the Company's sales effort during the first sales year will
principally be the primary care market, although some product may be sold to the
nursing home extended care market during the first year.

25
<PAGE> 29

As the Company's production capacity increases during the second sales year,
more emphasis will be given to expanding into other markets.

Managed Care Market. Distributors with well-trained sales forces will sell
the ZstatFlu product directly to physicians. For physicians that practice in the
managed care setting, the Company's strategy is to demonstrate a significant
savings and better utilization of antibiotics. It is recognized within the
healthcare industry that antibiotics are significantly over-utilized for upper
respiratory illness, which is of great concern and cost to HMO's and other
managed care organizations. Physicians, without proper diagnostic tools such as
ZstatFlu, are unable to accurately diagnose viral versus bacterial respiratory
infections. This contributes significantly to the overuse of antibiotics and the
resultant unnecessary cost to the healthcare system. Overuse of antibiotics also
contributes to development of drug resistance by certain bacteria. The Company
has targeted ZstatFlu to the managed care (HMO/PPO/PPM) segment where specific
controls can be readily put in place for insurers, physicians and patients that
will lead to both improved quality of care and reduced costs for management of
upper respiratory infections.

Pharmaco-Economic Model. The potential cost savings in using ZstatFlu has
been demonstrated in a pharmaco-economic model created by the Company. The
model, which is distributed by the Company to potential customers, is presently
being reviewed by the University of South Carolina Department of Pharmacy with
the intent to publish an outcome analysis of the management of upper respiratory
infection. The purpose of the interactive computer model is to demonstrate to
the managed care market the potential savings that would become available
through the implementation of a practice protocol that utilized ZstatFlu. The
interactive feature of such model allows the managed care company to input its
own statistical data to calculate total or segment-specific savings potentials.

The basic approach of the model is to treat an upper respiratory infection
complaint as an episode, during which a number of medical cost-bearing
activities occur. In this manner, the costs associated with conventional upper
respiratory infection treatment procedures can be compared to a new treatment
procedure involving ZstatFlu. The potential cost savings are then converted to
savings per capitated life for the managed care company.

The model considers the number of visits per influenza episode for
conventional treatment compared to treatment using ZstatFlu. It imposes a cost
per visit for the managed care company and the percentage of cases involving
upper respiratory complaints. The costs per visit include charges for the
physician evaluation, rapid strep cultures, influenza culture, blood count and
the prescription of antibiotics or decongestants. The model treats each of these
costs as variables, allowing the managed care unit to apply its empirical
percentages of involvement of those costs for comparison with use of ZstatFlu.

In comparing the cost of conventional treatment per influenza episode with
the treatment involving ZstatFlu, the managed care company can assess the impact
of reducing the percentage of cases in which antibiotics are prescribed, as well
as the potential reduction in expenses by utilizing nurse triage with the
ZstatFlu prior to involving a physician evaluation.

For example, a managed care company with 100,000 capitated lives may
experience physician involvement in 100% of upper respiratory infection
episodes. Its experience may also be that a range of diagnostic procedures are
run, with strep tests in 20%, a blood count in 10% and culture tests in 1% of
those cases. Antibiotics may be prescribed in 70% of those cases. With the
availability of ZstatFlu, as demonstrated by the pharmaco-economic model, the
introduction of a nurse triage function in 20% of the cases and a concurrent
reduction in antibiotic prescriptions in 35% of the cases, will result in a 13%
reduction in the cost per episode, even after the cost of the ZstatFlu unit. The
figures used in this example represent mid-ranges in national averages.

The cost benefit generated by the use of ZstatFlu is greater if the number
of subsequent physician visits is reduced by the use of ZstatFlu. This is
because 50% of physician visits for upper respiratory illness result in
subsequent visits to the physician. The extent to which managed care companies
can reduce subsequent visits through use of ZstatFlu will make the cost savings
more significant.

26
<PAGE> 30

The Company has held conferences with major regional HMO's in the U.S. to
demonstrate the cost benefits of ZstatFlu in the managed care environment. At
the time of launch of ZstatFlu, the Company will market heavily to medical
directors of significant HMO's. As an HMO adopts the Company's procedure for
managing upper respiratory infection, instruction is expected to pass down to
the HMO's primary care facilities which will facilitate the sales effort of the
distributors' salespeople for those accounts. NCI Managed Care, a consulting
firm in the health industry, provides the Company with consulting services
relating to marketing to managed care companies.

Therapeutic Products. For its therapeutic products, the Company does not
intend to establish its own sales and marketing force, but will seek
collaborative relationships with pharmaceutical companies. In the event that
potential collaborative partners are identified, the Company will need to
negotiate and enter into definitive agreements for the development of such
therapeutic products. There can be no assurance that the Company will be
successful in contracting with other firms for the collaborative development of
therapeutic products based on the ViraZyme technology or that any such
agreements will be on terms favorable to the Company. See "Risk
Factors -- Dependence on Corporate Collaborations for Therapeutic Products" and
"Risk Factors -- No Manufacturing Capability; Reliance on Third-Party
Manufacturers."

MANUFACTURING ARRANGEMENTS; SOURCES OF RAW MATERIAL

The Company has committed to pay DCL to process raw material into ZstatFlu
units at specified batch prices. Unit prices will vary depending upon batch
yields. Production commenced in August 1997 and is expected to continue through
November 1997. Beginning with the 1998-99 influenza season, the Company intends
to establish its own production facility located in Oklahoma. However, the
Company will do so only if conditions indicate that having its own facility will
result in no increased production costs per unit and the availability of the
principal chemical compound for ZstatFlu does not make outsourcing advantageous
relative to production by the Company.

The Company has placed purchase orders for the chemical compounds necessary
for the 1997-98 influenza season production requirements, and material is
currently available in quantities and within delivery schedules that meet the
Company's requirements. As indicated above, if material becomes available from a
greater number of suppliers and at lower costs, the Company will be less
inclined to produce ZstatFlu itself for the 1998-99 influenza season.

The Company has the technical capability with its existing personnel to
produce the chemical for ZstatFlu in the event the Company establishes its own
production facility. Additional technicians would be required, however, for the
Company to conduct its own production operation.

EUROPEAN MARKET

Requirements for marketing a diagnostic product in Europe are generally
less stringent than in the U.S. Once an application for marketing clearance is
submitted to the FDA, the product covered by such application may be marketed in
certain European countries. Accordingly, to take advantage of the 1997-98
influenza selling season in Europe, the Company entered into a contract with JLC
of Geneva, Switzerland ("JLC") pursuant to which JLC will proceed with the
fulfillment of the Company's marketing requirements in certain European
countries for the coming influenza season and assist the Company in establishing
an effective European distributor network. JLC has, during the past 10 years,
assisted other American biotechnology companies in successfully marketing
products in Europe. The Company has established a marketing office in Geneva,
Switzerland.

COMPETITION

Competition in the Company's markets is intense. The Company competes with
a large number of companies ranging from very small businesses to large
diagnostic, healthcare, pharmaceutical, biomedical and chemical companies, many
of which have substantially greater financial, manufacturing, marketing and
product research resources than the Company. Academic institutions, governmental
agencies and other public and private research organizations are also conducting
research activities and may commercialize products on

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<PAGE> 31

their own or through joint ventures. The Company intends to compete primarily on
the basis of the clinical utility, accuracy, speed, ease of use and other
performance characteristics of its products and, to a lesser degree, on the
price of its products.

The Company is aware that other companies are developing influenza
diagnostics which may compete with the Company's products. These diagnostic
products could compete directly with ZstatFlu and other Company products which
utilize the Company's ViraZyme technology. The existence of these and other
competing products or procedures that may be developed in the future may
adversely affect the marketability of products developed by the Company.

Although the Company's existing licensed patent rights cover a broad field
of viral diagnostics, the Company is aware of the efforts of others to develop
diagnostics for viral disease. Quidel, working with Glaxo Wellcome, and Biostar,
working with Biota Holdings, Ltd. ("Biota"), have each publicly announced
influenza diagnostic programs. The Company believes that the primary methods
being used by these competitors and others to develop such diagnostics are
substantially different than the Company's methods and do not offer the
anticipated market advantages of the ViraZyme system. There can be no assurance,
however, that the Company will be successful in fully developing its products so
that such expected marketing advantages will be realized or that the competitive
advantages of products of competitors will not exceed those of the Company's
products.

In addition, the Company is aware of influenza therapeutic programs of
other companies; specifically Glaxo Wellcome, whose influenza therapeutic the
Company believes is in FDA Phase III clinical trials, and Roche, which has begun
Phase I or Phase II clinical trials for its therapeutic for influenza. Programs
underway at Glaxo Wellcome and Roche both involve inhibition of enzymes in a
manner similar to the Company's approach. The Company recognizes that these two
competitors are further advanced in the development of therapeutics than is the
Company and may come to the market with a therapeutic product earlier than the
Company, which could be a barrier to market acceptance of the Company's product,
if developed.

A therapeutic product developed by Glaxo Wellcome or Roche will be a strong
competitor for any therapeutic which the Company may develop, because of the
size and resources of such companies. In the event the Company develops a
therapeutic product, it plans to contract with a large pharmaceutical company to
increase the Company's ability to compete against large companies such as Glaxo
Wellcome or Roche. There can be no assurance that such a contract can be secured
on terms satisfactory to the Company, or at all. See "-- Intellectual Property"
and "Risk Factors -- Dependence on Corporate Collaborations for Therapeutic
Products."

The Company's competitive position will also depend on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, implement production and marketing plans, obtain patent
protection and obtain adequate capital resources. See "Risk
Factors -- Dependence on Key Personnel" and "Management."

INTELLECTUAL PROPERTY

License From OMRF. Under the terms of the OMRF License, the Company has
been granted an exclusive, perpetual, worldwide license covering all of the
patents which comprise the ViraZyme technology and all foreign patents and
patent applications corresponding to those patent applications (the "Patent
Rights"). The issued U.S. patents covered by the OMRF License expire in the U.S.
from 2010 to 2014. The Patent Rights relate to the methods for use of naturally
occurring viral enzymes to detect the presence of a specific virus from a
patient specimen with the test yielding a visible reaction, as well as patents
on specific novel compounds, synthesis pathways and composition of matter. The
OMRF License grants the Company the perpetual, exclusive worldwide right to
manufacture, have manufactured, use, sell or have sold, products made under the
Patent Rights. In consideration for the OMRF License, the Company has: (i) paid
OMRF a license fee of $825,000; (ii) executed the License Note in the principal
amount of $425,000; (iii) granted OMRF a 2.0% royalty on net sales of products
covered by the OMRF License; (iv) granted to OMRF a warrant (the "OMRF License
Warrant") to purchase 5,667 shares of Common Stock at $3.20 per share; and (v)
issued to OMRF 165,130 shares of Common Stock (inclusive of 39,062 shares issued
upon conversion of

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<PAGE> 32

Series B Preferred). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a more detailed discussion of the terms
of the License Note issued to OMRF.

Although the scope of patent protection is difficult to quantify, the
Company believes that the OMRF License to the Patent Rights should afford
adequate protection to conduct its business as described in this Prospectus.
Under the terms of the OMRF License, the Company assumed responsibility to pay
Biota a royalty of 4% of the revenues derived by the Company from sales of
diagnostic products developed during a research collaboration between Symex
Corp. ("Symex") and Biota or utilizing intellectual property ("Collaboration
Intellectual Property") developed during or as a result of this research
collaboration. The Company does not believe that the ZstatFlu product utilizes
Collaboration Intellectual Property or other compounds developed during or as a
result of this collaboration and, therefore, does not believe that a royalty
will be due Biota. However, there can be no assurance that Biota will not be
successful in establishing that ZstatFlu utilizes Collaboration Intellectual
Property and that a royalty will be due Biota. In the event that a royalty is
payable, royalty payments to OMRF will be offset by any royalties payable to
Biota, and the Company does not believe that such obligation to Biota would
materially adversely affect the Company's capitalization or operations.

The technology licensed from OMRF was acquired by OMRF in 1993 pursuant to
the foreclosure by OMRF on the intellectual property of Symex. OMRF foreclosed
on such intellectual property when Symex defaulted in the repayment of $380,714
owed to OMRF. See "Certain Relationships and Related Transactions." Subsequent
to such foreclosure, the principal managerial and scientific personnel of Symex
were hired as employees of OMRF and continued as such until January 1, 1996,
when OMRF provided the services of such employees to the Company on a lease
basis. See "-- OMRF Support" and "-- Employees."

The Company believes that the family of compounds being developed by it for
therapeutic use are not within the claims of any other company, including Glaxo
Wellcome or Roche, who the Company is aware have filed patent applications for
certain therapeutic products based upon the review of patent disclosures made by
such companies. Biota also has exclusive rights to any Collaboration
Intellectual Property which is useful as an influenza therapeutic. The Company
believes that no compounds which are under development by the Company for an
influenza therapeutic constitute Collaboration Intellectual Property. See "Risk
Factors -- Limitations on Protection of Intellectual Property."

Other Proprietary Rights. In addition to Patent Rights, the Company relies
on trade secrets, trademarks and nondisclosure agreements to establish and
protect its proprietary rights. Despite these precautions, it may be possible
for unauthorized third parties to utilize the Company's technology or to obtain
and use information that the Company regards as proprietary. The laws of some
foreign countries do not protect the Company's proprietary rights in its
processes and products to the same extent as do the laws of the U.S.

The Company relies substantially on certain technologies which are not
patentable or proprietary and therefore may be available to the Company's
competitors. In addition, many of the processes and much of the know-how of
importance to the Company's technology are dependent upon the skills, knowledge
and experience of its scientific and technical personnel, which skills,
knowledge and experience are not patentable. To protect its rights in these
areas, the Company requires all employees, significant consultants and advisors,
and collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
the Company's trade secrets, know-how or other proprietary information in the
event of unauthorized use or disclosure of such trade secrets, know-how or
proprietary information. Further, in the absence of patent protection, the
Company may be exposed to competitors who independently develop substantially
equivalent technology or otherwise gain access to the Company's trade secrets,
knowledge or other proprietary information. ViraZyme and ViraSTAT are trademarks
registered to OMRF and licensed to the Company under the terms of the OMRF
License.

GOVERNMENT REGULATION

The following is a summary of principal areas of governmental regulation
which affect the Company and its operations. Any change in governmental
regulations or in the interpretation thereof could have a material adverse
effect on the Company.

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<PAGE> 33

Therapeutic Products. The production and marketing of the Company's
therapeutic products and its therapeutic research and development activities are
subject to regulation for safety, efficacy and quality by numerous governmental
authorities in the U.S. and other countries. In the U.S., drugs are subject to
rigorous regulation. The Federal Food, Drug and Cosmetics Act, as amended, and
the regulations promulgated thereunder, as well as other Federal and state
statutes and regulations, govern, among other things, the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of the Company's proposed therapeutic products. Product development
and approval within this regulatory framework take a number of years and involve
the expenditure of substantial resources. In addition to obtaining FDA approval
for each product, each drug manufacturing establishment must be registered with,
and approved by, the FDA. Domestic manufacturing establishments are subject to
regular inspections by the FDA and must comply with GMP. To supply products for
use in the U.S., foreign manufacturing establishments must also comply with GMP
and are subject to periodic inspection by the FDA or by regulatory authorities
in certain of such countries under reciprocal agreement with the FDA.

NEW DRUG DEVELOPMENT AND APPROVAL. The U.S. system of new drug approval
is the most rigorous in the world. According to a February 1993 report by the
Congressional Office of Technology Assessment, it cost an average of $359
million and took an average of 12 years from discovery of a compound to bring a
single new pharmaceutical product to market. Approximately one in 1,000
compounds that enter the pre-clinical testing stage eventually makes it to human
testing and only one-fifth of those are ultimately approved for
commercialization. In recent years, societal and governmental pressures have
created the expectation that drug discovery and development costs can be reduced
without sacrificing safety, efficacy and innovation. The need to significantly
improve or provide alternative strategies for successful pharmaceutical
discovery, research and development remains a major health care industry
challenge.

PRE-CLINICAL TESTING. During the pre-clinical testing stage, laboratory
and animal studies are conducted to show biological activity of the compound
against the targeted disease, and the compound is evaluated for safety. These
tests can take up to three years or more to complete.

INVESTIGATIONAL NEW DRUG APPLICATION. After pre-clinical testing, an IND
is filed with the FDA to begin human testing of the drug. The IND becomes
effective if the FDA does not reject it within 30 days. The IND must indicate
the results of previous experiments, how, where and by whom the new studies will
be conducted, how the chemical compound is manufactured, the method by which it
is believed to work in the human body, and any toxic effects of the compound
found in the animal studies. In addition, the IND must be reviewed and approved
by an institutional review board consisting of physicians at the hospital or
clinic where the proposed studies will be conducted. Progress reports detailing
the results of the clinical trials must be submitted at least annually to the
FDA.

PHASE I CLINICAL TRIALS. After an IND becomes effective, Phase I human
clinical trials can begin. These studies, involving usually between 20 and 80
healthy volunteers, can take up to one year or more to complete. The studies
determine a drug's safety profile, including the safe dosage range. The Phase I
clinical studies also determine how a drug is absorbed, distributed, metabolized
and excreted by the body, as well as the duration of its action.

PHASE II CLINICAL TRIALS. In Phase II clinical trials, controlled
studies of approximately 100 to 300 volunteer patients with the targeted disease
assess the drug's effectiveness. These studies are designed primarily to
evaluate the effectiveness of the drug on the volunteer patients as well as to
determine if there are any side effects on these patients. These studies can
take up to two years or more and may be conducted concurrently with Phase I
clinical trials. In addition, Phase I/II clinical trials may be conducted that
evaluate not only the efficacy but also the safety of the drug on the patient
population.

PHASE III CLINICAL TRIALS. This phase typically lasts up to three years
or more and usually involves 1,000 to 3,000 patients with the targeted disease.
During the Phase III clinical trials, physicians monitor the patients to
determine efficacy and to observe and report any adverse reactions that may
result from long-term use of the drug.

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<PAGE> 34

NEW DRUG APPLICATION ("NDA"). After the completion of all three clinical
trial phases, the data are analyzed and if the data indicate that the drug is
safe and effective, an NDA is filed with the FDA. The NDA must contain all of
the information on the drug that has been gathered to date, including data from
the clinical trials. NDAs are often over 100,000 pages in length. The average
NDA review time for new pharmaceuticals approved in 1995 was approximately 19
months.

FAST TRACK REVIEW. In December 1992, the FDA formalized procedures for
accelerating the approval of drugs to be marketed for the treatment of certain
serious diseases for which no satisfactory alternative treatment exists, such as
Alzheimer's disease and AIDS. If it is demonstrated that the drug has a positive
effect on survival or irreversible morbidity during Phase II clinical trials,
then the FDA may approve the drug for marketing without completion of Phase III
testing. The Company does not believe that an influenza therapeutic product will
be eligible for fast track review.

APPROVAL. If the FDA approves the NDA, the drug becomes available for
physicians to prescribe. The Company must continue to submit periodic reports to
the FDA, including descriptions of any adverse reactions reported. For certain
drugs which are administered on a long-term basis, the FDA may request
additional clinical studies (Phase IV) after the drug has begun to be marketed
to evaluate long-term effects.

Regulation of Diagnostic Products. The manufacture, distribution and sale
of any of the Company's products in the U.S. for clinical diagnostic purposes
will require prior authorization by the FDA. The FDA and similar agencies in
foreign countries, especially Japan, have promulgated substantial regulations
which apply to the testing, marketing, export and manufacturing of diagnostic
products. To obtain FDA clearance of a new product for diagnostic purposes, the
Company will, in most cases, be required to submit proof of the safety and
efficacy of the product. Such proof typically entails clinical and laboratory
tests. The testing, preparation of necessary applications and processing of
those applications by the FDA is expensive and time consuming.

The clinical testing required by the Company's diagnostic products is
expected to be significantly less extensive than that typically required for the
development of a drug or therapeutic product or for an invasive procedure.
Nevertheless, these clinical testing protocols may take several months or even
years to complete, depending on the nature of the filing. There can be no
assurance that the FDA will act favorably or quickly in making its review, and
significant difficulties or costs may be encountered by the Company in its
effort to obtain FDA clearances that could delay or preclude the Company from
marketing its products for diagnostic purposes. Furthermore, there can be no
assurance that the FDA will not request the development of additional data
following the original submission. Based upon the data submitted to it, the FDA
may also limit the scope of the labeling or permitted use of the product or deny
the application all together. With respect to patented products or technologies,
delays imposed by the governmental approval process may materially reduce the
period during which the Company will have the exclusive right to exploit those
products or technologies.

The marketability of the Company's diagnostic products may also be affected
by certain state and Federal legislation covering the use of diagnostic tests in
physician offices, including CLIA which requires physicians' offices conducting
tests which require sophisticated instruments or specially trained personnel to
be certified or licensed under CLIA. Although the Company believes that CLIA
regulations apply, it does not believe that CLIA will restrict the use of the
Company's diagnostic products in its target markets; however, there can be no
assurance that this will be true and such restrictions could severely limit the
marketability of the Company's planned products.

The Company's currently contemplated diagnostic products are regulated as
medical devices. Prior to entering commercial distribution, all medical devices
must undergo FDA review under one of two basic review procedures: a Section
510(k) premarket notification or a premarket approval application ("PMA"). A
510(k) is generally a relatively simple filing submitted to demonstrate that the
product in question is "substantially equivalent" to another legally marketed
device. In the event any of the Company's diagnostic products do not qualify for
clearance under the 510(k) procedure, it may be required to file a PMA which
shows (i) that the product is safe and effective based on extensive clinical
testing among several diverse testing sites and population groups; and (ii) that
the product has acceptable sensitivity and specificity. This requires much more
extensive testing than does the 510(k) procedure and involves a significantly
longer FDA review after

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the date of filing. In response to a PMA, the FDA may grant marketing clearance,
may request additional information, may set restrictive limits on claims for use
or may deny the application all together.

After product clearance has been received, such clearance may still be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. The FDA may require
surveillance programs to monitor the effect of products which have been
commercialized, and has the power to prevent or limit further marketing of the
products based on the results of these post-marketing programs. In addition to
obtaining FDA approval for each product, the FDA must, under the PMA guidelines,
approve the manufacturing facilities and procedures for the product. The FDA
will also inspect diagnostic companies on a routine basis for regulatory
compliance with its "Good Manufacturing Practices." The Company believes that
the use of its diagnostic products will not be restricted in physician office
laboratories located within the Company's target markets. See "Risk
Factors -- Government Regulation."

Regulation by Foreign Governments. Sales of the Company's products outside
the U.S. are also subject to certain regulatory requirements imposed by foreign
governments. Regulatory requirements for diagnostic products vary significantly
from country to country. Regulations in Western Europe, Canada, Australia, Japan
and other developed (non third-world) countries are often less stringent than
are the regulatory requirements in the U.S. The time to meet such regulatory
requirements outside the U.S. may be longer or shorter than that required to
achieve U.S. clearance.

Other Government Regulation. In addition to regulations enforced by the
FDA, the Company also is or will be subject to regulation under CLIA, the
Occupational Safety and Health Act, the Environmental Protection Act, the
Resource Conservation and Recovery Act and other present and future Federal,
state or local regulations. The Company's research and development activities
involve the controlled use of hazardous materials, chemicals and viruses.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standard prescribed by state and
Federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result, and any such liability
could exceed the resources of the Company.

OMRF SUPPORT

Until January 1, 1996, the scientific and product development activities
relating to the ViraZyme technology were conducted by OMRF. Since that time,
although the Company has performed those functions, OMRF has continued to
provide, on a marginal cost basis, significant supportive and collaborative
resources permitting the Company to access state-of-the-art facilities,
equipment, services and personnel. See "-- Employees." This operational
relationship will continue until 1999. This relationship has permitted the
Company to handle purchasing, equipment services and other non-technology
related needs without significant staffing increases and thereby apply more of
the Company's resources to technology and market development. The impact of this
support is expected to diminish in fiscal 1998 and thereafter as the Company
continues to hire personnel outside of the OMRF arrangement and assume the
performance of such services.

EMPLOYEES

The Company had 22 employees as of September 15, 1997, comprising 10
laboratory personnel, two manufacturing employees, five marketing employees and
five employees in finance and administration. Four of the Company's scientific
personnel and Mr. Livingston are employed by OMRF and their services are
provided to the Company by OMRF on a lease basis. As OMRF employees, these five
persons participate in retirement, health insurance, life insurance and other
employee benefit programs which, at the inception of this arrangement would have
otherwise been unavailable to the Company or would have represented a
prohibitive compensation expense. The Company reimburses OMRF on a monthly basis
for OMRF's costs associated with such employees, and these costs consist
primarily of salaries, payroll taxes, health insurance and life insurance
premiums and contributions to an employee participant retirement plan. Such
leasing arrangement is expected to continue until 1999. See "-- OMRF Support."
All other personnel are employees of the Company.

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The Company believes that its relations with its personnel are excellent.
The future success of the Company will depend in large part upon its continued
ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense. See "Risk Factors -- Dependence on
Key Personnel" and "Certain Relationships and Related Transactions."

FACILITIES

The Company leases approximately 10,000 square feet of laboratory and
office space located at 800 Research Parkway, Suite 100, Oklahoma City,
Oklahoma, pursuant to the terms of a lease (the "Presbyterian Lease") with
Presbyterian Health Foundation ("Presbyterian"). Approximately 1,000 square feet
of such leased space is subleased to OMRF for a technology transfer office. The
Presbyterian Lease has a term expiring March 1, 2002, with no rent payable
before March 1, 1999, and, thereafter, annual rent is payable at the rate of
$15.00 per square foot. The Company incurred certain leasehold improvements
which exceeded the defined tenant improvement allowance (the "Tenant Allowance
Overage") provided for under the lease. This Tenant Allowance Overage bears
interest at a rate of 10% over the repayment term of 60 months, with interest
only due for the first 24 months and principal and interest due monthly over the
final 36 months of the repayment term. The Tenant Allowance Overage payments
plus interest which aggregate $405,494, are due in addition to the base rent. As
additional consideration for the Presbyterian Lease, Presbyterian received
warrants to purchase 20,000 shares of Common Stock at an exercise price of $3.20
per share. The Presbyterian Lease Warrant has a term expiring March 1, 2002. See
"Certain Relationships and Related Transactions." The Company's operations are
expected to require in early fiscal 1999 an additional 10,000 to 15,000 square
feet of laboratory and office space. The Company is in discussions with
Presbyterian regarding the lease of such additional space in the office park
where the Company's existing office space is located. No lease terms have been
determined for such additional space.

LEGAL PROCEEDINGS

The Company is not now engaged in any legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

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

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Peter G. Livingston(1)....... 43 President, Chief Executive Officer and Director
Craig D. Shimasaki, Ph.D..... 41 Vice President of Research
Gary W. Pedersen............. 52 Vice President of Marketing and Sales
Charles E. Seeney............ 54 Vice President of Operations and Strategic Development
G. Carl Gibson............... 38 Controller, Secretary, Treasurer
William I. Bergman(2)........ 66 Director
William A. Hagstrom(3)....... 40 Director
J. Vernon Knight, M.D.(1).... 80 Director
David E. Rainbolt(2)......... 41 Director
Gilbert M. Schiff, M.D.(3)... 66 Director
William G. Thurman, M.D.(1).. 69 Director
</TABLE>

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

(1) Class II Director, whose term will expire at the 1999 Annual Meeting of
Stockholders.

(2) Class III Director, whose term will expire at the 2000 Annual Meeting of
Stockholders.

(3) Class I Director, whose term will expire at the 1998 Annual Meeting of
Stockholders.

Under the terms of the Placement Agency Agreement with Spencer Trask
Securities Incorporated ("Spencer Trask"), the Company has agreed upon request
of Spencer Trask, to elect to the Board of Directors at least one director,
reasonably acceptable to Spencer Trask, who is not affiliated with either the
Company or Spencer Trask. Spencer Trask has designated Mr. Bergman and Dr.
Knight as such directors, and both men have been elected to serve as directors
of the Company. Certain stockholders and all executive officers and directors of
the Company must vote in favor of such persons nominated by the Placement Agent
to stand for election to the Company's Board of Directors, and the Company must
use its best efforts, including the solicitation of proxies on behalf of such
nominees, to elect such nominees to the Board of Directors.

The Company's Certificate of Incorporation and Bylaws provide for the
division of the Board of Directors into three classes, each class consisting (as
nearly as possible) of one-third of the whole. The term of office of one class
of directors expires each year, with each class of directors being elected for a
term of three years and until the stockholders elect their qualified successors.
The Company's Bylaws provide that the Board of Directors by resolution from time
to time may fix the number of directors that shall constitute the whole Board of
Directors. The Board of Directors has set the number at seven.

Under certain registration rights granted to investors in private
placements of securities in 1996 and 1997, the Company must register 183,589
shares of Common Stock within six months from the closing of this Offering,
2,717,787 13-Month Lock-up Shares upon expiration of the 13-month lock-up period
and 115,624 24-Month Lock-up Shares upon expiration of the 24-month lock-up
period. See "Risk Factors -- Shares Eligible for Future Sale." If the Company
fails to register such shares as required, the Company must repurchase the
shares at fair market value. If the Company fails to repurchase the shares, such
stockholders have the right to elect a majority of the Board of Directors. See
"Shares Eligible for Future Sale" and "Description of Securities -- Common
Stock."

The following sets forth certain information concerning the directors and
executive officers of the Company.

Peter G. Livingston has served as President and as a director of the
Company since its incorporation. From September 1993 until January 1996, he also
served as Head, Virology Research Program at OMRF, for the purpose of organizing
the Company and continuing the development of the Company's technology. From
1990 to September 1993, he served as President of Symex. From 1988 to 1990, Mr.
Livingston was President

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<PAGE> 38

of Eagle Technologies Company, Inc., which designed and manufactured precision
plastic medical/laboratory components. From 1986 to 1988, he was Director of
Marketing for Biotechnology for Phillips Petroleum Company. Prior to 1986 he was
Director of New Products for McNeil Pharmaceuticals, a division of Johnson &
Johnson.

Craig D. Shimasaki, Ph.D., has served as Vice President of Research and the
Company's Acting Section Head of Biochemistry since January 1996. From September
1993 to January 1996 he was employed by OMRF as a Research Scientist. From
August 1987 until September 1993, he served as Executive Director of Research
and Department Head of Biochemistry of Symex. From October 1983 to July 1987 he
worked at Genentech, Inc. as a research associate in its HIV program. Dr.
Shimasaki has set up the Company's Biochemistry Department and co-developed and
implemented a GMP manufacturing documentation system and manufacturing area. He
has developed and optimized fluorescent antibody coupling procedures which have
resulted in the investigational ViraSTAT parainfluenza MAb kit. His work
includes the purification and characterization of influenza virus and MAbs, and
the co-development of the format of the ViraZyme assay. He is a co-inventor of
the patent for the method of the ViraZyme influenza viral detection in clinical
specimens. Dr. Shimasaki received his B.S. in Biochemistry from the University
of California at Davis and his Ph.D. in Molecular Biology and Biotechnology from
the University of Tulsa.

Gary W. Pedersen has served as Vice President for Marketing and Sales since
May 1997. From May 1995 to May 1997, Mr. Pedersen participated in various
entrepreneurial efforts in the healthcare field. From July 1994 to May 1995 he
was Vice President of Marketing at General Medical Corporation. From June 1986
to July 1994, he served in various executive positions at Anago Incorporated,
most recently serving as Senior Vice President of Sales and Marketing. Mr.
Pedersen holds a B.A. from Oakland University.

Charles E. Seeney has served as Vice President for Operations and Strategic
Development since November 1996. From August 1990 to November 1996, he held
positions with Kerr McGee Chemical Company, most recently serving as Manager,
New Product Development. From August 1978 to August 1990, Mr. Seeney served as
President of IMCERA Bioproducts, Inc., a division of the IMCERA Group. He holds
an M.S. in Polymer Science from the Institute of Polymer Science -- The
University of Akron, and a B.S. in Organic Chemistry from Lincoln University of
Missouri.

G. Carl Gibson has served as Controller and Treasurer since May 1997 and as
Secretary since August 1997. From December 1989 to May 1997, he was the Chief
Operating Officer of First Commercial Bank, SSB, Lawton and Norman, Oklahoma.
From February 1985 to December 1989 he was the Chief Financial Officer at
Citizens Bank in Lawton, Oklahoma. Mr. Gibson received his B.A. in Accounting
from the University of Oklahoma and is a Certified Public Accountant.

William I. Bergman has served as a director of the Company since 1996.
Since 1990, Mr. Bergman has served as President of the Council on Family Health.
Mr. Bergman served in various positions with Richardson-Vicks Inc., a health and
personal care products company, from 1952 until he retired in 1990. From 1985 to
1990 he served as President of Richardson-Vicks USA and, contemporaneous
therewith, from 1988 to 1990 as Vice President of its parent, the Proctor &
Gamble Company. Mr. Bergman serves as a director of Penederm Inc., a publicly
held development stage company engaged in developing skin and healthcare
products.

William A. Hagstrom has served as a director of the Company since 1994.
Since 1989, he has been President and Chief Executive Officer of UroCor, Inc.,
which provides a broad range of diagnostic and clinical services to the urology
market to assist in the diagnosis, prognosis and management of urological
cancers. Prior to joining UroCor, Inc., he was Vice-President of the Scientific
Products Division of Baxter-Travenol, a medical products company, where he
served in various marketing, sales, product planning and general management
positions from 1982 to 1989.

J. Vernon Knight, M.D., has served as a director of the Company since May
1996. Since 1966 he has held a variety of positions at Baylor College of
Medicine, including Professor and Chairman of the Department of Microbiology and
Immunology, Director of the Department of the Center for Biotechnology, and
Professor and Acting Chairman of the Department of Molecular Physiology and
Biophysics, and as Clinical Director of

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<PAGE> 39

the National Institute of Allergy and Infectious Disease at the National
Institutes of Health from 1959 until 1966.

David E. Rainbolt has served as a director of the Company since January
1997. Since 1984, he has been a director of BancFirst Corporation ("BancFirst"),
serving as President and Chief Executive Officer of BancFirst since January 1992
and as Executive Vice President and Chief Financial Officer from July 1984 to
December 1991. Mr. Rainbolt was President of Trencor, Inc. from January 1982 to
January 1984.

Gilbert M. Schiff, M.D., has served as a director of the Company since
1994. From 1974 to 1995 he served as President of the Gamble Institute of
Medical Research in Cincinnati, Ohio, and from 1974 to 1992 he was Director of
the Division of Clinical Research at that institution. The Gamble Institute
merged with the Children's Hospital Research Foundation in October 1995 and
became the Gamble Program for Clinical Studies, with Dr. Schiff as the Director.

William G. Thurman, M.D., has served as a director of the Company since
August 1997. He joined OMRF in 1979 as President and Scientific Director and
retired in September 1997. He currently serves as President Emeritus of OMRF
with responsibilities in the area of OMRF's technology transfer activities. From
1975 to 1979 he also served as Provost of the University of Oklahoma Health
Sciences Center.

KEY PERSONNEL

Komandoor E. Achyuthan, Ph.D., 42, has served as the Company's Section Head
of Enzyme Studies since August 1995 and is responsible for analysis of the
enzyme interaction of substrate and inhibitor molecules, as well as conducting
shelf life studies for the Company's products. From March 1994 to August 1995 he
was affiliated with the Noble Research Foundation at OMRF as a Research
Scientist, and from July 1986 to February 1994 he served as an Assistant
Research Professor at Duke University Medical Center. He received his B.S. in
Science and his M.S. and Ph.D. in Biochemistry from Osmania University,
Hyderabad, India.

Joyce A. Hansjergen, 48, has served as Section Head of Hybridoma
Development and Viral Studies since January 1996. From September 1993 to January
1996 she was employed by OMRF as a Research Associate. From 1987 until September
1993 she served as Department Head of Cell Culture at Symex. Before joining
Symex, Ms. Hansjergen served in a variety of positions in the Research and
Development Department at Flow Laboratories, Inc., most recently serving as Lab
Manager/Research Associate. Ms. Hansjergen is responsible for the acquisition,
propagation and maintenance of the virus strains and isolates needed for the
ViraZyme and ViraSTAT technologies. Her responsibilities include in-house
pre-clinical studies and viral specificity testing. Ms. Hansjergen received her
B.S. in Biology from the University of Cincinnati.

Robert Hudson, M.D., 58, has served as Medical Director of the Company
since September 1997. From 1996 to August 1997 he was President of The Hudson
Group, a health care consulting company. From 1995 to 1996 he served as Chief
Medical Officer and Senior Vice President of MetraHealth, a managed care
organization. From 1989 to 1994 he was employed by Metropolitan Life Insurance
Company, serving most recently as National Director of Managed Indemnity and
PPO.

Avraham Liav, Ph.D., 56, has served as Section Head of Synthetic Organic
Chemistry of the Company since January 1996. From September 1993 to January 1996
he was employed by OMRF as a Research Scientist. From January 1990 to September
1993 he was Department Head of Organic Chemistry at Symex. Prior to January 1990
he served as a Senior Research Associate for the National Jewish Center for
Immunology and Respiratory Medicine in Denver, Colorado. Dr. Liav developed the
purification scheme of the first ViraZyme substrate, and synthesized two
substrates which are highly specific to the viral neuraminidase. Dr. Liav is a
co-inventor of the patent for the method of the ViraZyme influenza viral
detection in clinical specimens. Dr. Liav received his B.S. and M.S. in
Chemistry from Hebrew University in Israel. He received his Ph.D. from the
Weizmann Institute of Science in Rehovoth, Israel.

36
<PAGE> 40

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth all compensation paid to or earned by the
Company's President and Chief Executive Officer during fiscal 1997. No other
officer of the Company received compensation in excess of $100,000 during such
period. See "Business -- Employees."

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(1)
--------------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Peter G. Livingston,........................ 1997 $168,000(2) $25,000 195,000
President and Chief Executive Officer
</TABLE>

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

(1) Represents shares issuable pursuant to options granted under the Stock
Option Plan.

(2) Includes $48,000 related to compensation unpaid in prior years, payment of
which was contingent upon successful financing arrangements which were
accomplished in 1997.

OPTION GRANTS IN FISCAL 1997

The following table sets forth information concerning individual grants of
stock options made during fiscal 1997 to the Company's President and Chief
Executive Officer.

<TABLE>
<CAPTION>
PERCENT OF TOTAL
OPTIONS EXERCISE
NUMBER OF SECURITIES GRANTED TO OR BASE
UNDERLYING OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL 1997 SHARE DATE
---- -------------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
Peter G. Livingston............ 195,000 55.7% $1.00 1/3/2007
</TABLE>

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

(1) Represents shares issuable pursuant to options granted under the Plan.
Options to purchase 48,750 shares are currently vested and options to
purchase an additional 48,750 shares will vest on each of January 3, 1998,
1999 and 2000.

The Company currently has key man insurance in the amount of $1.0 million
on the life of Mr. Livingston.

The Company pays its outside directors for their services as directors an
annual retainer of $4,000 each, and outside directors have been granted options
to purchase shares of the Company's Common Stock. See "-- Stock Option
Plans -- Directors Stock Option Plan."

AGREEMENTS WITH OFFICERS

Effective July 1, 1997, the Company entered into an Executive Services
Agreement with Peter G. Livingston, providing for an annual salary of $145,000,
and an annual bonus up to 50%, if and to the extent awarded. The Executive
Services Agreement may be terminated by either party at any time upon 30 days
notice; however, if Mr. Livingston is terminated without cause he will be
entitled to: (i) continuation of his salary and benefits for 12 months; (ii) a
cash payment equal to 50% of the previous bonus paid to him; and (iii) vesting
of any stock options which were unvested but would vest within the 12 months
following such notice of termination.

The Company's Noncompetition Agreement with Craig D. Shimasaki, Ph.D.
provides that if the Company terminates the employment of Dr. Shimasaki without
cause, the Company shall pay Dr. Shimasaki compensation equal to his annual
salary at the time of his termination.

37
<PAGE> 41

STOCK OPTION PLANS

ZymeTx, Inc. Stock Option Plan. Under the ZymeTx, Inc. Stock Option Plan
(the "Plan"), incentive stock options, as provided in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and non-qualified stock
options which do not qualify as incentive stock options, may be granted to
certain employees. Employees of the Company eligible to participate in the Plan
are selected by the Compensation Committee which is appointed by the Board of
Directors and which administers the Plan. The Plan was adopted by the Board of
Directors and approved by the Company's stockholders in 1994.

The exercise price of options granted under the Plan may not be less than
100% of the fair market value of the Common Stock at the time of grant. Options
granted under the Plan may not be exercised later than 10 years from the date of
grant.

Under the terms of the Plan, aggregate fair market value of shares issuable
upon the exercise of incentive stock options granted thereunder exercisable for
the first time during any one calendar year may not exceed $100,000. Generally,
options granted under the Plan expire 30 days following termination of an
optionee's employment; however, upon death or disability of the optionee, the
option must be exercised within one year after such death or disability, but in
no event later than the originally prescribed term of the option. The Plan shall
terminate on May 2, 2004, unless previously terminated by the Board of
Directors.

Subject to the terms of the Plan, the Compensation Committee has the
authority to determine all terms and provisions under which options are granted
under the Plan, including the individuals to whom such options may be granted,
the exercise price and number of shares subject to such options, the time or
times during which all or a portion of each option may be exercised, and certain
other provisions of each option.

As of October 20, 1997, an aggregate of 618,750 shares of Common Stock were
reserved for issuance under both the Plan and the Directors Plan, as such term
is defined below, and 482,000 shares of Common Stock are subject to outstanding
options granted under the Plan.

Directors Stock Option Plan. Under the ZymeTx, Inc. Directors Stock Option
Plan (the "Directors Plan"), non-qualified stock options may be granted to
directors who are not employees of the Company. The Directors Plan was adopted
by the Board of Directors and approved by the Company's stockholders in 1994.

The exercise price of options granted under the Directors Plan may not be
less than 100% of the fair market value of the Common Stock at the time of
grant. Generally, options granted under the Directors Plan expire 30 days from
the date of termination of the director's service on the Board. Upon death or
disability, options must be exercised within one year after a director's death
or disability, but in no event later than the originally prescribed term of the
option. The Plan shall terminate on May 2, 2004, unless previously terminated by
the Board of Directors.

The Compensation Committee also administers the Directors Plan. Subject to
the terms of the Directors Plan, the Compensation Committee has the authority to
determine all terms and provisions under which options are granted under the
Directors Plan, including the individuals to whom such options may be granted,
the exercise price and number of shares subject to such options, the time or
times during which all or a portion of each option may be exercised, and certain
other provisions of each option.

Options have been granted under the Directors Plan to Mr. Bergman, Mr.
Hagstrom, Dr. Knight and Dr. Schiff, for each to purchase 25,000 shares of
Common Stock at an exercise price of $1.00 per share. These options vest over a
three-year period. For Mr. Hagstrom and Dr. Schiff, one-third of such options
was vested on January 3, 1997, the date of grant, and an additional one-third
will become vested on each of the next two anniversaries of the date of grant;
for Mr. Bergman and Dr. Knight, such options vest one-third per year on each of
the next three anniversaries of the date of grant.

COMMITTEES

The Company has an Audit Committee, a Compensation Committee and a Finance
Committee. After completion of this Offering, the Company intends to establish a
Scientific Advisory Board consisting of Dr. Knight, Dr. Schiff and Dr. Thurman
and other recognized scientists in virology and enzymology.

38
<PAGE> 42

Audit Committee. The Audit Committee's functions include: (i) reviewing and
recommending to the Board of Directors (subject to stockholder approval) the
independent auditors selected to audit the Company's financial statements,
including the review and approval of the fees charged for all services by the
independent auditors; (ii) reviewing the scope of the annual audit plan; (iii)
reviewing the audited financial statements of the Company; (iv) reviewing the
management letter comments from the Company's independent auditors, including
management's responses and plans of action; (v) reviewing the proposed annual
audit plan and objectives, quarterly reports of audit activity, and adequacy of
staff; (vi) reviewing from time to time the Company's general policies and
procedures with respect to auditing, accounting and the application of
resources; (vii) reviewing any other matters and making special inquiries and
investigations referred to it by the Board of Directors; and (viii) making other
recommendations to the Board of Directors as the committee may deem appropriate.
The members of the Audit Committee are Mr. Hagstrom and Mr. Rainbolt. Mr.
Gibson, Controller and Treasurer of the Company, serves as a non-voting,
ex-officio member of the Audit Committee.

Compensation Committee. The Compensation Committee's functions include: (i)
determining base salaries, annual incentive bonus awards and other compensation
awards to the executive officers of the Company; and (ii) administering the
Company's Stock Option Plan and Directors Plan. The members of the Compensation
Committee are Mr. Bergman and Mr. Hagstrom.

Finance Committee. The Finance Committee's functions include, generally, to
evaluate and make recommendations to the Board concerning the Company's
financing activities, and, specifically, approving matters relating to the 1997
Private Placement and this Offering. The members of the Finance Committee are
Mr. Hagstrom and Mr. Rainbolt.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Bylaws include certain provisions whereby officers and
directors of the Company are to be indemnified against certain liabilities. The
Certificate of Incorporation of the Company also limits, to the fullest extent
permitted by Delaware law, a director's liability for monetary damages for
breach of fiduciary duty, including gross negligence. Under Delaware law,
however, a director's liability cannot be limited for (i) breach of the
director's duty of loyalty; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law; (iii) the
unlawful payment of a dividend or unlawful stock purchase redemption; or (iv)
any transaction from which the director derives an improper personal benefit.
Delaware law does not eliminate a director's duty of care and this provision has
no affect on the availability of equitable remedies such as injunction or
rescission based upon a director's breach of the duty of care.

The Company has entered into indemnification agreements with each of its
current directors which provide for the indemnification of and the advancement
of expenses to such persons in instances where such persons are named in any
suit resulting from their tenure as a director of the Company. The Company
believes the limitation of liability provisions in the Certificate of
Incorporation, Bylaws and, should they become applicable, the indemnification
agreements, facilitate the Company's ability to continue to attract and retain
qualified individuals to serve as directors of the Company. In addition, the
Company intends to obtain directors' and officers' liability insurance.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As described below, on December 22, 1995, the Company, OMRF, ZymeTx
Purchase Partners ("ZPP") and Presbyterian entered into a Recapitalization
Letter of Intent (the "Recapitalization Letter of Intent"), which provided, in
general, for financing of the Company's operations for five months and the
transfer of technology and the provision of certain administrative and personnel
support by OMRF to the Company.

On January 16, 1996, pursuant to the terms of the Recapitalization Letter
of Intent, OMRF, ZPP and Presbyterian (the "Bridge Lenders") and the Company
entered into a Bridge Loan Agreement (the "Bridge Loan Agreement"), under which
the Bridge Lenders made loans (the "Bridge Loans") of an aggregate principal
amount of $350,500. OMRF, ZPP and Presbyterian made Bridge Loans in the
principal amounts of

39
<PAGE> 43

$87,500, $175,500 and $87,500, respectively. The Bridge Loans were evidenced by
promissory notes (the "Bridge Notes"), which bore interest at 8% per annum. On
July 29, 1996, the Company repaid all outstanding Bridge Notes, except for
Bridge Notes aggregating $87,500 held by Presbyterian, which were ultimately
canceled and converted into 27,344 shares of Common Stock.

As additional consideration for the Bridge Loans, the Company issued to the
Bridge Lenders the Bridge Warrants, each of which entitles the holder thereof to
purchase one share of Common Stock for $3.20. OMRF, ZPP and Presbyterian were
issued Bridge Warrants entitling them to purchase 21,875 shares, 43,875 shares
and 21,875 shares of Common Stock, respectively. The Bridge Warrants will expire
on March 1, 2004.

Pursuant to the terms of the Recapitalization Letter of Intent, ZPP
purchased 750,000 shares of Common Stock at a purchase price of $.004 per share.
The Recapitalization Letter of Intent also set out the terms of the OMRF License
and the Company's financial obligations thereunder, as well as OMRF's commitment
to purchase securities in the Company's 1996 private placement of securities
(the "1996 Private Placement") equivalent to 101,562 shares of Common Stock at
$3.20 per share. See "Business -- Intellectual Property."

In connection with the Recapitalization Letter of Intent, the Company and
Spencer Trask entered into a Placement Agency Agreement dated May 22, 1996 (the
"1996 Placement Agency Agreement"), relating to the 1996 Private Placement,
pursuant to which the Company sold Series A Preferred at a Common Stock
equivalent price of $3.20 per share. Kevin Kimberlin, a holder of more than 5%
of the outstanding Common Stock, is an affiliate of Spencer Trask. As a
consequence of the closing of the 1996 Private Placement, the Company paid
agent's fees and expenses of $565,290 to Spencer Trask, which is equal to 10% of
subscriptions from non-affiliates from the 1996 Private Placement, and a
non-accountable expense allowance equal to 2% of such subscriptions. In
addition, the Company issued to Spencer Trask warrants ("1996 Placement Agent
Warrants") to purchase 236,930 shares of Common Stock, which was equal to 15% of
the number of shares of Common Stock issuable upon conversion of the securities
sold by Spencer Trask in the 1996 Private Placement. The exercise price of the
1996 Placement Agent's Warrants is $3.20 per share. The 1996 Placement Agent's
Warrants will be exercisable until July 2, 2004.

The Company granted Spencer Trask a right of first refusal for five years
from July 29, 1996 to purchase for its own account or to act as underwriter or
agent for any proposed public or private offering of the Company's securities by
the Company or any officer, director or holder of 5% of more of the Company's
Common Stock outstanding immediately preceding July 29, 1996. Such right
entitles Spencer Trask to purchase or sell such securities on terms no less
favorable than the Company or its principal stockholders can obtain elsewhere.

The Recapitalization Letter of Intent also provided for employment of the
Company's staff by OMRF. Accordingly, on July 24, 1996, the Company and OMRF
entered into an Employee Services Agreement. See "Business -- Employees." In
addition, the Recapitalization Letter of Intent provided that the Company will
have access to OMRF's computer network for computer operations and to OMRF's
laboratories on an "at cost" basis as needed. See "Business -- OMRF Support."

Since the closing of the 1996 Private Placement, the shares of Common Stock
and Bridge Warrants held by ZPP were distributed to the partners of ZPP,
consisting of Kimberlin Family Partners, L.P. and ML Oklahoma Venture Partners,
Limited Partnership ("MLOK"). Kimberlin Family Partners, L.P. and an affiliated
partnership received 450,000 shares of Common Stock in such distribution and all
43,875 Bridge Warrants. MLOK received 300,000 shares of Common Stock in such
distribution. Mr. Kimberlin is also an affiliate of Kimberlin Family Partners,
L.P.

On July 2, 1997, the Company and Spencer Trask entered into a Series C
Placement Agency Agreement (the "1997 Placement Agency Agreement") relating to
the 1997 Private Placement, pursuant to which the Company sold Series C
Preferred at a Common Stock equivalent price of $4.00 per share. As a
consequence of the closing of the 1997 Private Placement, the Company paid
agent's fees and expenses of approximately $690,000 to Spencer Trask, which is
equal to 10% of the sales proceeds from the 1997 Private Placement and a
non-accountable expense allowance equal to 2% of such sales proceeds. In
addition, the Company issued to

40
<PAGE> 44

Spencer Trask warrants (the "1997 Placement Agent Warrants") to purchase 215,625
shares of Common Stock, which was equal to 15% of the number of shares of Common
Stock issuable upon conversion of the securities sold by Spencer Trask in the
1997 Private Placement. The exercise price of the 1997 Placement Agent's
Warrants is $4.00 per share. The 1997 Placement Agent's Warrants are exercisable
until July 2, 2004.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of October 20, 1997, and as
adjusted to reflect the sale of the Common Stock offered hereby, by (i) each
person known by the Company to own beneficially more than 5% of Common Stock;
(ii) by each director; and (iii) all of the directors and executive officers of
the Company as a group.

<TABLE>
<CAPTION>
PERCENT OF CLASS(1)
NUMBER OF SHARES -------------------
BENEFICIALLY BEFORE AFTER
OWNED(1) OFFERING OFFERING
---------------- -------- --------
<S> <C> <C> <C>
Kevin Kimberlin(2).......................................... 516,851 12.5% 8.0%
c/o Spencer Trask Securities Incorporated
535 Madison Avenue
New York, New York 10022
OMRF (3).................................................... 321,291 8.0% 5.1%
825 N.E. 15th Street
Oklahoma City, Oklahoma 73105
ML Oklahoma Venture Partners,............................... 304,579 7.7% 4.8%
Limited Partnership
c/o Merrill Lynch & Co.
World Financial Center
South Tower, 14th Floor
New York, New York 10080-6114
US Ventech, Inc.(4)......................................... 456,250 11.5% 7.3%
c/o Friedli Corporate Finance
AG Freigustrasse 5
Zurich, Switzerland 8002
Peter G. Livingston (5)..................................... 48,750 1.2% *
William I. Bergman.......................................... -- -- --
William A. Hagstrom (5)..................................... 8,334 * *
J. Vernon Knight, M.D....................................... -- -- --
David E. Rainbolt (6)....................................... 7,813 * *
Gilbert M. Schiff, M.D. (5)................................. 8,334 * *
William G. Thurman, M.D.(7)................................. 6,250 * *
All Directors and Executive Officers
as a Group (11 persons)(8)................................ 91,981 2.3% 1.5%
</TABLE>

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

* Represents less than 1%.

(1) The persons named in this table have sole voting and investment power with
respect to all of the securities shown as beneficially owned by them, except
as indicated in the other footnotes to this table. Beneficial ownership is
determined in accordance with the rules and regulations of the U.S.
Securities and Exchange Commission. Shares of Common Stock subject to
options currently exercisable or exercisable on or before December 28, 1997
("Currently Exercisable Options") are deemed outstanding for purposes of
computing the percentage for such person and all officers and directors as a
group, but are not deemed outstanding in computing the percentage of any
other person.

(2) Kevin Kimberlin is an affiliate of the Placement Agent. The shares
beneficially owned by Mr. Kimberlin include shares held by Oshkim Limited
Partners, L.P. ("Oshkim") and 164,351 shares of Common

41
<PAGE> 45

Stock subject to warrants held by Oshkim, Spencer Trask Holdings, Inc. and
Kimberlin Family Partners, L.P. See "Certain Relationships and Related
Transactions."

(3) Includes 27,542 shares of Common Stock subject to Bridge Warrants and
License Warrants held by OMRF. See "Certain Relationships and Related
Transactions."

(4) Includes 300,000 shares beneficially owned by Venturetec Inc.
("Venturetec"), an affiliate of US Ventech, Inc. ("USVI"). USVI disclaims
the beneficial ownership of the shares held by Venturetec, and Venturetec
disclaims beneficial ownership of the shares of Common Stock beneficially
owned by USVI. Venturetec and USVI are investment companies organized under
the laws of the British Virgin Islands. Peter Friedli is the president of
both companies and the principals of both companies are non-U.S. financial
institutions.

(5) Represents shares subject to Currently Exercisable Options.

(6) Includes shares beneficially owned by Trend Venture Corp.

(7) Beneficially owned by the William G. and Gabrielle Thurman Living Trust
(12/96).

(8) Includes 77,918 shares subject to Currently Exercisable Options.

DESCRIPTION OF SECURITIES

COMMON STOCK

The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $.001 per share, of which 3,975,630 shares are currently issued and
outstanding. Holders of shares of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors from assets legally
available for that purpose after payment of dividends required to be paid on
outstanding shares of Preferred Stock, if any, and are entitled at all meetings
of stockholders to one vote for each share held by them. The shares of Common
Stock are not redeemable and do not have any preemptive or conversion rights.
All of the outstanding shares of Common Stock are fully paid and nonassessable.
In the event of a voluntary or involuntary winding up or dissolution,
liquidation, or partial liquidation of the Company, holders of Common Stock
shall participate, pro rata, in any distribution of the assets of the Company
remaining after payment of liabilities subject to the prior distribution rights
of any outstanding shares of Preferred Stock. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of Preferred Stock, if any.

If the Company does not satisfy certain registration rights granted to
investors in the 1996 Private Placement or the 1997 Private Placement, and the
Company has not repurchased the Common Stock owned by such investors at fair
market value at the time of such failure to register, such investors shall have
the right to elect a majority of the Company's Board of Directors. Under these
registration rights, the Company is required to file a registration statement
covering 183,589 shares of Common Stock within six months of the closing of this
Offering, and an additional registration statement covering 2,717,787 13-Month
Lock-up Shares upon expiration of the 13-month lock-up period from the closing
of this Offering and 115,624 24-Month Lock-up Shares upon expiration of the
24-month lock-up period from the closing of this Offering. Therefore, even
though the shares of Common Stock subject to registration rights will represent
collectively only 48.1% of the issued and outstanding Common Stock upon
completion of this Offering, in the event the Company does not satisfy the
registration rights of those investors or repurchase such shares, those
investors would have the right to elect a majority of the Board of Directors. It
is anticipated that the Company will register or repurchase these shares.

As of October 20, 1997, there were 275 holders of record of Common Stock.

PREFERRED STOCK

The Company is authorized to issue 12,000,000 shares of Preferred Stock,
par value $.001 per share. The Preferred Stock may be issued in one or more
series, with such voting powers, designations, preferences, rights,
qualifications, limitations and restrictions as shall be set forth in a
resolution of the Company's Board of

42
<PAGE> 46

Directors providing for the issue thereof. The issuance of Preferred Stock,
while providing flexibility in connection with possible financing, acquisitions
and other corporate purposes, could, among other things, adversely affect the
voting power of holders of Common Stock and, under certain circumstances, be
used as a means of discouraging, delaying or preventing a change in control of
the Company. At the closing of this Offering, the Company will have no shares of
Preferred Stock outstanding.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation and Bylaws
may be deemed to have antitakeover effects and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider to be in such
stockholder's best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.

Classified Board. The Company's Certificate of Incorporation provides that
(i) the Board of Directors is divided into three classes of as equal size as
possible; (ii) the number of directors is to be fixed from time to time by the
Board; and (iii) the term of office of each class expires in consecutive years
so that each year only one class is elected. These provisions may render more
difficult a change in control of the Company or the removal of incumbent
management.

No Stockholder Action by Written Consent; Special Meetings. The Company's
Certificate of Incorporation provides that no action shall be taken by
stockholders except at an annual or special meeting of stockholders, and
prohibits action by written consent in lieu of a meeting unless approved by the
Board of Directors. See "Risk Factors -- Anti-takeover Provisions." The
Company's Bylaws provide that, unless otherwise proscribed by law, special
meetings of stockholders can only be held pursuant to a resolution of the Board
of Directors or upon the request of stockholders holding a majority of the
issued and outstanding shares of Common Stock.

Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at stockholders' meetings.

Notice of stockholder proposals and director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or directors are to be elected. In all cases,
to be timely, notice must be received at the principal executive offices of the
Company not less than 40 days before the meeting, or, if on the day notice of
the meeting is given to the stockholders less than 45 days remain until the
meeting, (i) five days after notice is given but not less than five days prior
to the meeting in the case of stockholder proposals; and (ii) 10 days after
notice is given in the case of director nominations.

Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information about that
person required to be included in a proxy statement soliciting proxies for the
election of the proposed nominee (including such person's written consent to
serve as a director if so elected) and certain information about the stockholder
proposing to nominate that person. Stockholder proposals must also include
certain specified information.

These limitations on stockholder proposals do not restrict a stockholder's
right to include proposals in the Company's annual proxy materials pursuant to
rules promulgated under the Securities Exchange Act of 1934, as amended.

DELAWARE GENERAL CORPORATION LAW

Section 203 of the Delaware Act prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the date
of the business combination, the transaction is approved by the board of
directors of the corporation; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested

43
<PAGE> 47

stockholder owns at least 85% of the outstanding voting stock; or (iii) on or
after such date the business combination is approved by the board of directors
and by the affirmative vote of at least 66-2/3% of the outstanding voting stock
which is not owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock. The effect of such statute may be
to discourage certain types of transactions involving an actual or potential
change in control of the Company.

TRANSFER AGENT

The transfer agent for the Common Stock is American Stock Transfer & Trust
Company.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no public market for the Company's
Common Stock. Sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.

Upon completion of the Offering, the Company will have outstanding
6,275,630 shares of Common Stock. Of these shares all of the 2,300,000 shares
sold in the Offering (assuming no exercise of the Underwriters' overallotment
option) will be transferable without restriction or further registration under
the Securities Act, unless they are held by "affiliates" of the Company within
the meaning of Rule 144 promulgated under the Securities Act. Of the remaining
shares, 3,963,766 shares are Restricted Shares, and, as such, may not be sold in
the absence of registration under the Securities Act or an exemption therefrom
under Rules 144 and 701, and 43,500 shares are eligible for sale without
restriction or further registration under Rule 144(k), unless they are held by
"affiliates" of the Company or subject to "lock-up" agreements summarized below.

Of the Restricted Shares, 3,022,366 shares are 13-Month Lock-up Shares, and
660,311 shares are 24-Month Lock-up Shares, or cumulatively approximately 58.7%
of the outstanding shares of Common Stock after the Offering. See "Risk
Factors -- Shares Eligible for Future Sale." Upon expiration of the respective
13-month and 24-month lockup periods, these shares will be eligible for
immediate resale, subject, in certain cases, to certain volume, timing and other
requirements of Rule 144 promulgated under the Securities Act. The Company has
agreed to file, at the expiration of each such lock-up period, a registration
statement under the Securities Act covering certain of such shares.

The Company has agreed to file, within six months of the closing of this
Offering, a registration statement under the Securities Act covering 183,589
Restricted Shares, or approximately 2.9% of the outstanding shares of Common
Stock after the Offering. These Restricted Shares are not subject to the
"lock-up" agreements summarized above. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, could adversely affect the
prevailing market price of the Common Stock. See "Underwriting."

In general, under Rule 144, any person (or persons whose shares are
aggregated for purposes of Rule 144) who beneficially owns Restricted Shares
with respect to which at least one year has elapsed since the later of the date
the shares were acquired from the Company or from an affiliate of the Company,
is entitled to sell, within any three month period, a number of shares that does
not exceed the greater of (i) 1% of the then outstanding shares of Common Stock
of the Company; or (ii) the average weekly trading volume in Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and notice requirements, and to the
availability of current public information about the Company. A person who is
not an affiliate, has not been an affiliate within 90 days prior to sale and who
beneficially owns Restricted Shares with respect to which at least two years
have elapsed since the later of the date the shares were acquired from the
Company or from an affiliate of the Company, is entitled to sell such shares
under Rule 144(k) without regard to any of the volume limitations or other
requirements described above.

44
<PAGE> 48

In addition to the outstanding shares of Common Stock, there are 565,847
shares of Common Stock subject to outstanding warrants at a weighted average
exercise price of $3.50 per share. Such warrants are exercisable for a period
expiring at various dates between 2003 and 2004. The Company has granted the
holders of such warrants certain registration rights relating to the Common
Stock purchasable upon the exercise of such warrants. These warrants are subject
to either the 13-month or the 24-month lock-up period.

The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common Stock,
as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. Prior to this Offering, there has been
no trading market for the Common Stock. The Company anticipates that the trading
market in the Common Stock, if any, will be limited based upon the number of
shares currently outstanding and anticipated to be sold in this Offering.

As of the date of this Prospectus, the Company had reserved an aggregate of
618,750 shares of Common Stock for issuance pursuant to the Company's stock
option plans, and options to purchase 482,000 shares were outstanding. As soon
as practicable following the Offering, the Company intends to file a
registration statement under the Securities Act to register shares of Common
Stock reserved for issuance under such plans. Such registration statement will
automatically become effective immediately upon filing, however, these
securities are subject to the 24-month lock-up period. See "Management -- Stock
Option Plan" and "-- Directors Stock Option Plan."

UNDERWRITING

Each of the underwriters named below (the "Underwriters") have severally
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company the number of Shares set forth opposite their
respective names below. The nature of the obligations of the Underwriters is
such that if any of such shares are purchased, all must be purchased.

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Capital West Securities, Inc................................ 1,000,000
Millennium Financial Group, Inc............................. 910,000
ComVest Partners, Inc....................................... 350,000
Robb Peck McCooey........................................... 40,000
Total............................................. 2,300,000
</TABLE>

The Underwriters have advised the Company that they propose initially to
offer the Common Stock offered hereby to the public at the price to public set
forth on the cover page of this Prospectus. The Underwriters may allow a
concession to selected dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") not in excess of $.40 per share, and the
Underwriters may allow, and such dealers may reallow, to members of the NASD a
concession not in excess of $.20 per share. After the public offering, the price
to public, the concession and the reallowance may be changed by the
Underwriters.

Capital West Securities, Inc., one of the Underwriters, was first
registered as a broker-dealer in May 1995. Capital West has participated in only
seven public equity offerings as an underwriter, although certain of its
employees have had experience in underwriting public offerings while employed by
other broker-dealers. Prospective purchasers of the securities offered hereby
should consider Capital West's limited underwriting experience in evaluating
this Offering.

The Company has granted an option to the Underwriters, exercisable within
45 business days after the date of this Prospectus, to purchase up to an
aggregate of 345,000 additional shares of Common Stock at the initial price to
public, less the underwriting discount, set forth on the cover page of this
Prospectus. The Underwriters may exercise the option only for the purpose of
covering overallotments. To the extent that the Underwriters exercise such
option, each Underwriter will be committed, subject to certain conditions, to

45
<PAGE> 49

purchase from the Company on a pro rata basis that number of additional shares
of Common Stock which is proportionate to such Underwriters' initial commitment.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

The Company has agreed to pay to the Underwriters a nonaccountable expense
allowance of 3% of the gross proceeds derived from the sale of the shares of
Common Stock underwritten (including the sale of any shares of Common Stock
subject to the Underwriters' overallotment option), $75,000 of which has been
paid as of the date of this Prospectus. The Company also has agreed to pay all
expenses in connection with qualifying the Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
filing fees and fees and expenses of counsel retained for such purposes by the
Underwriters, and registering the Offering with the NASD.

In connection with this Offering, the Company has agreed to sell to the
Underwriters, for a price of $.001 per warrant, warrants (the "Underwriters'
Warrants") to purchase shares of Common Stock equal to 10% of the total number
of shares of Common Stock sold pursuant to this Offering, excluding shares
subject to the overallotment option. The Underwriters' Warrants are exercisable
at a price equal to 155% of the initial public offering price for a period of
four years commencing one year from the date of this Prospectus (the "Exercise
Period"). The Underwriters' Warrants grant to the holders thereof, with respect
to the registration under the Securities Act of the securities directly and
indirectly issuable upon exercise of the Underwriters' Warrants, one demand
registration right during the Exercise Period, as well as piggyback registration
rights at any time.

Holders of approximately 48% of the shares of Common Stock outstanding
after completion of this Offering have agreed for a period of 13 months after
the date of this Prospectus, they will not offer, sell or otherwise dispose of
any shares of Common Stock owned by them. The Underwriters have agreed that they
will not waive the lock-up period for 23% of the shares of Common Stock
outstanding after completion of this Offering. The Company and its executive
officers, directors and certain other stockholders have agreed to enter into
similar lock-up agreements, except that the term thereof is 24 months and the
Underwriters have no authority to waive the lock-up period.

At the Company's request, the Underwriters have reserved up to 70,000
shares of Common Stock (the "Directed Shares") for sale at the public offering
price to approximately 25 persons who are directors, officers or employees of,
or otherwise associated with, the Company and who have advised the Company of
their desire to participate in its potential future growth. Each director and
executive officer who is a purchaser of Directed Shares will be required to
agree to restrictions on resale similar to those described in the immediately
preceding paragraph. However, the Underwriters are not obligated to sell any
shares to any such persons. The number of Shares available for sale to the
general public will be reduced to the extent of sales of Directed Shares to any
of the persons for whom they have been reserved. Any shares not so purchased
will be offered by the Underwriters on the same basis as all other shares
offered hereby.

Prior to this Offering, there has been no market for the Common Stock and
there can be no assurance that a regular trading market will develop upon the
completion of this Offering. The initial public offering price was determined by
negotiations between the Company and the Underwriters. The primary factors
considered in determining such offering price included the history of and
prospects for the Company's business and the industry in which the Company
competes, market valuation of comparable companies, market conditions for public
offerings, the prospects for future earnings of the Company, an assessment of
the Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors.

The Underwriters have advised the Company that the Underwriters do not
expect any sales by the Underwriters to accounts over which they exercise
discretionary authority.

46
<PAGE> 50

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
has been passed upon for the Company by Phillips McFall McCaffrey McVay &
Murrah, P.C., Oklahoma City, Oklahoma. Bright & Barnes, P.C., Oklahoma City,
Oklahoma, has served as counsel to the Underwriters in connection with this
Offering.

EXPERTS

The financial statements of ZymeTx, Inc. at June 30, 1997, and for the
years ended June 30, 1996 and 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as an expert in accounting and auditing.

ADDITIONAL INFORMATION

The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed a
Registration Statement on Form SB-2 with the Commission under the Securities Act
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and in the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits thereto. Statements contained in this Prospectus concerning the
provisions of documents filed with the Registration Statement as exhibits and
schedules are necessarily summaries of such documents, and each such statement
is qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. The Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge and copied upon payment
of the charges prescribed by the Commission at the Public Reference Room of the
Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.

47
<PAGE> 51

GLOSSARY

Active Site -- means that portion of an enzyme that acts upon a molecule
changing the molecule through the action.

Adenovirus -- comprises 47 known serotypes of viruses belonging to the
family adenoviridae. These viruses can cause respiratory disease,
keratoconjunctivitis, diarrhea, cystitis and other diseases.

Antibody -- means a protein molecule produced by lymphocytes following
introduction of a foreign entity. The purpose of the antibody is to assist in
elimination of the foreign entity from the body.

Capitated Lives -- A population of individuals covered by health insurance
that represent a level payment per life to a health care organization in return
for an agreed upon level of health coverage.

Chromogen -- means a molecule or compound capable of absorbing light in the
visible spectrum, such that a color is observed visually, or its absorbance
characteristics are measured by an instrument.

Cytomegalovirus -- means a sub-family of the Herpesviridae. These viruses
cause latent infection in the salivary glands.

Deoxyribonucleic Acid (DNA) -- means the genetic blueprint for encoding all
RNA and ultimately the hereditary material for all life.

Gene Probe -- means a molecule that reacts with the genetic material of a
cell and is used to detect the presence of the cell by the unique map of the
genetic material.

GMP -- means Good Manufacturing Practices, a set of standards to which the
FDA requires adherence in order for an organization to sell its products to the
consumer.

Herpes Simplex Virus -- means a virus from the family Herpesviridae,
subfamily Alphaherpesvirinae, genus Human Herpes Virus group. Causes "cold
sores," particularly in young children. The virus can also pass along nerves and
become latent in ganglia from which it is reactivated by stimuli such as colds
and sunlight.

Influenza Virus -- means a virus from the family Orthomyxoviridae. There
are three genera, A, B, C; A&B are most common to humans, while C rarely causes
significant infection.

Inhibitor -- means a molecule that is recognized by an enzyme and locks
into the active site thus reducing the ability of the enzyme to act upon other
molecules.

Monoclonal Antibody (MAb) -- means an antibody derived from a single
B-cell, raised against a single localized area on the molecular surface of a
protein, nucleic acid or polysaccharide. These antibodies are highly specific
for a particular part of a macromolecule.

Neuraminidase -- means an enzyme of the family Sialidase that acts upon
neuraminic acid and like compounds.

POC -- means point-of-care. This refers to the site where a test is
actually conducted.

Rational Design -- a method of designing a molecule based upon the
foreknowledge of the desired structural characteristics being sought.

Recognition Portion -- means a chemical entity capable of acting with the
active site of an enzyme.

Respiratory Syncytial Virus (RSV) -- means a virus that infects humans,
usually children, which is an important cause of acute respiratory disease.

Ribonucleic Acid (RNA) -- means the genetic material that encodes protein.

Sensitivity -- means the measure of actual positives versus the sum of
false positives and false negatives in a diagnostic test. A high value indicates
that the test detects even low levels of the desired target. A low value
indicates that detection occurs at higher levels of infection.

48
<PAGE> 52

Specificity -- means the measure of actual negatives versus the sum of
actual negatives and false positives in a diagnostic test. A high value
indicates that the test detects only the desired target. A low value is
indicative of detection of similar but not targeted entities.

Substrate -- means the molecule acted upon by an enzyme resulting in a
change to the molecule.

Virus -- (Latin meaning: poison or slime) infectious units comprising
either RNA or DNA enclosed in a protective coat which contain information that
permit them to replicate themselves once they have inserted themselves into host
cells.

X-ray Crystallography -- a method of structural analysis of a substance
whereby crystals of the substance are grown and analyzed using 3-dimensional
computer aided designs.

49
<PAGE> 53

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheet at June 30, 1997.............................. F-3
Statements of Operations for the years ended June 30, 1996
and 1997.................................................. F-4
Statements of Stockholders' Equity for the years ended June
30, 1996 and 1997......................................... F-5
Statements of Cash Flows for the years ended June 30, 1996
and 1997.................................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 54

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
ZymeTx, Inc.

We have audited the accompanying balance sheet of ZymeTx, Inc. (a
development stage company) as of June 30, 1997, and the related statements of
operations, stockholders' equity and cash flows for the years ended June 30,
1996 and 1997 and for the period from February 24, 1994 (inception) through June
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ZymeTx, Inc. (a development
stage company) at June 30, 1997, and the results of its operations and its cash
flows for the years ended June 30, 1996 and 1997 and for the period from
February 24, 1994 (inception) through June 30, 1997 in conformity with generally
accepted accounting principles.

ERNST & YOUNG LLP

Oklahoma City, Oklahoma
August 8, 1997

F-2
<PAGE> 55

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 226,312
Marketable securities, available-for-sale................. 1,594,382
Inventory................................................. 99,107
Prepaid insurance and other............................... 9,210
-----------
Total current assets.............................. 1,929,011
Property, equipment and leasehold improvements, net (Notes 2
and 3).................................................... 295,393
Proprietary technology and other intangibles, net (Note
4)........................................................ 116,827
Deferred offering costs and other, net...................... 41,746
-----------
Total assets...................................... $ 2,382,977
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 540,025
Other..................................................... 9,929
-----------
Total current liabilities......................... 549,954
Long term obligations --
Note payable to stockholder due after one year (Note 4)... 265,836
Deferred lease rentals (Note 3)........................... 69,029
Redeemable preferred stock -- Series B (156,250 shares
issued and outstanding) (Note 5).......................... 125,000
Stockholders' equity (Notes 5, 6 and 8):
Preferred stock $.001 par value; 9,843,750 Series A shares
authorized (6,318,125 shares issued and outstanding)... 6,318
Common stock $.001 par value; 16,500,000 shares authorized
(919,568 shares issued and outstanding)................ 920
Additional paid-in capital................................ 4,410,198
Deficit accumulated during the development stage.......... (3,050,890)
Unrealized holding gains on marketable securities
available for sale..................................... 6,612
-----------
Total stockholders' equity........................ 1,373,158
-----------
Total liabilities and stockholders' equity........ $ 2,382,977
===========
</TABLE>

See accompanying notes.

F-3
<PAGE> 56

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, CUMULATIVE
------------------------- FROM
1996 1997 INCEPTION
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Sales............................................. $ 7,756 $ 8,496 $ 25,449
Other............................................. -- 1,303 1,303
---------- ----------- -----------
Total revenues............................ 7,756 9,799 26,752
Operating expenses:
Research and development.......................... 268,731 1,098,167 1,377,339
Cost of sales..................................... -- 2,200 2,200
Acquired technology and patent costs from OMRF
(Note 4)....................................... -- 958,505 958,505
General and administrative........................ 98,911 637,262 736,930
Depreciation and amortization..................... 426 27,991 28,417
---------- ----------- -----------
Total operating expenses.................. 368,068 2,724,125 3,103,391
---------- ----------- -----------
Loss from operations................................ (360,312) (2,714,326) (3,076,639)
Other income (expense):
Interest income................................... -- 94,993 94,993
Dividend income................................... -- 2,052 2,052
Interest expense (Note 4)......................... (9,338) (58,989) (71,296)
---------- ----------- -----------
Total other income (expense).............. (9,338) 38,056 25,749
---------- ----------- -----------
Net loss............................................ (369,650) (2,676,270) (3,050,890)
Preferred stock dividends........................... -- 8,604 8,604
---------- ----------- -----------
Net loss applicable to common stock................. $ (369,650) $(2,684,874) $(3,059,494)
========== =========== ===========
Net loss per common and common equivalent share..... $ (.26) $ (1.88) $ (2.14)
========== =========== ===========
Weighted average common and common equivalent shares
outstanding....................................... 1,429,334 1,429,829 1,429,783
========== =========== ===========
Supplemental net loss per common and common
equivalent share.................................. $ (.12) $ (.88) $ (1.00)
========== =========== ===========
Supplemental weighted average common and common
equivalent shares outstanding..................... 3,047,928 3,048,423 3,048,376
========== =========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 57

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
UNREALIZED
HOLDING
CONVERTIBLE DEFICIT GAINS ON
PREFERRED STOCK -- ACCUMULATED MARKETABLE TOTAL
SERIES A COMMON STOCK ADDITIONAL DURING THE SECURITIES STOCKHOLDERS'
--------------------- ------------------- PAID-IN DEVELOPMENT AVAILABLE EQUITY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL STAGE FOR SALE (DEFICIT)
--------- --------- ------- --------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1994.................... -- $ -- 43,500 $ 44 $ 1,956 $ -- $ -- $ 2,000
Net loss.................. -- -- -- -- -- (4,970) -- (4,970)
--------- ------ ------- ---- ---------- ----------- ------ -----------
Balance at June 30,
1995.................... -- -- 43,500 44 1,956 (4,970) -- (2,970)
Net loss.................. -- -- -- -- -- (369,650) -- (369,650)
--------- ------ ------- ---- ---------- ----------- ------ -----------
Balance at June 30,
1996.................... -- -- 43,500 44 1,956 (374,620) -- (372,620)
Issuance of common
stock................... -- -- 876,068 876 2,628 -- -- 3,504
Issuance of Series A
Preferred Stock, net of
offering expenses of
$642,568................ 6,318,125 6,318 -- -- 4,405,614 -- -- 4,411,932
Unrealized holding gains
on marketable securities
available for sale...... -- -- -- -- -- -- 6,612 6,612
Net loss.................. -- -- -- -- -- (2,676,270) -- (2,676,270)
--------- ------ ------- ---- ---------- ----------- ------ -----------
Balance at June 30,
1997.................... 6,318,125 $6,318 919,568 $920 $4,410,198 $(3,050,890) $6,612 $ 1,373,158
========= ====== ======= ==== ========== =========== ====== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE> 58

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, CUMULATIVE
------------------------ FROM
1996 1997 INCEPTION
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss............................................. $(369,650) $(2,676,270) $(3,050,890)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization...................... 9,004 50,183 67,880
Acquired technology and patent costs from OMRF..... -- 336,422 336,422
Accretion of interest.............................. 6,261 54,918 61,179
Deferred lease rentals............................. -- 69,029 69,029
Changes in operating assets and liabilities:
Interest receivable on marketable securities.... -- (15,822) (15,822)
Prepaid insurance and other..................... -- (9,210) (10,392)
Inventory....................................... -- (32,819) (32,819)
Accounts payable................................ 114,347 424,610 540,025
Other liabilities............................... -- 9,929 9,929
--------- ----------- -----------
Total adjustments.......................... 129,612 887,240 1,025,431
--------- ----------- -----------
Net cash used by operating activities................ (240,038) (1,789,030) (2,025,459)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities.................... -- (1,571,948) (1,571,948)
Purchase of property, equipment and leasehold
improvements....................................... (7,544) (292,232) (342,679)
Purchase of inventory, proprietary technology and
other intangibles (Note 4)......................... -- (202,917) (202,917)
--------- ----------- -----------
Net cash used by investing activities................ (7,544) (2,067,097) (2,117,544)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable.............. 350,500 -- 392,510
Payments on notes payable............................ (9,259) (302,012) (311,271)
Proceeds from issuance of common stock............... -- 3,000 5,000
Proceeds from issuance of preferred stock -- Series
A.................................................. -- 4,383,338 4,383,338
Deferred offering costs of preferred stock........... (58,906) (41,356) (100,262)
--------- ----------- -----------
Net cash provided by financing activities............ 282,335 4,042,970 4,369,315
--------- ----------- -----------
Net increase in cash................................. 34,753 186,843 226,312
Cash and cash equivalents at beginning of period..... 4,716 39,469 --
--------- ----------- -----------
Cash and cash equivalents at end of period........... $ 39,469 $ 226,312 $ 226,312
========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID............. $ 3,077 $ 10,333 $ 16,379
</TABLE>

See accompanying notes.

F-6
<PAGE> 59

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

ZymeTx, Inc. ("the Company"), a Delaware corporation, was formed February
24, 1994. The Company had no significant operations from formation through June
30, 1994. The Company is a development stage biomedical company engaged in
research and development relating to medical diagnostic and therapeutic
products.

The Company anticipates working on a number of long-term development
projects which will involve experimental and unproven technology. The projects
may require many years and substantial expenditures to complete, and may
ultimately be unsuccessful. Therefore, the Company will need to obtain
additional funds from outside sources to continue its research and development
activities, fund operating expenses, pursue regulatory approvals and establish
production, sales and marketing capabilities, as necessary. Management believes
it has sufficient capital to achieve planned business objectives including
supporting preclinical development and clinical testing, through at least 1998.
For periods thereafter, the Company intends to raise additional capital through
the issuance of equity securities to existing or new investors or through
alliances with corporate partners. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or more
of its development programs or obtain funds through collaborative arrangements
with others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid debt
investments with maturities of 90 days or less when purchased.

Marketable Securities

Based on the nature of the assets held by the Company and management's
investment strategy, the Company's investments in marketable securities have
been classified as available-for-sale. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The securities mature within one year
and the amortized cost basis, aggregate fair value, and unrealized holding gains
at June 30, 1997 are summarized below:

<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
COST FAIR HOLDING
BASIS VALUE GAINS
---------- ---------- ----------
<S> <C> <C> <C>
U.S. Government-backed treasury bills............... $ 349,110 $ 349,645 $ 535
Mortgage-backed securities.......................... 1,058,660 1,064,737 6,077
Certificates of deposit............................. 180,000 180,000 --
---------- ---------- ------
$1,587,770 $1,594,382 $6,612
========== ========== ======
</TABLE>

Inventory

Inventories are carried at the lower of cost (first-in, first-out) or
market, substantially all of which are raw materials.

F-7
<PAGE> 60

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation and Amortization

Depreciation of property and equipment is computed using the straight-line
method over three to seven years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets or the remaining lease term.

Proprietary Technology and Other Intangibles

Amortization of proprietary technology and other intangibles acquired is
computed using the straight-line method over periods of between five and ten
years. Accumulated amortization aggregated $20,594 as of June 30, 1997.

Deferred Offering Costs

Specific incremental costs directly attributable to the private placement
of preferred stock in 1997 (the "1997 Private Placement") were deferred at June
30, 1997 and were charged against the gross proceeds of the 1997 Private
Placement when subsequently closed.

Stock Compensation

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock options is not less than the
estimated fair value of the underlying stock on the date of grant, no
compensation is recorded.

Concentration of Credit Risk

The Company invests its excess cash in debt instruments of the U.S.
Government and its agencies, institutions and other short-term investments with
strong credit ratings. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The Company has not experienced any realized losses
on its marketable securities.

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 the
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.

Fair Values of Financial Instruments

The carrying amount reported in the balance sheet for the fixed-rate note
payable has been discounted and approximates its fair value (Note 4).

Net Loss Per Share

Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options, convertible preferred stock and warrants are excluded from
the computation as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common
and common equivalent

F-8
<PAGE> 61

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

shares issued during the period beginning 12 months prior to the initial filing
of the proposed public offering at prices substantially below the assumed public
offering price ("Cheap Stock") have been included in the calculation as if they
were outstanding for all periods presented (using the treasury stock method and
the assumed public offering price for stock options and warrants and the
if-converted method for convertible preferred stock).

Supplemental net loss per share is computed as noted above except that it
also includes the common stock equivalent shares related to convertible
preferred stock which will automatically convert to common stock in connection
with the closing of an initial public offering.

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which is required to be adopted by the Company in the
reporting period ending December 31, 1997. At that time, the Company will be
required to change the method currently used to compute net loss per share.
Under the new requirements for calculating basic earnings per share, the effect
of stock options will be excluded. The Company has determined the impact of SFAS
128 on the calculation of net loss per share, exclusive of the Cheap Stock rules
of the SEC, would not be material.

Historical net loss per share information is as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, CUMULATIVE
------------------- FROM
1996 1997 INCEPTION
-------- -------- ----------
<S> <C> <C> <C>
Net loss per common share.............................. $ (8.50) $ (2.95) $ (10.13)
======= ======= ========
Weighted average common shares outstanding............. 43,500 909,206 302,078
======= ======= ========
</TABLE>

2. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements, stated at cost, are
summarized as follows:

<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
Laboratory equipment........................................ $ 65,135
Manufacturing equipment..................................... 200,317
Computer equipment.......................................... 33,592
Office furniture, equipment and leasehold improvements...... 43,635
--------
342,679
Less accumulated depreciation and amortization.............. (47,286)
--------
$295,393
========
</TABLE>

3. LEASE COMMITMENTS

In January 1997, the Company consolidated substantially all of its
operations, research, marketing and administrative functions into newly
constructed facilities leased from a stockholder of the Company. The Company's
ten-year lease on these facilities currently covers approximately 10,000 square
feet with options available on additional space. The lease provides for no rent
payable the first two years and a fixed rate thereafter for the remaining eight
years ("Base Rent"). The Company incurred certain leasehold improvements which
exceeded the defined tenant improvement allowance (the "Tenant Allowance
Overage") provided for under the lease. This Tenant Allowance Overage bears
interest at a rate of 10% over the repayment term of 60 months, with interest
only due for the first 24 months and principal and interest due monthly over the
final 36 months of the repayment term. The Tenant Allowance Overage payments are
due in addition to the Base Rent. The Company is recognizing the total facility
lease payments, including the Tenant

F-9
<PAGE> 62

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Allowance Overage, on a straight-line method over the entire term of the lease
agreement. Accordingly, as of June 30, 1997, the Company has accrued a deferred
lease rental liability of $69,029. As additional consideration for the lease,
this stockholder received warrants to purchase 20,000 shares of Common Stock at
an exercise price of $3.20 per share to which the Company attributed no value.
These lease warrants expire on January 1, 2002. The Company has granted the
lessor a security interest in all equipment, inventory fixtures, furniture and
other property now owned or hereafter acquired by the Company which is located
on the leased premises.

Rental expense related to the leased facilities during 1997 was $69,029
(none in 1996). Prior to January 1, 1997, the Company operated using a minimal
amount of administrative space provided rent free by one of its stockholders.

Future minimum lease commitments as of June 30, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30:
-------------------
<S> <C>
1998................................................... $ 147,811
1999................................................... 176,344
2000................................................... 233,324
2001................................................... 233,345
2002................................................... 194,706
Thereafter (laboratory and office space to 2007)....... 550,819
----------
Total minimum lease payments...................... $1,536,349
==========
</TABLE>

4. RELATED PARTY TRANSACTIONS

Since January 1, 1996, the Company has performed scientific and product
development activities relating to the ViraZyme(R) technology; however, Oklahoma
Medical Research Foundation ("OMRF"), a stockholder, has provided, on a marginal
cost basis, significant support and collaborative resources permitting the
Company to access state-of-the-art facilities, equipment, services and
personnel. For the years ended June 30, 1996 and 1997, OMRF charged the Company
$306,566 and $963,003, respectively, related to such arrangement. Substantially
all of such costs have been charged to research and development and general and
administrative expenses in the accompanying statements of operations. This
operational arrangement has permitted the Company to handle purchasing,
equipment services, and other non-technology related needs without significant
staffing increases and thereby apply more of the Company's resources to
technology and market development. This operational arrangement will continue
until 1999.

In January 1996, the Company and three stockholders entered into a bridge
loan agreement under which the stockholders made loans to the Company of
$350,500 to be used to fund operations in exchange for 8% unsecured notes (the
"Notes") and warrants to purchase 87,625 shares of the Company's Common Stock at
$3.20 per share. The Notes required repayment of principal and accrued but
unpaid interest at the earlier of the successful completion of the 1996 Private
Placement or twenty-four months from execution. In July 1996, the Company repaid
$271,521 of the outstanding notes and accrued interest and retired $87,500 of
the Notes with the issuance of 109,375 shares of Series A Preferred Stock.

Effective July 1996, the Company entered into a license agreement (the
"License Agreement") with OMRF, a stockholder, whereby the Company was granted
an exclusive, perpetual, worldwide license covering all the patents which
comprise the ViraZyme(R) technology. The License Agreement grants the Company
the right to manufacture, use, and sell products made under the patent rights.
In exchange for the License Agreement, the Company paid OMRF $825,000, executed
a note payable (the "Note") in the principal amount of $425,000 (valued at
$210,918), issued 156,250 shares of Series B Preferred Stock (valued at $.80

F-10
<PAGE> 63

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

per share aggregating $125,000), issued 126,068 shares of common stock (valued
at the then existing par value of $.004 per share aggregating $504), granted the
stockholder a 2% royalty on net sales of products derived from the intellectual
property conveyed with the License Agreement and issued a warrant to purchase
5,667 shares of common stock at $3.20 per share (to which the Company attributed
no value). The aggregate value assigned to this transaction amounted to
$1,161,422 which was allocated as follows: inventory -- $66,288; developed
technology and assembled workforce -- $136,629; and technology in the research
and development stage -- $958,505. The Company, under the terms of the License
Agreement, has also agreed to assume responsibility to pay a third party a
royalty of 4% of the revenues derived by the Company from sales of diagnostic
products utilizing specific collaboration intellectual property, as defined. The
Note bears no interest for the first twenty-four months following issuance and
interest at an 8% rate per annum thereafter, requires quarterly interest only
payments beginning in May 1998 and requires quarterly interest and $25,000
principal payments beginning in May 1999 until paid in full. This Note was
discounted at issuance from its face amount of $425,000 to $210,918 assuming a
market rate of interest of 20% per annum. Imputed interest for the year ended
June 30, 1997 included in the accompanying statement of operations aggregated
$54,918 (none in 1996).

In July 1996, OMRF purchased 406,250 shares of the Company's Series A
Preferred Stock in the 1996 Private Placement.

The Company leases certain facilities from a stockholder, as discussed in
Note 3. The Company recognized rent expense totaling $69,029 in 1997 (none in
1996) related to its facilities which are leased from this stockholder.

In management's opinion, these license and lease transactions were
conducted on no less favorable terms than those which could have been obtained
from unrelated third parties.

5. REDEEMABLE PREFERRED STOCK, NONREDEEMABLE PREFERRED STOCK AND COMMON STOCK

Capital Stock

As of June 30, 1997, the Company was authorized to issue 16,500,000 shares
of Common Stock, $.001 par value (the "Common Stock") and 10,000,000 shares of
preferred stock, par value $.001 per share (the "Preferred Stock"). The
Preferred Stock may be issued in one or more series, with such voting powers,
designations, preference, rights, qualifications, limitations and restrictions
as shall be set forth in a resolution of the Company's Board of Directors
providing for the issue thereof. In May 1996, the Company restated its
Certificate of Incorporation increasing the number of authorized shares of
Common Stock from 2,000,000 shares to 16,500,000 shares. Simultaneously, it
consummated a reverse split, 1 for .87, of its Common Stock thereby reducing the
then outstanding common shares from 200,000 shares to 173,999 shares. In July
1997, the Company filed a restated Certificate of Incorporation to effect a
one-for-four reverse split of its Common Stock, Common Stock options and
warrants. In July 1997, the stockholders also approved (i) an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 16,500,000 shares to 30,000,000 shares and
increasing the number of authorized shares of Preferred Stock from 10,000,000
shares to 12,000,000 shares, (ii) an adjustment to the rate of conversion of the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock to
reflect the one-for-four reverse stock split, and (iii) the establishment and
designation of 1,750,000 shares of Series C Preferred Stock. All historical
financial information included in the accompanying financial statements has been
adjusted retroactively to give effect to the reverse stock splits.

F-11
<PAGE> 64

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Common Stock

In February 1994, the Company issued 43,500 shares of Common Stock for
$2,000 in connection with the Company's formation.

In July 1996, the Company issued 750,000 shares of Common Stock for $3,000
in connection with a recapitalization and, as discussed in Note 4, the Company
issued 126,068 shares of Common Stock as partial consideration for the License
Agreement.

Preferred Stock

At June 30, 1997, the Company has designated and issued Series A and Series
B Preferred Stock, both of which are subject to antidilution adjustments.

The Series A Convertible Preferred Stock ("Series A"), of which 6,318,125
shares are issued and outstanding as of June 30, 1997, were issued in connection
with the 1996 Private Placement which commenced in May 1996 with numerous
closings in July 1996 through November 1996. Proceeds to the Company from such
1996 Private Placement aggregated approximately $4.4 million, net of offering
expenses. Each share of the Series A is convertible, at any time at the option
of the holder, into .25 shares of Common Stock and will automatically convert
into .25 shares of Common Stock at the consummation of an initial public
offering, as defined, as well as upon certain other events. The Series A has no
specified dividend rate, entitles the holder to a number of votes equal to the
number of shares of Common Stock into which the Series A is convertible, is not
redeemable and has a liquidation preference of $.80 per share (an aggregate of
$5,054,500 as of June 30, 1997). In connection with this transaction, the
Company issued warrants to the 1996 Private Placement agent to purchase 236,930
shares of the Company's Common Stock at $3.20 per share.

The Series B Convertible Preferred Stock ("Series B"), of which 156,250
shares are issued and outstanding as of June 30, 1997, were issued as partial
consideration for the License Agreement. The Series B is mandatorily redeemable
by the Company not later than 120 days following each fiscal year at the rate of
$3.20 for each share equal to the quotient of 20% of free cash flow divided by
$3.20 for purposes of determining the number of shares to be redeemed. Free cash
flow is defined as net income before interest, taxes and depreciation, less debt
service. Each share of Series B is convertible at any time at the option of the
holder into .25 shares of Common Stock, will automatically convert into shares
of Common Stock at the consummation of an initial public offering, as defined,
shall be entitled to cumulative annual dividends at the rate of $.06 per share
per annum and entitles the holder to a number of votes equal to the number of
shares of Common Stock into which the Series B is convertible. Dividends in
arrears as of June 30, 1997 related to the Series B aggregated $8,604. The
liquidation preference of the Series B of $3.20 per share as of June 30, 1997,
exclusive of dividends in arrears, aggregates $500,000.

The Series C Convertible Preferred Stock ("Series C") is convertible at any
time at the option of holder into one share of Common Stock, subject to
antidilution adjustments and will automatically convert into shares of Common
Stock at the consummation of an initial public offering, as defined, as well as
upon certain other events. The Series C has no specified dividend rate, entitles
the holder to a number of votes equal to the number of shares of Common Stock
into which the Series C is convertible and has a liquidation preference equal to
the greater of $4.00 per share, or such amount per share as would have been
payable had each such share been converted to Common Stock immediately prior to
such liquidation (Note 8).

Under certain registration rights granted to investors in private
placements of securities in 1996 and 1997, the Company must register certain
shares of Common Stock within specified time periods following the closing of an
initial public offering. If the Company fails to register such shares as
required, the Company must repurchase the shares at fair market value. If the
Company fails to repurchase the shares, such stockholders have the right to
elect a majority of the Board of Directors.

F-12
<PAGE> 65

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Warrants

At June 30, 1997, there were warrants outstanding for the purchase of an
aggregate of 350,222 shares of the Company's common stock exercisable at $3.20
per share which expire from January 1998 through November 2003 (Notes 3 and 4).

6. STOCK OPTION PLANS

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is generally recognized.

Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a minimum value option pricing model with the following weighted average
assumptions for 1997 (none in 1996): risk-free interest rate of 6.2% and a
weighted average expected life of the option of six years.

Because option valuation models require the input of subjective assumptions
including the expected life of the option, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
qualified and non-qualified options is amortized to expense over the options'
vesting period. The Company's pro forma information follows:

<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1997
-----------
<S> <C>
Net loss applicable to common stock......................... $(2,718,405)
Net loss per common and common equivalent share............. (1.90)
</TABLE>

The Company has adopted stock option plans for employees, the ZymeTx, Inc.
Stock Option Plan (the "Employees' Plan"), as well as for non-employees, the
ZymeTx, Inc. Director Stock Option Plan (the "Directors' Plan") (collectively,
the "Plans"). As of June 30, 1997, there are 450,000 shares of common stock
available for issuance under both the Employees' Plan and the Directors' Plan.
There are two forms of options: options intended to qualify as incentive stock
options ("ISO Options") under the Employees' Plan and the Internal Revenue Code
of 1986, as amended (the "Code"), and nonqualified options under the Directors'
Plan (the "Nonqualified Options"). In July 1997, the stockholders approved
increasing the number of shares of the Company's Common Stock reserved for
issuance under the Plans to 618,750.

In 1997, the Company issued options to employees and directors covering
350,000 shares and 100,000 shares, respectively, of common stock exercisable at
prices ranging from $1.00 to $2.00 per share. Considering the nature of the
preferred stock already issued, the vesting requirements of the options and the
recent sales of the common stock of the Company, the Company estimated that the
adjusted fair value of the common stock at the date of grant of theses options
did not exceed the exercise price of the options.

F-13
<PAGE> 66

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Activity in the Company's Employees' Plan during 1997 is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Outstanding options at beginning of period.................. -- $ --
Granted..................................................... 350,000 1.14
Exercised................................................... -- --
Surrendered, forfeited or expired........................... -- --
--------
Outstanding options at end of period........................ 350,000 1.14
========
Exercisable at end of period................................ 70,625 1.00
========
Weighted average fair value of options granted during
period.................................................... $ .37
</TABLE>

Outstanding options at June 30, 1997 had a weighted average remaining
contractual life of 9.6 years.

Activity in the Company's Directors' Plan during 1997 is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Outstanding options at beginning of period.................. -- $ --
Granted..................................................... 100,000 1.00
Exercised................................................... -- --
Surrendered, forfeited or expired........................... -- --
--------
Outstanding options at end of period........................ 100,000 1.00
========
Exercisable at end of period................................ 16,500 1.00
========
Weighted average fair value of options granted during
period.................................................... $ .32
</TABLE>

Outstanding options at June 30, 1997 had a weighted average remaining
contractual life of 9.5 years.

7. INCOME TAXES

The provision (credit) for income taxes differs from the expected income
tax using the federal statutory rate on income (loss) before income taxes due to
the following:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1996 1997
--------- ----------
<S> <C> <C>
Credit at federal statutory rate of 34%..................... $(125,681) $ (909,932)
Permanent differences....................................... 9 755
State tax benefit........................................... (14,638) (106,966)
Change in valuation allowance............................... 140,310 1,016,143
--------- ----------
$ -- $ --
========= ==========
</TABLE>

F-14
<PAGE> 67

ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax assets and liabilities, resulting from differences in the
timing of recognition of revenues and expenses, consist of the following:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1996 1997
--------- -----------
<S> <C> <C>
Deferred tax liability:
Tax depreciation in excess of financial.................. $ 2,470 $ 12,096
Deferred tax assets:
Acquired in-process technology expensed for financial,
capitalized for tax, net of amortization.............. -- 376,732
Net operating loss carryforward.......................... 142,356 793,772
Other.................................................... 2,379 --
--------- -----------
144,735 1,170,504
Valuation allowance...................................... (142,265) (1,158,408)
--------- -----------
Net deferred tax assets.................................. 2,470 12,096
--------- -----------
Net deferred tax liability............................ $ -- $ --
========= ===========
</TABLE>

As of June 30, 1997, the Company had a federal net operating loss
carryforward of approximately $2,089,000. The net operating loss carryforward
will expire from 2010 through 2011, if not utilized. Utilization of the net
operating losses may be subject to a substantial annual limitation due to the
"ownership change" provisions of the Internal Revenue Code of 1986 (Note 8).

Because of the Company's lack of earnings history, the net deferred tax
asset comprised of its net operating loss carryforward has been fully offset by
valuation allowance. The valuation allowance increased by $140,310 and
$1,016,143 in 1996 and 1997, respectively.

8. PRIVATE PLACEMENT AND INITIAL PUBLIC OFFERING

In June 1997, the Board of Directors authorized management of the Company
to initiate a private placement of up to 1,750,000 shares of Series C Preferred
Stock (the "1997 Private Placement") at a price of $4.00 per share. On August 7,
1997, the Company closed this private placement, selling 1,437,504 shares which,
net of costs and expenses, yielded net proceeds of approximately $4,925,000.

In July 1997, the Board of Directors authorized management of the Company
to file a Registration Statement with the Securities and Exchange Commission
offering shares of its Common Stock to the public. If the offering is
consummated, all of the Series A, Series B and Series C Preferred Stock
outstanding will automatically convert into shares of Common Stock upon the
closing of the offering. At such time, the Company will be required to recognize
as a charge to retained earnings a noncash dividend related to the Series C
Preferred Stock converted to Common Stock. The noncash dividend will be
equivalent to all or some portion of the difference in the price received per
share for the Series C Preferred Stock and the price received per share for the
Common Stock issued in such public offering. Such dividend will also reduce net
income applicable to Common Stock and, accordingly, reduce earnings per share in
the period the offering is consummated.

F-15
<PAGE> 68

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

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 1
Risk Factors............................. 5
Use of Proceeds.......................... 13
Dividend Policy.......................... 14
Dilution................................. 14
Capitalization........................... 15
Pro Forma Balance Sheet.................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 19
Business................................. 22
Management............................... 34
Certain Relationships and Related
Transactions........................... 39
Principal Stockholders................... 41
Description of Securities................ 42
Shares Eligible for Future Sale.......... 44
Underwriting............................. 45
Legal Matters............................ 47
Experts.................................. 47
Additional Information................... 47
Glossary................................. 48
Financial Statements..................... F-1
</TABLE>

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

Until November 23, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

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

2,300,000 SHARES

ZYMETX LOGO

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

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

CAPITAL WEST SECURITIES, INC.

MILLENNIUM FINANCIAL GROUP, INC.

COMVEST PARTNERS, INC.

OCTOBER 29, 1997

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